With record numbers of Americans entering retirement age for the next four years, knowing how much to save for retirement has never been more important. Financial expert Suze Orman has called the 4% retirement rule problematic. Here’s why Orman feels that this retirement rule does not work.

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Often known for her blunt and straightforward financial advice, Orman shared in an interview with Moneywise that she found the 4% retirement rule very dangerous. Discussing the cost of living, Orman expressed her concerns about retirement savings, stating, “The 4% retirement rule doesn’t work anymore. I think it’s very dangerous.”

Before record-high inflation and interest rate hikes, the 4% retirement rule was the golden standard for retirement savings. Now, many people, including Orman, are questioning whether this rule can still be applied in today’s economic climate. This financial practice was coined in 1994 by financial planner Bill Bengen. He based his calculations on decades of statistics, relevant back then, with a more reasonable rate of return. According to Bengen, if retirees adjusted their withdrawals to 4%, they could make their money last at least another 30 years.

In practice, this meant that people would need to withdraw 4% of their retirement funds in the first year of their retirement, and thereafter, that amount would be adjusted for inflation each year. The problem with this rule is that this calculation was based on stock and bond returns from 1926 to 1976. David Blanchett, head of retirement research at PGIM DC Solutions, agrees with Orman that this retirement rule is no longer feasible. Blanchett admitted, “It’s going to be too low for most people who are retiring at a reasonable age.”

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Colin Gerrety, a financial planner, echoed this sentiment, revealing, “Very rarely have I ever seen a client who just withdraws 4% of their portfolio every year and calls it a day.” He adds, “Things tend to be a lot lumpier and a lot messier than that.”

Instead of 4%, Orman suggests that this figure should be lowered to 3%, saying, “I would not be using the 4% figure on any level.” Orman acknowledges that the actual figure of withdrawal will depend entirely on each person’s circumstances. She encourages people to hold off taking out their Social Security for as long as they can, preferably until they are at least 70 years old. This way, they are guaranteed to receive the maximum monthly amount. But this is not always the case. Orman explains that people do not understand the tax ramifications of collecting Social Security early and that there’s still this incorrect mentality that as soon as people reach retirement age, they will claim Social Security.

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“Stop this: ‘Oh, I’m going to retire at 60. I’m going to start claiming Social Security at 62,'” Orman said.

In addition, Orman stresses that regardless of what withdrawal figure you use, “take the least amount possible out of retirement accounts.” She encourages people to start growing an emergency fund as early as possible to prevent withdrawal from retirement funds in case of medical problems, stock market swings, and interest rate hikes. She warns that Americans with no emergency savings have a “financial tornado” heading their way.

Other financial experts have also agreed that 4% will not cut it anymore and have suggested 3.3% instead to allow for a more flexible approach. In fact, Bengen himself no longer feels that a 4% withdrawal will work, although he differs from Orman and believes that this figure should be increased to 4.7%.

Adopting a flexible withdrawal figure that meets your evolving needs is a prudent approach.

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This article Suze Orman Warns That A ‘Financial Tornado’ Is Coming For People With No Emergency Retirement Savings — 4% Retirement Rule Does Not Work originally appeared on Benzinga.com

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