The 4% rule was developed by financial planner William Bengen in 1994. ... Through his research, Bengen found that people could withdraw 4% of their investments in the first year of retirement and then withdraw the same amount, adjusted for inflation, for at least 30 years without exhausting their portfolio.
Based on the returns on the S&P 500 in the past 10 years, the 4% safe withdrawal rate looks like a solid bet going forward. Even if interest rates remain where they are now, a retiree relying on the strategy will do just fine – as long as the stock market continues to cooperate.
The 4% rule assumes your investment portfolio contains about 60% stocks and 40% bonds. It also assumes you'll keep your spending level throughout retirement. If both of these things are true for you and you want to follow the simplest possible retirement withdrawal strategy, the 4% rule may be right for you.
Bengen has applied much of Kitces' thinking, using the Shiller CAPE index (which reflects the cyclically adjusted price-earnings ratio for the S&P 500) and inflation data, to come up with his latest revision and recommendation for a generally safe withdrawal rate: 5%.
4 or 4.5 Percent
Ever since financial planner Bill Bengen came up with the 4 percent rule, aka the Bengen rule, in 1994, many financial advisers have been recommending 4 percent as a safe annual withdrawal rate to ensure retirees' money lasts for 30 years.
In fact, a retiree who is willing to cut back spending in bad years by just 2.5 per cent can lift their starting safe withdrawal rate as high as 5 per cent of their savings - without increasing the chances of running out of money.
The 25x Rule is a way to estimate how much money you need to save for retirement. ... According to the 25x Rule, you would need to save at least $1.25 million to be able to safely withdraw $50,000 of income in your first year of retirement.
If you have $500,000 in savings, according to the 4% rule, you will have access to roughly $20,000 for 30 years. Retiring abroad in a country in South America may be more affordable in the long term than retiring in Europe.
2% Interest
| Monthly Spending | Runs out in |
|---|---|
| $3,000/mo | 9.2 years |
| $3,600/mo | 7.6 years |
| $4,200/mo | 6.4 years |
| $4,800/mo | 5.6 years |
This means, if you retire at 55, £700k will fund an individual for 36 years and a couple for 28 years. So, if you've retired at 55, that'll take you comfortably to the UK's combined average life expectancy of 81.
2% Interest
| Monthly Spending | Runs out in |
|---|---|
| $2,400/mo | 16.4 years |
| $3,200/mo | 11.8 years |
| $4,000/mo | 9.2 years |
| $4,800/mo | 7.6 years |
The 4 Percent Rule and Early Retirement
FIRE is an acronym that stands for Financial Independence, Retire Early and some people are retiring as soon as their early 30s and 40s. This means their stock portfolio will need to last significantly longer than that of a traditional retiree.
However, if you are no longer working, just how long will a million dollars last in retirement? The financial technology company SmartAsset looked at average household expenses and found that, nationwide, a $1 million nest egg should last 23.46 years.
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