1. 4% rule is a safe rule of thumb used to determine how much a retiree should withdraw from a retirement corpus each year.
2. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing from this corpus through retirement.
3. Life expectancy plays an important role in determining if this rate will be sustainable, as retirees who live longer need their portfolios to last longer, and medical costs and other expenses can increase as retirees age.
4. 4% rule was created using historical data on stock and bond returns over a 50-year period from 1926 to 1976 in USA.
5. Before early 1990s, experts generally considered 5% to be a safe amount for retirees to withdraw each year, but financial advisor William Bengen conducted an exhaustive study of historical returns in 1994, focusing heavily on the severe market downturns of 1930s and early 1970s, and concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years.
6. While some retirees who adhere to 4% rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with inflation.
7. Possible ways to adjust for inflation include setting a flat annual increase of 2% per year, which is the target inflation rate, or adjusting withdrawals based on actual inflation rates, with the former providing steady and predictable increases, while the latter more effectively matches income to cost-of-living changes.
8. The 4% rule might not work for a retiree in the following scenarios:-
a) A person whose portfolio features higher-risk investments than typical index funds and bonds needs to be more conservative when withdrawing money, particularly during early years of retirement.
b) A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio.
c) Further, 4% rule does not work unless a retiree remains loyal to it year in and year out, as violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the principal, which directly impacts the compound interest that the retiree depends on for sustainability.
9. Actually, 4% rule may be a little on the conservative side, as it was developed to take into account the worst economic situations, but this is not a reason to go beyond it because safety is a key element for retirees, even if following it may leave those who retire in calmer economic times with a huge amount of money left over.
10. In general, 4% withdrawal rate is quite modest relative to long-term historical average return of 8% on a balanced 65/35 equity/debt portfolio!
2. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing from this corpus through retirement.
3. Life expectancy plays an important role in determining if this rate will be sustainable, as retirees who live longer need their portfolios to last longer, and medical costs and other expenses can increase as retirees age.
4. 4% rule was created using historical data on stock and bond returns over a 50-year period from 1926 to 1976 in USA.
5. Before early 1990s, experts generally considered 5% to be a safe amount for retirees to withdraw each year, but financial advisor William Bengen conducted an exhaustive study of historical returns in 1994, focusing heavily on the severe market downturns of 1930s and early 1970s, and concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years.
6. While some retirees who adhere to 4% rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with inflation.
7. Possible ways to adjust for inflation include setting a flat annual increase of 2% per year, which is the target inflation rate, or adjusting withdrawals based on actual inflation rates, with the former providing steady and predictable increases, while the latter more effectively matches income to cost-of-living changes.
8. The 4% rule might not work for a retiree in the following scenarios:-
a) A person whose portfolio features higher-risk investments than typical index funds and bonds needs to be more conservative when withdrawing money, particularly during early years of retirement.
b) A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio.
c) Further, 4% rule does not work unless a retiree remains loyal to it year in and year out, as violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the principal, which directly impacts the compound interest that the retiree depends on for sustainability.
9. Actually, 4% rule may be a little on the conservative side, as it was developed to take into account the worst economic situations, but this is not a reason to go beyond it because safety is a key element for retirees, even if following it may leave those who retire in calmer economic times with a huge amount of money left over.
10. In general, 4% withdrawal rate is quite modest relative to long-term historical average return of 8% on a balanced 65/35 equity/debt portfolio!