The 4% Rule
What is the premise behind the 4% rule when pulling money out of your investment account to cover your living expenses in retirement?
What is the premise behind the 4% rule when pulling money out of your investment account to cover your living expenses in retirement?
The 4% rule provides a guide regarding how much you can pull out of your investment account (all of your liquid assets like retirement accounts, money in the bank, and any other money invested outside of retirement accounts) to supplement any fixed income to pay the monthly and yearly bills WITHOUT the investment account running dry in 30 years (this also accounts for a rough estimate of 3% for inflation as well). Let’s dig deeper.
When a person retires, they are counting on their retirement and non-retirement accounts to pay them back all of the money (with interest) they paid in over the years. Taking out 4% or less is a wise withdrawal rate based on historical returns and a few important caveats. Take a look at the calculator below to see where you currently are based on your amounts, asset allocation and expected time horizon (death). https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf.
Here are three points to keep in mind. (1) Past returns are nice to look at, but they are in no way guarantees of future returns. (2) Asset allocation is critically important even in retirement, which means keeping 50% or more in stocks is wise for most folks going into retirement. (3) Keeping costs very low will make the numbers work must easier than high cost, which is why an all index mutual fund portfolio is a no-brainer for the informed investor. More details can be had in my 3rd book, Graduation!