Look at most any magazine or news story related to your money and retirement, and you are going to see outrageously high numbers for what your nest egg should look like. I think they do this just to sell some advertising. The real number you should be focusing on is the 4% rule.
What is the 4% rule? It’s a number that was determined to allow you to retire comfortably and not have to worry about money in your retirement.
In this post, we are going to look at this number in more detail to see why it works great and what could be a stumbling block. Of course, we will see how you can overcome this as well.
What Is The 4% Rule?
At its most basic, the 4% is rule states that you can safely withdraw 4% of the value of your portfolio in any given year and not run out of money in retirement. This number was used in various monte carlo simulations to prove that you would be OK from the standpoint of your nest egg surviving your retirement.
Another way to look at the 4% rule is to simply take your expected annual retirement budget and multiply this amount by 25. When you do this, you have a good idea of what your nest egg size should be at retirement.
For example, let’s say you expect your retirement budget to be $30,000 annually. If you multiply this by 25, you end up with a nest egg of $750,000.
If we use this amount and withdraw 4% annually, you are living on $30,000. See how that works?
The Benefits Of The 4% Rule
The best part about this rule is that it simplifies things. You know you can count on 4% of your money and not run out.
How is this possible?
Since you will most likely be earning more than 4% on your invested money, your portfolio should continue to grow or at least hold steady during your golden years.
And by using 4%, which is just higher than the historical average for inflation, you ensure that as the cost of living increases, you won’t be getting squeezed.
The Downside To The 4% Rule
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