The 4% rule

Training 1045 minutes4 percent rule

You are 62, a civil engineer retiring next year with $750,000 saved. The 4% rule: take 4% in year one, then the same amount plus inflation each year.

Training goal: Make your savings last a lifetime

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Situation

1. Your first year of retirement. How much do you withdraw?

$30,000: exactly 4% of $750,000
$60,000: you only live once
Withdraw nothing, live on the state pension

2. In your very first year, the market drops 20%.

Sell the stocks and go to cash
Trim spending by 10% this year
Withdraw more while there is still money

3. A neighbor says to keep everything in bonds: "It is calmer that way."

Everything in bonds
Everything in stocks for growth
Stocks plus bonds, 1 to 2 years of cash

4. Your younger sister is 45 with a 14-year-old son. She wants to quit and live on the 4% rule for the next 45 years. She asks your advice.

Suggest 3 to 3.5% for that horizon
Tell her 4% works for any horizon
Talk her out of it, too early

What you will learn

The 4% rule: take 4% in year one, then the same amount plus inflation.
Take less in bad years and keep 1 to 2 years of cash on hand.
For retirements over 30 years, 3 to 3.5% is safer.

Your real-life step

Multiply your savings by 0.04 and divide by 12: that is your monthly income under the 4% rule. Compare it with your spending.

Questions and answers

What is the 4% rule?

A retirement guide: withdraw 4% of savings in year one, then the same amount adjusted for inflation. Historically a mixed portfolio lasted about 30 years this way.

Does the 4% rule still work?

It is a guide based on past data, not a guarantee. Many use 3 to 3.5% for long retirements or flexibly cut withdrawals in bad years.

How much do I need for the 4% rule?

Your yearly spending times 25. For $40,000 a year, that is $1,000,000.

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Numbers are illustrative. A game, not financial advice.