The 4 % Rule: What is it and what does it mean for retires. How do retirees determine the amount of money that they will need to survive on, each year, given their living needs and the number of years they would need the money for. In short, it determines how much will the retirees savings last without worrying about having the money run out.

Based on academic research there is a 4% rule that helps determine the amount of money retirees would need each year.

The 4 % rule says a retiree can withdraw 4% of their portfolio without incurring the risk of running out of money. Each year thereafter, inorder to keep up with the cost of living you would increase that initial amount by the rate of inflation.

I have illustrated a simplistic view of how the 4 % rule works.

The assumption here is that this person retires at Age 62. This person has a portfolio value of $1,000,000. The money is not in the market so there is no rate of return. The portfolio is not inclusive of social security benefits. As you can see the portfolio value diminishes over time. The amount this person withdraws diminishes over the years.

Portfolio Amount Age Portfolio Value Portfolio Amount Reduced by
Year 1 63 40000 960000
Year 2 64 57600 902400
Year 3 65 54144 848256
Year 4 66 50895 797361
Year 5 67 47842 749519
Year 6 68 44971 704548
Year 7 69 42273 662275
Year 8 70 39736 622538
Year 9 71 37352 585186
Year 10 72 35111 550075
Year 11 73 33005 517071
Year 12 74 31024 486046
Year 13 75 29163 456884
Year 14 76 27413 429470
Year 15 77 25768 403702
Year 16 78 24222 379480
Year 17 79 22769 356711
Year 18 80 21403 335309
Year 20 82 20119 315190
Year 21 83 18911 296279
Year 22 84 17777 278502
Year 23 85 16710 261792
Year 24 86 15708 246084
Year 25 87 14765 231319
Year 26 88 13879 217440
Year 27 89 13046 204394
Year 28 90 12264 192130
Year 29 91 11528 180602
Year 30 92 10836 169766
Year 31 93 10186 159580
Year 32 94 9575 150005
Year 33 95 9000 141005
Year 34 96 8460 132545
Year 35 97 7953 124592
Year 36 98 7476 117117
Year 37 99 7027 110090
Year 38 100 6605 103484

There are Pro’s and Con’s to using this rule.

Pro’s

  • Consistent withdrawals year after year maintain a steady standard of living
  • No need to cut spending during an economic downturn or consider altering one’s lifestyle to reflect poor market returns

Con’s

During market drops, such as the 2000 tech crash and the 2008-2009 financial crisis, the 4% rule can cause a lot of stress for retirees and potentially fail some of them altogether.

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