4% Rule for Retirement: A Comprehensive Guide

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4% Rule for Retirement: The 4% rule is a retirement withdrawal strategy that suggests retirees can safely withdraw 4% of their savings in the first year of retirement and then adjust for inflation each subsequent year. The rule is based on a study by William Bengen, a financial advisor, in the 1990s. Bengen found that retirees who withdrew 4% of their savings each year had a 95% chance of their savings lasting for at least 30 years.

Here are some examples of how the 4% rule works:

  • Example 1: A retiree with $1 million in savings could withdraw $40,000 in the first year of retirement. In the second year, they would adjust their withdrawal for inflation. If inflation was 2%, they would withdraw $40,800.
  • Example 2: A retiree with $500,000 in savings could withdraw $20,000 in the first year of retirement. In the second year, they would adjust their withdrawal for inflation. If inflation was 2%, they would withdraw $20,400.
  • Example 3: A retiree with $250,000 in savings could withdraw $10,000 in the first year of retirement. In the second year, they would adjust their withdrawal for inflation. If inflation was 2%, they would withdraw $10,200.

It is important to note that the 4% rule is just a guideline. The actual amount that a retiree can safely withdraw each year will depend on a number of factors, including their age, health, spending habits, and investment portfolio.

Here are some additional things to keep in mind when using the 4% rule:

  • The 4% rule is based on historical returns. There is no guarantee that future returns will be the same as historical returns.
  • The 4% rule does not take into account individual circumstances. Every retiree is different, and their withdrawal strategy should be tailored to their individual needs.
  • The 4% rule is not a set-in-stone rule. Retirees may need to adjust their withdrawal rate over time, depending on their financial situation and market conditions.

If you are considering using the 4% rule, it is important to talk to a financial advisor to develop a withdrawal strategy that is right for you.