How to use the 4% rule to help you retire
Would you like to know a secret?
I don’t really care about the Mueller report; I don’t give a flying fig about Brexit and I have about as much interest in Donald Trump as I do about a gnat.
Either I have got it all wrong or the media thinks that I care more about these things than I really do.
As far as I am concerned, there are far more important things to bother about than a special counsel’s investigation, the hole that the United Kingdom has dug for itself and a dysfunctional US administration.
Stay in control
What good does it do me to worry about the things that I have absolutely no control over?
But what I do worry about is whether I will have enough money to live off when I stop work. You should think about it, too.
It doesn’t matter whether you are in your teens or whether you are in your sixties – you really should give it some serious thought. And the earlier that you think about it, the better it could be for you….
…. It might mean that you have more time to get your finances right.
So, here’s the question: What are you going to do when you receive your last pay cheque from work?
Will the money that you have put away throughout your working life be enough to sustain you through your old age?
And how much will you realistically need to make sure that you don’t run out of readies when you stick your plastic into an ATM?
To say that “it depends” is just not good enough. It isn’t even an answer.
Admittedly, we are all different. We all have very different lifestyles. So, we could go through our savings at vastly different rates.
4% Rule of thumb
But here is a rule of thumb that I have been working towards that could be useful for you, too:
We should draw down no more than 4% of our savings every year when we stop work.
If you have stashed away $100,000 for your sunset years, then you could afford to draw down $4,000 a year.
If you have a million dollars at retirement, then you could afford to take out $40,000 without eroding your capital.
With a $5 million pot, you could comfortably take out $200,000 a year!
It’s not rocket science: The more you have when you retire, the more you could have to spend in your retirement.
But here’s the rub. And this is where “it depends” comes in.
It depends on what you invest your money into when you retire that counts.
If the money is invested in a bunch of bonds that yield around 2%, then even drawing down 4% a year from your fund could be too much.
The drawings exceed the returns generated.
But if you invest in a portfolio of shares that generates around 7% a year, and assuming that inflation is about 3%, then it should be possible to draw down 4% without scrambling your nest egg.
A higher return than 7% means you could draw down more.
Time to choose
So, we have some clear choices to make. Firstly, decide how much income you would like at retirement.
I can‘t help you with that. Multiply that number by 25. And, depending on your age, that might give you an idea of what should be your target retirement sum.
Then decide how you plan to achieve your target.