The 4% rule is a widely followed guideline for determining how much money you can safely withdraw from your retirement savings each year. It is based on the idea that you can withdraw 4% of your savings in the first year of retirement, and then adjust that amount for inflation in subsequent years.
The 4% rule was first introduced in 1994 by financial planner William Bengen, and it has since become a popular guideline for retirees and financial advisors. The rule is based on the assumption that you will invest your retirement savings in a diversified portfolio of stocks and bonds, and that you will be able to sustain a withdrawal rate of 4% per year without running out of money.
The 4% rule is not a hard and fast rule, and it is not suitable for everyone. It is based on a number of assumptions, including that you will live for at least 25 years in retirement and that you will experience a certain level of investment returns. The rule also assumes that you will have a certain level of other sources of income, such as Social Security or a pension.
If you are planning for retirement, it is important to understand the limitations of the 4% rule and to consider your own financial situation and goals. While the 4% rule can be a useful starting point, it is important to understand that your individual circumstances may be different, and you may need to adjust your withdrawal rate accordingly.
There are several factors to consider when determining your retirement withdrawal rate, including:
- Your retirement savings: The amount of money you have saved for retirement will be a major factor in determining your withdrawal rate. If you have a large nest egg, you may be able to sustain a higher withdrawal rate.
- Your other sources of income
- Your lifestyle during retirement
