What is the 4% rule?
The 4% rule was developed by William Bengen in 1994. Since then, it has been used by financial professionals to help retirees determine different withdrawal strategies. The way it works is you multiply your retirement savings by 4%, and the total is what you will live on per year. After the first year of retirement, it is important to factor in inflation. For example, if inflation is 2%, add 2% to 4% and multiply your savings by 6% instead.
According to Vanguard historical rates of return, the 4% rule works best over a 30-year period. With that in mind, if you use the 4% rule try to stay inside a 30-year retirement and factor in financial crises. This will help you get through retirement without running out of money. If you are looking to implement a 50-year retirement plan, Casey Smith outlines other strategies that may work better for you. These strategies include flexible spending and implementing a Financial Independence, Retire Early (FIRE) lifestyle. With either a 30-year plan or a 50-year plan, it’s important to plan long-term. Speak with an advisor today to figure out the best strategies for you!
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