How many of you have heard about the 4% retirement rule? I suspect that those who have looked into retirement have come across this rule in one way or another.
What is the 4% rule?
The 4% rule is the percentage of your portfolio that you can withdraw / year while keeping the balance intact. This is assuming that you stay invested in the market with balanced asset allocation. According to William Bengen, CFP, 4% of your portfolio can be withdrawn from your portfolio (adjusted for inflation) while keeping your portfolio intact for 30 years with extremely high certainty. This is assuming a 50/50 equities/bond asset mix during retirement.
- If I grew my portfolio to $1,000,000 by the time I retire, I can withdraw $ 1,000,000 x 4% = $40,000 / year until I draw my last breath. This will keep most/all of the capital intact to pass onto my heirs/beneficiaries.
- Trying to figure out your portfolio value required for a certain lifestyle? If you needed $50k/year to survive during retirement, according to the 4% rule, you would need $50,000/4% = $1,250,000 in portfolio value.
If i decide to retire early and live entirely on my portfolio, I would need a considerable portfolio size if I wanted to follow the 4% rule.
From my Retiring Early Series, I determined that we would need around $45,000 / year to live comfortably (in todays dollars). If we retire before CPP/pension benefits kick in, we would need to depend on a portfolio size of $45,000/4% = $1,125,000. Looks like we have a little ways to go. :)