The 4% Rule

Here’s a formula to help insure that your retirement savings last as long as you do!

Many studies indicate that if you want your retirement savings to last, you should withdraw no more than 4% to 6% of your savings each year. The exact percentage depends on many factors, including how long you live. Obviously no one has a crystal ball to see into the future, but if you’re in good health and retire at a relatively early age, withdrawing a smaller percentage each year will help insure that your savings last as long as you do! The amount of savings that you spend each year will also depend on how much you receive from other sources of income– part-time work, social security, etc. Assuming a withdrawal rate of 4%, for every dollar you want to withdraw annually during retirement, you need to have $25 in assets set aside at the time you retire. In this example, the investor wants $80,000 in annual income during retirement. Each year, he’s going to receive $20,000 of that from Social Security and $10,000 from a pension. In order to make up the difference – which is $50,000.
The 4% Rule
Desired retirement income:
Social security:
Investment income needed:
4% withdrawal rate
Total Investment assets needed:
If someone has $100,000 in savings and withdraws 4% a year, that’s just $4,000 a year. With $1,000,000 dollars in savings (at the same 4% withdrawal rate) the amount grows to $40,000 a year … which sounds like a much nicer retirement!
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