Another way of saying this in planning terms is that you can multiply your estimated annual expenses in retirement by 25 to estimate how much you need to save for retirement, colloquially called the “25x rule.” I’m of the mind that this is actually the most useful application of the 4% rule as opposed to a rigid dictation of annual withdrawal amounts in retirement. Specifically, the “4 percent rule” means that at retirement, the retiree can withdraw 4% of the portfolio the first year, followed by the same amount, adjusted for inflation, every year thereafter for 30 years without exhausting the portfolio. Implications of the 4 Percent Rule as a Retirement Withdrawal Rate
You can find his book on Amazon here.Ī subsequent study from Cooley et al in 1998 now known as the Trinity Study backed up Bengen’s findings, though for some reason they used corporate bonds instead of treasury bonds, which strikes me as odd. Thus, 4% was the maximum number that was deemed “safe.” His landmark paper appeared in the Journal of Financial Planning. In 1994, through his research of modeling hypothetical retirements starting in 51 years between 19 and using real historical returns, he observed that 4% was the withdrawal rate at which no failures occurred when simulating possible outcomes for minimum-30-year periods.
Prior to becoming a CFP, Bengen was literally a rocket scientist, so he was well-suited for the task, and set out to do it himself. Bengen sought something more rigorous and robust to use with his own clients. Previously, advisors had used vague rules of thumb for retirement withdrawal rates without any strong underlying math. Using this figure and assumptions about future expenses and investment returns, young investors can estimate how much they need to save and invest to retire and the age at which they can retire.įinancial planner William Bengen wanted to establish a retirement withdrawal rate he could tell his clients so that they wouldn’t outlive their savings after retiring. The 4% rule refers to what is widely accepted as a safe withdrawal rate (SWR) for retirees from their investment account. The Best Bond Funds Out There – 13 ETFs.
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