Ritzy Retirement: The 4% Rule for Retirement Fund Withdrawals

Introduction

The 4% Rule, also known as the Rule of 25, is a practical guideline used by retirees to decide how much they should withdraw from their retirement funds each year. Proposed by William Bengen, a financial adviser in California, this straightforward method ensures a steady income stream while maintaining an adequate overall account balance for future years. Let's explore the details:

The 4% Rule Explained

- In the first year of retirement, retirees withdraw 4% of their retirement savings.

- In subsequent years, they adjust the withdrawal amount for inflation.

- For example, if your retirement fund is $1,000,000, following the 4% rule means withdrawing $40,000 in the first year. If inflation is 2%, the next year's withdrawal would be $40,000 * 1.02 = $40,800.

The Rule of 25 or 4% Rule

Assumptions of the 4% Rule

- Invest 50% of your retirement funds in blue-chip stocks (e.g., S&P 500 Index Funds) and the remaining 50% in intermediate-term government bonds.

- Rebalance your portfolio annually to maintain the initial allocation (e.g., 50% stocks, 50% bonds).

- The 4% rule assumes a moderate investment risk tolerance.

- Adjust withdrawals for inflation to keep pace with rising costs.

Other Considerations

- A 4.5% withdrawal rate may also be sustainable if you allocate 23% to blue-chip stocks and 27% to small-cap stocks.

- If you avoid stocks altogether and invest solely in safe intermediate-term government bonds, a 2.5% withdrawal rate is necessary for a 30-year duration.

Remember, individual circumstances and risk tolerance play a significant role. Explore the provided links for more insights!

How to Save Taxes by Choosing the Right Retirement Fund Withdrawal Order

The Perfect Plan for Retirement Savings: 8 Key Elements for Employees

The Ultimate Guide to Roth IRA vs Traditional IRA: Which One Will Make You Richer?

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Labels: Retirement Planning