Thursday, September 29, 2011

Retirement Income Using the 4% Rule

I recently stumbled on this rule and found out that the idea has been discussed in quite a lot of articles. This should be an area that actuarial science students can explore.

How much can I safely withdraw from my retirement funds?

Simple – use the 4% rule. This will give you a great chance of not running out of your money and it’s valid for 25+ year periods. If you are at an advanced life stage where 25 years is a dream then the 4% can be adjusted upwards.

The way the 4% rule works is that you start by taking 4% out of your portfolio in the first year – this includes dividends, interest, withdrawals. The next year you take out the same figure you took out the first year plus inflation. So if you start by taking $40,000 out and then inflation is 3% then the second year you take out $40,000 + 3% ($1200) = $41,200. Every year after that you adjust the previous year’s withdrawal amount by the inflation rate.

... Read more here and this article The 4% Rule—At What Price? by
Jason S. Scott, William F. Sharpe, and John G. Watson
April 2008

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