THE MAGIC OF THE 4% RULE
When talking about financial goals I always mention the 4% rule. You may be wondering, what am I even talking about. Yes, the 4% rule. It is the rule that helps guide individuals to the magical retirement number.
The 4% Rule
In the FIRE (Financial Independence Retire Early) community, we talk about the 4% rule. It is a rule that came out of the Trinity Study. It was determined that if you could take out 4% of your net worth every year, your money could last for around 30 years.
It is a rule that came out of the Trinity Study. It was determined that if you could take out 4% of your net worth every year, your money could last for around 30 years.
Three finance professors from Trinity University decided to study the stock market and portfolios to determine what is a safe withdrawal rate for your retirement.
They took a look at stock/bond mixes and withdrawal rates from 1925-1995, and published a paper in 1998 on the results they came up with.
The payout periods they looked at was 15 and 30 years. They determined that at a 3% to 4% withdrawal rate per year could make your money last for 30 years. Of course, 3% is better than 4%, but over the course of those many years through the Great Depression, stagnant 60s, inflation periods of the 70s, and booming 80s, their research showed that it is safe to withdraw 4% of your retirement every year.
How to determine your FI number
The way to find your number you will need to take the number 25 and multiply it by the amount of money you would like to spend each year.
You can also take your annual spending then multiply it by 25. This can help you determine how much you need, and help with the goals needed to achieve our desired outcome.
Swipe Up to read more and set financial goals for your future