The 4% Rule and Why You Should Practice It

Thinking about retirement? No, well you should be! Due to modern advancements, we are living longer meaning we’ll have to work longer, save longer, and are often given the option of deciding at what age to retire.

Save Yourself Financial Heartache and Only Withdraw 4%

The 4% rule advises that you withdraw only 4% of your savings during the first year of retirement. If you follow this rule, you should have enough savings to last you 30 years into retirement.

This financial rule is nothing new. It was first introduced in 1994, by a financial advisor named Bill Bengen. However, it didn’t gather fame until Trinity University performed a study on it. Today many use this as a model for their retirement plan and credit it for setting them up for retirement.

The 4% Rule In Practice

By the time of your retirement, if you save up 500,000, then the 4% rule will go as follows:  you’ll have a total of 20,000 to spend in the first year, with the following year having an increase that corresponds to the interest rate of your portfolio.

Where Does Your Social Security Fall In All of This?

However, this model doesn’t factor in social security benefits. The average American receives $16,000 per year from social security checks. If we take this number and add it to our previous calculations than you’ll have an annual income of $36,000 instead of the previously allocated $20,000.

Is This Model Full Proof?

The answer is no. This plan was based on data collected during the late 90s when our economy was quite different than it is now. Moreover, each individual is different and while they advise you to withdraw 4% the first year you may be more inclined to withdraw 5% or 3%. The amount of withdrawal should a line with your retirement plan, you should choose a percentage you feel comfortable withdrawing for the upcoming years.

Plan Early, Rather Than Later

Having a plan is far better than blindly withdrawing as you please for the upcoming years. Many advise that this “rule” shouldn’t be referred to as a rule at all. Instead, it should be viewed as advice or guidelines. Do you plan on applying the 4% rule to your retirement plan? Let us know!