Word of the Week 4% Rule

 

 

 

The 4 % rule

Investopedia Definition

What is the ‘Four Percent Rule’
The four percent rule is a rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. This rule seeks to provide a steady stream of funds to the retiree, while also keeping an account balance that allows funds to be withdrawn for a number of years. The 4% rate is considered a “safe” rate, with the withdrawals consisting primarily of interest and dividends.
Origins of the Four Percent Rule
The four percent rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976. Prior to the early 1990s, 5% was generally considered a safe amount for retirees to withdraw each year. Skeptical of whether this amount was sufficient, in 1994, financial advisor William Bengen conducted an exhaustive study of historical returns, focusing heavily on the severe market downturns of the 1930s and early 1970s. Bengen concluded that even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years

Leave a Reply

Your email address will not be published. Required fields are marked *