What is The 4% Rule and Why It Matters

Planning for retirement is a wicked big decision! Right?! It can be one of the biggest things we plan for in our lives. However, the biggest unknown we have while planning is how to know how much money we need in retirement. How much money do we need invested for us to continue to live our meaningful and purposeful lives while in retirement?  If we attempt to calculate how munch money we need in retirement we’ll most likely come across something called the 4% rule.

Think of this as a simple guideline for figuring out how much money you can take out of your retirement savings each year without running out. This money you take out is often referred to drawdown. So we sometimes ask the question, “what is our drawdown strategy.” This is the process of calculating how much money we can take out of our savings or investments.  But what actually is the 4% rule, where did it come from, and how can you rock this rule to make your own retirement plan? Let’s break it down!

What Is the 4% Rule?

Okay, using the 4% rule, you should be able to take out 4% of your retirement savings in the first year of retirement, and then you keep adjusting that amount for inflation each year. Your nest egg (your invested assets like brokerage and retirement accounts like IRAs or 401ks) should last for approximately 30ish years. This rule is meant to help ensure peeps don’t run out of money while in retirement and still able to live comfortable life.

Why Is the 4% Rule Used?

The 4% rule is popular, and continues to used for a few reasons:

1. Simplicity: It’s an easy-to-follow formula that doesn’t require complex calculations.

2. Historical Data: Bengen’s research was based on decades of market performance, making it a tested strategy for most people.

3. Inflation Protection: By adjusting withdrawals for a typical inflation rate, the rule helps ensure your spending power doesn’t erode over time.

4. Peace of Mind: It provides some sense of predictability, allowing retirees to budget with more confidence.

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