The 4% Rule is a quick estimate of a safe withdrawal rate for retirement, given reasonable long term returns. There are many variables which can make this value conservative or aggressive, but it’s a good starting point. It also provides an interesting layer for the Stairway of Spending:
I prefer to look at it as “Required Investment” = 25 x “Desired Expenses”. For every $5,000/year of expenses, I’d need another $125,000 saved. Depending on your savings rate, $125K can significantly delay goals:
Keep in mind, this doesn’t include compounding, which makes it easier to go from $500K to $750K, than $250K to $500K. I excluded it to keep the chart useful for those steadily shifting to investment income. For example, I might choose to reduce work hours, spending a portion of my investments to make up for the lost revenue. Rather than locking in expenses, I could set a fixed savings rate, spending all but $25,000 of all income. My expenses could increase steadily each year, and/or I could work slightly less.
I’ll close with a list of factors to consider how conservative or aggressive the 4% Rule might be in your context:
Positive:
- Market beating investments
- Strong market early in withdrawal phase
- Government benefits
- Flexible spending
- Flexible work hours
- Downward trending costs
Negative:
- Market failing investments
- Weak market early in withdrawal phase
- Fraud
- Hackers
- Health crisis
- Natural disaster
- Unnatural disaster
- Inflexible spending
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