Learn More: Four Percent Rule

Setting a goal for retirement can be daunting.  It may seem foolish to set a specific target in the present for a future that feels distant and uncertain.  And yet, my advice is to be as specific as possible with your goal because this helps you to adjust to variation and the unexpected as you track your progress.

How big should your nest egg be?

The “Four Percent Rule” suggests that if you limit your withdrawals from your nest egg to 4% each year in retirement, you are very likely to never run out of money.  The rule is based on market history, and so all the usual caveats of “past performance does not guarantee future returns” hold sway.  And yet, it’s a good place to start.

I’d like to show you how to apply the rule to your situation.  If you want more background, a lot has been written on the subject of safe withdrawal rates: I recommend reading more here or here.

Let’s look at the retirement plan for Teresa and Seth.  They set a target for $70,000 spending per year in retirement, adjusted for inflation.

4% Rule Figure 1

Teresa and Seth planned around a more conservative 3.5% withdrawal rate, to give themselves more flexibility and peace of mind:4% Rule Figure2pexels-photo-413879.jpeg

4% isn’t a magic number.  You might have more guaranteed income and feel comfortable targeting a more aggressive withdrawal rate.  You might have more uncertainty and a smaller social safety net and wish to target a more conservative withdrawal rate.  The important thing is not what your specific goal is, but rather that you HAVE a specific goal from which to make a plan.

The 4% rule is a good jumping off point towards establishing that specific goal.  Once you have a target, it’s a lot easier to take aim at it.

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