What Is The 4% Rule? How Much Money Do I Need To Retire?



Enroll in the FREE Personal Finance Principles course: http://courses.videoschoolonline.com/courses/personal-finance-principles/ In this video, I want to explain the 4% rule. This is also known as the Safe Withdrawal Rate - or basically the rate at which you can spend your money without ever running out of money. An easy way to calculate what this means for you - and how much money you’ll need to retire is by flipping it around and multiplying your yearly expenses by 25. For example, if you and your family spend $40,000 per year, you’ll need to have 1,000,000 invested to not run out of money. There must be some limit to how long you can withdraw 4% and still have money left over, right? The study that explains the 4% rule is called the Trinity Study, and it looked at how much money you’d need to retire for every year between 1926 and 2009. The study found that if you invest 50% of your money in stocks and 50% of your money in bonds, withdrawing 4% of your money will be fine for 25 years, 100% of the time. Doing it for 30 years - you’ll still have money left over 96% of the time. only if you retired in a very unlucky year and never made any money after retirement including pensions or social security - the 4% rule didn’t work. So to make sure we’re all clear - the 4% rule isn’t 100% foolproof. But those odds are pretty darn good - and even while I hope to retire from regular work longer than 30 years - i know I’ll continue to make money doing things i love which will make sure that the 4% rule does succeed. For those of you that want to be 100% sure your money will never run out (especially for those of you who plan to retire longer than 30 years), use the 3% rule and only withdraw 3% of your investments per year. Let’s get back to the 4% rule and dive a little deeper. As many of you are probably asking, why is 4% the safe number and not 10% or 2%. Very simply, investing money will pay you dividends and increase in value at an average rate of 7% per year. On average inflation is about 3%, basically decreasing the actual value of the money you have. Combine those two numbers, and you’re a 4% - your net income will increase by 4% each year. And if you spend that 4% without going over, you’ll end the year with the same amount that you’ve started… in perpetuity. Okay okay - i know a lot of you say this is crazy - what about the recession - you can’t predict stocks - and lots more thoughts. But let’s look at those numbers even deeper. Since 1900… over one hundred years ago, the average return per year has been 7% including reinvested dividends (meaning you reinvest the dividends - or the money the companies pay your for investing - into your investment). For inflation - since 1913 - over one hundred years ago, the average yearly inflation is 3.22% Even through the great depression, world wars, crazy years of inflation, more wars, and the great recession the average return rate has been 7% and inflation has been just over 3% What does this tell us? It tells us that investing is more about being patient and investing early rather than trying to time the market. Now this doesn’t mean that it can’t change. Investing is a risk. That’s why you do it and make money from it. But world war iii could happen. another even greater depression could happen. and we have to be prepared for something like that. because if you retired with 1,000,000 in 2007, assuming you’d be able to spend 4% of your net worth per year, you were in for a surprise - which might mean going back to work for a few years and waiting out the recession. hopefully, if you did that… and left your investments in the stock and bond market, you would be in good shape. The key takeaway is that throughout the history of modern america - you’ll be fine to retire using the 4% rule. So calculate your yearly expenses… include some emergency padding… and start investing to get to that goal of 25 times your expenses. Let me know if you have any questions or comments below! Is this crazy? Or am I onto something? Again, thank you to mr money mustache and the mad feintist for the inspiration! Cheers, Phil Please subscribe to the channel and leave a comment below! Video School Online: http://www.videoschoolonline.com Courses: http://www.videoschoolonline.com/course-library/ Twitter: http://www.twitter.com/philebiner Facebook: http://www.facebook.com/videoschoolonline

Comments

  1. I retired at the start of this year only 7 months after conception, 60 days or so and I'll pop out ready to party.
  2. Unless you live in turkey where hyperinflation makes your money a third of its value in ten years time. Then your fucked.
  3. I always wonder how much I really need to invest. My wife will have a military pension worth about 4700 a month when she retires and 43. Currently my union pension pays out about 5700 a month after 59. On top of that I have maxed out my Ira for 9 years. (I'm 32 she is 38). Plus I have a tax deferred annuity with around 12,000 with an annual contribution of around 4500. The reason I ask is because all retirement health advice I look into has no option for even entering our pensions and says my financial health is low.
  4. Was difficult to nderstand
  5. the world is aging and if you are less than 40yrs old and put your retirement in stocks / bonds, there will be a massive sell off when you retire and you wont get much return. the data since 1900 are not relevant as it happened when people had less educated , less competitions, and only the west had industries. But now and mostly because the completion, that 7% growth will be unlikely to stay.
  6. Assuming a 7% return just isnt realistic. This is very typical of pre-'08 investment strategies. These models dont work anymore due to the low-interest rate environment. See they are working off of an "average" return which has most of its returns coming from a higher interest rate world. If you were to look at a 30 yr chart of average interest rates youd see rates going steadily down for the past 3 decades. So, an "average" which includes rates from 1900 that you will never get again isn't very helpful.
  7. 1960's 1970's -- savings account ,, Bank or Savings and Loan 5.25 % interest compounded Daily // it was easy to become wealthy in America ,, and then came REAGAN
  8. I did this fake investment simulation with my bank a few years ago and forgot about it, some time ago it caught my eye again. If it was real, let's say i'd be living in a cardboard box i found on the street by now.
  9. I disagree. I think inflation is a figure that is subjective to the person. Certain products have different inflation rates. TV's seem to be going down in price, while many cars have gone up a lot over 30 years and if you buy a car frequently, there's a lot of lost money in your car. Anyway, I think that to be safer you should use inflation rate of 3.25% and a return on "investment" should be 6% to be safe. The vast majority of people will never see 7% even before taxes & fees! But will go with the 7% since the stats say it's real. Thus 7-3.25= 3.75% which means most people better have a great retirement amount or don't live very long or have a larger savings amount.

    By the way, I retired at age 53 and have been retired for nearly 6 years and my nest eggs are still growing. I am at a rate of about 2.6%. the biggest factor in doing this is having a good job that pays a good retirement (government) and having money to save. The private sector is geared to fuck the employee while helping the rich get richer. No idea why people continue to vote GOP when they have done NOTHING for anyone but the rich over the past 40 years. take a look at the GINI coef. and you'll see the USA will soon be no better than Mexico
  10. Great video with some very good data to explain the 4% rule. I would add that the increase in your stock investment account would include not only dividends, as you mention, but also capital gains, and both would be left in the account. The magic of compounding can do a lot without much work over many years. Thanks for your thorough video.
  11. Its a roller coaster, you lose money in 03, lose money in 08 and the only reason you don't lose money in 14 is because the individual mandate to buy health insurance, my scare is are we entering an age in which the only way the market grows is by government intervention? coming 2020 or 2024 what is the government going to push us down our throat to artificially grow the economy again?
  12. So I work for a state hospital they take 7% of my check which is good. I also have an optional 403b acct and take 5% there. I figure save it before I send on something stupid lol ...
  13. I am going to retire at 29 next year, so hyped!
  14. This is widely used in the financial industry, but it is overly conservative.  The U.S. stock market has averaged about 11% since 1929, not sure where 7% came from. So even with inflation, you should be able to use 8% of your investment without touching the principle on average. The problem with investing for retirement is that most people don't do it. The withdrawal rate is the least of your worries.
  15. I retired this year at age 11
  16. My motivation to retire is so I can volunteer more of my time. I can't fathom "relaxing" doing nothing.
  17. i retired this year at age 16
  18. Reality is that there are no percentage that will work 100% of the time. People simply can live longer and inflation rate might be higher for basic needs light housing, utilities, food, gas, car, clothing, and medical expense than the government figures suggest. These days savings and CD's are paying less than inflation even before tax so to try to keep up with it, people invest money. But in low safe savings rate, the riskier investments tend to not do as well as it has historically because people already bid up the stocks to that point. I think the explanation of why the 4% worked is flawed. It isn't because investment did about 7% and you subtract 3% for inflation and you were left with 4%. If that's the case, the portfolio should last indefinitely. The reason it worked most cases is that even when investments didn't do well, it is essentially dipping into principal and hopefully, it isn't deep enough that it will run dry before you die. I've seen worse analysis than this. People applying it in extreme early retirement strategy thinking they can retire at age 30 or 40 but didn't realize this rule of thumb is only for 30 years of retirement. Since these younger people aren't worried about medical expense, it tends to bite a lot harder when they get older and if that gets combined with a few bad sequencing of returns (even if average returns stay roughly the same which isn't even guaranteed), they have either cut costs and/or find a job or try to get on welfare because they have been out of the job market too long for any employer to take seriously.
  19. Am I incorrect to say that you have not planned to leave any money for your family if you simply follow this rule? I don't want my kids to get nothing when I die, assuming I retire with my preplanned number and I live for another 25 - 30 years?
  20. Good Advice man. I aspire to retire before 2030 :)


Additional Information:

Visibility: 223355

Duration: 5m 52s

Rating: 1730