The Financial Freedom: What’s the 4% percent rule in Retirement

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The Financial Freedom: What's the 4% percent rule in Retirement

Many people choose to retire when they are elderly or incapable of doing their job due to health reasons. People may also retire when they are eligible for private or public pension benefits, although some are forced to retire when bodily conditions no longer allow the person to work any longer (by illness or accident) or as a result of legislation concerning their positions.

Retirement is the benefits grants given to people for the duration of their pacific period of time they keep working with the Organisation either with the Federal Government or a reputable public Company. Many people are worried. They are close to retirement.  Do I have enough to retire? What if markets fall?  If I live for 30 years, will I have enough to survive?

Nowadays, most developed countries have systems to provide pensions on retirement in old age, funded by employers or the state. In many poorer countries, there is no support for the elderly beyond that provided by the family. Today, retirement with a pension is considered a right of the worker in many societies; hard ideological, social, cultural, and political battles have been fought over whether this is a right. In many Western countries, this is a right embodied in national constitutions.

Philip L. Cooley, Carl M. Hubbard, and Daniel T Walz in Sustainable Withdrawal Rates From Your Retirement Portfolio examine how safe it is to withdraw specific amounts from your portfolio, depending on the percentage of your portfolio which is in stocks relative to bonds.  

The study looks at the effects of a range of nominal and inflation-adjusted withdrawal rates applied monthly on the success rates of retirement portfolios of large-cap stocks and corporate bonds for payout periods of 15, 20, 25, and 30 years. A portfolio is deemed a success if it completes the payout period with a terminal value that is greater than zero. Using historical financial market returns, the study suggests that portfolios of at least 75% stock provide 4% to 5% inflation-adjusted withdrawals”

The results of their figures from 1926 until 1997, are below:

Payout period3%4%5%6%7%8%9%10%11%12%
100% stocks
20 years100989694918372584540
25 years100989692887558443829
30 years100989591847460493733
75% stocks, 25% bonds
20 years10010010096948368513830
25 years1001009896907350402919
30 years1001009895886351352614
50% stocks, 50% bonds
20 years10010010010098835536174
25 years1001001001009458351320
30 years10010010098814219500
25% stocks, 75% bonds
20 years10010010010010062231140
25 years10010010010060176000
30 years100100100952150000
100% bonds
20 years10010010091473615400
25 years10010096482982000
30 years1001005326200000

The above figures show that taking out 4% is safe, and usually, 5% is safe.  Some caveats should be added here.  For people who want their kids to get an inheritance, withdrawing 4% is sufficiently conservative to ensure the money will be worth the same in inflation-adjusted terms I’m the future.

Sure, your account won’t compound by the 8%-10% before inflation and 6% after inflation you can expect before drawing down, but your account should be worth AT LEAST the same in inflation-adjusted terms in the future. Taking out 5% is probably safe in terms of not running out of cash, but it might mean the inheritance you give your kids is worth less than the pot you have now. 

The Financial Freedom: What’s the 4% percent rule in Retirement


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