What’s that 4% rule I keep hearing about?

What’s that 4% rule I keep hearing about?

The 4% Rule is a widely known guideline in retirement planning. It’s based on a study by William Bengen in 1994 and later research from the Trinity Study.

The 4% rule suggests at retirement, you can withdraw 4% of your portfolio, adjusting the amount each subsequent year for inflation, with a high probability of the portfolio lasting for 30 years. This rule is based on historical data of stock and bond returns. It assumes a portfolio mix of about 50-75% in stocks and the rest in bonds.

High-income earners and doctors can use this rule as a benchmark for retirement planning.

As a doc, by determining the lifestyle you want in retirement and estimating expenses, you can calculate the total portfolio needed at retirement. For example, if annual expenses are estimated at $100,000, according to the 4% rule, you would need a $2.5 million portfolio ($100,000 / 0.04).

A few things to consider:

   – **Early Retirement**: High earners aiming for early retirement might need to adjust the withdrawal rate lower than 4% as their retirement period may be longer than 30 years.

   – **Market Variability**: Stock and bond market performance can affect portfolio longevity. High-income earners may need to adjust their withdrawal rate based on market conditions.

   – **Tax Strategies**: Effective tax planning is crucial, especially for those with substantial retirement savings in different account types (e.g., taxable, tax-deferred, and tax-free accounts).

   – **Lifestyle Choices**: Lifestyle aspirations in retirement can significantly impact the required portfolio size. High earners should consider how their spending habits may change in retirement.

There are alternatives to the 4% Rule:

   – **Dynamic Spending Strategies**: Adjust spending based on portfolio performance.

   – **Variable Withdrawal Strategies**: Alter withdrawals based on age, market performance, and other factors.

   – **Bucket Strategies**: Allocate assets into different ‘buckets’ based on the time frame for when the money will be needed.

High-income earners can leverage the 4% rule as a starting point for retirement planning. It’s important to adapt the rule to personal circumstances and consult with financial advisors for a tailored approach. Regular review and adjustments based on personal needs, market conditions, and tax laws are essential for maintaining financial independence in retirement.

If you are looking for a financial advisor, send me a message. We have a team of financial advisors available to you.


This post is for informational and educational purposes only.  It does not constitute tax, investment, or legal advice. If you are seeking such advice, you should seek the assistance of a qualified professional.

Caroline Clerisme, DMD

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