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

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!

[Aziz__]

Planning retirement has never been this confusing! First SVB, then Signature bank and now First republic, these are all the signs of yet another 2008 market crash and recession 2.0, so my question is do I still save in the United States dollar, or could this be a good time to buy stocks? So I’m left wondering what 2023 has in store for us investors, I’ve been sitting on over $745K equity from a home sale and I’m not sure where to go from here,

[Riggsnic_co]

I believe the retirement crisis will get even worse. Many struggle to save due to low wages, rising prices, and exorbitant rents. With homeownership becoming unattainable for middle-class Americans, they may not have a home to rely on for retirement either.

[DavidMiller-dudy]

Retiring early is possible but tough, it definitely requires discipline and big sacrifices. It’s not only about saving, the huge step is boosting earning capacity. I’m glad I got into stocks and recently understood and purchased my first NFT.

[sunilj]

I retired this year at 40 my childhood dream come true

[LivingOverseasTV]

Very good information. I have been living on a budget of $1, 200 per month including health care and traveling the world. I think this may be a good option for some. Ecuador and Thailand are both very affordable and my lifestyle, for the most part, is greatly improved. I would love to team up with someone to create some workshops to bring this information to those that are interested.

[coasteyscoasteys]

it's good to plan for the future but don't get addicted to it, at least live a little today.
anything can happen, health issue, death,

[ticnatz]

I retired this year at 58. I won't even tap into my holdings. I will be reinvesting still, for quite a few years. I live in Europe, get an American pension, and will work just a little bit. I firmly believe in living below your you can

[Brutus]

Thank you for explaining the 4% rule in a simple way to understand. I love personal finance!!!

[stangtrax]

ATTENTION: At 1:07 it says 50/50 stocks and bonds. At 3:07 it is a chart of 100% stocks. Overall I agree and like the video. Each do what you want, but 100% stocks investment, with dollar cost average and a drip for me. I studied the stock chart also going back the 100 years even the great depression. One day I need to make a video of explaining how simple investing really is vs risk and reward. Man I would have liked to know what I know now 20 years ago.

[RetireCertain]

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.

[HeritageWealthPlanning]

Big fan of Video School Online. This video does an adequate job of discussing the 4% "rule". My only comment though is if you retired in October 2007.

By March 2009, you are now taking 6.6% out of your portfolio. This is called sequence of return risk. It gets overlooked A LOT. And in reality when people are faced with it, they have a hard time staying the course. I've seen it over, and over, again.

Secondly, the 4% rule was based on an era where the 10 Treasury bonds were paying twice what they are now.

With bond rates as they are today, the 4% has been downward adjusted to 3.2%.

[ethelbertt]

A really good video, retirement it's a crucial point in our lives many forget to plan for.

[MikeRosehart]

Great video, I enjoyed it, I was thinking of making a very similar video explaining how I retired at 24/25 with the 4% SWR

[taxol]

There is simpler way if you can afford it.
Buy properties where the population is still growing, rent them as income. Keep renting them and hold these properties until you decide to quit being landlord. Maybe at age 75 or so.
Sell the properties, invest the proceed in blue chips dividend stocks or bonds.
Inflation will incrase your property value till the time you decide to sell them
Dividends and bonds coupon will support your monthly living cost.

[ox]

S&p averages just under 10% every year with reinvestment.

[andrewnewman]

Retired 8 years ago and I've been able to keep my finances in check through investment. i make about $24k a month from my investments in foreign exchange markets(forex).
There isn't a particular amount of money needed for retirement

[forgednotcast]

The Median balance in a 401k at age 65 is only 126, 000 dollars which under the 4% rule is $5, 040 a year and $420 a month. One Million is a very small segment of American retirees.

[keatonmorgan]

Good video, am grateful I made an early move toward retirement that has benefited me so much lately.

[bobbytheblade]

4% withdrawal rate is too low for those who retire early and have the means to grow the asset way beyond that.
My wife has managed growth in our investment net worth an average of 12% which is crazy good, and we both retired in our 50's.
Our withdrawal rate is right at 8% which allows us to index inflation and experience some real growth though slight. And we are prepared for cutting back in hard times.
This works well for us, but is everybody going to be able to grow this well in retirement?
Most folk should follow a safer, less aggressive route.

[MJAli]

1) Become debt free
2) Have a years salary saved for emergencies
3) Now work when ever you want to.