The 4% Rule

Andrey Savov - "What is that 4% rule?"

Sometimes I forget that not everyone is in the NAD club and they don't know the lingo we use. I decided to use this post to give a description and brief history of the 4% withdrawal rate.

First let's define what that the 4% rule applies to.

It applies to the rate as to which you can withdraw your investment funds without damaging your quality of life.

The answer to that that question is the 4% rule.

There was a study done in 1988, three professors from Trinity University sat down and ran a bunch of numbers. Basically they asked what would happen at various withdrawal percentage rates to various portfolios, each with a different mix of stocks and bonds, over 30 year periods depending on what year the withdrawals were started.  Oh, and both with adjusting withdrawals for inflation and with not adjusting withdrawals.Then they updated it in 2009.

Of all the numbers that they ran they found that the best percentage of withdrawal they could find was 4%. At 4% a portfolio with 50 stocks and 50 bonds would not only remain intact after 30 years but would actually grow despite making 4% withdrawals every year for 30 years.

There's not much else we can talk about when explaining the rule. While you can argue that the study was done during the boom years but i'd argue that the 4% rule is the base minimum and that in actuality you could pull 3% or 2% indefinitely as well if you needed.  

Lastly in most years during the study you could pull upwards of 7% and not bother your nest egg.

With investing nothing is set in stone, nor is responsible to assume that there wont be ups and downs in the market.

The real key is to live below your means ( like 35% below your means) so you can truly be free no matter what the market does.

Remember Living the new American Dream lifestyle isn't about having a million dollars in the bank, its not about not working or all that stuff, its about setting up your life so you can live your life without worrying about where money will come from. So you can sky dive, so you can plant your garden, so you can go camping, so you can volunteer or whatever else you want to do.

You don't get freedom by living like a rock-star. The law of averages doesn't work that way.

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