One of the biggest concerns for retirees is the fear of running out of money. How do you know how much of your investments you can withdraw every year without running out of money?
How much money can I safely withdraw from my retirement funds?
Simple – use the 4% rule. This will give you a great chance of not running out of your money and it’s valid for 25+ year periods. If you are at an advanced life stage where 25 years is a pipe dream then the 4% can be adjusted upwards.
The way the 4% rule works is that you start by taking 4% out of your portfolio in the first year – this includes dividends, interest and withdrawals. The next year you take out the same amount you took out the first year plus inflation. So if you start by taking $40,000 out in the first year and inflation is 3% then in the second year you take out $40,000 + 3% ($1200) = $41,200. Every year after that you adjust the previous year’s withdrawal amount by the inflation rate. Keep in mind that this 4% figure will be your gross income before taxes.
The 4% rule is really a guideline rather than a hard and fast rule – If your equities perform better than expected then you can spend a bit more than the 4% rule amount however the opposite is also true, if you encounter a bear market and the value of your portfolio drops then you should be prepared to cut back on the withdrawals.
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