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Whenever the discussion begins about retirement saving with my father, and the question keeps coming in our mind how much money we need to save for retirement so we could live a comfortable retirement life?
If you are looking for the answer over the internet, you may have encountered enough calculations that blow up your mind.
Many finance experts put their theory and calculation and tried to solve the problem with some calculations.
I would say some of them are amazing and the influence they’ve created by putting the complicated number with simple understanding saved the retirement life of many Americans retiree.
Saving is not a big deal if you only know how to handle it. Technology-based services come with great saving coupons such as Uber promo code for existing users which helps to save dollars during the trip.
Before the jump to the world of saving, spending, inflation, number, expenses, income, withdrawal, 4% rule I would suggest drinking water because you are going to save money and boost up for your comfortable retirement.
History of 4% rule
The 4% rule theory was first put forth by the financial planner Bill Bengen in the early 90s to answer those who were concerned that they run out of money before they died.
Bill Bengen came forward and explained if they save 4% of their savings, they could not run out of money after assuming the regular growth of money.
The concept has been celebrated and criticized during this year and comes again under analysis in the market as particularly current retirees facing the low-interest rates in the USA.
“I always warned people that the 4 percent rule is not a law of nature like Newton’s laws of motion,” said Mr. Bengen, who graduated from the Massachusetts Institute of Technology with a bachelor’s in aeronautics and astronautics in 1969. “It is entirely possible that at some time in the future there could be a worse case.”
4% Rule
I would like to explain 4 % rule also known as safe withdrawal rate or the way out of which you spend your money without running out of money.
It also determines when and how much money you need to retire. The easy way to calculate how does it work and how much you need to retire?
Assuming the annual income of your family and multiply by 25 give you the number in which you can consider that amount you need to have during your retirement age.
Take an example your family is spending $40,000 per year, then you should have $1 million invested or more during your retirement age to last a lifetime.
There should be some limitations, how long can you save the 4% from your withdrawal and didn’t run out of money. The concept that explains the 4% rule is called the trinity study.
Trinity study looked at how the money you’d need to retire every year between 1926 to 2009.
The study tells if you invest 50% of your money to stock a 50% money to your bonds and withdrawing 4% of your money will be fine for 25 years and 100% of the time 4% rule does work perfectly.
Taking a 4% rule for 30 years, and it will work 96% of the time. The little problem befalls over here is that 4% rule will face problem if you retire in an unlucky year without any pension and social security deposits.
In such a situation, I have prepared myself to do the things that I love to do such as I don’t want to stop my passive income through my passion and I will try to make my 4% rule succeed.
There is no 100% surety for a 4% rule right now. You need to calculate your net worth, and balance to make sure you are going in the right way to prove the 4% rule is to succeed or fail for you.
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Should we go to the 3% rule?
If you are wondering why everyone talking about the 4% rule which may consist of chances of failure and what about 3% rule will give the 100% guaranteed success rate.
I am very well aware of the 3% rule which makes sure us that it will work completely fine. When I dig deeper into the 3% rule, and why not 10% rule such thoughts were running in my mind.
The money you have invested in stocks will give the dividends an increase in value at a rate of 7% per year on average, and if I add the inflation rate of 3% per year which is a decrease in the value dividends you have. After combining those two factors you will have 4% in your net worth.
The calculation is quite simple and historical data also represents a 7% return, and 3% average inflation working fine since 1900, which was a century of wars, recession, and prediction of stocks but still, the average inflation was 3%, and the return value of the investment was 7% at that time also.
Key Takeaway
- Throughout modern history, 4% rule is a great thumb rule which is successful and victorious use it properly you will find this rule more comfortable during your retirement age.
- Use the 3% rule if you are not sure about the 4% but multiply to 33 to your annual expenses to get the money idea you should have when you’ll retire.
- Start investing and make a saving, and reinvest the dividends to make more money so that you will have a great retirement year ahead and there will be no chance of running out of money.
Final thoughts
Make sure your yearly expenses low and be patient and let the money work for you.
A human being is supposed to work and compromise to live a normal life to meet the basic necessity.
Retirement is the time you need to take by all yourself that is why we need to prepare for everything comes in our way.