4 Percent Rule

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If you have not heard about the four percent rule, you are not alone. As you transition from saving for retirement to actually starting your retirement, you are probably going to hear about this rule more than once. The four percent rule is basically a general guideline about how much you can take from a retirement account and not run out. It is considered a safe rate for you to withdraw from investments because most of your withdrawal would be from dividends and interest.

The History of the Four Percent Rule
Originally, this rule was started in the 1990s. At the time, a financier called William Bengen was creating a study of historical stock market returns. He looked at the 50-year span between 1926 and 1976 to see how much the stock markets earned on average. In particular, he looked closely at the economic downturns of the 1970s and 1930s. After reviewing all of this data, he decided that a 4 percent annual withdrawal rate would always take longer than 33 years to exhaust retirement portfolio. Even with including the Great Depression in his data, he found no
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One important component in this rule is life expectancy. As we mention in the last section, the four percent rule was made with the assumption that the money would last for at least 33 years. If you have family members who regularly live past 100, you may need to rethink your retirement spending. High medical costs are likely later in life anyway, but medical cost and other expenses can also increase over the several decades that you are retired.

Because of the changing expenses, you must also account for inflation. You can either increase your withdrawal amount by 2 percent a year to match the United States Federal Reserve Bank's target inflation rate, or you can adjust your withdrawal amounts based on how the inflation rate actually
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