The 4% rule that can make your retirement money last long

The 4% rule of thumb can solve this problem. If you withdraw 4% from your portfolio each year after retirement, the fund can last you at least 30 years.

For example, when you retire at age 60, you have an investment of ??5 crores. If you remove ??20 lakh every year, or 4% of your wallet, your money can last you up to 90 years.

US-based financial advisor William P. Bengen first explained the 4% withdrawal rate. He looked at historical data from the stock and bond markets. He realized that if an individual withdraws 4% each year from the portfolio after retirement, the corpus will last for at least 30 years, regardless of market conditions.

It’s a conservative approach to ensure that your retirement corpus doesn’t run out prematurely. When saving for retirement, there is also a lot of uncertainty surrounding life expectancy, market performance, and inflation.

All of these have a direct impact on your investments. You have to be careful about how much you take out of it each year to cover your expenses.

The 4% rule attempts to protect your savings against such factors by preventing retirees from withdrawing beyond a certain percentage of their corpus.

There are times when the rule of thumb may not work. For example, a severe market downturn can significantly erode the value of stocks in a person’s portfolio. It also may not work if the retiree doesn’t stick to the rule every year.

A lot also depends on your asset allocation and your investment possibilities. If you are 100% in debt products, the rule may not work. In his research, Bengen looked at a portfolio of 50% stocks and 50% bonds.

Equity generally offers a higher return than debt. If a person’s retirement portfolio is not in stocks, the withdrawal rate should be less than 4%.

Use rules of thumb as guiding principles and adjust things based on what works for you.

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