Familiar With The 4% Rule? - Well, You Can Forget It
The 4% rule is a high level guideline for retirement that was created in the 1990s and made some sense for a while, until it didn't at all.
The 4% Rule
In essence the rule is used to figure the amount of income a retiree can withdraw from their investment accounts each year that will also enable them to maintain the account balance.
This assume a typical "diversified" portfolio of 60% stocks and 40% bonds. (I quoted diversified since anyone who reads or listens to my stuff knows in reality that is not diversified)
The 4% rate is considered a safe rate of withdrawal as it will consist primarily of interest and dividends.
Death of the 4% Rule
It was a novel little calculation, here's the rub though - when it was created government bonds were paying more than 4% and stocks were in a bull market.
Now government bonds are paying sub 4% and as anyone saw from 2000 to 2010, you ended up with zero growth on your stock portfolio. A period that is often referred to as the "lost decade."
In fact, apparently if someone retired in the year 2000 and used the 4% rule they would have seen a 33% reduction in their balance by 2010.
That is not exactly a recipe that "maintains the account balance."
Multiple Streams of Income
Bottom line is creating multiple streams of income is key for retirement (or financial freedom) and having that produced just from stocks and bonds is a tough match to win.
There are so many investment vehicles out there from annuities and rental real estate to name just a couple. It is really just a matter of looking and learning.
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Best Regards,
Disclaimer: All info in this post is my opinion and for educational us
Free e-book: ScaredyCatGuide to Knowing What the Heck Bitcoin Is
Best Regards,
Disclaimer: All info in this post is my opinion and for educational us
Great post. Never heard about that and it's important to always make certain rules makes sense. Did you read Kiyosaki's book "Prophecy"?
Haven't read that one but have of course read rich dad poor dad and more recently the Loopholes of Real Estate. That was great for tax info etc.
I read Prophecy around 13 yrs ago and it was a prediction for essentially now. Talked about how the stock market would peak and crash because the laws require the generation with the most money to have to withdraw money every month from their retirement. If it wasn't for Kiyosaki I would not be in real estate.
They also chose that rate as it was consider a risk free rate which could be achieved to guarantee long term income for retirees. I think we can no longer assume any risk free returns. Also, not to get too deep in discussions but social security was always meant to supplement this income but can we assume that will exist in the future?
I already work under the assumption that I will not see social security $$$ when I reach the allowable age. If it happens some how that it's just a bonus.
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There are so many things from the past that are irrelevant in modern times. It's talked about so much but I never get tired of stressing it. The 40 hour a week for 40 years of our lives is outdated as well. There are so many ways to generate income that for me, getting a regular job should be more of a safety net. A 20th century mindset does not work in the 21st century anymore.
Exactly, need to evolve and grow in out thinking and approach.
Always :)
If we don not change, we will be slaves. :(
With P/E ratios over 70, 4% isn't even on the radar anymore.
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Good point. When it comes to the 4% rule, not only do you have to worry about down markets, but you also have to adjust for inflation each year which further depletes your retirement account. Looking into various streams of income while at the same time reducing current expenses will help your nest egg sustain you longer.
Stocks are getting surpassed by cryptocurrencies for example.
And just like that, the mentality of saving for your retirement is changing, and will change even more when people realise the potential of coins like STEEM, where you can make your dream come true.
Multiple Streams of Income is the way to go in my opinion, if you have a consistent and multiple ways of income over the years, unless something catastrophic happens in the world, you will do just fine...