Green Living Library
  • Welcome
  • Blog
  • Green Living with a Kid
  • Lifestyle
    • All Natural Health
    • Books Worth Reading
    • Composting
    • Green Documentaries
    • Green Transportation
    • Green Landscaping
    • Reduce, Reuse and Recycle
  • Food
    • Organic Farming
    • Composting
    • Extra Resources
    • Food Storage and Preservation
    • Gardening >
      • Companion Planting
      • Seed Starting
      • Weed Control
    • Soil >
      • Soil Health
      • Soil Science
      • Soil Building
      • Soil Tests
  • Home Building
    • Adobe and Earthbag Building
    • Cob
    • Log
    • Rammed Earth
    • Straw Bales
    • Heating and Cooling >
      • Home Heating External Links
  • Frugal Living Library
  • Renewable Energy
    • Solar Power
  • About
  • Contact
  • Green Living Photo Gallery
  • Welcome
  • Blog
  • Green Living with a Kid
  • Lifestyle
    • All Natural Health
    • Books Worth Reading
    • Composting
    • Green Documentaries
    • Green Transportation
    • Green Landscaping
    • Reduce, Reuse and Recycle
  • Food
    • Organic Farming
    • Composting
    • Extra Resources
    • Food Storage and Preservation
    • Gardening >
      • Companion Planting
      • Seed Starting
      • Weed Control
    • Soil >
      • Soil Health
      • Soil Science
      • Soil Building
      • Soil Tests
  • Home Building
    • Adobe and Earthbag Building
    • Cob
    • Log
    • Rammed Earth
    • Straw Bales
    • Heating and Cooling >
      • Home Heating External Links
  • Frugal Living Library
  • Renewable Energy
    • Solar Power
  • About
  • Contact
  • Green Living Photo Gallery

What is the 4% Rule?

2/17/2019

0 Comments

 
The 4% rule and its findings are critical to the success of the FIRE principle and understanding it is the key to being able to retire much earlier than you thought.  I will try to give you a clear explanation of what the 4% rule is and how it can be applied to your life.

​
4% in a nutshell

The 4% rule is basically the rule that tells you how much you can withdraw from a investment portfolio and expect it to keep its current value.  It is derived from two other numbers found out there in the economy that have shown to be the averages for the expected rate of return on investments and the average inflation rate of the economy.

Rate of Return- how much money you make from the growth of your stocks/bonds and the money they payout in dividends.

Inflation- the growing cost of stuff ie. how a candy bar used to be 50 cents in 1995 and now costs a $1.25


On average it has been found that the return on investment for the general economy is 7%.  This does not mean individual picked stocks but is instead the growth rate overall for the whole economy.  

During this same period of time the average inflation rate is 3%.  So by doing a little bit of simple subtraction of you arrive at a sustainable withdrawal rate of 4%.

This idea has been back up by something called the Trinity Study which showed that over a 30 year retirement if you only withdrew 4% of your portfolio every year that your money has a 96% chance of lasting the whole time.  

But now you might be saying to yourself only 30 years what if retire when I'm 40 is my money going to run out when I’m 70.  

The simple answer is no because of a couple extenuating factors.

  1. If you retire at the age of 40 do you really think you are not going to make another cent the rest of your life.  No you are going to end up doing things just to avoid boredom and I would bet that some of those things will make you money.
  2. The Trinity Study does not take into account social security, pensions or other forms of retirement income that kick in once you reach a certain age.  You could very well end up with a fully funded retirement without having to even touch your portfolio once that money starts coming in.
  3. In  most years the economy actually grows by more than 7% so if you are only withdrawing 4% the extra income is being reinvested which causes your portfolio to grow.

While the 4% rule is powerful the key to really making money lasting a lifetime is flexibility.  If the economy tanks for a year or two and your return on investments is low you might have to cut expenses or get a part time job.  When the economy is booming at 8,9 or 10% that would be a good time to go on a nice long vacation or buy some rental property that can provide you with another source of income.  


Moral of the Story

The 4% percent rule and it should really be called a 4% guideline is something to give you a target to shoot at with your saving and investing.  It is not something that you need to live or die by but instead use it as a benchmark to refer to when making your financial decisions.

 



Further Reading

http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/

​
0 Comments



Leave a Reply.

    Author

    Hello my name is Josh Larson and I am the creator of the Green Living Library.  Here on the blog you will find updates to content found in the Green Living Library as well as stories from those living the sustainable life already.  

    Archives

    November 2020
    October 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    August 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    January 2018
    September 2017
    July 2017
    June 2017
    April 2017
    March 2017
    January 2017
    December 2016
    November 2016
    October 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    February 2016
    January 2016
    December 2015
    October 2015
    August 2015
    July 2015
    June 2015
    April 2015
    March 2015
    February 2015

    Categories

    All
    Climate Change
    Companion Planting
    Composting
    Cover Crops
    DIY
    Documentaries
    Financial Independence
    FIRE
    Food Forests
    Food Preservation
    Gardening
    GMO
    Health
    Heating
    Home Heating
    Homesteading
    Human Population
    Industrial Agriculture
    Mulch
    Organic Food
    Organic Matter
    Passive Cooling
    Permaculture
    Plastic
    Pollution
    Recycling
    Renewable Energy
    Reuse
    Seed Starting
    Soil
    Soil Compaction
    Solar
    Solar Power
    Species Extinction
    Tillage
    Trees
    Trellis
    Tweaks
    Urban Agriculture
    Windbreaks

Photos used under Creative Commons from andrew_ross, Scrap Pile, USDA NRCS South Dakota, mikecogh, mikecogh, rmkoske, UnitedSoybeanBoard, naturalflow, Rennett Stowe