Some call it the 25x retirement rule.
There are way too many rules to keep track of when retirement and finances are concerned. Let’s start off with one of the most prominent rules of all that has been around for quite a while, and financial planners refer to this rule when calculating the investment figure of a comfortable retirement.
What is the Four percent rule and where did it come from?
According to Investopedia.com, the four percent rule is a rule of thumb used to calculate the amount of money a retiree should withdraw. The chief aim of this rule is to provide a steady income stream that can potentially outlast retiree’s age.
Few factors play a key role during retirement. The four percent rule only considers the income bit of the retiree, whereas if the medical expenses, car and home maintenance can dramatically change the outlook of the for percent rule.
Now, inflation is taking its place in the economy, given the recent boost with stimulus packages. According to the four percent rule, a retiree can only take out four percent adjusted for inflation. While Four percent rule recommends having a mix of stocks and bonds at about 50-50. With the interest rate being at an all-time low, bonds return almost nothing compared to stocks. But if retirees allocate their holding more towards stock and the stocks dip just like back in 2008 and tech crash, they may not be able to wait for the stock to rise back up.
The rule was developed back in 1994 when bonds were yielding 7.09%, and now as mention above, it is around one percent, which is far from ideal for the outdated four percent rule.
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