Thread by @tradersushma

👍The 4% Rule of Thumb for Withdrawals from Retirement Fund👍

A Thread🧵
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#financialplanning
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Generally when people plan for their retirement their main focus is to find out how much corpus is sufficient for a decent retirement life. The spending part is usually ignored.

The 4% rule is one such plan which talks of the spending phase.
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The 4% rule tells us about how much a retiree should withdraw from his retirement a/c each year which shall continue to provide him a steady source of income without depleting his retirement corpus.
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The 4% rule says that if a retiree withdraws 4% from his retirement a/c each year (adjusted for inflation after the 2nd year), the funds shall continue to provide him regular income stream for 30 years at least.
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Key Takeaways

🔹Withdraw 4% of your retirement savings.
🔹Each year after, withdraw the initial 4% amount, but adjusted for inflation.
🔹Your retirement savings should last 30 years.
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Let us understand with an example.

Retirement fund = Rs 1cr
Inflation = 6%
1st year withdrawal = Rs 4 lacs
2nd year withdrawal = Rs 4.24 lacs
& so on.

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Assumptions for this rule

🔹The corpus is invested in the ratio of 60% in equity & 40% in debt.
🔹The spending level of the retiree shall remain constant throughout the retirement years.

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History of 4% rule

4% rule of spending was first introduced by US-based Financial Advisor William Bengen in 1994. Earlier 5% was considered to be safe amount for retirees to withdraw each year.
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Advantages of 4% rule

🔹It is very simple to follow.
🔹If followed religiously, it protects you from running out of funds in your retirement years.
🔹It caps the spending habit of the retiree upto 4% of his funds.

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Disadvantages of 4% rule

🔹It is not dynamic & does not consider the fluctuations in spending habits of the retiree.
🔹It does not work on different asset allocation.
🔹It does not account for changing market conditions.

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🔹This rule is based on past performance of the markets & is not predictive of future results.
🔹This rule accounts only for 30 years of living after retirement. It is not fit for early retirees (retired at age 30s or 40s) or people with higher longevity.
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Since this rule was introduced by William Bengen who studied the historical data of US stock and bond markets, this 4% rule may not be suitable for Indian context & % withdrawal amount may vary.
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So one should not blindly follow this 4% withdrawal rule & find out their own % number after going through their individual requirements.

That's all for this thread.

If u have enjoyed this thread, RT the 1st post for wider audience.

Thank u!

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