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