One of the retirement strategies; comes from a paper written in 1998 by three finance professors at Trinity University. Idea was to study & identify, as to what rate of withdrawal is an ideal rate per year, which is sustainable to the retirement corpus, and can last 30 years.
How the 4% rule works?
To figure out how much money you need for your retirement corpus, multiple 25 with the annual retirement income (you wish that point of time). Let’s say you need 10 lacs per year.
Hence, your retirement corpus will be = 10 lacs multiplied by 25 = 2.5 crores.
Let’s now look at how 4% will work: You withdraw 4% of your total account balance in the 1st year. Then every following year you will withdraw 4% plus inflation, such that effective value of the investment remains same.
Lot of study & back dated testing says that, 4% rule has a 96% probability of leaving more than 100% of you original starting principal.
Equity or Bond?
Equity have the most potential to make more money, but also suffers most during the lows, whereas Bonds gives stability, but without big returns. Therefore, a good mix of 50/50 is appropriate, and with higher tenure in mind, higher dose of equity is suggested, which may go as high to 60% or even 70%.
Its recommended to speak & consult your financial advisor, before initiating such exercise. As 4% rule may sound attractive & simple, but asset allocation model, risk profiling & funds selection requires expertise.
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