Picture this: You’ve finally bid adieu to the rat race, sipping on your kopi-Peng, and enjoying the perks of retirement. But wait, how much can you spend without turning your 3-room HDB flat into a cardboard box? Enter the 4% rule, your newfound best friend.
Now what exactly is the 4% rule?
According to Investopedia, the 4% rule for retirement budgeting suggests that a retiree withdraw 4% of the balance in their retirement accounts in the first year after retiring and then withdraw the same dollar amount, adjusted for inflation, every year thereafter. The concept of the 4% Rule is attributed to Bill Bengen, a financial adviser in Southern California who created it in the mid-1990s. The rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976, focusing heavily on the severe market downturns of the 1930s and early 1970s. Bengen concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in fewer than 33 years.
In other words, if you have retirement period of 33 years, and assuming your capital is invested (in stocks and bonds), there is a high likelihood that you have will the same capital as initial if you only withdraw at mximum 4% of the capital. This is because the investment returns from market is sufficient to cover this 4% expense as historically the ROI is 6-10%.
Remember, the 4% rule is just one ingredient in your retirement laksa. Mix it with some CPF magic, sprinkle in a dash of property appreciation, and voila – you’ve got yourself a recipe for retirement success!
To try out the 4% rule, please use the online calculator to generate the data.