Retirement planning has been an increasing concern to many people but the jargon and math involved have also discouraged some interested minds. Many fancy retiring early and also want something to ground them so they can live well till they are grey heads. It can’t be easy when you want to travel all you want without worrying about money. However, some financial planners made it much simpler to take people back on the retirement tracks with one rule. The 4% safe withdrawal rate.
What is a 4 % safe withdrawal rate?
This rule came from an intensive study of basic financial factors (stock and bond markets) throughout history and created a simulation of the possible outcome when someone invested enough while they sat and withdrew some spending cash every year. What would their life be like? Would they be broke after some years or will the money run them their whole lives? So, they created virtual assumptions of people withdrawing different percentages every year so as to know which ones would retire and still be able to live well and those who will become broke and die poor. And that’s when the 4% safe withdrawal rate was born.
The 4% safe withdrawal rate is the amount of money you withdraw each year and still have enough principle to last your whole life. That percentage is seen to be able to work even when you live for more than 30 years with or without financial crises during your existence.
Let’s say you’ve invested $200,000. If you withdraw $8,000 every year for expenses, your withdrawal rate would be 4% which is said to be safe. This means that if you maintain the 4% withdrawal rate, you will live for the rest of your time not having to worry about money.
How does the 4% safe withdrawal rate affect financial independence?
It will depend on how you picture your financial independence. Even in a financial crisis, this rule has been proved to work. The calculations have been repeated over and over again, the occurrences in the financial sector have also been included when making the calculations. Yes, the rule holds for many years so long as you do not deep your fingers into an additional percentage. However, on a normal scale, 5% has been proved to work too. Which means, if you live on a 3% withdrawal rate, there’s a 100% chance you’ll be safe, and have enough to leave a fat inheritance to your heir.
How do you keep it at a 4% safe withdrawal rate?
There is this tendency of people dipping into savings from time to time which is disastrous. Just like you will run out of savings and face repercussions, the same applies to this. But this time, you’ll be completely broke maybe at an age that you won’t be able to get back in the game. To prevent this, it is important to plan in advance.
While you are creating your huge sum of retirement money, create space for fun. Some years will be different from others as you may want to plan a trip or buy a new fancy car, normal stuff. If you didn’t ensure some space in the 4 percent, you’ll end up making it 5 percent or more. After you do that, you know what will happen and it isn’t pretty.
You can also make a plan of how you’ll be spending differently each year. You can decide to spend less this year and use the extras next year. Will it be worth it, yes, you’ll be keeping financial independence intact while you enjoy your life.
Is it all good with the 4% safe withdrawal rate?
So, you make enough money, ditch your job and live safely. Right? It depends. There are just too many mystical factors. I am not talking aliens invading earth. I am referring to your life experiencing a crazy tornado. What if you have to pay for a long-term medical emergency? Let’s not go there yet.
Let’s say you retire, move to a sandy and palm trees paradise or go to reinvent yourself in the countryside…you name your picture of financial independence. What will happen if you discover you aren’t happy with where you are? What if you’d want to go for your purpose and it needs some high funding. Would you stay in your expenditure lane and forget it? I hope not. See, with the 4% safe withdrawal rate, it doesn’t mean all is figured out.
Another scenario could be a mammoth emergency that you can’t afford. You obviously set aside what you need and everything but what really is enough? The unpredicted outcomes are too scary. If you created a financial dependent mindset already, it might be hard to pick yourself up from an unpredicted ditch.
So all those scenarios are bound to happen. Whether caused by you or not. One constant is, if something goes wrong, you won’t like your life or most importantly, you won’t like what you must do to get it back. The deal is:
-Follow the 4% safe withdrawal rule and make as much money you’ll need for financial independence. It works and you can live just fine.
-Don’t stop at financial independence. Do what you like to do and seek financial freedom.
As much as retirement planning includes the safe withdrawal rate, it also should include a life of fulfillment. You won’t get that by always struggling not to go beyond a certain percentage. It is a great safety net but it doesn’t have to be the safety net, rise above the waters.