The 4% rule of retirement planning – What is it?
Sounds like a plan for renewment. Is it a simple rule or is there more to it? Can we apply it any time we want to? Having time on your side helps? Our experts weigh in on retirement, planning and renewing your life.
Chennai
saravanan@purplepond.in
The 4% “Rule of Thumb” is used by many retirement planners in the context of thewithdrawal rate. It is a simplified and easy way to understand the basic concepts of retirement.
The concept of the 4% Rule is attributed to Bill Bengen, a financial adviser in Southern California, USA who created it in the mid-1990s.
Mr Bengen claimed that 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.
He also concluded that, even during an untenable market condition, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in 33 years with the withdrawal inflation adjusted (Inflation of 2%).
Taking the case of India, the back tested data on Debt Fund (GILT) where there is zero credit risk, the 4% withdrawal with an elevated 5% inflation also satisfies the condition of living out of the returns for a period of 21 years (2001 – 2022).