4% rule use for 10 Years For Retirement plan

I am not sure if you are familiar with so called 4% rule. If not I would like to introduce to you. This rules gives you idea how much you should take from your investment account when you finish with your 10 year retirement plan. For example, if you saved totally 600 000 USD during 10 years you can take 2 000 USD from your account without any problem.

You may think that saving of 600 000 USD is quite impossible, but you should not forget that those money are not only savings, but also incomes from your investments (see picture below). For calculations we use investment return 10% which is just 1.3% higher than long term average of S&P 500. I believe that your investments will be little better than this average if you focus on good stock only.

 

The example of 600 000 USD can be high or low target for you so it is up to you what target you will set. My main idea which I want to share is that your investment income will help you a lot to achieve this. Check my 10 YEAR PLAN, which you can download below. You can set your expected incomes and expense and you will see how much you will get after 10 years (yellow boxes are ready for your input, grey boxes are calculated).

10 YEAR PLAN

But let me return to 4% rule. Those 4% are quite safe to protect you from inflation influence as you still have big difference between 10% (expected investment return) and 4% (your monthly income). So it is up to you if you follow 4% rule or if you change to 5%, 6% or 7% rule. I believe it is better to follow 4% rule as you will have at least two benefits from this. First is that will will be protected in case of bad year for investment (and those years will definitely come). Second reason is connected with already mentioned difference between 4% and 10%. Those 6% difference which you will not spend will help you to increase your investment base.

Let me show you this at example.
You have 600 000 USD on you investing account, so after 10 years you start to take 4% (24 000 USD) from this account for your year expense (600 000 – 24 000 = 576 000). Now we calculate how much you earn by investing as your average investment return is 10% (576 000 + 10% = 633 600). As you can see from second year your base at investing account increased from 600 000 USD to 633 600 USD which is now not 2 000 USD per month but 2 112 USD. By this you will get more and more money for spend every year.

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