Have you sat in your office at the boring job you hate and daydreamed about being 65 and finally escaping the 9-5 grind? If so, this article may be for you. Contrary to popular belief retirement isn’t based on a specific age, it’s based on a number. Once you hit your number you can pull the ripcord and peace outta there. How do you know what your number is? Let me introduce the 4% rule. This rule comes from a study by financial advisor William Bengen who wanted to find out what is a safe withdrawal amount for retirees. William found that there is no historical case where a 4% annual withdrawal from a 50/50 bond & stock portfolio depleted the balance in less than 33 years, even when accounting for the Great Depression or the crazy inflation of the 70s.

Here is how the rule is practiced. Take your current retirement portfolio balance, multiply it by 0.04, and the answer is the amount you can safely withdraw. As an example, if you have $1M in retirement accounts, the 4% rule says you can safely live off $40K per year. The rule also allows for you to increase that $40K by 2% every year to adjust for inflation. So $40,800 in year 2, $41,616 in year 3, etc.

To apply this rule to early retirement planning, take the amount of money you want to live off of in retirement and divide it by 0.04. The answer is the total amount you should aim to have in your accounts before retiring. As an example, if you want to live it large off $100K per year in retirement, you should aim for $2.5M. Now I should note that the study was only looking at a 33-year retirement span. If your goal is to retire early, I would recommend adjusting your withdrawal to 2.5 or 3% as a more conservative buffer. OR keep the 4% but be flexible in retirement and be willing to withdraw less or work part time when the market is in a down year. I also would never recommend a 50/50 bond/stock portfolio, especially for early retirement. The goal is to live off the earnings from your investments without having to reduce the principal balance. Although the 4% rule isn’t the holy grail, it is a great number to benchmark and keep in mind as you accelerate your net worth.

So, here’s your homework assignment.

1. How much do you want to live off per year in retirement? _____

2. Take answer 1 and divide by 0.04 = ______

3. Answer 2 is the amount you need invested/saved before you can potentially retire

Bam, you now have a retirement savings goal. You’re welcome.

Source for the S&P 500 rolling returns – a fascinating read if you’re a finance nerd like me