Don’t worry you don’t need to be Carol Vorderman or have completed any sort of Maths qualifications to understand the 4% rule. In fact its pretty simple.
However it is an important part of the FIRE (financial independence retire early) movement and indeed semi-retire FIRE.
So what is this mysterious rule??
Put simply, it is the percentage of your investment portfolio (freedom fund) you can withdraw every year and never run out of money (well at least for 30+ years). In other words, you can withdraw 4% from your freedom fund annually to cover some or all of your living expenses and still have lots of money left.
This rule was the result of a famous study in 1998 called the Trinity Study. It looked at different scenarios for withdrawing money from an investment portfolio of stocks and bonds at different points over a 70 year period. This was to find what percentage of investments could be safely withdrawn each year to provide an income in retirement without running out of money for at least 30 years. They found this number to be 4 %. If you want to know more about the study here is a thorough explanation Trinity study – Wikipedia . The 4% rule is also called the safe withdrawal rate.
Knowing this safe withdrawal rate number means you can work out the amount of money you need in your investment portfolio to be able to cover your expenses post FIRE. This is obviously going to be quite a large number for full FIRE which is why semi-retire FIRE can be a more achievable goal.
There is an easy way to work out exactly how much you will need. For full FIRE you can work out the amount you need to have invested by multiplying your annual living expenses by 25.
For example, if you need £2000 a month to live on once you retire you can multiply this by 12 to get the yearly amount of £24000 and then multiply by 25 which is £600,000. That means if you have this amount in investments you can safely withdraw 4% (£2000) each month and hopefully never run out of money.
For semi-retire FIRE, if you want to cover half your expenses you can half the amount in your investments, so £300,000 will give you around £1000 income a month. If this still sounds like too much a pot of £150,000 will give you a £500 a month income, still a nice little income to be able to drop a day or 2 work a week for ever!
These numbers only work for investments though as savings interest rates are usually not as high and so safe withdrawal rates are lower. Fortunately investing can be pretty simple too if you follow a few rules which I will cover in my next post!
Disclaimer: This is not financial advice and you should seek independent advice if you choose to invest.
Semi-Retire FIRE 