Saturday Critical Action – Think of Your Assets as Income

by | 26May2018 | Critical Actions, Investing, Retirement | 0 comments

Welcome to the Saturday Critical Action. Each Saturday we take the weekly action from Jonathan Clements‘ blog Humble Dollar and “militarize” it for you. Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get…free. Here is this week’s critical action:

THINK OF YOUR ASSETS AS INCOME. If you retired today, how much income would your nest egg generate? One rule of thumb says that, in the first year of retirement, you can withdraw 4% of your portfolio’s value, equal to $4,000 for every $100,000 saved. It’s a sobering way to assess your retirement readiness—and it might prompt you to save more, postpone retirement or work part-time in retirement.

 

The rule of thumb he mentions and explains is known as the 4% rule, which can also be applied to a military pension. For example, if you stay in long enough to earn a $40,000 per year pension, that is about the same as having $1,000,000 in investments. You can read all about the value of a military pension in this article.

Keep in mind that the 4% rule is controversial and is only a rule of thumb. There are some good articles out there that take a deeper dive on the 4% rule. Here are a few:

Adjusting Safe Withdrawal Rates To The Retiree’s Time Horizon

How Has The 4% Rule Held Up Since The Tech Bubble And The 2008 Financial Crisis?

Resolving the Paradox – Is the Safe Withdrawal Rate Sometimes Too Safe?

Safe Withdrawal Rate for Early Retirees

Understanding Sequence Of Return Risk – Safe Withdrawal Rates, Bear Market Crashes, And Bad Decades

What Returns Are Safe Withdrawal Rates REALLY Based Upon?

 

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