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The 4 Percent Rule (4% Rule)

00:00 4% Rule Basics
0:55 Trinity Study
1:13 4% Rule for F.I.R.E.
1:25 SP500 Historical Data
2:13 Inflation
2:37 4% Rule Calculator Spreadsheet
3:49 4% Rule Portfolios
4:50 3 Tips for Financial Independence
https://www.thecasualcapitalist.com/f...

In this video I'm going to explain the Four Percent Rule and I'm also going to
show you some tips how I was able to start living off of the four percent rule.

The four percent rule is also known as a safe withdrawal rate for retirement and this basically says that you can withdraw four percent of your retirement fund every year without ever running out of money.

This works by saving up a certain amount of money, investing this in the stocks and bonds where you should be able to earn an average of about seven percent on your
Investments.

From this seven percent, three percent goes towards inflation while the other four percent is what you can spend every single year. And the theory is, is that your original starting amount will never run out. In fact, it should increase by about three percent a year to track with inflation.

So let's look at some real numbers, let's say you were able to save a million, dollars for retirement. If you multiply this by four percent this means that you can spend forty thousand dollars every
single year.

The 4% Rule and FIRE

Now, you might be wondering where these numbers come from and if they work for FIRE because usually when someone retires early, they need more than 30 years to live off of their retirement fund.

So we’re going to look at the past one hundred years of data for the US Stock Market and we can see that the SP 500 returned about 10.4 percent over the past 100 years.

This is going to include all the good years and all of the bad years. It includes the Great Depression, World War II, the Vietnam War, the Tech Bubble bursting in the 90s, the Global Financial Crisis in 2008, Covid and today.

And today (2022), the stock market is down but it will have up years it will have down years these are
historical averages and that's what all of the numbers are based on.

We can do the exact same thing with inflation we can go back 100 years to 1922 and we can see that the average inflation rate was 2.9 percent and as of recording this video inflation is about 8.3 percent so this year is obviously much higher but even if we look at the data just going back 10 years we can see that most years it was under three percent 1.7 1.5 0.8 and if we add up all of these years divide them by 10 we'll get the average of three percent inflation so some years will be higher some years will be lower all of the numbers are based on historical data.

And so now we’re going to look at some sample portfolio allocations. This is where we split the money between stocks and bonds. So in the first one, we have a 50% stocks and 50% bonds portfolio. If we take $1,000,000 then this means we’ll put $500,000 into stocks and $500,000 into bonds.

Now if we take the historical returns that we just talked about, then a 50/50 portfolio will give us a yearly return of 8.15% and then we subtract inflation of 2.91% this gives us 5.24% which is higher than the 4% rule. So some would consider the 4% rule to be conservative.

Next we can look at some other portfolio allocations like 60/40 and 70/30. As you can see, the higher the percentage in stocks, the better returns there will be over the long term. But this will also be more volatile and in some ways more risky, so it all depends on your risk tolerance.

The 4% Rule was made famous by three professors at Trinity University that back tested a mix of stock and bond portfolios for 30 year periods and found that there was a 95% success rate when 4% of the retirement fund was withdrawn every year.

Sources:
https://stockcharts.com/freecharts/hi...
https://www.macrotrends.net/2016/10-y...
https://www.macrotrends.net/2526/sp-5...
https://www.in2013dollars.com/us/infl...
https://www.officialdata.org/us/stock...
https://en.wikipedia.org/wiki/Trinity...