What’s the 4% rule in retirement fund?

Credit: Pixabay

By: MJ Gonzales | Executive Chronicles

As early as now, it’s recommended that slowly think and build your retirement fund for your own good. Although you can’t fathom what lies ahead, ‘the better way to predict your future is to create it’ according to Abraham Lincoln.  Now, don’t bet on the idea you only need a million to five million to make your senior citizen version relaxed and financially stable.  Aside from the 20/20 rule, the other term you need to assess in retirement is the 4% withdrawal rate strategy.

Imagine that you’re already retired and the sole financial support you can get comes from your hard-earned retirement fund. According to some financial analysis, even if you have Php 10 to 50 million there’s possibility of failure (PoF). The chance of PoF rates, which affect in sustaining your needs and wants, is high if you don’t mind your annual withdrawal rate.  In a study done by financial planner William Bengen in 1994, the sustainable and safest rule of thumb when it comes to withdrawal rate from your retirement savings is four percent per annum.

However, some money management experts contest that it’s not applicable or reliable knowing notable issues such as inflation rate per year, erratic market status [fluctuations], and unexpected financial crisis. According to Trading Economics, the core inflation rate in the Philippines averaged 3.95 percent from 2001 until 2016. Around September last year, it’s only 1.4 percent and from February to April 2016, it’s stable at 1.5 percent.

Another important factor here is your life expectancy, which if you follow the 20/20 rule you intend to live 20 more years after your retirement age [usually 60-years old].  In that 20 years, you don’t want your money be just enough for your day-to-day expenses, right?  In opinion of Walter Updegrave , the ‘We’re Not in Kansas Anymore: How to Retire Rich in a Totally Changed World’ author and editor of RealDealRetirement.com, better to adjust your withdrawal rate especially in early years of your retirement like  3% to 4%. With it, your fund could support you for up to 30 or more years.

Credit: Pixabay
Credit: Pixabay

“So I recommend starting out with a reasonable withdrawal rate — as well as an appropriate mix of stocks and bonds, given your risk tolerance — and then adjust as you go along,” the former editor of Money Magazine advised.