So just a little clarity on the 4% rule. Please any and everyone comment. I get the whole concept of the 4% rule but im just hung up on one portion and dont laugh at me lol. So does this 4% rule go into action once you retire...example if i retire at 62, i do 4% of what i need to leave from 62 until i think i will pass on (pretty morbid), Thanks for any and all comments.
The 4% rule would take effect AFTER you retire. It means you would need to acquire enough wealth in your retirement portfolio to withdraw 4% of it every year to live on without depleting any (or at least minimal) of your principle. The internal rate of return on the stock market since 1950 is ~7-8%, so theoretically if you are only withdrawing 4% each year to live on then the average returns in the market should safely cover this so that you're living off the returns and not drawing down your principle. The trinity study back in 1998 is the primary study that ran all the statistical analyses over different time horizons in the market and discovered that withdrawing 4% per year would give you a >95% chance of having sustained income for a 30 year retirement without running out of funds.
So the simple math would be to 25x whatever annual income you calculate you will need to live off of and that is the ultimate amount you would need in your portfolio to retire. Ex: if you calculate you would need $50,000/year to comfortable live and pay your expenses, then you would need to accumulate (50,000 x25)= $1,250,000 in order to reach your goal to retire. Hope that helps.