The 4% Rule

The 4% Rule

Have you ever thought “How much do I need to save for my retirement”? I certainly have.

So, I jumped onto and started punching in numbers and guessing at how long I’ll live for and guessing at how much I will be spending each week in 30 YEARS TIME, how much superannuation might be on offer, what my KiwiSaver balance might be and flicking to this screen and that screen so I could get a best guess at guessing all of the above. Arrrrgggghhhh! After I had opened up five different tabs and was flicking through them all to work out how much to guess and calculate I thought to myself “there must be a simpler way”?

More and more Kiwi’s are twigging onto this FIRE, FI, NBCWM (not being crap with money) ‘movement’. You and I are simplifying our lives, watching what we earn, watching what we spend and most of us are noting that information down in spreadsheets like this:

Every Dollar Budget

Or if you are a more visual person you might stick something to your fridge that looks like this:

Paying off mortage

But whatever way we document and log our debt, earnings, savings and expenses we have come to KNOW exactly how much it costs us to live each month and each year.

The IMPORTANCE of a budget outweighs the BOREDOM of having to do a budget because only once we have these accurate figures can we even think about applying the 4% Rule and working out how much money we need to have invested before we can retire. Otherwise we are just taking a stab in the dark at our retirement number. And I for one don’t want to turn to Jonny when we are 85 and living in a tent in a park because the money ran out and say “Oops, looks like my best guess was wrong Honey”.

Professor’s from Trinity University in America created a study that looked into a sustainable withdrawal rate and to cut a long story short, they came up with the 4% Rule (a link to their study is below):

Here is how you work it out:
Your yearly expenses x 25 = A BIG NUMBER

And it's this big number that gives me a rough but fairly accurate idea of how much money we need to have invested before we can retire. THEN if I pull no more than 4% of that number out each year to live on in retirement I ‘should’ preserve the remainder of my investment, it won’t deplete, and I won’t run out of money.

Here is an example:
$50,000 x 25 = $1,250,000

The 4% Rule (or 4% safe withdrawal rate) using this figure would tell me that 4% of $1,250,000 is of course $50,000. So, that’s what I can remove from my investments each year and still preserve the capital.

It’s a simple yet tricky calculation to pin your financial future upon because there are of course factors that are unknown:

  • How will my investments perform over time? Stock markets rise and fall.
  • I will get superannuation, but not for another 25+ years. Or won’t I?
  • What will the inflation rate look like going forward?
  • Will I continue to spend less than I earn?
  • Will I work more or less in the next 10, 20 or 30 years?

Of course when I write about retirement I’m not thinking about the age of 65, I’m thinking about retirement as a concept, not a number. I remember in 2017 there was quite a bit on the news about how much money we Kiwi’s might need to have saved in order to retire to a ‘good lifestyle’ etc but that was all focussed on being 65 and receiving the government super and THEN whether or not you were going out for steak dinners and having holidays or not. I recall the debates getting quite heated.

Jonny and I are already ‘semi-retired’ and both work part time so we are relying on the income we make with no outside assistance. And the one thing that does stand out to me when I write about this is that it is within my grasp to fully retire much earlier than 65 years of age IF I CHOOSE TOO but I will need more money because I WILL NOT be entitled to any superannuation payment.

It is all about my spending habits, my SAVING habits and living within my means. The lower my yearly expenses, the less I need to have invested.

So, the 4% Rule helps to put some numbers around the philosophical argument of “how much do I need to retire”. And the fact that I’ve kept track of my expenses and can use an accurate figure of my own does mean I have a BIG NUMBER to aim for. And I don’t know about you, but I used to think I needed multiple millions which felt VERY UNATTAINABLE but now, when I calculate my own figures, I find that I actually need far less than I thought which is comforting and the best bit is that it is within my control and attainable. What about you?

Happy Saving!



I’ve done a simple summary above of how the 4% Rule works but for more detail make sure you check out these links:

Mr. Money Mustache: The 4% Rule: The Easy Answer to "How Much Do I Need for Retirement?"

JL Collins: Stocks - Part XIII: The 4% rule, withdrawal rates and how much can I spend anyway?

And for the geeks amongst you here is the Trinity Study itself: Portfolio Success Rates: Where to Draw the Line

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