What is the 4 % rule of financial freedom?

What Is the 4% Rule of Financial Freedom?

The 4% rule is a guideline to determine how much you can safely withdraw from your retirement savings each year without running out of money.

It’s based on a theory that if you withdraw 4% of your portfolio in the first year of retirement and adjust that amount annually for inflation, your savings should last for 30 years or more.

Here’s how it works:

1. Determine Your Retirement Goal: Estimate your annual expenses in retirement. For example, if you need $40,000 per year, you’ll use that as your baseline.
2. Calculate Your Target Savings: Multiply your annual expenses by 25. In this example, $40,000 × 25 = $1,000,000. This is the amount you’ll need to retire with the 4% rule.
3. Withdraw Strategically: During retirement, you withdraw 4% in year one ($40,000 from $1,000,000) and adjust for inflation in subsequent years.

The 4% rule assumes a diversified investment portfolio with a mix of stocks and bonds. It’s not foolproof — market performance, taxes, and personal circumstances can affect its success — but it provides a simple framework for financial freedom planning.

In essence, the 4% rule is about balance: ensuring your money supports your lifestyle while preserving enough to last. It’s a valuable tool for anyone striving to achieve financial independence and a worry-free retirement.

The Catch

This does not account for the cost of emergencies, including medical which are more likely as we get older.

The 4% is a great goal to strive for, having that $1,000,000 but more will always be better in this game.

My mindset shift regarding this goal, is to find a way to first make the million, but then live off the interest instead of withdrawing from the base saving.

Something to think about.