The 4% Rule is a guideline for retirement withdrawals, suggesting that you can withdraw 4% of your retirement portfolio in the first year and adjust that amount annually for inflation. The aim is to ensure that your savings last for a 30-year retirement.
The rule is based on historical data showing that a balanced portfolio of stocks and bonds (split approximately 50:50) could support a 4% annual withdrawal rate over decades without running out of money.
For example, if you have a retirement portfolio of CHF 500'000, you would withdraw CHF 20'000 in the first year. The next year, you would increase the amount by the rate of inflation to maintain your purchasing power.
Whilst the 4% Rule sounds great and is a useful starting point, it is important to remember that it is not a guarantee. Market conditions, unexpected expenses, and changes in life expectancy may mean your withdrawal strategy requires adjustments.
Some retirees opt for a more conservative approach, like a 3% or 3.5% withdrawal rate, to reduce the risk of depleting their funds in volatile markets.
The 4% Rule is best for those who plan to rely on their investments for the bulk of their retirement income and prefer a steady withdrawal strategy. However, it may be helpful to periodically reassess your plan to stay aligned with your financial goals and changing economic conditions.