The Four Percent Solution

 

The ‘Four Percent Solution’ is discussed in the book, “Safe 4 Retirement : The Four Keys to a Safe Retirement” as providing a novel approach to retirement income planning:

But is there a way in which people can take income and still ensure that their principal will remain constant? Certainly we can buy CDs or original issue bonds and hold until maturity for this to occur. However, the reality is that this approach not only yields low rates on CDs, but it’s also very difficult to gain a bond at the exact value that you’ll be able to redeem it at without fluctuations in price over this time. Plus, for most of us, our investment portfolio will be the major source of retirement income and that portfolio should be made of various holdings and asset classes (stocks, bonds, mutual funds, etc.).

So the question becomes “How much should I withdraw from my portfolio to gain an income while ensuring protection of my principal?” Seven percent? Five percent? This is an interesting question when you’re seeking a percentage rather than an amount. Even with a large portfolio, if you look at percentages rather than amounts for your yearly income, a single percentage change can impact your ability to maintain your principal.

So, what is the right number?

Fortunately, we have professors, analysts, and economists who are much smarter than I who study this stuff. This chapter is about one approach that is gaining interest and attention, the 4% solution. This is an approach that says that withdrawing 4% from your investments will provide lifetime income and you’ll never outlive your assets.”

– excerpt from ‘Safe 4 Retirement : The 4 Keys to a Safe Retirement’ by Jack Tatar

For more information on the ‘The Four Percent Solution’ see these web links:

CNN/Money article by Walter Updegrave, Money Magazine senior editor

‘The One Thing’ blog entry on “The Four Percent Solution”

The 4% Rule : At What Cost?  – Stanford University study

 The Trinity Study wiki

About.com article by Michael Rubin : How Much Can You Safely Withdraw from Your Retirement Account Each Year?

‘Is the 4% Solution Viable in This Economy and Markets’? – Smart Money Article 1/2012

Testing the 4% a Year Retirement Rule – March 5, 2012, Wall Street Journal

 

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