The Inverse 4% Rule Puts Retirement Income and Expenses into Sight


You may have heard of the “4% rule” when it comes to withdrawing retirement benefits, but why not try the “reverse 4% rule”?

Flipping this investment guideline can help retirees think about their retirement money in a new way. Instead of multiplying your nest egg total by 4%, divide your withdrawals or contributions by 4% to get a sense of how certain financial decisions will affect your future retirement lifestyle and security.

result? Earning $50 an hour has the same immediate effect of saving an additional $1,250. It may sound too good to be true, but it just requires a new way of thinking.

Let’s review: The 4% rule, devised by planner William Bengen in the 1990s, allows you to withdraw that percentage each year from your inflation-adjusted stock and bond portfolio, and that your portfolio will last at least 30 years.

The inverse 4% rule shows how extra income or additional expenses affect your nest egg in retirement.

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Turn your side hustle into $250,000

Consider the case of retirees who incur unexpectedly high costs during inflationary times. What if, instead of withdrawing more cash to pay for higher living expenses, he or she went back to work and did consulting five hours a week for $50 an hour? Does extra income make a big difference to a 7-figure retirement account?

Let’s do the math:

Assuming a retiree’s nest egg is $2 million, this supports withdrawals of $80,000 per year under the 4% rule. If the retiree works in that consulting business for 10 months a year and earns $10,000 a year, the extra income temporarily jumps her retirement savings from $2 million to her $2.25 million. is the same as

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Alternatively, our retirees can withdraw only $70,000 from their retirement account, leaving an extra $10,000 to continue compounding for the remainder of their retirement years. “The main benefit is that you can save more money,” said Michael Finke, professor of wealth management at the American College of Financial Services. It’s a surefire way to reduce financing costs.”

Sure, the effect of a part-time job is like $250,000 in additional assets for as long as the retiree continues to work, but a $2 million nest egg provides income safely for 30 years. . Meanwhile, her extra $10,000 allows him to buy a nice balcony stateroom for her two-week cruise to St. Martin without losing a single dollar from the investment.

Reasons to choose a used car

Restructuring financial decision-making along these lines is not a new concept. Consider the individual economist who, citing the “Latte Rule,” argues that those who buy a cup of coffee every day are doomed to a dire financial future. $107,000.

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4% of future annual income will decrease for every $1,000 withdrawn from retirement assets
$40 annual withdrawal. Consider buying a car for retirement. You’ve worked hard, so why not upgrade from a $25,000 reliable used car to a new $60,000 SUV?

So the extra $35,000 you spend on your car equates to saving $1,400 a year over the next 30 years, or $117 a month. When you look at those numbers, used cars are easier to drive.

Income vs Expense vs Quality of Life

No need to fire up your iPhone calculator every time you go to the store to figure out the difference between good scotch and cheap scotch. Knowing how hard you worked and wasted to hatch the nest egg, and how to balance using some of your money to improve your quality of life and risk living your money longer. there is only you

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That luxury car might be a splurge, but you might decide it’s worth spending another $50,000 to get the home you really want. Yes, the 4% rule implies a $2,000 reduction in annual draw. In this case, unlike your car, you’re at least putting your money into a high-value asset that you can borrow someday if you need it.

It doesn’t take math to figure out that your money will last longer if you increase your retirement or spend less each year. But a few quick divisions can help give you some perspective on long-term results.

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