Knowing the 4% Rule, Old Age Becomes Prosperous Without Losing Wealth

Jakarta, Armfalcon.com – For those of you who have started collecting retirement funds, then you should be familiar with the concept of the 4% Rule.

This concept is the concept of withdrawing pension funds to support living expenses, without having to worry that the funds will decrease and run out.

This mathematical concept was introduced by William P. Bengen, in his writing entitled “Determining Withdrawal Rates Using Historical Data.”

Simply put, when your retirement funds are accumulated, you only need to withdraw 4% of the total funds in the first year of retirement to make a living.

Is this concept right for you? Here’s the review.

What would an example of the 4% rule look like?

Let’s just say, you have a target of collecting a pension fund of IDR 5 billion at the age of 60. So in the first year when you officially retire, you only need to withdraw 4% of IDR 5 billion or IDR 200 million to make a living for a year.

However, in subsequent years this 4% withdrawal may become irrelevant due to the inflation factor.

If only there was an increase in inflation of 2%, then the amount you withdraw is IDR 200 million x 102% = IDR 204 million.

A common mistake in understanding the 4% Rule is that someone routinely withdraws 4% of their investment every year regardless of inflation and so on.

Where does this 4% Rule come from?

Bengen previously made research that since 1993, stock investments can generally provide a return rate of 10.3% per year. Meanwhile, bonds have returns of 5.2% per year.

Like saying there is a withdrawal of funds, then the returns on stocks and bonds that you save will produce returns which will later return the total value of your portfolio.

If someone invests in these two instruments and manages to collect retirement funds according to the target, then the first withdrawal of 4% and so on, will make your pension fund last up to 50 years.

Is this concept right for you?

The 4% Rule concept is often said to be more suitable for collecting pension funds in the long term, unlike those who want to retire young like the FIRE generation

In fact, without having to withdraw your pension fund, you can of course also get passive income if you allocate your total pension fund in a lump sum to state debt instruments.

Again, personal financial planning is of course personal. Everyone has different preferences and mindsets about finance.

[Gambas:Video CNBC]