How to Make Your Retirement Savings Last for Decades: The 4% Rule Explained

A Look at the Markets: Bitcoin

Bitcoin is approaching the top of the range that it has been in since February. In my opinion, a close above 72,000$ on the Weekly chart would be very positive as we move through the last quarter of 2024.

Note: ‘close above’ means the price would be above a certain level at the end of the time period of the candle e.g. hourly, daily and in this case weekly.

How to Make Your Retirement Savings Last for Decades: The 4% Rule Explained

Once you reach retirement, how can you make your savings last for decades?

Investment experts have long recommended the 4% rule as a reliable way to make your retirement savings last. This straightforward approach suggests withdrawing 4% of your initial portfolio in your first year of retirement, then adjusting that amount for inflation in subsequent years. For instance, with a €1 million portfolio, you could withdraw €40,000 in your first year of retirement.

The beauty of this strategy lies in its simplicity and effectiveness.

How Does It Work in Practice?

Let's break down the numbers with a real-world example.

Imagine you've built a retirement portfolio worth €1 million by age 67. In your first year, you would withdraw €40,000 (4% of €1 million), and if inflation runs at 2% the following year, you'd increase your withdrawal to €40,800. This approach allows your withdrawals to keep pace with rising living costs while maintaining a sustainable rate.

Your retirement dreams deserve a solid financial foundation.

Making the Most of Your Retirement Strategy

Smart investors know that flexibility is key to long-term success.

While the 4% rule provides a helpful framework, it's important to remember that market conditions can vary significantly over time. Many financial advisors suggest building a portfolio large enough to withdraw less than 4% annually, creating a safety buffer during market downturns. Additionally, this withdrawal strategy works best when combined with other income sources, such as state pensions or private retirement accounts.

Your financial security deserves careful planning and strategic thinking.

Key Takeaway for Investors

The 4% rule stands as a proven compass for retirement planning.

Historical data shows that following the 4% rule typically allows your portfolio to last 30 years or more in retirement. This approach has weathered various market conditions and economic cycles, providing retirees with a reliable framework for sustainable withdrawals. Most importantly, it offers peace of mind by providing a clear strategy for making your retirement savings last.

Note: I would not use the 4% blindly - I would monitor the portfolio performance and the rate of inflation annually to see if I had to make any adjustments.

Next week, we will look at how to work out how much you might need for retirement and how to get there using ETFs and dollar cost averaging.

The Distributional Consequences of Bitcoin - ECB Report

On October 12, 2024, Ulrich Bindseil and Jürgen Schaaf from the European Central Bank (ECB) released a report titled "The Distributional Consequences of Bitcoin". This isn’t their first take on the cryptocurrency. Back in November 2022, they predicted that Bitcoin would experience an “artificially induced last gasp before the road to irrelevance”. But their latest report focuses less on Bitcoin disappearing and more on how it could impact wealth distribution, especially between early and late investors.

The report highlights a critical issue: early adopters of Bitcoin have accumulated significant wealth compared to those who entered the market later. Interestingly, the authors mention a figure of $10 million as a potential future value for Bitcoin, which suggests they may see its price increasing rather than heading towards ‘irrelevance’.

But why is this a concern? Shouldn’t we also be concerned about early investors in companies like Amazon, Apple, or Nvidia, who have similarly reaped financial rewards? And when it comes to the ECB’s criticism that Bitcoin doesn’t generate income—it's worth noting that neither do assets like gold or early-stage startups. All of these involve financial speculation, yet they still hold value.

However, in my opinion, the most important point that the report did not cover is the role of central banks themselves in wealth redistribution. By inflating away debt and devaluing currency, central banks push up the price of assets, which disproportionately benefits wealthier individuals who already own these assets. This phenomenon raises a key question: who is truly responsible for the wealth distribution?

Word of the Day: Buffer

The first thing I think of when I hear the word buffer is the things on the front of trains or at the end of the tracks.

Buffer - noun - countable - the metal parts at the front or the back of a train or at the end of the track that help protect the train and reduce damage if the train hits something.

A more general definition is:

Buffer - noun - countable - something or someone that helps protect from harm. In a business English context:

In the above example, we can see how ‘buffer’ means extra time or resources set aside as a margin of safety.

In our discussion about the 4% rule we called the margin of safety a ‘safety buffer’.