The 4% rule

The 4% rule shows  the amount someone can safely withdraw yearly from his invested money and theoretically never run out of money. So someone who can live with  annual expenses that are about4% of his invested money ,can safely retire.

 For example a person who has saved 1 million euros can retire with an annual  income 4% of that,  which is  0.04* 1 million = 40.000 euros annually  that's about 3.300 euros monthly.

The 4% rule is more a rule of thumb than an actual rule ,it is based on the assumption that an investor is invested on a safe diversified portfolio with a nice mix of bonds and stocks. These returns are based on historical data  of the last century  .The 4% rule was first popularized by an  influential 1998 paper by three professors of finance at Trinity University

Many have doubts about using the 4%, so many may use 3% but is even that safe? In the investment world there is the notion of the risk free rate, the risk-free rate is the return you get for bearing no risk.These are returns you get for investing in safe government bonds of  countries with zero default chance, for example U.S.A or Germany in the euro area. But take a look at what have happened in euro area the rates have turned negative, so this mean you pay interest for owning the bond.

 The conclusion after all these, is that you cant store your money safely  and rely on risk free-rates.Even the risk-free rates arent really  risk-free.U.S.A is considered to be the most stable and safe country and with no default risk. The same way people in the past  thought  the Roman empire will last forever!

The world isnt a safe place,we should know this  by now,we cant get rid of uncertainty but at least we can take less risks than the average person around us and that will make us feel safe enough. Given on how things are  now, as long as you invest in businesses  that produce value you can make money. A nice mix of real estate, stocks and bonds can easily give you 3-4 % . The good part is you dont even need to sale to get profits. You can create for example, a safe dividend portfolio that pays you divided of 3% and with growing dividends every year. Then you can sell a very small part of your portfolio each year to get the additional 1%.

The 4%  is something that looks  similar with what a pension after 25 or 30 years of work looks like. If you think about it, it is no different of what an average retiree gets after working for 25-30 years. 4% is if you reverse it 100/4=25 . That means if you make each year 4 from your job you need to work 25 years to make 100. 3% is 33 years of yearly income. So in other words you need to have stored 25 to 30 years value of work to retire.If you have already accumulated 25 -30 years of work you can retire on about that income.

  Paradoxically the 4% rule is inherited in our working life system. Work for at least 25 years and then you can retire.

 Retiring early through passive income for people that have an average job is a Utopia,especially if they want to follow  a passive investing strategy.
How early you can retire it depends on the relation between your income and expenses,if you have high income and average expenses then you can get quicker to the average income and retire earlier ,but if you have an average job to retire earlier you must live poor and retire as poor that's the trade off.

 If you need to take something valuable out of the 4% rule is that your yearly  income from your job worths about 4% of  the same income in retirement .If your goal is to retire earlier then you have to accumulate money that account for at least 25 years of work.