What the 4% Rule Means to You
The 4% rule is a key rule-of-thumb guideline in retirement planning. It helps you estimate how large a nest egg you need to have to cover your costs throughout retirement. Having a good handle on the 4% rule means you can map out the lifestyle you can expect in your golden years and make adjustments in your plan between now and then to better suit your needs.
To get started with the 4% rule, start by estimating the annual expenses you need your nest egg to cover once you stop drawing a paycheck. Divide that amount by 4%, and the result is the size your portfolio probably needs to be to cover those expenses over a 30-year retirement. For example, if you need your portfolio to cover $20,000 per year, you'd need to have $500,000 saved by the time you retire. In retirement, you can then spend that $20,000 in your first year and adjust based on inflation after that.
At some point, you're going to have to spend all that money you've saved for retirement. Image source: Getty Images
Source: Fool.com
