Warning: Geeky Financial Stuff Follows

I have heard about the “4%” rule for a while now, which is that, in retirement, you can safely withdraw about 4%/year of your assets and have a 100% change of having your assets last you 30 years. This tells you both how much you need to have saved to retire with a certain income, or, vice versa, how much income you can have off what you managed to save.

But I was fuzzy about the details, such as: is it 4% of whatever’s in your account on a given year, or 4% of your starting amount and then you take the same amount every year after that, and what about inflation? What are your assets supposed to be invested in? I mean, y’know?

I finally discovered, by way of the Fool, the following articles:

http://www.retireearlyhomepage.com/restud1.html – basis for the 4% rule
http://www.retireearlyhomepage.com/moresafe.html – the even-safer 3.8% and 2.9% rule
http://www.retireearlyhomepage.com/popr.html – getting more money per year on a modified 4% rule
http://www.retireearlyhomepage.com/novtips.html – tweaking up the 4% by using TIPS

The basic 4% rule is as follows (and this is based on backtesting of historical stock/bond returns)
– Your annaul income is based on 4% of your total assets in the first year of retirement.
– Your assets are invested in a well-diversified 75% stocks/ 25% bonds.
– Each year you take out the same dollar amount, plus an additional amount based on the inflation rate (so your buying power stays the same)
– If you end up in a really bad phase of the stock market, at the end of the 30 years you may be broke. But if the market return over the period is more average, you will probably still have a chunk of cash at the end of 30 years.

The even-safer 3.8% rule says that you have a 100% chance of having the same dollar amount of money at the end of 30 years as you did when you started. Now, this amount will be worth less because of inflation, but you’ll still have it.

The super-safe 2.9% rule says that you have a 100% chance of having the same value of money at the end of 30 years as when you started. Inflation-adjusted, in other words.

There’s a couple other methods in the last two links that are interesting as well.

Now I just need to amass $25,000,000 so I can retire on $1,000,000 a year.