Retirement planning: What is the 4% rule and how is it useful?

A lot of things often change after a person retires. One of the most significant changes, however, is how much they earn and how they spend their earnings and savings, both of which may reduce significantly after retirement. The 4% rule plays an important role here, posing as a point for people to start planning their post-retirement spending.

In the mid-1990s, financial adviser Bill Bengen analysed historically marked data on stocks, shares and bonds using actual market returns from 1926 to 1976. He then analysed if, for people retiring in 1976, their portfolio would serve them for the next 30 years. Although Bengen didn't coin the term ‘4% rule’, it came from the research he did. He observed that a first withdrawal rate of 4% allowed most portfolios of retirees to last 50 years or more.