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The 4% Rule article reprint from magazine

The 4% Rule and Your ՙNumber’

How to Calculate Your Retirement Savings


So, you’ve saved money to build wealth. Congratulations! Do you
have enough to retire on? Not sure? Using basic math you can
figure it out. Read on to find out how.

One of the most important things to remember about your retirement
years is that you will spend money. Trips, golf, dinner out, gifts
for the grandkids, new cars, maintaining/upgrading/remodeling
your home — not to mention everyday living expenses — are just
some of the purchases you can expect to drain your wealth.
Estimating how much money you need each year to continue
to live your current lifestyle or to achieve the lifestyle you aspire
to can be difficult, but is far from impossible. Start with your
current expenses. Will they remain in place? Mortgage, utilities,
health insurance, groceries, dining out, pets, club memberships,
car payments, house cleaners, second homes and hobbies should
all be considered carefully.

If you use Quicken or similar software to track your monthly
expenses, it will be a huge help in finding out how your family
spends money. Invest the time to print out a few years’ worth of
expenses to review. How much did you spend each year? Which
expenses are going to increase as you get older? Medical expenses,
for sure, will go up. What about your health insurance? I’m fairly
certain your recreational activities like dining, golf and travel are
going to increase if you aren’t spending so much time at work!
Now, what expenses are going to decrease? It likely isn’t much,
other than true work-related items such as wardrobe or commuting
costs. To be safe, project a very similar annual expense amount —
unless you can point to a paid off mortgage or other significant
item no longer on the books (e.g., private school or college tuition).
We started off talking about your potential spending because, in
order to know your “number,” you need to start with the end goal
in mind. This includes how much you plan to spend annually, and
what you are hoping to spend it on. But how does knowing that
annual spend number help? Well, knowing how much you spend
annually allows you to use the 4 Percent Rule.

The 4 Percent Rule was created using historical data on stock and
bond returns over the 50-year period from 1926 to 1976. Prior to the
early 1990s, 5 percent was generally considered a safe amount for
retirees to withdraw each year. Skeptical of whether this amount
was sufficient, in 1994 financial advisor William Bengen conducted
an exhaustive study of historical returns, focusing heavily on the
severe market downturns of the 1930s and early 1970s. Bengen
concluded that even during untenable markets, no historical
case existed in which a 4 percent annual withdrawal exhausted a
retirement portfolio in less than 33 years. — Investopedia

If you work with a good financial advisor, they most likely have
a fancy software program to provide you with a report known as a
Monte Carlo analysis. Basically, it will take your investable wealth
(think assets like stocks, bonds, gold and cash), as well as assets
you absolutely will convert to investable wealth near or upon your
retirement (like your dental practice or any real estate), and run
multiple simulations using the actual historical market performance
to predict how your retirement assets will perform in each
of those various simulations. The variables are extensive, but
consider just a few that are key: retirement age, expected length
of years in retirement, pre-retirement wealth, annual spending,
investment mix during retirement and any other sources of
income during retirement (Social Security, annuities, pensions,
inheritances, part-time employment, etc.).

What constitutes an investable asset? I’d argue everything you
own that can be converted to cash is an asset to count. If you are
willing to sell it, I say you can count it. If you aren’t willing to sell
it, you can’t count it. Easier said than done, as some things you just
don’t want to sell to convert them into cash, or it is difficult to do so.
Can you count your primary residence? Your summer/vacation
home? Your fifth-wheel camper? What about your 1956
Corvette sitting in the garage? Other collectibles (Beanie Babies,
coins, stamps or oldtime dental chairs)? Remember, you need to
live somewhere, so selling your primary residence isn’t much of
an option unless you downsize or utilize a reverse mortgage to
capture the accumulated equity. It is usually a safe practice to NOT
include your primary residence in your wealth calculation. But, if
you had to make a choice between eating and selling your yacht,
I would hope you’d sell the yacht for something before you starve
to death. Be realistic; just because you bought the yacht for $2
million doesn’t mean you’ll get that for it on the secondary market.
Look at “for sale” flyers at the marina to see what a comparable
yacht is advertised for and knock it down 10 percent to 25 percent
for a realistic number of what you could get for the yacht if you
had to convert it immediately to cash.

Back to the Monte Carlo analysis software: if you don’t like the
answers it is providing, just change the variables and run another
analysis. It is fast and simple to do. It takes mere seconds thanks
to computers to update the variables and run another analysis.
A good financial advisor will have looked at the original output
and already tweaked a few variables to help you understand how
waiting an extra year or two longer to retire, saving more now,
spending less later, changing your investment mix or any number
of variables could change your results and provide a happier
retirement climate for your family.

Don’t want to sit down with a financial advisor? I’d argue there is a
very good reason to do so. They are experienced at running the analysis
and can help you avoid some common pitfalls. You most likely aren’t
their first consultation regarding this, so they will ask some insightful
questions to help guide you. Is your potential financial advisor the
fiduciary to your practice’s 401(k)? If they are, you are paying them
out of that account. So, why not take advantage of their expertise?
Still not convinced? No problem. Do you have access to your 401(k)
plan’s website? Chances are they have a calculator designed to do very
similar things and you can do them yourself online.

Don’t have the patience to fill out the calculator’s variables? I
can save you some time, but it isn’t as comprehensive as a fullblown
analysis by an advisor or an online calculator. All you need
is how much you plan to spend each year in retirement. Now
multiply that spending number by 25. THAT is your “number.” It
really is that simple. I’ll refer to the number as $X.

And, if you have $X of investable assets (your number), you
should be able to generate 4-plus percent annual returns using a
relatively conservative investment mix of stocks, bonds and cash.
If you achieve 4 percent returns on $X, then you can spend that
income next year. If you achieve larger returns, $X grows larger to
provide safety in future years, or you can spend more next year by
choosing 4 percent of the larger $X amount (risky!).
If you miss your goal, or lose money, $X gets smaller and you
should consider if you can spend less or just continue to maintain
the prior year’s same 4 percent spending while waiting for the
investments to start providing better returns.

The purpose of a Monte Carlo analysis is to provide customers
with the “risk of ruin” potential of constantly spending 4 percent of
the original number, regardless of investment results. Given some
bad investment years (think 1929, 2001 or 2008), and a dwindling
asset base, a constant spending amount can deplete your investable
assets and cause you to run out of money well before you run
out of time. But as you’ve already read above, taking out 4 percent
of your original number is a safe bet — you won’t run out of money
before 33 years of living in retirement. Is that enough? Hopefully!
Here’s an example. Suppose you want to spend $100,000 per year
in retirement. Multiply that by 25, and $2,500,000 is your number.
Work the rest of the year, and make sure you earn 4 percent on
your number. Now, you can move that year’s $100,000 income to
a safe, short-term, interest-bearing checking account and live off
that checking account when you announce your retirement.

The year you are living out of that checking account, your goal is to
make another 4 percent on your $2,500,000 principal.
Move the income and interest (or sell stock) to fund your
checking account again, rinse and repeat every year and leave
$2,500,000 behind to your heirs (barring any severe market dips).
Obviously, if you want to spend $200,000, just multiply by 25 and
$5,000,000 is your number. And if you need $500,000 annually,
just multiply that by 25 and you’ll need $12,500,000.

So, now you know how to figure out if you have enough money
saved to retire. Find out your expenses first and multiply by 25
to get your number. Are your available investable assets greater
than your number? If so, you have the option to retire. If not, keep
working and build your assets, sell some assets to increase your
investable assets, or find a way to reduce your spending to afford
your retirement years on your available assets. More than likely,
you need to save more; most folks do.

Have you maxed out you and your spouse’s retirement plan? If
you have, and are over 49, have you taken advantage of the “catchup”
contributions you can make as an older worker of 50 plus? If
the retirement plans are fully funded, have you set aside money in
a taxable brokerage account to fill in the shortfall?
Finally, I’m going to give you the best retirement advice I can give
your children and younger loved ones: start as early as possible.
The power of compounding investment earnings is powerful.
Startlingly powerful. Even $1,000 invested by a child annually
will provide giant returns after 40 to 50 years untouched in sound
investments. The same applies for 20-somethings. Getting them
started on a healthy habit of saving 10 percent or more of their
income is a great way for them to achieve early financial independence.
Choosing to go to work each day is vastly different than
having to go to work each day. Think about it.


• $18,000 employee deferral
• $6,000 employee catch-up contribution
• $54,000 annual overall contribution limit
• $60,000 annual overall contribution limit 50+
* Please consult the website or a CPA for
other important limitations and regulations regarding
contributions and limits. Provided for example
only. The 2018 levels will be published at
in Q4 2017. They were not published by press time
for this article.

• 4% retirement rule
• Monte Carlo simulation retirement
• Conservative retirement portfolio
• Dividend investing
• Spending in retirement
• Compound growth


For questions and more information, Dr. Johnson can be reached at