THE 4% RULE EXPLAINED

One day you have a million dollars invested in and you're gonna wanna retire. But how much of that million dollars can you take out every single year? I'm gonna show you right now. This is something called the 4% rule and a lot of new investors misunderstand this. As in, I take out 4% every year. Hold on a second. The idea behind the 4% rule is that it turns your portfolio into a paycheck. You withdraw 4% in year one, and then re-adjust future withdrawals based on inflation. But how do you do that? What say you have that sweet, sweet $1 million, which I happen to have right here. Look, it says over $1 million. And you're gonna withdraw 4%, which is $40,000. Now, I know a lot of people are gonna lose their minds in the comments and go, $40,000 in 30 years is gonna, dude, shut up. This is just an example. You take that $40,000 out and your portfolio value is now $960,000. But the stock market increases by 10% that year. So you take $960,000, you multiply it by 1.10, 10%, and your portfolio value at the end of the year has grown to $1,056,000, despite having taken out $40 grand. Year two over retirement, inflation is up 3%. You don't take out $40,000, you increase it by how much inflation grew. $40,000 times 1.03. You withdraw $41,200. So you needed to increase that amount because inflation. You start off the year at $1,056 million, but you've immediately take out $41,200. Your portfolio value is now $1,014,800. But markets gained 10% that year. Which means at the end of the year, your portfolio is $1,116,280. And inflation increases by 3% again. In year three, take the $41,200 that you pulled out the year prior. You do the same math again. $41,200 times 1.03. And now you withdraw $42,436. You now have a portfolio value of $1,073,844. But guess what? The markets go up another 10%. Which means the end of year portfolio is $1,181,228. Some people like to call the 4% rule the infinite money glitch. All right, you learned something. See you later.