Have you heard of the 4% retirement rule?
Not sure who actually created it, but I first stumbled across this through mrmoneymoustache.com.
The theory is simple: Accumulate enough capital such that you can live on its 4% yearly return, and you immediately retire.
Example, say your monthly expenses amount to $5,000. This means you will need $60,000 for yearly expenses. Divided by 4%, you need $1.5M in capital.
I find this theory interesting and worth considering for few reasons, especially in Malaysia, my home country:
- It basically means, once you hit that capital target , you can live off its yearly 4% returns. Meaning the principal or capital remains untouched. Current fixed deposits rates in Malaysia are around 4%.
- Naysayers may say-what about inflation and increasing costs of living? Well, this theory assumes that you go on total retirement mode once you achieved the targeted amount. In reality, most people will probably work on their real passions during retirement and perhaps generate income from there. Opportunities are endless when you have the option to work or not. My take- you only work because you want to, not because you have to, and that usually leads to financial returns.
- Simple target to focus on. Combine this theory with another one- if you are able to save 70% of your monthly income today, you will be able to save enough to retire in 11 years. Do the maths.
Assuming monthly income is $8,000=70% equals $5,600 saved every month. $2,400 for monthly expenses.
After 11 years= $5,600 × 12months× 11 years= $739,200 saved.
4% of that=$29,568=$2,364/month in passive income.
Another way of looking at the 4% rule is to target accumulating 25 times your annual expenses and you are pretty much set.
Here’s the question: What’s your targeted amount following the 4% rule?
And here’s how you can accelerate your progress to hitting the 4% capital amount:
- Aim to fast track your career. The more you earn, the more you can save. The more bonuses you can achieve. Put in the same effort into ensuring your career progression is on track as your investments.
- Get rid of the doodads in the your life or “money suckers”. Track your expenses daily and look at your spending habits. Cut out the unnecessary expenses. Things like snacks, coffee lattes, unused gym memberships, etc.
- For every promotion, aim to stick to the same regular lifestyle. The problem is most people’s expenses increases in line with their income. I still drive my 8 year-old car till now. A friend of mine who is a VP in his company recently changed his 400k mileage used Volvo to the cheapest local manual car in the market. His reason? It takes me from point A to B.
For me, I need around $3M to hit the 4% retirement rule. That will equal to around $10,000 per month in passive income. Enough for a comfortable living for me and my family as a start. As of now, most of my networth are locked into properties assets. I’m working to increase my earned income as much as I can, save as much as I can and invest as much as I can.
Do you think the 4% rule works? Let me know 🙂