This is part III of ĠEMMA’s series on Rules of Thumbs that act act as a useful and reliable steer which engages persons offers a better course of action than not following it is in the withdrawal of savings from your retirement pot.
Today’s post explores the Inflated 4% Rule. This rule is tested for the following general case: person is retired; starts accessing the savings from their money pot at ages of 65, 70 and 75 years; has a balanced or conservative investment; and the ppension pot is assumed to be €55,000.
The Inflated 4% Rule of Thumb
This works as follows:
- This will give you €2,265 in the first year, and that amount is the same in real terms for future years – so the nominal amount increases.
- As a retiree you will receive the same real amount each year (as the amount is inflation adjusted) – but the length it lasts for varies depending on the actual investment returns received.
- This is a good option if you want your income to grow with inflation and that you are only comfortable with a very low chance of running out of money before you pass away.
Prons and Cons of the Inflated 4% Rule of Thumb
|Most Suitable for||Pros||Cons||Inheritance|
|People worried about running out of money in retirement or who want to leave an inheritance.||Fund likely to last a lifetime. Income will rise with inflation.||Lower income than other Rule of Thumb options.||Inheritance payment likely and average inheritance amount large in relation to starting value.|
The Rule of Thumb is tested. The following is to be taken into account:
- The income shown is adjusted for inflation. This is why this Rule gives an amount which increases with inflation each year, appears flat. If the income looks level from one year to the next that means it will be a higher number of Euros in future, but will have the same spending power as today.
- As investment returns in the future are uncertain, the income you will receive is uncertain. The dark income is income which you will almost certainly receive (at least 95% probability of receiving), the medium colour is additional income you will probably receive (at least 50% probability of receiving) and the light colour is further income you might receive (less than 50% probability of receiving
- The green pie-charts show the probability of surviving from age 65 to the age shown, allowing for typical New Zealand mortality experience. The following compares New Zealand and Malte life expectancy as per https://www.worldometers.info/demographics/malta-demographics/.