4% Rule Of Retirement

Why Do You Need Financial Freedom?

The first thought which strikes your and my mind when we hear about retirement is “no work at all – phase” or what you can sophisticatedly say physical freedom. But shall the concept of retirement be enclosed here? Is a retired person mentally and financially stable (the idea of physical freedom must have been accompanied by enough treasury corpus to sustain till death!)

Of Course not!

For this financial fitness and mental freedom, this 4% retirement rule – to what you can call as a boon for bygone- has been discovered. This 4% retirement rule can give you an absolutely easy going and monetary healthy life if you employ and deploy your fund in a disciplined manner. Under this rule, you can choose to withdraw 4% of your portfolio amount every year. Having said that, the next question would be – how long would it last?

Well, it involves simple math by calculation (but ample patience and determination in practicality) to understand approx 25-30 years of time frame to blow your account. Let’s say your portfolio is 100%. Withdrawing 4% every year, I will be able to carry this phenomenon for 25 calculated years, whatever be the market conditions.

Equity & Debt – 1:1 ratio

Now, there are many factors affecting the market cycle but systematic investment of money backed by money management techniques, risk – return ratio and fine analysis can give you tremendous returns, the interest of which you can withdraw in the bull market! Of course, to bring a tandem in your investment you shall go with a 1:1 ratio in the equity and debt market. However, all your funding employment will depend upon your risk bearing capacity and return appetite.

Putting some lights on the highly-lighted segment, Trading and Investment, if your inclination is towards heavy long term returns you can choose to invest more in equities directly via share market or in Growth/reinvestment plans of SIP for 10-20 years. SIP gives tremendous 15% compounded returns so your SIP of 1000/month or 12000 p.a. will yield you 14.97 lakhs after 20 years. Besides this, dividends and capital appreciation on your direct equity investment is cherry on the top giving 5-6 times returns.

But, if you desire for yearly returns without sharing it with the government(tax-saving),  Debt funds are for you. You can invest in bond markets which yield inflation adjusted returns and assured income as well, unlike equities. You can also take advantage of indexation (tax-cutting) to increase your profits. In SIP, you can choose the dividend distribution plan which would give you regular dividends as income when announced. This dividend/interest can be invested in overnight funds to give ultra-short term returns (funding your traveling expense!)

Conclusion

With the emergence of investment cult in the economy, people are shifting more towards financial freedom than financial security. Investment helps a person save his income to higher-return yielding asset class and make money on money. It is important to start early investing to generate huge corpus for meeting financial goals and creating wealth slowly and steadily.

4% rule inculcates saving as well as investment habits amongst people who want financial freedom not necessarily after 60 but even after 30. This is nothing but F.I.R.E for you i.e. financial independence, retire early.

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