Early retirement is not a very far-fetched idea anymore. In fact, more people are retiring early from their jobs and pursuing their dreams of travelling the world or simply spending more time with their loved ones.
For instance, Doug Brown and Lisa Zandt, who were sales and marketing managers at major Fortune 500 companies in the US, decided to retire early and spent nine years sailing the world.
We were doing well financially and had always been enamored with the sailing lifestyle," Lisa told Bankrate. "We got to the point where the stress of the corporate life was too much." The couple then sold their house and cars and bought a sailboat to live their dream.
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"Living on a boat outside of the US was much less expensive than living in the US," she said, adding: "You don't need $10 million to retire."
British author and scriptwriter Jonathan Clements once said: "Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money." So how do you know it's time to retire and you have enough money to last you a lifetime?
That is when you apply the 4 percent rule. The rule, first articulated by financial adviser William P Bengen, determines the amount of funds that one can withdraw from a retirement account each year – which is 4 percent of your savings — ensuring a steady flow of income where all the expenses are covered.
Here's how it works. Let's peg your yearly spending at $40,000. That means that in order to retire, you'll need to get your retirement portfolio to $1 million. Through the 4 percent rule, each year you can withdraw $40,000, which is usually the interest and dividends earned on the retirement account and investment portfolio.
While the rule has been followed by many and there have even been a few success stories, many experts argue that the rule, also known as the Bengen rule, does not really apply to everyone. "Retirement experts have clustered around a 4 percent withdrawal rate, but there's really no one size fits all that works for everyone," Gerri Walsh, president of the FINRA Investor Education Foundation, told the Alert Investor.
Experts believe that retirees should calculate their finances as per their needs and not blindly depend on the 4 percent rule. In fact, Bengen himself has said that the "4 percent rule is not a law of nature".
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"I always warned people that the 4 percent rule is not a law of nature," he told the New York Times. "It is entirely possible that at some time in the future there could be a worse case."