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Expert advises against blindly using the 4% rule for retirement planning. He emphasizes considering retirement age and inflation.
Financial planning is a daunting task and it is advised to take a professional help if you are confused.
Planning for retirement can be daunting, but the 4% rule offers a straightforward approach to determine if you’re financially ready to retire. This rule suggests that if 4% of your wealth covers your annual expenses, you can retire immediately. In other words, having 25 times your annual expenses means you can retire comfortably.
However, it shouldn’t be considered as a straightforward, with many ifs and buts exist to counter the theory. There are important factors to consider, such as your retirement age and inflation.
Anmol Gupta, Founder of 7Prosper – Your Personal Financial Planner, recently shared an insightful post on LinkedIn about retirement planning. He advises against using the 4% rule blindly.
Understanding The 4% Rule
The 4% rule suggests that if 4% of your wealth covers your expenses, you can retire immediately. To put it differently, having 25 times your annual expenses means you can retire. However, there are two crucial factors to consider, Gupta states:
Retirement Age Matters
This rule is best applied if you plan to retire around age 55-60, as it assumes a retirement period of approximately 30 years. If you aim to retire much earlier, you’ll need a larger corpus since you’ll be living longer without income.
Account for Inflation
Always estimate your future inflated expenses at the time of retirement, rather than today’s expenses. Ignoring inflation can lead to significant miscalculations.
Example Calculation
Consider this example:
– Current expenses: Rs 50,000/month (Rs 6 lakh/year)
– Current age: 30
– Target retirement age: 55
– Inflation rate: 6%
Using the Rule of 72, your expenses will double every 12 years. By age 55, your lifestyle will cost around Rs 24 lakh/year instead of Rs 6 lakh. Applying the 4% rule, you’ll need:
Rs 24 lakh × 25 = Rs 6 crore
Thus, you’ll require Rs 6 crore at age 55 to retire comfortably.
Why Rely On Thumb Rules?
In today’s era of AI, it’s better to use accurate calculators to estimate your retirement corpus rather than relying solely on thumb rules, says Anmol Gupta.
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