You can use the rule to reverse-engineer how much you need to save.
The conclusion of the research was that with a balanced portfolio between stocks and bonds, you could start by taking 4% of your savings the first year, and then increasingly that amount by the rate of inflation every year after that.
So as an example, if you saved $250,000 in your retirement account, then the first year, you'd withdraw $10,000.
If inflation was 3%, then in year 2, you'd withdraw $10,300.
If you did that, according to the research, you would be able to make your money last at least 30 years into retirement.
In particular, bad performance early in retirement has an especially adverse impact on the 4% rule, because the reduction in principal value increases the percentage of your entire portfolio that you withdraw each year.
For instance, if you withdraw 4% the first year and then your portfolio loses 50% of its value, then the next year's withdrawal under the rule will be around 8%.
Most notably, interest rates are extremely low, and that has reduced the amount of income that the bond side of the investment portfolio can produce.
Some of the proposed changes include the following: If you're willing to allow for the potential of reduced withdrawals if the market performs badly, then it can dramatically extend how long a portfolio can last.
Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.