4 Stages to Financial Independence (2024)

FAQs

What is the 4 rule for financial independence? ›

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.

Known as the 4% rule, Bengen argued that investors could safely set their annual withdrawal rate to 4% of their initial retirement pot and adjust it for inflation without running out of money over a 30-year time horizon.

We have therefore created the four key stages of wealth management to help you understand where you are now, and where you are aiming for in the future. These four stages are named Grow (Accumulation), Nurture (Consolidation), Sustain (Decumulation) and Legacy (Protect).

Key Points. The economic cycle generally comprises four phases: expansion, peak, contraction, and recovery. The duration of economic cycles varies, making the phases difficult to time. Some sectors tend to outperform others during different phases of the cycle.

This includes strategic and tactical steps to continually evaluate and improve four key financial indicators: cash flow, credit, customers, and collateral. We call these indicators the 4 C's.

What is the step 4 of the financial plan? ›

Among the key findings: 45% of young adults say they are completely financially independent from their parents. Among those in their early 30s, that share rises to 67%, compared with 44% of those ages 25 to 29 and 16% of those ages 18 to 24.

The 4% rule entails withdrawing up to 4% of your retirement in the first year, and subsequently withdrawing based on inflation. Some risks of the 4% rule include whims of the market, life expectancy, and changing tax rates. The rule may not hold up today, and other withdrawal strategies may work better for your needs.

It may sound complicated, but consider the work that would go into planning out your budget for the next five years, let alone a 30-year budget. In comparison, the 4% rule is simple. For example: If you have $1 million in total retirement savings, you will have a budget of $40,000 in your first year of retirement.

Retirees who are depending on their savings to fund essential expenses would want to have a conservative approach. However, those who have can withstand more market fluctuations may have more flexibility with withdrawal rates. For those retirees, the 4% rule likely will provide an outdated recommendation.

The 4% Rule in Action

Using the 4% rule, someone with $1 million saved would withdraw $40,000 the first year under the 4% rule, then give themselves raises aligned with inflation. So, if overall prices rose 3% the next year, they would take out $41,200 and so forth.