The “4 percent rule” is a bedrock of retirement planning. But does it apply to those who quit working before 65? The rule of thumb holds that retirees who spend only 4 percent of their investment portfolio annually, adjusted for inflation, will be able to stretch out their savings for the rest of their life. For example, a $1 million brokerage account gets you $40,000 a year to spend.
Lately, the 4 percent rule has been under assault, with experts warning that the future could bring weaker market returns, an increased life span, or both. “If you retire at 40 with a couple million dollars, you’re going to worry—about financial emergencies, taxes, inflation, market crashes, and the chance you’ll live a lot longer than you’d planned for,” says Robert Karn, an adviser with Karn Couzens & Associates in Farmington, Conn.
Evan Inglis, an actuary at Nuveen Asset Management, offers an alternative rule: Divide your age by 20—couples should use the younger partner’s age—to get the percentage that you can safely spend. For a 40-year-old, that’s 2 percent, or $20,000 a year on $1 million in savings.
How do these concepts play out in the real world? We asked three people who retired in their 30s and 40s to explain how they’ve made it pay off.