The 4% Rule
The 4% rule (also known as the Trinity Study), was a paper written by three finance professors from Trinity University in 1998, which states that a person has sufficient savings in assets if 4% of his/her assets are sufficient to cover a year’s expenses.
An easier way to calculate the 4% rule is to figure out how much money you need each year to maintain your lifestyle and multiply that number by 25.
For example, my living expenses are about $1,5000 per month. That’s $18,000 per year. $18,000 X 25 = $450,000.
That’s it. $450,000 is my number. When I get there, I can consider myself financially independent.
A lot of people in the FIRE community (Financial Independence Retire Early), have seen the 4% Rule as the guidepost for retirement.
My question is, how much the Coronavirus will interfere with my retirement and the retirement of millions of individuals.
So far, I own three indexes: one Canadian, one U.S. and one international. The drop in these indexes has been from 25% to 30%. Overall my portfolio is down 29% for the year.
The last 20 years
Here is a chart of the Vanguard Total Market Index for the past 20 years. This graph takes into consideration the Financial crisis of 2008 and our recent Coronavirus downturn.
If we assume dividends to be around 2%, we could say that during the past 20 years, the Vanguard Total Market Index has returned about 7.2%
Although the 4% rule has a lot of shortcomings, I still feel confident to continue using it as a guidepost for my retirement.
My updated view on emergency funds
In the past, I have questioned the need for an emergency fund. I have highlighted the opportunity cost of not having the money invested. Now, I have changed my mind.
Here is my updated way of thinking:
1. Have some cash money in the house. We never know if there will be some kind of problem with global internet, or electricity, or any of the electronic sources of exchange that we use now a day.
2. Build a three-month emergency fund. This should be the bare minimum we should have at all times in our savings account. It should be accessible, without any penalty, at any moment.
3. If you are on track for your savings goals, consider having up to one year of money reserve without being invested.
As for me, right now, I have a three-month emergency fund, but I plan to increase it by one month every year.
Is the Coronavirus affecting your retirement plans?
Have you reconsidered any of your investment plans?
Share your situation on the comments or send me a private message.
Related Posts
- What if you never save for retirement?
- Living paycheck to paycheck on times of the coronavirus
- The Coronavirus; the only antidote is to stay home
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