Once you retire from Shell, your investment portfolio will need to help support your lifestyle. But how much can you safely withdraw each month?

A common rule of thumb is the 4% Rule. In this video I talk about how to apply the 4% Rule, where it shines, and how it could lead to a lackluster retirement.

Stay tuned for my next video where I cover my preferred approach to calculating your retirement paycheck.

Full Transcript:

How do I create a retirement paycheck with my portfolio?

Once you retire from Shell, your investment portfolio will then need to go and help support your lifestyle. Today, we’ll cover a common rule of thumb, the 4% rule, and talk about how it’s applied where it does really well and where it does not so well.

Now, in the last video, we covered a hypothetical example, John. John moved money from his lump sum payments from Shell at retirement into their joint account. Now, in addition to their joint account, we’re going to assume that they have 401(k)s and Roth IRAs. Now for this example, we’re going to assume that they’ve built up a nest egg of $4 million. They’ve done a great job saving over many, many years.

Now when applying the 4% rule we multiply the portfolio value. So, in this case, $4 million times 4% and of course that equals $160,000. This is the amount that they can safely withdraw from their portfolio in year one of retirement. Now in year two that’ll be increased for inflation and that will continue then each year so they can maintain their standard of living.

Now one thing to note about this $160,000 number; that is the total amount withdrawn. So that also includes money going towards fees and taxes. Now fees and taxes will vary in each unique situation. So, in this hypothetical example, let’s just assume that they’re paying $46,000 per year in fees and taxes, and therefore they are left with $114,000 per year to live on, or their net paycheck after fees and taxes is $9,500 per month.

Now, of course, throughout retirement, markets will go up and markets will go down. The 4% rule does a really good job of minimizing the chances of running out of money by setting a predetermined amount that can be withdrawn, regardless of what the markets are doing. This is where it really shines. So, it’s great at minimizing the chance to run out of money, but let’s talk about where it typically fails.

Too many people following the 4% rule under spend their portfolio, and this ultimately leads them to dying with the proverbial mattress stuffed full of money. So yes, they did not run out of money in retirement, but they never got to fully enjoy the nest egg that they’ve worked so hard for over many decades to build.

Stay tuned for my next video, where I’ll cover my preferred approach for calculating your retirement paycheck. The Retirement Income Guardrails.