One of the old saws of the personal finance space is the "4% Rule," which states that in retirement, you can withdraw 4% of the value of your investment portfolio each year without risking running out of money by the end of your life (that is, your portfolio will continue to grow at a rate that offsets the amount you are withdrawing, such that it will never be drawn down to zero). If 4% of your portfolio is enough for you to live on, then congratulations! You can retire risk free.
There's a few BIG but's here, which Matt Murphy, CFP, walks through in this episode. The 4% rule was formulated based on a number of assumptions, including past market performance trends from a particular window of time (1926-1976) that have not held since, especially with the interest rate environment of the last 25 years or so. The 4% Rule also assumes you will be spending money in retirment in equal chunks, i.e. you'll spend the same amount of money at age 67 as you will age 87. This assumption disregards the fact that many people like to spend thier early retirement years traveling, remodeling their house, moving somewhere closer to family, or perhaps downsizing -- all of which involve significant one-time expenses.
There are many other problems with the 4% Rule that Matt walks through in the episode, but the important takeway is that retirement isn't about achieving a number -- it's about thinking through what you want to do with your life, coming up with a plan for how you will spend your money to make those goals happen, and then preparing for a variety of scenarios for when life inevitably throws a curveball in your wisdom years.
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