I have a question about the 4% rule. If you have 1.5 million saved up and you have no debt and spend $50000 per year with no other expenses and you are 30 years old can you retire? Because 40000 times 25 is 1.25 million. And is this what this means
Yes, but only if you have a plan to limit withdrawls in poor performing years, especially in the first 10 or 20 years... Why? The scenario for 4% shows that 95 times out of 100 scenarios (of historical returns), you DONT run out of money within 30 years.
Sally cited a WR of 3.3% (50k/1.5MM), which has never failed historically.
In other words, Sally, to answer your question: yes, that's what the 4% rule means.
If you are in America, and you retired in any year between 1890 or 1985 (that 90 year span), and had 1.5MM (in real dollars, so whatever that was equivalent to at the time) and spent 50k (in real dollars), you would never have run out of money. You would have survived the great depression. The inflation of the 70s. Multiple world wars. The tech boom, and bust.
It's not guaranteed; if the future is worse than ever in the past, it might not work out. But you'd have to be pretty pessimistic, IMO, to think that will be the case. Indications seem to be that things are only getting better, and even if the economy stagnates, will it be worse than the great depression? I'd think probably not, personally.
How much of this 1.5 million is it expected to return, does the calculation assumes this money goes to a index 500 fund or can this all go to a cd? If it goes to the CD rather than a market do you know how much a CD needs to return ?
The original 4% rule had a mix of 60/40 stocks/bonds, but there have been studies ranging from 0% stocks up to 100%.
Having your money all in a CD is very, very risky, almost guaranteed to fail. Having it in stocks is risky in the short term, if you had to take it all out at once, because, as you know, the market can "crash"--that means, temporarily, people are undervaluing things. It's bad to sell at that point. But stocks are ownership in businesses--real businesses selling goods and services to people. Electric companies. Grocery stores and restaurants. Clothing companies and construction firms. Tech companies. And on, and on, and on. Those companies may have a little dip in their profits as the economy deals with the crash, but overall they'll keep doing what they're doing. And people will notice, and go "hey, these companies are making money, I want to own some of that," and prices will come back.
You can recover from a stock market crash.
On the other hand, you cannot recover from inflation eating away at your principal. We're very unlikely to have massive deflation to bring back the buying power of your dollar. So if you invest in a CD paying 2%, and inflation is 3%, suddenly your money is "worth" 1% less in buying power. That 1.5MM gains 2% (30k) in nominal dollars, but loses 3% (45k) to inflation. Suddenly your money lost 15k
without you spending any. The 4% rule works because the stock market, on average, gains 7% above inflation. So if you only spend 4% + inflation, you'll never run out of money--in fact, your money will grow and grow. It won't every year (and you need to only take 4%, rather than that 7%, because of this--if it's down early in your retirement, taking too much out then could handicap your portfolio's ability to come back). The market rarely returns its average. But over time, your money will grow, and grow. It just won't in a CD.
So what about TIPs? These are paying approximately 0% right now, but the benefit of them is they're tied to inflation. So you get inflation + X% (where X is the going rate--like I said, about 0 right now). That's much better, overall, than the 2% of a CD. So let's say you did that. How much would you need invested? Well, you'd need your overall expenses x the number of years you have left. You're literally going to pre-fund each year of your life, earn 0% real on it, but have it keep up with inflation. So if you think you're going to live 50 more years, you take your annual expenses and multiply by 50. So in your case, 50k x 50 = 2.5MM. This, again, has the risk that you guess too low, and outlive your money (whereas a sub-4% rule very likely has your money grow and grow).
I'd suggest, for someone thinking of retiring and worried about the stock market, to begin to learn about it. What it actually is. It can be gambling, if you're buying and selling, or "investing" on a short time frame (days, or weeks). If you're long term purchasing shares of companies and viewing it as ownership of those companies, with no plans to sell (buy and hold), and ignoring the short term fluctuations, you'll do just fine.
Hope that helps. :)