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You should aim to have 25 times your expected retirement living expenses, after taxes, pensions, and social assistance, invested before you retire. The 4% rule states that generally, in retirement, you can draw 4% (inflation adjusted) from your investments, and maintain your capital throughout a 30-year retirement. The long-term real average of the stock market is ~7% returns, but during a withdrawal phase, sequence of returns risk becomes an important consideration.

Sequence of Returns Risk


Consider an individual with $1,000,000 retirement portfolio, planning to draw 7% per year. ($70,000)


If this individual retires in a year like 2006 and draws $70,000 in a year like 2008 when equity markets are down by 50%, their portfolio would be reduced to less than 40% of its original value in a single year.

This level of loss would leave the retirement portfolio unsustainable at its current withdrawal rate.

In 1994, William Bengen's research showed us that even with the worst retirement timing, it is safe to draw 4% from a 60/40 portfolio, and expect to maintain your capital for a 30-year retirement. Based on historical returns, past performance doesn't guarantee future results. 

Today, life expectancy keeps on improving, so considering working longer, or living on less than 4% might be necessary.


Retirement Allocation


Asset allocation in retirement is very different than during your working years. During your working years, if assets lose value, you can wait it out, without drawing from your funds. In retirement, you don't have this luxury, so a 2-year emergency fund is recommended.

Like any stage in your life, asset allocation is highly dependent on your risk profile, goals and time horizon. A good starting point for an average investor is to hold about 2 years worth of expenses in a high-interest savings account, about 8 years worth of expenses in bonds, and about 15 years worth of expenses in diverse equities.

This allocation of your 25 years worth of expenses divides out to a 60% equity, 40% fixed income allocation, with a 2-year emergency fund. As markets fluctuate, rebalance your portfolio to continuously maintain your desired allocation. This will result in always buying low and selling high as markets fluctuate. This is a general guideline, not a guaranteed plan for success. 

How much is enough for Retirement?


A generally accepted rule of thumb for retirement planning is the 4% rule. It says that based on historical returns, you should be able to count on withdrawing 4% from your investments without ever depleting your original capital.  Here's a Podcast on the 4% rule.