We have all heard of the 4% rule as the guide to retiring early. As long as we don't withdraw more than 4% of our savings each year, we can maintain the same quality of life without ever running out of retirement funds.
We talk about how the 4% rule works, and how to pick stocks with more than 4% dividend yield to speed up your passive income for early retirement.
What Is the 4% Rule?
The 4% rule is a shortcut to calculating the Safe Withdrawal Rate from your retirement savings. If you withdraw no more than 4% of your total equity each year, then you can enjoy a comfortable lifestyle and never run out of money.
How Long Can You Live on the 4% Rule?
When William Bengen discovered the 4% rule in the 90s, he first analysed the market performance and different retirement scenarios over the past 75 years to find a safe withdrawal rate. Then he proposed that as long as you don't withdraw more than 4% of your life savings per year, you will never worry about running out of money in your lifetime.
We are confident the 4% rule can let us enjoy at least 30 years of retirement.
The 4% Rule Formula for Retirement
Since we want to keep our costs below 4% of our total equity, we simply multiply our annual expenses by 25 to find our target retirement fund.
Target Retirement Savings = Annual Expenses X 25
So we can create a comparison where our annual expenses meet the target retirement savings. This shows we can speed up our retirement by reducing costs in our lifestyle and accumulating wealth through savings.
|Annual expenses||Target retirement savings|
Why Use the 4% Rule?
There are a few advantages to planning your retirement with the 4% rule:
- The rule helps us set a money-saving goal quickly, and maintain good money habits.
- It is a time-tested, believable rule of thumb.
- A disciplined withdrawal rate of less than 4% should maintain a consistent quality of retirement.
Risks of the 4% Rule
Here are some risks to planning your retirement with the 4% rule:
- In the event of big and unexpected inflation, a 4% withdrawal rate may not be enough.
- Some people may feel leaving too much savings behind as inheritance is missing out on a better quality of life.
- The retirement cash flow may not be enough to cover medical emergencies and other unexpected expenses.
How to Pick Stocks With More Than 4% Dividend Yield
Since we want to retire with 4% of our equity, we can use the Dividend Stock Picker to find blue-chip stocks with more than 4% yield for long-term investment. So we can live on the dividends during retirement.
- With more than 25 consecutive years of increasing dividends.
- More than 4% dividend yield.
- Also more than 10% in Upside so we have enough margin of safety to avoid stock price crashes.
Finally, we sort the list by Dividend Yield. We get a list of value stocks with a great dividend-paying record with more than 4% yield.
|Stocks||Description||Last||Fair value||Upside||Dividend yield||Years of dividend growth|
|WBA||Walgreens Boots Alliance Inc||$29.98||$37.78||26.02%||6.43%||48|
|WPC||W.P. Carey Inc||$66.45||$73.99||11.35%||6.43%||26|
|FLIC||First of Long Island Corp||$13.85||$19.38||39.93%||6.06%||27|
|AROW||Arrow Financial Corp||$20.44||$31.03||51.81%||5.28%||30|
|NNN||National Retail Properties Inc||$40.32||$45.81||13.62%||5.19%||34|
|O||Realty Income Corp||$59.22||$67.85||14.57%||5.18%||30|
|NWN||Northwest Natural Holding Co||$41.33||$47.05||13.84%||4.48%||67|
The WBA stock has been increasing in dividends for 48 years straight. We can expect a 6.43% dividend yield for holding the stocks, with a 26% potential Upside for a bullish outlook. There is a high probability of providing us with passive income for retirement.
Now you know the importance of the 4% rule, apart from reducing expenses, we can use the dividend scanner to find consistent dividend income.
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