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Assume an individual retire's with a Portfolio of $1,000,000 and they follow the 4 % rule...

  1. Assume an individual retire's with a Portfolio of $1,000,000 and they follow the 4 % rule for withdrawing funds with an inflation adjustment expected to average 3% per year. What average annual Rate of Return must they earn so that they do not run out of funds before the 30-year time horizon?

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Answer #1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

As per 4% rule, you should withdraw 4% of portfolio value =1,000,000*4% = $40,000

Formula: The present value of an ordinary annuity (PV)

PV = C× [1-(1+r)^-n]/r

PV = Present value (The cummulative amount available at Present) 1,000,000

C= Periodic cash flow. 40,000

r =effective interest rate for the period.

n = number of periods. 30

1,000,000 = 40,000× [1-(1+r)^-30]/r

r = 1.219%

Inflation rate (I) = 3%

Average rate of return [(1+r)*(1+I)]-1

= [(1+0.01219)*(1+0.03)]-1

= 4.256% (Answer).

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