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What is the 4% rule, and how does it apply to crypto investing?

APRIL 7, 2021

What is the 4% rule, and how does it apply to crypto investing?

Joëlle Gasser

DAO Member

Are you thinking about investing in promising crypto assets and are wondering how much you can afford to safely spend in retirement? Then you have come to the right place because we’re going to dig into one of the most common retirement savings rules - the 4% rule.

What is the 4% rule? 

The four per cent rule aims to allow you to live your retirement comfortably. We’re going to break down how this rule can provide for regular income in retirement.

The four per cent rule is a guideline for retirement planning that claims that you can comfortably withdraw four per cent of your investments a year (adjusted for inflation) without running out of money for at least 30 years. Because of the 30-year time frame, it’s often used as a rule of thumb for retirement planning.

Let’s look at an example to illustrate how the 4% rule can work in practice. Let’s say you have $1,000,000 when you retire; then this would mean that you can withdraw $40,000 the first year, then adjust the same $40,000 for any possible inflation the second year, and so on for every subsequent year.

Where does the 4% rule come from?

In 1994, financial advisor William Bengen published a study that examined withdrawal rates for retirements lasting for a 30-year time frame. Using empirical data from 1926 to 1976, his study showed that if you don’t withdraw more than 4% of your portfolio in the initial year, there is a higher chance that the amount in your portfolio will be higher than what you spend. 

But why 4%, and not any other percentage? 4% equals 1/25 of your investment portfolio, which means that it would last for at least 25 years without adjustments (and the rule includes making annual adjustments for inflation). 

In addition, your investments will continue to grow over that period, and many investments grow at a rate that’s higher than 4% a year (the stock market, for example, has historically grown by an average of 8% a year). With this in mind, the 4% withdrawal might be less than the amount the portfolio would grow.

In Bengen’s study, most portfolios following the 4% rule lasted 33 years.

So… does the 4% rule really work?

The 4% rule is a general guideline, meaning it is not universally applicable and may not work for your personal situation. However, it is a good starting point, especially if this is the first time you’ve considered preparing for retirement.

But here are some considerations you need to keep in mind, which might lead you to lower the annual rate the rule suggests, or lower the timeframe you expect your investments to fund.

Two key considerations are the amount a person has in their portfolio when they retire, and their risk appetite.

Let’s say you retire with less than $100,000 in your investment portfolio. This means you would withdraw less than $4,000 every year if you stick to the 4% rule. In many parts of the world, this would not be enough for a comfortable retirement. This would mean you’d need to withdraw more, and your funds wouldn’t last for 30 years.

And what if your retirement lasts for more than 30 years? You cannot plan how long you’re going to live, so there’s the risk that your portfolio will not be able to sustain following the 4% rule for that long. It also doesn’t cover the possibility of retiring early.

Depending on the laws in your country, you will have to pay considerable taxes when withdrawing four per cent of your portfolio every year. These will need to be considered when calculating what you need to live comfortably.

Ultimately, the goal of this method is to find a balance between what your requirements are for a comfortable lifestyle and how much you want your investments to grow.

How to apply the 4% rule

Now, how does the 4% rule work in practise? 

First, what kind of lifestyle are you seeking to have in retirement? In your calculations, you might include factors such as travelling, shopping, health, further education for yourself and for your children, pursuing your hobbies and so on. 

To give you a broad idea of how much you might need, you can have a look at how much you have been spending per year for the last few years and set it as your annual spending goal. (Though it’s important to keep in mind that this figure is likely higher than what you would need in retirement, as you will no longer have any expenses associated with your work life.) 

Second, multiply your goal by 25 to get the total value of your retirement portfolio. For example, if your annual objective was set to $50,000, you would need to have $1,250,000 in your portfolio by the time you retire. From this amount, you can then withdraw 4% per year in your retirement.

Long-term crypto investment 

All investments come with risks. This statement is even more relevant when it comes to crypto because cryptocurrencies are extremely volatile assets. The exposure to volatility carries higher risks, but also higher rewards. There are many strategies where you can earn a lot by trading actively on a daily basis, but this approach demands a lot of time.

A common crypto strategy where you can earn high returns in the long run is HODL (Hold On for Dear Life) where you simply hold onto your crypto investment for a long period of time. 

Let’s have a look at the SwissBorg token. If you had invested $1000 when the ICO price for CHSB was set to $0.1 back in 2017, your SwissBorg tokens would be worth $13,400 today (with 1 CHSB being worth $1.34 at the time of writing). Even if you didn’t invest at the time of its public launching but in December 2020 with an average value of $0.25, you would have a total value of $4,000. 

Admittedly, there have been significant drops since SwissBorg’s ICO, with the token falling below 1 cent. However, one of the benefits of long-term hodl-ing is that you can wait out any bearish periods, simply holding your tokens until the price goes up.

In general, all tokens experience volatility, but projects with strong fundamentals tend to increase in value over the long term.

How to use the SwissBorg app to plan long-term investments

SwissBorg has developed an accessible wealth management app for everyone that allows you to buy and exchange different crypto assets (including their very own CHSB token!) -  the SwissBorg app.

With 13 tokens listed in the app (and more coming soon), you have the opportunity to diversify your crypto portfolio and minimise risk, all within a single app.

Beyond simply diversifying through holding different cryptos, you also have the opportunity to diversify your methods of earning with SwissBorg’s yield wallets, which allow you to earn a passive income on your cryptos. SwissBorg currently offers yield wallets on the SwissBorg token, USD coin and Ethereum, with yields of up to 20% p.a.! 

SwissBorg CEO and founder, Cyrus Fazel, said the following in relation to the Smart Yield wallet: 

“You just have to passively earn income and enjoy all the great ways of building wealth in the long run because wealth is not made out of one day. It’s made out of a long, purposeful life.” (Pow Wow #10, 2021).

One final way to earn even more rewards is to become a Premium user. With the Community Premium, users can earn 1.5x the standard yield by staking just 2,000 CHSB (coming soon!), while Genesis Premium users can earn double the standard yield along with a range of other benefits by staking 50,000 CHSB (accessible for a limited period of time). 

Final thoughts on the 4% rule

What have we learnt?

  • The 4% rule is a general guideline for funding your retirement. It can provide a target to calculate your desired retirement savings, and a budget for once you are retired.
  • Because it is a guideline, the 4% rule might need to be adapted according to the amount in your portfolio at retirement, your desired retirement lifestyle and the length of your retirement.
  • The SwissBorg app allows you to diversify your crypto assets and earn a yield. This can be a good starting point to invest for a longer period of time.

Disclaimer: The information contained in or provided from or through this article (the "Article") is not intended to be and does not constitute financial advice, trading advice, or any other type of advice, and should not be interpreted or understood as any form of promotion, recommendation, inducement, offer or invitation to (i) buy or sell any product, (ii) carry out transactions, or (iii) engage in any other legal transaction. This Article should be considered as marketing material and not as the result of financial research/independent investments.

Neither SBorg SA nor its affiliates (“Entities”), make any representation or warranty or guarantee as to the completeness, accuracy, timeliness or suitability of any information contained within any part of the Article, nor to it being free from error. The Entities reserve the right to change any information contained in this Article without restriction or notice. The Entities do not accept any liability (whether in contract, tort or otherwise howsoever and whether or not they have been negligent) for any loss or damage (including, without limitation, loss of profit), which may arise directly or indirectly from use of or reliance on such information and/or from the Article.

Earn a yield of up to 30% p.a. on USDC and 15% p.a on ETH! 

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