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The 4% rule

By following the 4% rule, you can build up a capital that never runs out.

The construction of an adequate amount of capital guaranteeing the security of old age, as well as the issue of pensions themselves, is of paramount importance to the state. But they want you to take care of your own pension yourself too. So the topic of retirement is also a priority part of financial planning. The 4% rule can help you to achieve security.

The 4% rule


However, you may be wondering how much money you would still have to raise for this.

Retirement still seems a long way off, and many people regardless of this want to know, at least in the order of magnitude, the amount of security it provides for their old days.
You may not want to work until you are 65 years old. If you know you can afford to retire, it’s easier to make a decision about when.

How much capital do you need as a retiree?

In a financial planning, time has the greatest value. So even if the retreat seems far away, maybe your company is on the rise now, it still makes sense to run through it, at least in thought.
One financial planning methodology is to achieve a goal after a goal. Accordingly, address your retirement and business exit strategy at the very end, if applicable, in the year in which it is due.

Retirement may still be far away, but there and then it’s very hard to change. One after another strategy accordingly doesn’t make much sense. Because this is how you “feed” the capital needs of the other with one of your goals. It’s much easier if you take action up to 30 years before your planned retreat.

How can you calculate the capital needed for your pension?

From a financial point of view, a pension is nothing more than an annuity. Since you don’t want to ever be without a pension, we can consider it a perpetual annuity. Since inflation also has to be reckoned with over such a period of time, this further enhanced as an increasing perpetual annuity.

If you want to calculate the required capital, you can do it using the following formula:

PV = C / (r-g)

PV = Present Value. The amount you need to have on the day you retire.

C = Capital. That’s how much you’d like to receive a pension in Year 1 (yes, the formula above counts on an annualized basis, if you’re interested in the same thing every month, feel free to ask)

r = Rate. The growth rate at which your invested capital increases.

g = Growth. You want to increase your pension by this amount every year to keep up with inflation.

Many people find that they are either not interested in investing or do not understand it, so in their eyes is the fixed that they have as cash back home. If you don’t ask for the buoyancy of the economy, you’ll still need retirement capital. So you have to put this wealth together yourself.

How much capital do you need for retirement if you solve it on your own?

If you spend 30 years without income (the state will either provide enough or not), the first thing that may come to mind is that you need to have 30x your annual income.

The annual income here is what you would like to receive annually as a retiree, typically almost the same as what you now live on.

Broadly speaking, let’s look at pretty much what to expect by going around this one issue.

Suppose you now live on HUF 500.000 per month, which will mean HUF 6.000.000 per year.

If you are planning to retire for 30 years and would like to receive enough per month to receive the same as what you now need for HUF 500.000, then count on inflation due to the long time horizon. What you get now for 500.000 HUF, you can only buy more expensive later.

Calculated with 4% inflation, which is now HUF 500.000, in 30 years it will be HUF 1.622.000. Taking a simple arithmetic mean, let’s look at how much money you need for your safety.

(We take the arithmetic mean because in the beginning, the less money you need compared to this, the more you will need in the end).

Arithmetic mean: (500.000 HUF / month + 1.622.000 HUF / month) / 2 = 1.061.000 HUF / month

That’s all you need on a monthly basis. To maintain your standard of living on your own:

HUF 1.061.000 / month * 12 months * 30 years = HUF 381.960.000

This amount will probably run out by the end. We are done, you know what you have to do, I’m glad I could help.

Let’s look at how much capital you need if you still want to take advantage of money market returns but want to use a simpler solution.

We call on the 4% rule for this.

The 4% rule shows how much capital is able to support you with complete security regardless of market movements. This is because only the yields, or if the money market closed a good year, you will pick up some of the yields. Capital is retained even if the money market performed poorly that year (after all, gains made in good years offset losses made in bad years).

I recommend the Trinity study for your attention to the 4% rule.

How much capital do you need using the 4% rule?

Before many get to their hearts that the above amount is unlikely, let’s look further. You would rightly call me and ask the question, “Reni! That’s a lot! Do I really need that much? How much is it really needed? ”

Let’s look at the case that if we look at the example above, you need 6 million forints a year to make a living. Add to that the fact that you need more and more money every year because of inflation than the year before, so I calculated 4% more and more take out each year.
And what does capital know? You obviously don’t sit on it back home like Uncle Dagobert. Since the market can grow by an average of 8-10% per year, in this example your money will grow by 7%.

What is the amount of capital that never runs out?

The basic logic of the 4% rule is that you invest your money. Then market movements will be followed by your return, so it is not nearly as predictable as the value of a bank account. The good news, though, is that what can go down can go up. And in the money market, there is basically a lot more upside.

What is the amount of 4% of which is exactly HUF 6 million? This is nothing but 150 million. Thus, by the logic of the 4% rule, if you have 150 million invested, you are guaranteed to be able to take out of it, plus inflation, as much as you can make a living from. And capital never runs out.

Using the 4% rule, your balance will look like this:

Capital gain with the use of the 4% Rule


Sounds good, right?

The 4% rule is crisis-proof.

Examining a 30-year time horizon, including the DotCom scandal in the early 2000s and the 2008 mortgage crisis, it was found that users of the 4% rule had, on average, 2.8 times more capital than the value of their initial investment.

We can say that no matter what happens, you can be completely safe as a retiree if you rely on the 4% rule.

What’s wrong with using the 4% rule exclusively?

The 4% rule is very good to show direction, but as you can see, it sounds more good than really necessary. It is good if you target it, because if that amount isn’t met 100%, it’s not a big deal either, but if if you absolutely need it so much and it doesn’t come together, there’s already trouble.

Since we used a general rule of thumb here, rather than calculating the incremental perpetual annuity mentioned above, diligently, don’t even expect an exact result.

It sounds very good that not only will your capital never run out, but it will even grow, you would need this amount of wealth for your old age security if:

  • you want to create an opportunity for a better life for your heirs
  • you are a Highlander with big plans and so you would never die but you would need more and more money

It is a fact that it provides a great deal of security. Another issue is that it does not correspond to the average reality. If you are not a member of the top 10%, you will have to pinch it for some other purpose just to get the heirs to receive your capital and make it easier for them. But this is about you.

If you definitely want to set aside 25 times your annual income, it could be a significant burden on you, your business, and your family.

Plus, in most cases, you really don’t need that amount.
If we take the worst case scenario (i.e., the state where the state doesn’t give you a single penny under any title and you can’t work), then far far less money is enough than what the 4% rule shows.

How can you raise the right amount of capital for your retirement?

We will look at this in each case according to your individual life situation. Then we consider that

  • whether you, as an individual or as a company, should start doing this
  • what is the capital actually required
  • what you can add from other sources, what benefits you are eligible for

So before I push the theoretical calculations of an entire math book in front of you, ask us for a personal meeting at the contact menu. Then we will look at what you really need for your safety in old age and also look for the shortest path to it.


  1. Based on the example above, how much will you need as a retiree? How do you solve this?
  2. Do you find it more appropriate to put together the necessary capital from private money or company money?
  3. To your knowledge, what are the options that can bring you closer to this goal?

I am happy to read your comments and experiences as comments. If you have a question, the easiest way to ask it is in the contact menu.

You can access this article in Hungarian and German
Hungarian flag A 4%-os szabály: Mekkora tőke ad biztonságot neked nyugdíjasként?
German flag 4% Regel: Wie viel brauchst du für eine ausreichende Rente?


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