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Does The 4% Rule Make A Good Retirement Plan?
Does the 4% rule make a good retirement plan? Before we answer that question let’s first explore what the 4% rule is and some of its pros and cons.
The 4% rule is a great personal finance rule of thumb.
Like many rules of thumb, it provides good direction for financial goals, it’s simple, it’s easy to understand, and it’s relatively accurate.
Unlike other personal finance rules of thumb, the 4% rule is also backed up by quite a bit of academic research, so if there was any personal finance rule of thumb to use, it would certainly be the 4% rule.
Let’s review what the 4% rule is in more detail, the pros and cons, and why you may or may not want to use the 4% rule for your retirement plan.
Did You Know Your CPP Estimate Is Probably Wrong?
If you’re preparing for retirement, then you may have looked up your CPP estimate to get an idea of how much you might receive from the Canada Pension Plan (CPP) in the future.
But did you know that your CPP estimate is probably wrong?
If you’re wondering “How much CPP will I get” then its important to know that your CPP estimate is based on some pretty big assumptions. Unless you’re about to start CPP tomorrow, your actual CPP could be much different than your estimate.
When Service Canada creates your CPP estimate there are a few important assumptions they’re making about your future income and years of work. These assumptions are necessary to create an estimate of your future CPP benefits because CPP benefits are based on contributions which in turn are based on employment income.
But if your future employment income is different than their assumptions this could lead to your actual CPP being much lower or possibly much higher than estimated.
In this blog post we’re going to look at the three major assumptions that impact your CPP estimate and why the amount you receive from CPP could be thousands per year different than what the estimate suggests. We’re also going to look at how you can use a CPP calculator to get a better estimate of your future CPP benefit.
When The Stock Market Drops, What Is Normal Versus Concerning?
When the stock market drops, what should you consider “normal” and when should you be concerned?
When there is a stock market drop, a large stock market correction, or a recession, it can be very disconcerting to see your portfolio drop day after day and week after week. For new investors, and even many experienced investors, seeing their portfolio decline by $1,000, $10,000, or even $100,000+ can be tough to stomach.
But as investors, we should anticipate that our portfolios will drop and some point. A portfolio will probably go through 5-10 large stock market drops over a lifetime. The question is, how large a drop is considered “normal”? And at what point should you be concerned?
During a large stock market drop it can be hard to avoid negative headlines. Bad news sells and when the stock market drops it can make headlines for months or years. This “headline effect” can cause even more panic.
But large drops in the stock market have been happening for decades. The reason may be different, but the result is always the same, a large decline in portfolio value followed by a recovery (at some point).
These historical stock market drops can teach us a good lesson about what is considered “normal”.
What “normal” is will depend on a few factors. The first factor is your level of diversification. The second factor is your current asset allocation, how is your portfolio allocated between equities and fixed-income. The third factor is if you’re currently in the accumulation phase, which can help mute the impact of a large stock market drop, or if you’re in the decumulation phase, when retirement withdrawals can amplify the impact of a large stock market decline.
Let’s look at some historical data to understand what “normal” looks like based on some of these factors.