What is the 7% rule in finance?
The 7% Rule in Finance
The "7% rule" in finance typically refers to a commonly cited guideline for investment returns or safe withdrawal rates. It can mean different things in various contexts, but most notably:
1. Investment Returns
- Many financial advisors use a 7% average annual return as a benchmark for long-term stock market investments, based on historical returns of the S&P 500 after adjusting for inflation.
- This figure is used for projecting future investment growth in retirement planning or other long-term financial goals.
2. Safe Withdrawal Rate
- Some people mistakenly refer to a "7% rule" when discussing how much you can safely withdraw from your retirement portfolio each year without running out of money. The more common figure here is the "4% rule," but some aggressive strategies or certain contexts might reference 7% for shorter time horizons or higher-risk tolerance.
3. Rule of 72
- The "7% rule" is sometimes connected to the Rule of 72, a quick way to estimate how long it will take for an investment to double at a given interest rate. At 7% annual return, your investment will double in approximately 10 years (72 divided by 7 = about 10.3).
Important Note
The actual safe withdrawal rate or expected return can vary significantly based on market conditions, inflation, investment choices, and risk tolerance. The 7% figure is a general guideline, not a guarantee.