permanent income theory

The Theory of Sustainable Income

The Theory of Sustainable Income, also known as the 4% Safe withdrawal rate, is a financial strategy developed by retired chemical engineer William Bengen in the early 1990s. It holds that a retiree should withdraw no more than 4% of their Investment portfolios value each year in order to ensure their money lasts throughout retirement. This rate of spend down was determined to strike the best balance between maximizing Annual Income and ensuring the Investor does not run out of Money before the end of their Golden Years.

The Theory of Sustainable Income is based on two assumptions: that investment returns remain constant over time and that investment returns occur in a specific order. These assumptions allow the strategy to be flexible enough to adjust to changing market conditions while still providing the retirement investor with a reliable way to withdraw the income they need each year.

The strategy starts by looking at the portfolio’s historical returns in order to get an estimate of the average return over a multi-year period. This information is used to calculate a safe withdrawal rate that will provide income without exhausting the portfolio.

For example, an investor with an Investment portfolio worth $1 million with an average return of 5% could withdraw $50,000 each year without running out of money 25 years later. That same decision would only provide an income of $45,000 per year if the average return was 2%.

The strategy also looks at the investor’s risk tolerance. For example, an investor with a low risk tolerance might want to withdraw no more than 3% or 4% of their Investment’s value each year, while a higher risk investor might choose to withdraw up to 6% or even 8%.

The idea behind the Theory of Sustainable Income is that it allows the investor to take a greater share of their money each year without jeopardizing their retirement. This means they can enjoy a higher standard of living throughout their retirement while still having the assurance that they wont run out of money.

The strategy has gained traction among retirement investors who want to ensure that their retirement savings last throughout their Golden Years. It has also become popular with investors who want to make sure their money will keep up with inflation while they’re retired.

The Theory of Sustainable Income isn’t without its drawbacks. For one, it assumes that investment returns will remain consistent over time, which isn’t always the case. Also, the strategy relies heavily on the investor’s ability to estimate their historical returns accurately, which can be difficult to do.

In spite of these drawbacks, the Theory of Sustainable Income remains a popular strategy for retirement investors who want to make sure their nest egg will last. It provides a reliable way to ensure their money will continue to provide income throughout their retirement, no matter the market conditions.

The Theory of Permanent Income is primarily an economic theory developed by American economist Milton Friedman. The theory explains consumers buying behavior by showing that rational buyers make purchasing decisions based on their permanent income, not their temporary income.

Basically, permanent income is a hypothetical figure that indicates the total amount of money a consumer can expect to receive over the course of a lifetime. It includes income from salary, investments, real estate, and other sources. Temporary income, on the other hand, only refers to current, short-term income.

The Theory of Permanent Income states that when making purchasing decisions, people should consider their permanent income, not their short-term income. According to this theory, rational consumers are more inclined to purchase items when their permanent income is steady, even if their current income is temporarily low. This is because people who have a steady permanent income are more likely to be able to maintain their future purchasing power.

The Theory of Permanent Income also states that consumers are more likely to save money when their permanent income is low. This is because low-income consumers often feel that their current income is their only source of financial security. Therefore, they are more likely to save money in the event of a financial emergency.

In conclusion, the Theory of Permanent Income explains why people make the decisions they do when it comes to spending and saving money. This theory states that people should consider their permanent income, not their short-term income, when making decisions about their finances. People are more likely to purchase items when their permanent income is steady and save money when it is low. Knowing this, consumers can manage and budget their money more effectively.