Rule #3, The 4% Rule

Confused man, wondering what the best rate of withdrawal is.

This was developed by Bill Bengen in the mid-90s and is a general guideline that says you can take 4% of your retirement income, increasing it for inflation, year over year, and it should last you for 30 years.  So if you retire at 65, that means your retirement should last till you are 95.  This rule has come under a lot of attack, some saying 5% is ok, others even saying 10% is ok, but the idea is that withdrawing a consistent amount adjusted for inflation, plus taking into account ups and downs of the market, the money should last.  What I will say is that 4% is a generally conservative rule, but the current economic conditions need to be considered and factored in.  Not to mention your own personal planning.

Here is a view of what this might look like if you had $1 million set at the time of retirement in 1980, and every 5 years after, how long will it last?  Be aware, it is not all pretty. Especially if you get very aggressive with your withdrawal rate.

Assumptions:

• S&P Rate of Return based on data from macrotrends.net (https://www.macrotrends.net/2526/sp-500-historical-annual-returns#google_vignette)

• No adjustments were made to reduce the risk of the return. E.g., No bonds or lower interest adjustments.

• Every year, the withdrawal increased regardless of the return, 1 lump sum withdrawal per year.

• 3% adjustment was made to the withdrawal every year

The table shows how long each withdrawal rate would have lasted from 4-10% based on historic data. The + denotes a continuation for the foreseeable future.

What should you take away from this table?

• If you retired in 1980 with the assumptions above, you could take almost 8% and your money would still last 30 years, compared to 1990, where that money would still last, but not quite go as far

• The year 2000 was a rough year to retire, and a 10% withdrawal rate would have really put you in a pickle; even 4% would have only lasted 20 years.

• If you see your investments going up, year over year, it is probably safe to take a little more out. That 4% rule in the 90s, based would have earned you $4.7 Million by the beginning of 2025.

The rule is not so much a rule as it is a guideline.  It has to be adjusted and managed based on economic conditions.  Also, be careful when you hear some say, you can take out 10%, as you can see here, that is way too aggressive, unless you know you are going to live for another 10 years, take it a little easy.  In general, for most economic conditions, you should be able to do somewhere between 5-7%, but adjust; it is not just a set it and forget it.

In the end, retirement does not mean you have to stop working; instead, find what you like and what works within your budget.  Have fun and enjoy those years, it's not the time to be a Scrooge or just sit back. Make the most of those years and enjoy all you have saved leading up to it.

How much do you need to retire?  That also depends.  Next week, I’ll dig into the 25x rule, which is a guideline to help you figure out what that magic number is for you.

As always, if you want to play around with the spreadsheet I created, just shoot me an email and I'd be happy to send you a link. Brian@coachbw.com And, any questions, thoughts, or feedback, leave me a comment or send me a note.