Retirement 4 Percent Rule

The following article is a sample from the book ,The 6 Steps to Financial Freedom, what the marketers and Wall Street don’t want you to know.

Many people are worried. They are close to retirement.  Do I have enough to retire. What if markets fall?  If I live for 30 years, will I have enough to survive?

In Sustainable Withdrawal Rates From Your Retirement Portfolio, Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz examine how safe it is to withdraw specific amounts from your portfolio, depending on the percentage of your portfolio which is in stocks relative to bonds .  

In their own words on page 1 of their report (http://afcpe.org/assets/pdf/vol1014.pdf), “The study looks at the effects of a range of nominal and inflation-adjusted withdrawal rates applied monthly on the success rates of retirement portfolios of large-cap stocks and corporate bonds for payout periods of 15, 20, 25, and 30 years. A portfolio is deemed a success if it completes the payout period with a terminal value that is greater than zero. Using historical financial market returns, the study suggests that portfolios of at least 75% stock provide 4% to 5% inflation- adjusted withdrawals”

The results of their figures from 1926 until 1997, are below:

Payout period

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

100% stocks
20 years

100

98

96

94

91

83

72

58

45

40

25 years

100

98

96

92

88

75

58

44

38

29

30 years

100

98

95

91

84

74

60

49

37

33

75% stocks, 25% bonds
20 years

100

100

100

96

94

83

68

51

38

30

25 years

100

100

98

96

90

73

50

40

29

19

30 years

100

100

98

95

88

63

51

35

26

14

50% stocks, 50% bonds
20 years

100

100

100

100

98

83

55

36

17

4

25 years

100

100

100

100

94

58

35

13

2

0

30 years

100

100

100

98

81

42

19

5

0

0

25% stocks, 75% bonds
20 years

100

100

100

100

100

62

23

11

4

0

25 years

100

100

100

100

60

17

6

0

0

0

30 years

100

100

100

95

21

5

0

0

0

0

100% bonds
20 years

100

100

100

91

47

36

15

4

0

0

25 years

100

100

96

48

29

8

2

0

0

0

30 years

100

100

53

26

2

0

0

0

0

0

The above figures show that taking out 4% is safe, and usually 5% is safe.  Some caveats should be added here.  For people who want their kids to get an inheritance, withdrawing 4% is sufficiently conservative to ensure the money will be worth the same in inflation adjusted terms I’m the future.

Sure, your account won’t compound by the 8%-10% before inflation and 6% after inflation you can expect before drawing down, but your account should be worth AT LEAST the same in inflation adjusted terms in the future. Taking out 5% is probably safe in terms of not running out of cash, but it might mean the inheritance you give your kids is worth less than the pot you have now. 

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