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4% RULE

The withdrawal method, also known as the 4% rule is a common rule of thumb in retirement planning. It states that you can withdraw 4% of your savings in your first year of retirement and adjust that amount for inflation for every year without risking running out of money for at least 30 years.


The 4% rule assumes your investment portfolio contains about 60% stocks and 40% bonds. It also assumes you'll keep your spending level throughout retirement. It is supported using Monte Carlo simulations which run 1000’s of possible sequence of returns to predict the probability of your retirement success or failure.


There are several scenarios in which the Four Percent Rule might not work for a retiree. A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio. Further, the Four Percent Rule does not work unless a retiree remains loyal to it year in and year out. Violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the principal, which directly impacts the compound interest that the retiree depends on for sustainability.


You are basically relying on your portfolio and the corresponding success/failure probabilities to hedge against the 3 major retirement risks of longevity, inflation, and sequence of return. The more funds you have invested may mean that you can lower your withdrawal rate perhaps below 4% and thereby increase your odds of success. The maximum initial “safe” withdrawal rate is 4%


You should be aware that the 4% rule is an older rule that has come under pressure in recent years. Following it no longer necessarily guarantees you won't run short of funds. It may work depending on how your investments perform, but you can't count on it being a sure thing, as it was developed when bond interest rates were much higher than they are now. We see this strategy mainly being used for shorter retirements where the person wants a simple plan with low flexibility

Life expectancy plays an important role in determining if this rate will be sustainable, as retirees who live longer need their portfolios to last longer, and medical costs and other expenses can increase as retirees age.


*https://earlyretirementnow.com/2016/04/15/pros-and-cons-of-different-withdrawal-rate-rules/

CRN202304-275585

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