We, and loads of others, have written about the importance of understanding safe or sustainable withdrawal rates when saving for retirement. How much will I be able to take out of my savings each year and not end up eating cat food should I be lucky enough to live to 80? Assumptions about this are key to the retirement calculators you find online, for example. The most commonly cited rule of thumb is 4%.
But what if we’ve all been worrying about the entirely wrong thing? Continue reading
One of the most important questions that investors need to understand is how much income they can expect to safely draw from their portfolios over a long time horizon. This income problem is often characterized as an attempt to determine a safe or sustainable withdrawal rate (SWR).
I have written about sustainable withdrawal rates in a range of articles, as well as in detailed case studies. While there are many variations on the theme, the most commonly discussed outcome from SWR studies is what is called the ‘4% rule,’ which states that you can safely draw an inflation-adjusted income equal to 4% of the value of your portfolio in the year of retirement. If you retire with $1 Million, you can draw $40,000 the first year, and then increase this amount each year by 3% to keep pace with inflation.
Questioning the 4% Rule
To begin any discussion of SWRs, it is important to understand the assumptions that go into the 4% rule. Continue reading