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Retirement Account Withdrawals – Making the 4% Rule Work

Here’s a common question I hear a lot:

How much can I safely withdrawal from my retirement savings after I retire.

Obviously, the answer depends on a number of factors such as when you retire, how long you live, and if you want a good chance of your funds lasting until you pass away, but studies have been conducted that concluded a 4% withdrawal rate was recommended.  In fact, 4% has kind of become a prudent rule of thumb when considering withdrawal rates.

A few years ago, an updated study (1) was completed that revealed some important info about the 4% Rule that I want to share.

If You Retire At Age 70 or later, the 4% rule will probably work well.  In the study, there were no instances of running out of money during your lifetime withdrawing 4% from a portfolio invested 75 percent in stocks and 25 percent in bonds for a 20- or 25-year retirement period.

For a portfolio invested 50 percent in stocks and 50 percent in bonds, there were no failures for 20-year retirements, and only a 2 percent failure rate for 25-year retirements. So, the four-percent rule appears to be safe if you’re retiring at age 70 or later, since a portfolio with a 25-year retirement goal would have very high odds of lasting until age 95.

Lets Talk About Retiring at Age 65 For all 30-year retirement periods, the four-percent rule failed only 4 percent of the time for a 75/25 portfolio, and 8 percent of the time for a 50/50 portfolio. So you could use the four-percent rule if you retire at age 65, but be ready to make adjustments under certain circumstances which we’ll talk about in a minute.

OK, Lets Talk About Retiring Before Age 65 For 35-year retirements, the four-percent rule failed 8 percent of the time for a 75/25 portfolio, and 15 percent of the time for a 50/50 portfolio. For me, these failure rates are too high to guarantee peace of mind for retirements well before age 65. That’s why 35 years is probably just too long to be withdrawing principal from your retirement accounts because too much can go wrong during that long a time.

Instead, if you’re retiring well before age 65, consider living on just the interest and dividends of a portfolio which is balanced between stocks and bonds, at least until age 65 — and age 70 would be even better. That strategy probably results in withdrawals of around 3 percent of your portfolio. If retiring well before 65, you might also consider working part time if you need additional income to meet your living expenses.

The updated 4% withdrawal study also showed that the four-percent rule failed when there was high inflation and/or poor stock market returns early in a retirement period.

Those Monday morning quarterbacks would tell you not to retire before the market crashes or before there’s high inflation!

More practical advice would be to make a mid-course adjustment if you experience high inflation or poor investment returns during your retirement.

You could cut back on your principal withdrawals if that happens, which buys time to let your portfolio recover. And consider living on just the interest and dividends for a while. This can mean watching your living expenses or finding some other source of income, such working. These may not be ideal choices, but I figure they’ll beat running out of money in your eighties and nineties.

On the other hand, if you experience a favorable investment environment during the first five to ten years of retirement, you could reset your withdrawal amount to four percent of your larger portfolio, if that would give you a higher withdrawal amount than rigidly sticking to your original withdrawal plan.

It’s entirely appropriate to make mid-course adjustments to your withdrawal strategy to reflect your ongoing investment and inflation experience — good or bad.

This has been John Williams, with Ironwood Wealth Management and the Smart Financial Future blog site.  Don’t hesitate to let us know if you have any questions.  We’ll see you next time.


(1) Revisiting Retirement Withdrawal Plans and Their Historical Rates of Return by Chris O’Flinn and Felix Schirripa, May 16, 2010