When it comes to Early Retirement, the 4% rule is often mentioned. But are we sure that this rule is actually valid?
Some studies have been performed on a shallow or incomplete database. On this site, for the most common assets, we have a monthly historical data source going back to 1871. And with real data, you’ll find that 4% isn’t a 100% certain threshold.
Furthermore, very often the simulations only cover 30-year retirement periods. Here we also provide simulations up to 70 years of retirement period.
Introduction
The 4% rule is a widely popular guideline for retirees looking to live off of the income generated by their investments.
The rule states that retirees can safely withdraw 4% of their portfolio value in the first year of retirement and adjust that amount for inflation in subsequent years. This rule, which was first introduced by financial advisor William Bengen in 1994, has become famous for providing a simple and easy way for retirees to plan their finances in retirement.
However, it’s important to note that the 4% rule is not a one-size-fits-all solution. There are several factors that can affect the safety and sustainability of a 4% withdrawal rate, such as the retiree’s life expectancy, the composition of their portfolio, and the current economic conditions.
For example, if a retiree has a shorter life expectancy or a good stocks/bonds balanced portfolio, they may be able to safely withdraw more than 4%. On the other hand, if a retiree has a longer life expectancy or a portfolio heavily invested in bonds, they may need to withdraw less than 4% to ensure the sustainability of their portfolio.
It’s also important to note that the 4% rule is based on historical data and assumes a specific set of market conditions. While it can provide a rough estimate of what withdrawal rate may be safe, it’s not a guarantee for the future. In other words, it could be risky to rely too much on the 4% rule.
Just as example, check the most famous and simple asset allocations, to get an idea of what a safe withdrawal rate could be:
US Stocks/Bonds 60/40
US Stocks/Bonds 40/60
How to plan your retirement
That’s why it’s essential to consult a financial advisor and use a retirement income planning tool to determine the withdrawal rate that is most suitable for your unique situation.
On our website, you can find multiple detailed simulations that will help you understand and choose the withdrawal rate that is right for you. It’s also important to regularly review your withdrawal rate and adjust it as needed.
On this website, you’ll discover that a balanced portfolio guaranteed a higher withdrawal rate than a 100% stocks one. It’s counter-intuitive, because you tend to think that a portfolio with higher returns can give you more security: in reality, a riskier portfolio also exposes you to higher losses that can erode your capital.
Conclusion
In conclusion, the 4% rule can be a useful starting point for retirees planning their finances in retirement, but it’s important to understand that it’s not a one-size-fits-all solution. Many factors can affect the safety and sustainability of a 4% withdrawal rate, and it’s essential to consult a financial advisor and use a retirement income planning tool to determine the withdrawal rate that is most suitable for your unique situation.
