Index funds offer you a simple, easy, and affordable way to invest in stocks and bonds without actually having to pick them yourself. Even better, itâs actually the recommended strategy for building wealth for the average Joe. You can use index funds as your main investing strategy to carry you all the way up to […]
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Figuring out how to invest $500,000 can be exciting and stressful, mostly because this much cash can make a huge difference in your life. If you can invest half a million dollars and leave it alone for a few decades, you can easily grow your nest egg to be worth more than $1 million dollars. […]
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Get a Wall Street-level investment tool and supercharge your returns with this powerful (and free) app. Understand everything from your net worth to the fees you’re being charged, all in one place.Get a Wall Street-level investment tool and supercharge your returns with this powerful (and free) app. Understand everything from your net worth to the fees you’re being charged, all in one place.
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A liquid asset is anything that you currently have in your checking and savings account or any possessions that you own that can easily be converted to cash within a short period of time. This particular type of asset is usually regarded as cash, due to the fact that its value will be the same
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The stock market is a place for investors to buy and sell shares in companies â simple enough, right? But when it comes down to how these trades take place, who can actually make these deals, which companies can sell shares, and most importantly, what you should do with all this information, many people draw
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After the 2008 financial crisis Steve and Mary made the tough choice to delay their retirement. Even though their savings was adequate, it just didn’t feel right. They had a vision of their “happy retirement” – spending time with their grandkids, buying a small lake house, traveling to Greece – and none of that seemed likely […]
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Last week, I wrote about the problem with retirement spending: How much should you spend during retirement? If you spend too much, you run the risk of depleting your savings. But if you spend too little, you’re sacrificing the opportunity to make the most of your money, to “drink life to the lees”.
One of the guiding principles in retirement planning is that there’s a “safe withdrawal rate”, a pace at which you can access your investments so that your nest egg will last for thirty years (or longer).
For simplicity’s sake, a lot of folks talk about the “four-percent rule”: Generally speaking, it’s safe to withdraw 4% from your investment portfolio every year without risk of running out of money. (This “rule” manifests itself here at Get Rich Slowly when I say that you’ve reached Financial Independence once you’ve saved 25x your annual spending — 33x your annual spending if you want to be cautious.)
Today, I want to take a closer look at the four-percent rule for safe withdrawals — then explore why the theory behind it doesn’t always mesh well with the reality of our daily lives.
Last August, William Bengen (who first proposed the 4% rule in a 1994 article), participated in an “ask me anything” discussion at the financial independence subreddit.
Here’s the top question and answer from that thread (with additional formatting for readability):
Question
Is the 4% rule still relevant in today’s economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?Answer
The “4% rule” is actually the “4.5% rule” — I modified it some years ago on the basis of new research.The 4.5% is the percentage you could “safely” withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you “throw away” the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year’s inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950.
Now, on to your specific question. I find that the state of the “economy” had little bearing on safe withdrawal rates. Two things count:
- If you encounter a major bear market early in retirement, and/or
- If you experience high inflation during retirement.
Both factors drive the safe withdrawal rate down.
My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%!
However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970’s, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things.
In my opinion, inflation is the retiree’s worst enemy. As your “time horizon” increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006…
If you plan to live forever, 4% should do it.
That’s some helpful information, and it comes directly from a man who has been researching this subject for 25 years. Obviously, it’s no guarantee that a four-percent withdrawal rate will hold up in the future, but it’s enough for me to continue suggesting that you’re financially independent once your savings reaches 25 times your annual spending.
But here’s the catch — and the reason I’m writing this article: From my experience, spending in early retirement is not a level thing. It fluctuates from year to year. Sometimes it fluctuates wildly.
Spring 2021 saw ups and downs financially, lots of great progress with The Best Interest, and one cute puppy!
There are plenty of legitimate places to get free money online. Here’s a list of 40 places you get free money fast, without a hassle.
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The market’s returns aren’t promised. The sequence of returns might not work in your favor. But you can still be a successful investor.