4% Retirement Withdrawal Rule

March 7th, 2007  |  Published in Disbursements  |  2 Comments

In yet another one of Walter Updegrave’s retirement columns, I was introduced to the 4% withdrawal rule for your 401K. Basically, the rule is based on running Monte Carlo simulations (computer simulations of the probabilities dealing with the markets) where if you withdraw only 4% of your retirement assets each year, there is an 80% chance that your funds, regardless of how well or how badly the markets perform, will last thirty years. Obviously, as you increase how much you withdraw, that probability goes down.

Now, Walter does make an excellent point in that 4% isn’t a hard and fast rule because it doesn’t keep up with inflation. At 3% a year, that really starts eating into your fixed income unless you adjust your withdrawals to match inflation. For example, if you have $1M in assets, 4% is $40,000 a year. In ten years, in order to have $40,000 in purchasing power in today dollars, you will have to have closer to $54,000 in funds if inflation were to grow at 3% a year. So, to combat that you will want to increase your disbursements to at least match inflation.

Also, you will want to enjoy your retirement so don’t feel as though you’re forced to that 4% rule. If you spend more now and spend less later, as long as it evens out you should be okay.

  

Responses

  1. Wealth Building Lessons says:

    April 9th, 2007 at 5:15 pm (#)

    I strongly recommend that you read ‘Yes you can retire comfortably’ by Stein.

    He explains in detail how this may or may not suitable to your situation. Based on your retirement returns, a flat 4% withdrawal during the initial years of your retirement in a bear market could cause you to run out of money in 12-15 years.

    While you may get average returns, you need to prepare for worst case returns and best case longevity!

  2. A Realistic Retirement Number :: My Retirement Blog says:

    March 10th, 2008 at 6:39 am (#)

    […] retire and still maintain a close standard of living. People throw out rules of thumb like the 4% withdrawal rule and the like but is that really the […]