So that last week of September was a bit rough on many folks.
- Stock markets took a good-sized downturn
- Hurricane Ian inflicted great damage in Florida
- Surgeons took a good chunk of cancer from my upper lip
We can choose not to dwell on that week and move forward to better things (much easier for me to do than those who lost so much down in SW Florida). My stitches came out today and recovery is off to a good start. So is the beard.
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The above has nothing to do with the “Four Per Cent Rule”, so onto the title subject:
Most of you who’ve done retirement research are aware of this rule, or guideline. From Rob Berger’s 18 August 2022 Forbes Advisor article:
“How much of your nest egg can you spend each year without running out of money in retirement? (Mike’s editorial note…this assumes a retiree has no other income sources) In 1994, financial advisor William Bengen published a paper that answered this very question.
Bengen found that retirees could safely spend about 4% of their retirement savings in the first year of retirement. In subsequent years, they could adjust the annual withdraws by the rate of inflation.
Following this simple formula, Bengen found that most retirement portfolios would last at least 30 years. In many cases the portfolios remained intact for 50 years or more.
The 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio’s value. If you have $1 million saved for retirement, for example, you could spend $40,000 in the first year of retirement following the 4% rule. Beginning in year two of retirement, you adjust this amount by the rate of inflation….In year three, you’d take the prior year’s allowed withdrawal, and then adjust that amount for inflation.
Bengen looked at retirements beginning over a 50-year period from 1926 to 1976. He used actual market returns from 1926 through 1992 (Note: Bergen updated his research after his 1994 paper to look at results after 1992). Withdrawals were made at the end of each year and the portfolio rebalanced annually….from this he evaluated the longevity of the portfolio for up to 50 years. For example, he examined whether a portfolio of someone retiring in 1926 would last until 1976. For those retiring in 1976, he examined whether their portfolio would last until 2026….What he found was that an initial withdrawal rate of 4% enabled most portfolios to last 50 years or more. And for those that fell short, they still lasted about 35 years or longer, more than enough for the majority of retirees.”
This guideline holds true for portfolios of greater and less value than $1.0M.
If you want a broader, more offbeat (and more entertaining) explanation, then check out this link and search for their 4% Rule article:
https://www.mrmoneymustache.com
One last reference to consider:
https://www.investopedia.com/terms/f/four-percent-rule.asp
If you were to browse through these references, there might be plenty of “What if” reactions. That’s why I like to refer to this as a guideline (somewhat more valid than a single person’s opinion) rather than anything close to a hard and fast rule. I am not suggesting that anyone use this as a primary retirement planning tool. But at least you know what it refers to when you hear someone talk about it.
One last unrelated subject: the leaves are changing color, so I’m really looking forward to be around here for the next couple of weeks!