Even at extremely high stock valuations, research by financial planner Michael Kitces shows that the 4% rule still holds. ... Using an asset allocation of 60% stocks and 40% bonds, Kitces found that the lowest safe initial withdrawal rate was 4.4%.
Based on the returns on the S&P 500 in the past 10 years, the 4% safe withdrawal rate looks like a solid bet going forward. Even if interest rates remain where they are now, a retiree relying on the strategy will do just fine – as long as the stock market continues to cooperate.
Bengen has applied much of Kitces' thinking, using the Shiller CAPE index (which reflects the cyclically adjusted price-earnings ratio for the S&P 500) and inflation data, to come up with his latest revision and recommendation for a generally safe withdrawal rate: 5%.
As a rule of thumb, aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, then adjust that amount every year for inflation.
One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
The 4% rule
The metric, created in the 1990s by financial advisor William Bengen, says retirees can withdraw 4% of their total portfolio in the first year of retirement. That dollar amount stays the same each year and rises only with annual inflation.
The 25x Rule is a way to estimate how much money you need to save for retirement. ... According to the 25x Rule, you would need to save at least $1.25 million to be able to safely withdraw $50,000 of income in your first year of retirement.
How long will $500,000 last in retirement? If you've saved $500,000 for retirement and withdraw $20,000 per year, it will probably last you 25 years. Of course, it will last longer if you expect an annual return from investing your money or if you withdraw less per year.
In fact, a retiree who is willing to cut back spending in bad years by just 2.5 per cent can lift their starting safe withdrawal rate as high as 5 per cent of their savings - without increasing the chances of running out of money.
2% Interest
| Monthly Spending | Runs out in |
|---|---|
| $3,000/mo | 9.2 years |
| $3,600/mo | 7.6 years |
| $4,200/mo | 6.4 years |
| $4,800/mo | 5.6 years |
If you expect to have a relatively safe retirement income of $60,000 a year, you will need $800,000 saved up by the time you retire. ... Your income gap is now just $24,000 a year, which you will draw from your retirement savings of $800,000 to close the gap.
The 4 Percent Rule and Early Retirement
FIRE is an acronym that stands for Financial Independence, Retire Early and some people are retiring as soon as their early 30s and 40s. This means their stock portfolio will need to last significantly longer than that of a traditional retiree.
How long will savings of $800,000 last? When will $800k run out? Your savings will last for 12 years and 8 months.
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