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%.
The 25X rule says that if you save 25 times your desired annual retirement salary, you can withdraw 4% of that amount each year and it will last 30 years.
The 4% rule is based on research by William Bengen, published in 1994, that found that if you invested at least 50% of your money in stocks and the rest in bonds, you'd have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on ...
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.
It states that you can comfortably withdraw 4% of your savings in your first year of retirement and adjust that amount for inflation for every subsequent year without risking running out of money for at least 30 years.
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.
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.
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 |
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.
COMPOUND ANNUAL GROWTH RATE FOR THE S&P 500
As you can see, inflation-adjusted average returns for the S&P 500 have been between 5% and 8% over a few selected 30-year periods. The bottom line is that using a rate of return of 6% or 7% is a good bet for your retirement planning.
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.
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