CookieDough wrote: ↑Thu Jun 13, 2024 8:08 pmI believe the 4% rule (of thumb) for a withdrawal rate is based on an anticipated return of 7% overall for a balanced portfolio, with 3% left over to cover inflation increases. All rules of thumb, very simplified.
Not quite. The 4% discovery was not based on anticipating anything. It was backward looking, to answer a question: at any point historically, what was the maximum withdrawal rate (as a percent of the initial portfolio, and then adjusted for inflation) that would have allowed a portfolio (of a particular mix) to survive a 30 year retirement? For many points in history, including retirements in good times and bad, it was discovered that (including retiring in 1928, or at any point in the 1960s; not just good economic times!), 4% of the initial value, adjusted for inflation each year, would survive. Except for one specific point in the 1960s, where 3.8% would have been needed.
If memory serves, the study was later revised to include total market indices (instead of simply large caps, as the initial study had done), and I think the worst starting point had a 4.5% SWR.
Of course, this is not a rule in any real sense: you have no way of knowing if you're starting at a good time, a bad time, or something that could turn out to be worse than the worst period thus far. But the study also didn't include things like other sources of income in that time (such as social security, or working one day a week at the local golf course) or belt tightening (if your portfolio is down, are you still planning to take four vacations a year, or might you find a way to take only two?) that would have allowed a portfolio to survive longer.
Also if memory serves, it was written in part in response to the view that "the average return is P%, therefore P% per year is safe to withdraw." In the early 90s, there were many who advocated that 8% was a safe amount to withdraw.
I hope this makes more sense, both for the origin of it and how it might be useful in your own planning.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
