Safe Withdrawal Rate (4% Rule)
The percentage of your retirement portfolio you can withdraw annually without running out of money, historically around 4%.
What You Need to Know
The 4% rule is the foundation of retirement planning. It states you can withdraw 4% of your portfolio in year 1 of retirement, adjust for inflation each year, and have a 95% chance of your money lasting 30 years.
How It Works:
- Portfolio: $1,000,000
- Year 1 withdrawal: $40,000 (4%)
- Year 2: $40,800 (adjusted for 2% inflation)
- Year 3: $41,616 (adjusted for inflation again)
- Continue for 30 years
The Trinity Study: This rule comes from a famous 1998 study analyzing historical market returns from 1926-1995. It found that a 60/40 stock/bond portfolio with 4% withdrawals survived 95% of 30-year periods.
Why 4%? It balances:
- Living comfortably (withdrawing enough)
- Portfolio longevity (not running out)
- Historical market returns (7-10% stocks, 4-6% bonds)
Criticisms & Adjustments:
1. Lower Returns Today: Some experts recommend 3-3.5% due to:
- Lower bond yields than historical average
- Higher stock valuations
- Longer retirements (people living to 90+)
2. Sequence of Returns Risk: If you retire into a bear market, 4% might be too aggressive. Market crashes early in retirement can devastate portfolios.
3. Dynamic Spending: Rather than fixed 4%, adjust based on market performance:
- Market up 20%? Withdraw 5%
- Market down 20%? Withdraw 3%
FIRE Movement: Many early retirees use 3-3.5% for safety since their retirement could last 50+ years.
Target Portfolio: $1M portfolio = $40k/year (4%). Need $60k/year? You need $1.5M saved.
Sources & References
This information is sourced from authoritative government and academic institutions:
- morningstar.com
https://www.morningstar.com/lp/the-4-rule
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Related Terms in Retirement Planning
401(k)
An employer-sponsored retirement account where you contribute pre-tax income, often with employer matching.
Backdoor Roth IRA
A legal strategy allowing high earners to contribute to a Roth IRA by converting a Traditional IRA contribution.
Employer Match
Free money from your employer when you contribute to a 401(k) or similar retirement plan, typically matching 3-6% of your salary.
FIRE (Financial Independence, Retire Early)
A movement focused on saving aggressively (50-70% of income) to retire decades earlier than traditional retirement age.
Pre-Tax (Before Tax)
Income or contributions made before taxes are withheld, reducing current taxable income.
QCD (Qualified Charitable Distribution)
A tax-free donation of up to $105,000 per year directly from your IRA to charity, available to those age 70½ and older, that counts toward your RMD.