Quote:
Originally Posted by Russ_Boston
Why do people keep using the 4% rate for withdrawal?
I'm no mathematician, and correct me if I'm wrong, if you made 7% this year on your investment and took out 4% wouldn't your nest egg actually grow?
Just sayin!
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If you dig into the 4% rule it gets to be very complicated. The actual withdrawal rate depends on your mix of investments, number of years you estimate for retirement, whether the stock market is at a high or low when you retire, inflation etc.
I think the origin was from a study done at Trinity University and that study just mentioned the 4% rule as
one of a number of alternatives. At that time investment advice would have told you that you could live off of 8 to 10% of your investments. Thus the 4% was a big departure from what people in the investment field were recommending. There has been a lot of research since then and the 4% rule hold up in general discussions and hopefully makes the point that you have to be conservative in your withdrawals.
However when you get close to retiring you have to start paying attention to the problems you have with the rule. For example is the market is up and you have a million dollars you can with draw 40,000 per year. If the market crashed the year before that year and your million went to 500,000 you could only withdraw 20,000. The problem is the theory is that if you retired with a million you could withdraw 40,000, adjusted for inflation, for life but if you retired when the market was down you could only do 20,000 for life. This does not make any sense because you only have 1/2 million due to the market crash so you have to know how to adjust the rate for the type of market you are retiring in.