Wednesday, November 21, 2012

Revisiting the 4% Rule

Revisiting the 4% Rule 
(Vanguard, August 29, 2012)

The authors from Vanguard remind us that the 4% Rule isn't really a simple rule--the 4% rate of withdrawal needs to be adjusted for life expectancies different from 30 years and different investment mixes (as well as inflation after retirement).  They also note that it is unlikely that retirees actually follow the 4% rule for their entire retirement, stating, "more realistically, retirees continue to monitor their portfolios and spending, adopting some level of flexibility to account for changes in market returns and unplanned spending needs." 

The withdrawal rates contained in Figure 2 of the Vanguard paper are reasonably consistent with withdrawal rates using the spreadsheet on this website with assumptions of 5% investment return, 3% inflation, no annuity income and no amounts left to heirs.  Of course, retirees with annuity income and/or plans to leave significant amounts to heirs may have to make additional adjustments to the Vanguard withdrawal rates shown in Figure 2.  Alternatively, we would suggest that you simply use the spreadsheets and methodology contained in this website.