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.

What Will $1 Million Get You in Retirement?

What Will $1 Million Get You in Retirement? 
By Douglas Carey (AOL Daily Finance, 11/9/12)

Author argues that under his assumptions and the Monte Carlo method, a couple planning for 30 years of retirement invested 70% in equities and 30% in medium duration Treasuries has an 80% probability of not outliving their $1 million retirement savings if they withdraw $55,000 in the first year of their retirement (and increase that amount by inflation each year).   While his assumption for annual investment return on equities is shown as a "more reasonable" 6%, this is a real (after inflation) rate of return assumption on equities, and therefore his nominal investment return assumption on equities is approximately 9% per year, based on his assumed inflation assumption of 3% per annum.  If you input a 30-year life expectancy, 7.65% investment return (70% at 9% and 30% at 4.5%) and inflation of 3%, you will get a first year withdrawal rate of about 5.9% in the spendable calculator on this website.  So, a $55,000 initial withdrawal from $1 million of accumulated savings may be reasonable for a 30-year retirement period if you plan to be invested 70% in equities throughout your retirement and you believe you will achieve a 6% real rate of return on those assets.   Retirees who feel somewhat less bullish about equity investments may wish to run the spreadsheets and develop withdrawal strategies based on lower real rate of investment return assumptions.