The 4% Rule
Seeking A Fixed Percentage Approach To Retirement Spending
The fixed percentage withdrawal strategy is the polar opposite of constant inflation-adjusted spending. Subsequent strategies we consider will strive to strike a balance between these two. This fixed percentage strategy calls for retirees to spend a constant percentage of the remaining portfolio balance in each year of retirement.
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The Perks Of Being A Flexible Spender In Retirement
William Bengen’s 1994 article introduced the concept of the 4% rule for retirement withdrawals. He defined the sustainable spending rate as the percentage of retirement date assets which can be withdrawn, with this amount adjusted for inflation in subsequent years, such that the retirement portfolio is not depleted for at least thirty years.
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Should You Plan On Your Retirement Lasting 30 Years Or 40?
The 4% rule has a planning horizon of thirty years. But is that a long enough horizon?
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What If Retirees Don’t Want To Run Out Of Money In 30 Years?
Traditional safe withdrawal rate literature regularly makes the assumption that retirees will choose a withdrawal rate that will leave precisely no wealth after the final withdrawal in the thirtieth year of retirement. This can leave them playing a game of chicken as their wealth plummets toward zero.
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How Do Taxes Affect The 4% Rule?
Because the tax situations of individuals will vary so greatly in terms of tax rates, interest and dividends supported by the portfolio, and the cost-basis of the taxable account, it is impossible to create one general number for a sustainable spending rate from a taxable account.
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Should You Lower Your Distributions If Your Portfolio Underperforms The Stock Market?
Another optimistic assumption of classic safe withdrawal rate studies is that retirees are able to earn precisely the underlying index returns net of the risks. But three truths dispute that idea.
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A Safer Approach To Retirement Income Planning
The relationship between stock market valuations and sustainable spending rates has great implications for retirement planning when we consider how the pre-retirement savings phase and the post-retirement withdrawal phase can be linked through the stock market valuation level at retirement.
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Does the 4% Rule Work in Today’s Markets?
This is a matter where Monte Carlo simulations are able to shine, by allowing simulations to begin from today’s starting point rather than incorporating historical outcomes generated from completely different market environments.
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Don’t Bet Your Retirement On History Repeating Itself
People nearing retirement should take note of the fact that U.S. financial markets have entered uncharted waters now in regards to the low bond yields and high stock market valuations facing investors.
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With Retirement Longer Than Ever, What Is the New 4% Rule?
One of the most hotly contested debates in personal finance is over the safe withdrawal rate for retirement. How much can you expect to spend sustainably from your investments during retirement? What do we need to do to be safe?
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The 4% Rule And The Search For A Safe Withdrawal Rate
Of the two main schools of thought in retirement income planning, the probability-based school of thought is probably most familiar to the public and financial professionals.
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Improving Retirement Income Efficiency Using Reverse Mortgages
Maintaining higher fixed costs in retirement increases exposure to sequence risk by requiring a higher withdrawal rate from remaining assets. Drawing from a reverse mortgage has the potential to mitigate this aspect of sequence risk by reducing the need for portfolio withdrawals at inopportune times.
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