· 4% POST-RETIREMENT SAFE WITHDRAWAL RULE
o A safe withdrawal rate is the amount of money that you can withdraw from your investments each year after retirement, with the ability for future year’s withdrawals to increase with inflation, and with a high likelihood that this money will last for the remainder of your life expectancy, even if investments are delivering below average returns.
o The typical 4% rule recommends that a retiree should only spend a fixed real amount equal to 4% of his initial wealth annually.
o He should keep rebalancing the remainder of his money in a 60%-40% mix of stocks and bonds throughout a 30-year retirement period.
o This will give the retiree a great chance of not running out of money for 25+ year periods.
o If you are at such an advanced life stage where 25 years seems a pipe dream, then the 4% withdrawal can be adjusted upwards.
o The way this rule works is that you start by taking 4% out of your portfolio in the first year of retirement – this includes dividends, interest and withdrawals.
o The next year you take out the same amount you took out the first year plus inflation.
o So if you start by taking out an amount 'X', equivalent to 4% of your wealth, in the first year and inflation is 7%, then in the second year you should take out 'X' + 7% of 'X'.
o Every year after that, you keep adjusting the previous year’s withdrawal amount by the inflation rate.
o Keep in mind that this 4% figure will be your gross income before taxes.
o The 4% rule is really a guideline rather than a hard and fast rule.
o If your equities perform better than expected, then you can spend a bit more than the 4% rule amount.
o However the opposite is also true, if you encounter a bear market and the value of your portfolio drops, then you should be prepared to cut back on the withdrawals.