Quote:
Originally Posted by jIM_Ohio
I would suggest looking up the trinity study. This will educate you on the longevity of portfolio's. That is where the 4% rule generally comes from.
A 60-40 equity/bond mix can last 30-40 years (based on past market performance) if 4% of portfolio is withdrawn per year (increased each year for inflation).
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To follow up on this, the Trinity study assumed you pick an initial withdrawal rate of 4% and adjusted the dollar amount upward each year for inflation (not the 4%). So as an example, say you had a portfolio of $2M at retirement. The first year you could take out $80K (4%). If inflation for that year runs at 3.5%, then the 2nd year you could take out $82.8K ($80K * 1.035),
regardless of your portfolio value at the time of withdrawal. So if your portfolio performed poorly and lost 10% of its value, you would end up drawing a lot more than just 4.14% (which is 4% * 1.035). In this example, your actual draw for year 2 would be 4.8% of the total portfolio value.
In the Trinity study, this strategy had something like a 90% chance of success after 30-40 years. In reality, anything more than a 90% chance of success is probably just noise anyway.
A more conservative strategy is to index the percentage of withdrawal to inflation, which means you withdraw lower amounts in years when your portfolio has not done so hot, and more when it is doing well. To incorporate this strategy you would need to be able to adjust your standard of living in lean years.