Don’t Believe in the “Safe Withdrawal Rate”

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You’ve been a good saver. Now, as you get ready for retirement, you begin to consider how you will use your retirement savings to generate monthly retirement income. Will you need the advice of a financial advisor? Sensibly, you conclude that you do. You have questions:

  • How much can I safely spend each month?
  • How much risk should I take?
  • How can I protect my financial security if my investments don’t perform well?

To answer these questions, you contact several local financial advisors. You find that when it comes to generating retirement income from your investment portfolio, each of their advice is the same: use the 4% rule. After conversations with these advisors, you’ve come to believe that the 4% rule is the best or the only approach to implement.

What is the 4% rule? It’s a popular methodology for producing income that states you will be able to “safely” draw down annual income beginning at 4% of your portfolio’s value, and then in each subsequent year, you’ll withdraw an amount adjusted for inflation based upon the Consumer Price Index (CPI). The rule assumes that your portfolio is composed of stocks and bonds.