Hey guys...
As a few others have said, most BH's will use the 4% rule as a guide as to the size required of your portfolio, rather than a hard and fast rule for how much you can safely spend. That's certainly the case for me.
Here's a case in point using fairly simple numbers where the 4% rule is clearly "wrong" (unless I am missing something).
$100k/year required to spend in retirement. Using the 4% rule, that's about $2.5m in assets. Projected retirement, let's say 30 years.
Let's again say a 50/50 mix of stocks and bonds. Down here in Australia, Bonds or CD's are currently yielding 4.5-5%, and an ETF like a high dividend fund (VHY) around the same.
So earnings alone on $2.5m is $112k even if you assume 4.5% yield. No drawdown of principle at all is required.
If you wanted some more potential for growth, then you could allocate more than 50% to "dividend" stocks. I'm not sure about the US, but down here in Australia our dividend stocks are fairly stable in dividend return (even during chaotic times), and if you're not selling them - over the long haul they also have a fairly solid capital appreciation. Dividend growth is also generally enough to cover inflation, at least when you look at some of our bigger dividend earners (Banks etc) whose dividends have generally appreciated over the prevailing inflation amount.
Even if you go completely conservative and keep it 100% in "CD's" the average long-term return on these is still around 4%, granted it does not take into account inflation.
The icing on the cake (for fellow Aussies) is that our "earnings" in retirement are tax free, and those dividends have a input tax credit that we can claim back from the Government, effectively another 30% of the dividends received.
So the 4% rule (at least as far as I use it), is used as amount to specify how much to build up your nest egg to in order to ensure it can theoretically pay out forever, and very likely also increase in value. So long of course you never sell anything in your portfolio, just enjoy the returns.
Unless I'm a numpty and have forgotten something... A 4% withdrawal rate (ie sell down rate of the principle) for my portfolio would mean close to an 8-9% realisation of it's balance each year.
Personally I'm gunning for a portfolio that is big enough that it can on average return about 4% without needing to ever touch the principle, but that's quite different than "the 4% rule"...
Unless I'm derp. And yes I know there are fluctuations in the underlying assets values during market crashes etc.
As a few others have said, most BH's will use the 4% rule as a guide as to the size required of your portfolio, rather than a hard and fast rule for how much you can safely spend. That's certainly the case for me.
Here's a case in point using fairly simple numbers where the 4% rule is clearly "wrong" (unless I am missing something).
$100k/year required to spend in retirement. Using the 4% rule, that's about $2.5m in assets. Projected retirement, let's say 30 years.
Let's again say a 50/50 mix of stocks and bonds. Down here in Australia, Bonds or CD's are currently yielding 4.5-5%, and an ETF like a high dividend fund (VHY) around the same.
So earnings alone on $2.5m is $112k even if you assume 4.5% yield. No drawdown of principle at all is required.
If you wanted some more potential for growth, then you could allocate more than 50% to "dividend" stocks. I'm not sure about the US, but down here in Australia our dividend stocks are fairly stable in dividend return (even during chaotic times), and if you're not selling them - over the long haul they also have a fairly solid capital appreciation. Dividend growth is also generally enough to cover inflation, at least when you look at some of our bigger dividend earners (Banks etc) whose dividends have generally appreciated over the prevailing inflation amount.
Even if you go completely conservative and keep it 100% in "CD's" the average long-term return on these is still around 4%, granted it does not take into account inflation.
The icing on the cake (for fellow Aussies) is that our "earnings" in retirement are tax free, and those dividends have a input tax credit that we can claim back from the Government, effectively another 30% of the dividends received.
So the 4% rule (at least as far as I use it), is used as amount to specify how much to build up your nest egg to in order to ensure it can theoretically pay out forever, and very likely also increase in value. So long of course you never sell anything in your portfolio, just enjoy the returns.
Unless I'm a numpty and have forgotten something... A 4% withdrawal rate (ie sell down rate of the principle) for my portfolio would mean close to an 8-9% realisation of it's balance each year.
Personally I'm gunning for a portfolio that is big enough that it can on average return about 4% without needing to ever touch the principle, but that's quite different than "the 4% rule"...
Unless I'm derp. And yes I know there are fluctuations in the underlying assets values during market crashes etc.
Statistics: Posted by galactica1971 — Fri Apr 12, 2024 1:08 am — Replies 425 — Views 30436