The Importance of Return Sequence With The 4% Rule

Last week, we looked at a retirement withdrawal strategy that crashed and burned for Mr. and Mrs. Growth. They were withdrawing from a $1,000,000 nest egg using the familiar 4% rule. That rule starts with a 4% withdrawal in Year 1 and then adds 3% each year to the withdrawal amount to keep up with inflation. It turned out that the growth in the Growth’s retirement assets just could not keep up with the compounding effect of that 3% per year inflation increment. Their average annual return also equaled 3%. They ran out of money in Year 25 of a 30-year plan.

For me personally, this is my takeaway: Don’t rely on a total return strategy and portfolio withdrawals to fund retirement. Don’t employ automatic inflation escalators in your withdrawals every year. How this method has gained dominance in the retirement industry is a mystery to me. The risks of failure, and fear of failure, are just so great.

Source: Seeking Alpha

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