Dividends4Life: Retirement's 4% Rule

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Retirement's 4% Rule

Posted by D4L | Wednesday, September 07, 2011 | | 0 comments »

Ms. P explained to them how they should apply the 4% withdrawal rule to finance the rest of their lives. But it’s trickier than they imagined. She showed them some charts that were outputs of Monte Carlo testing on their portfolio. Under lots of scenarios, they discovered, their money won’t last for 30 years. Not only that, toward the end of their golden years, their portfolio may take a sickening plunge towards zero—even if it makes it to 30 years with some assets left. How could this be? After all, they are millionaires!

There are two culprits. The first is inflation. Their portfolio may get eaten away by annual, tiny-looking increases in their withdrawals that Ms. P says they need to make to keep up with inflation. Those increases are like termites bringing down a building. The second culprit is the withdrawals themselves. By liquidating assets from their portfolio to create income each year, they have fewer assets remaining after each withdrawal. The only way the withdrawal scheme can work is if the value of the remaining assets expands enough to cover the amount sold.

Source: Seeking Alpha

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