Episode 119: The 4% Rule and How 4% Became the Safe Withdrawal Rate for Retirement

The Grow Your Wealthy Mindset Podcast

You may have heard that your retirement portfolio should be 25 times your spending or your income for you to retire. This is actually derived from The 4% Rule, which is the commonly held belief that you an safely withdrawal 4% from your retirement portfolio invested in stock and bonds and not run out of money before you die. In this episode, I look at the original published research where the 4% rule originated, which has been nicknamed the Trinity Study. I also talk about the paper published by William Bengen, who inspire the authors of the Trinity Study.

The key take home points are:

1. If you withdrawal 4% of your retirement portfolio in your first year of retirement, and then withdraw that amount adjusted for inflation in each subsequent year, then there is a 95% chance your portfolio will last at least 30 years. This assumes a portfolio that is invested at least 50% in an S&P 500 Index fund with the rest invested in long-term high-grade corporate bonds.

2. Have at least 50% of your stock and bond portfolio invested in stocks. A portfolio of 75% stocks and 25% bonds results in more upside with no significant downside compared to investing 50% stocks and 50% bonds. A portfolio of 100% stocks does have the possibility of significant downsides compared to a 75/25 stock/bond portfolio.

The original papers:

Cooley, Phillip L., Carl M. Hubbard, and Daniel T. Walz. (1998). "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable." AAII Journal, 20(1), 10-14.

https://www.aaii.com/journal/199802/feature.pdf

Bengen, William P. (1994). "Determining Withdrawal Rates Using Historical Data." Journal of Financial Planning, 7(4), 17-26.

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Disclaimer: The content provided in the Grow Your Wealthy Mindset Podcast is for informational and entertainment only and should not be considered professional investment, legal, or tax advice. Dr Elisa Chiang is not a certified financial planner, attorney, or accountant. The views expressed are the personal opinion of Elisa Chiang and her guests and should not be taken as advice specific to you, the listener of the podcast. Personal finance is personal and your personal financial decision need to be made based on your personal financial situation and risk tolerance after having completed your own due diligence.