2

Lots of planners and web sites suggest rule of 4% for 30 year retirement.

Also per many sites US average return in stock market is about 6.5 to 7 %.

So is the 6.5-4 = 2.5% is safety margin ? Any specific formula or changes in Excel PMT for this calculation ?

6

1 Answer 1

1

There are many resources explaining the components of the 4% rule, and do note that this is a vague number and can and will differ based on market outcomes and investment strategy.

The basis for the spread between the 4% stated in the rule and the generally higher expected average return of an equity-based investment portfolio is that (1) you need to pay taxes on your income, keeping in mind that traditional IRA/401(k) withdrawals are taxed as income, and (2) your expenses are going to increase due to inflation which has a federally stated target of 2% but can fluctuate and stay high for long periods of time.

After receiving dividend and interest income and selling any assets needed to cover your expenses and pay your tax bills, your portfolio will still need to generate more income on an ongoing basis over time, thus the need to generate a total return that exceeds your expenses by a substantial amount.

1
  • 5
    It's not a vague number, it's specifically 4%. The usefulness of the rule can be debated, but the premise is straightforward, based on historical market returns there has not been a period where a 4% initial withdrawal rate adjusted for inflation each year wouldn't have lasted 30+ years. The reason it can't match the average market rate has nothing to do with taxes (the rule is about how much you can withdraw, what obligations you might have with the funds you withdraw), it is because down years happen (see sequence of returns risk link under question).
    – Hart CO
    Jul 31 at 3:12

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.