what is rule for 40 year retirement?

Question

For 30 year retirement 4% rule is suggested to be followed. Suppose a prospective retiree wants to plan for 40years, what should be max withdrawal rate

Answer 1

The 4% rule is based on the results of the Trinity study that broadly found that if you had a mix of 50% stocks to 50% bonds you could withdraw 4% of the total value of the portfolio for up to 30 years and not run out of money 96% of the time. This was based on going back and looking at historical trends in the stock market and calculating the outcome of this withdrawal rate at different points in time. This article offers a more comprehensive summary and explains why the 4% rule may be even more robust than you think (assuming you have the ability to spend less than 4% when the economy is down).

So this is all probabilities-- no one can say for certain that the 4% rule will work for you whenever you choose to retire, but they can say that in the past it has worked 96% of the time. In the case of a 40 year retirement you have a 91% chance of having your money last the entire time. If you wanted to have a 96% chance of having your money last for 40 years you'd need to follow a 3.7% withdrawal rule. You can use this online calculator to mess around with the numbers and see what you get under different scenarios.

One thing worth noting-- following either the 4% rule for 30 years or 3.7% rule for 40 years-- the average outcome of these approaches actually has you doubling your initial investment by the end of the period (as measured by the median result). This helps highlight the fact that this rule is more robust than people actually give it credit for-- if you're able to withdraw less than 4% during the bad years, and compensate by withdrawing more than 4% during the good years you likely have a more than 96% chance of having your money last the whole time.