"In other words, let's say you have $1 million total for retirement, which in year one, you would withdraw $40,000 to live on. However, if the cost of living rises 2% in the same year, you would increase your percentage withdrawal next year by the same amount, so year two would require a $40,800 withdrawal, and so on for the next 30 years."
"No matter where you go online, there is a better-than-good chance that you will see the 4% rule come up around the idea of retirement. This is basically the prevailing rule of thumb as to how much money you can withdraw every year and live on your investments indefinitely. The problem with the 4% rule is that since it's become one of the primary investment strategies, the market and retirement needs have shifted."
The 4% rule prescribes withdrawing 4% of total investments in the first year of retirement and then adjusting that dollar amount annually for inflation. Its goal is to allow retirees to live off investments without outliving their savings for roughly 30 years. For example, a $1 million portfolio yields a $40,000 initial withdrawal, which increases with inflation to $40,800 if inflation is 2%. The approach assumes constant, inflation-adjusted withdrawals and no deviations from the plan. Market changes and evolving retirement needs expose limitations in flexibility and raise concerns about its suitability today.
Read at 24/7 Wall St.
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