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We have all heard of the 4% rule. We know the S&P index has return an average annual return of 10.26% since 1957. Even considering inflation and sequence of returns, how is it possible to run out of retirement funds sticking to the 4% strategy and using cash during downturns. In fact, isn’t more likely assets will grow?
Oops, just noticed this is an old post.
I only see the 4% rule as a useful tool for estimating a ballpark figure as you near retirement. It provides a simple formula: your needed portfolio balance is 25 times your desired annual spending, which in theory gives you a low probability of depleting your funds over a 30-year period.
As for your actual question, you’re right that over the long term, I fully expect to see my retirement accounts grow. But I also wouldn’t be surprised if at some stage the value halved due to severe market volatility. That’s the reason for a conservative withdrawal like 4%—it’s a tool to smooth out the long-term volatile nature of the markets. The biggest risk is not a low average return, but the sequence of returns risk that you mentioned.
Personally, I wouldn’t implement such a rigid strategy. A more comfortable and realistic approach for me involves a mix of fixed income and a dynamic withdrawal strategy. I also keep ten years’ worth of cash outside my retirement accounts as a hedge against that early years’ sequence of returns risk, an opportunity cost I’m indifferent to.
A key flaw of the 4% rule is that it doesn’t even account for the impact of taxes on the withdrawals.
It’s purpose is to help people make sure they don’t run out of money under a worse case scenario, so if you don’t experience a worse case, assets will be higher than otherwise. It isn’t supposed to ensure your assets don’t grow. It’s a conservative approach to withdrawing assets in retirement that will likely result in a large estate at death.
In answer to your exact question: yes, it’s more likely your assets will grow (but you cannot be 100% sure).
I think a better question might be: since the 4% rule was invented 30 years ago, if a person followed it, how would it have worked out.
I’ve searched the internet without finding an answer.
Sorry, I copied the wrong 2nd link. It should be this one.
https://www.bigpicapp.co/bigpicapp/index?v=free