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Should retirees use a 4% portfolio withdrawal rate?

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tshort
tshort
5 months ago

I like McClung’s method, described in his book, Living Off Your Money. His approach involves choosing an initial withdrawal rate based on a variety of factors, and then modifying it annually in response to your remaining portfolio value and what happened in the market during the previous 12 months.

Rob Thompson
Rob Thompson
5 months ago

I probably have no right to comment but here goes:

First, my parents raised me as a Boglehead before there was such a thing with a little seasoning from Louis Rukeyser and Bob Brinker.

I personally feel that the withdrawal rate planning should only come after the retirement budget is finalized.

And lastly, I’m a dividend growth investor and have built our portfolio trying to maintain a 70/30-60/40 allocation diversified across all sectors. We strive for 3% income which of course is now mostly supported by our dividend portfolio because of the issues with bond yields. Someone here famously wrote that you hold bonds not for return ON your money but return OF your money so I reluctantly try to follow my parent’s advice with the bond allocation.

Our dividend stocks are carefully chosen and have consistently raised their dividend every year commencing prior to Recession 2009. Many for 25 plus years. If they freeze or cut their dividend they go on probation while I consider the circumstances. This track record is pure hindsight and has little bearing on the future but it helps me sleep very well at night.

With this plan, we exceed our budget and have a 1% buffer (4%-3%…because I calculate it both ways). Any dividends not needed are selectively reinvested back into the portfolio or the enjoyment of the years we have left.

But ask me again in 5 years when I turn 70 and start Social Security…

tshort
tshort
5 months ago
Reply to  Rob Thompson

I’ve read some BH threads about dividend stocks, and how their annualized returns end up being less than non-dividend stocks that are otherwise similar.

That aside, I like the idea of passive income, as I have very little. Would love to know what your picks are!

Thomas
Thomas
5 months ago

Answering this question gets super technical very quickly. I don’t have any strong opinions on what the “right” safe withdrawal rate should be. I think it depends on lots of personal factors such as your age and willingness to reduce spending during a downturn, as well as factors outside your control like the CAPE ratio, interest rates, and inflation.

I defer to the advice of experts since this is fundamentally a quantitative question. Here are a few of my favorite resources on determining safe withdrawal rates:

Rick Connor
Rick Connor
5 months ago
Reply to  Thomas

Thanks for the links. The web has a large amount of info on this topic.

R Quinn
R Quinn
5 months ago

If not, what? Recently I have read suggestions from 3% to 5% so why not 4%? The real trick is to start with assets sufficient to generate income greater than needed income using 4% It’s the percentage of what $ that really matters. Besides if funds are in a qualified plan except Roth, RMDs set the withdrawal for you at 72 and they start about 4% and increase. Nothing days one must spend all they withdraw.

Mike Zaccardi
Mike Zaccardi
5 months ago

No. I think a lot has changed since the Trinity Study was first published. With current yields on the aggregate bond index near 1.6% and lofty equity valuations, at some point, we are going to have to reduce the expected returns of a balanced portfolio.

9% historically is just not realistic. Maybe 4% going forward. With inflation expected to be near 2.5% over the next 5 years, that makes for lousy real returns for retirees.

Retirees must be flexible with their saving and spending plans so that their withdrawals strategy survives.

David Powell
David Powell
6 months ago

4% is a very reasonable starting point but retirees should be prepared to adjust this based on real (after inflation) portfolio gains/losses over time.

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