At some point you start thinking about retiring. You worked hard and have a nice retirement portfolio, now you want to enjoy your time and live life to their fullest. How much can you afford to withdraw from your portfolio each year?

If you spend too much you risk depleting your portfolio, if you spend too little you may not enjoy the retirement you wanted.

The most common advice given to retirees for managing spending and investing during their retirement years is the 4% rule. The rule is based on a 1998 financial study at Trinity University which examined annual withdrawals from a mixed portfolio of stocks and bonds. The study found that a max withdrawal rate of 4% during the first year and then adjusted annually for inflation, was unlikely to deplete the portfolio during a payout period of 30 years.

The study ran simulations from 1926 through 1995 and included the 1929 crash, Great Depression and crash of 1987, the theory being that even at the extremes the portfolio survived and was able to carry the retiree all the way. More studies were conducted the following years, with updated numbers, still producing the same results.

Here’s an example to the 4% rule: 🧠

If you need $40,000 to live off each year than you can retire once you have $1 million.

The first year you withdraw $40,000, assuming inflation is 2% that year, you would increase your withdrawal rate next year by 2% to $40,800, and so on for 30 years.

A simplistic way to think about it is to assume that for the whole retirement period inflation will be zero and the portfolio yield will be zero, if you withdraw $40K each year you will deplete the portfolio in 25 years ($1M / $40K = 25). Since the markets on average return a higher yield than inflation the portfolio should last longer than 25 years.

Somethings to think about:

  • The study assumes a time frame of 30 years, this may not suite some people that aim to retire early and have 40 or 50 years of retirement before them.
  • The 4% withdrawal doesn’t take into account fluctuations in your portfolio value or years where you spend more, or less, than the inflation increase.
    • You need to assume that some years you will need a large emergency withdrawal, like a health emergency or major repairs to your home.
    • If a year after you retire your portfolio crashes 20% than you may need to rethink your spending as the 4% sum you were counting on is now 5% of your current portfolio (not adjusted for inflation).
  • The portfolio composition in the study was of 50% in stocks and 50% in bonds. Some people have more risk tolerance than others and may change their portfolio composition over time.
  • The rule assumes that there are no taxes or fees on your portfolio withdraws.

Dealing with drawdowns

50% or more in stocks is an aggressive allocation, it’s hard to stand the psychological stress of seeing your portfolio decrease in value, not knowing when the market will return to climb, especially when your livelihood depends on it. Stocks are more volatile than bonds so these portfolio sale-offs can occur every few years.

Since 1982 the S&P 500 has had quite a few sell-offs:

S&P 500 drawdowns

The most important thing to remember is that markets historically returned to growth even after big dislocations and that the historic average return of the S&P 500 is 9% including dividend.

Asset Allocation

The Trinity study only looked at a portfolio of stocks and bonds, these are financial assets. You can diversify into more real assets that would provide a bigger diversification and an extra margin of safety like real estate, private equity, venture capital and commodities.


You might want to allocate some of your stock allocation to high dividend paying companies. This allocation may help you mentally when markets are in turmoil as the dividend will cover at least some of your expenses. For example the S&P 500 Dividend Aristocrats index is composed of companies in the S&P 500 index that have increased their dividends in each of the past 25 consecutive years. You can choose some of the companies from this index.

My rule of thumb is that if a 3% to 4% withdrawal rate has a very high success rate than my preference would be to go even lower to a 2% – 3% withdrawal rate, this would give me a sufficient margin of safety.

Bottom line

The most important rule is to stay flexible, nothing ever goes exactly as planned, especially on a 30-40 year timeframe. Life comes at you fast so plan accordingly, save yourself as large a margin of safety as you can and be just a little paranoid, it can save you.

See Also:


Disclaimer: This article does not represent investment advice and is solely the author’s opinion. The author is not a financial advisor. Readers are expected to perform their own due diligence before making investment decisions.

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