Withdrawal Rates
The 4% rule, sequence risk, dynamic strategies5 sections
A withdrawal rate is the share of the portfolio drawn in the first year of retirement. That first figure then sets the pace for every year after it, which is why it carries more weight than its size suggests.
The 4% rule comes from the Trinity Study (1998), which tested how withdrawal rates fared across historical 30-year periods.
- 1Withdraw 4% of the portfolio in the first year of retirement.
- 2Adjust that dollar amount for inflation each following year.
- 3The withdrawal therefore stays constant in real terms, regardless of what the portfolio does.
Worked through
A $2M portfolio at 4% draws $80,000 in year one. At 3% inflation that becomes $82,400 in year two and $84,872 in year three, whatever the market did in between.
The finding was that 4% survived about 95% of historical 30-year periods in US markets. It is a result about the past rather than a property of the future, and the 5% that failed were real periods too.
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