The Ideal Withdrawal Rate For Retirement Does Not Touch Principal

The ideal withdrawal rate for retirement does not touch principal. Ideally, you want to live off your retirement principal income for the rest of your life. This way, you won't have to stress about running out of money.

Further, if you never touch principal, you can leave a legacy for your children and charities following the Legacy Retirement Philosophy. Leaving a legacy honors your family name and helps others for years to come. As you get older, I promise you will think about what you want to leave behind to make the world a better place.

The ideal withdrawal rate for retirement also allows you to pass on your wealth. You can amass up to the estate tax threshold so your heirs don't have to pay the onerous 40% estate tax rate. Further, you can give away your state to charities that may need your money the most.

Your goal, if you choose to accept, is to create a large enough estate that will provide incredible passive income for your loved ones long after you are gone. This is what endowments do.

Why not consider doing the same if you are a magnanimous and financially savvy individual? For 2023, individuals can accumulate an impressive $12.92 million before having to pay an estate tax upon death. The estate tax threshold limit changes every year.

A 4 Percent Withdrawal Rate Is Too High

I always scratch my head when I hear advisors talk about the “4% withdrawal rule” or any withdrawal rate that's greater than a risk-free rate of return for that matter.

Times have changed folks. Interest rates are close to zero. The stock market isn't a slam dunk with all that's going on in the world. Further, we are living much longer now.

The proper safe withdrawal rate = 80% X the 10-year bond yield, at least for the initial two or three years in retirement as you figure out your new life out.

When the 4% Rule was conjured up in the late 1990s, the 10-year bond yield was at 6%. Therefore, of course you could withdraw at 4% since you could earn 6% risk-free back then!

There are so many variables that it is impossible to calculate a bullet proof withdrawal rate rule unless that rate is 0%. Sure, there's a 99% chance you will die before 110. There's also a 99.9% chance you'll die before 150, but who really knows? We might be one with machines by the year 2030 and live forever!

Instead of thinking about how much you can withdraw to bleed your retirement funds down to $0 by the time you die, I highly encourage everyone to think about leaving a financial legacy for your loved ones. Make your estate so vast that it will never run out of money.

Even if we fail to come up with a perpetual giving machine to leave for others, the end result will be much better than if we only focused on ourselves.

The Ideal Withdrawal Rate In Retirement

Let's assume everybody retires at 65 with $1 million dollars. Becoming a millionaire is fast becoming a rule rather than the exception thanks to inflation. Therefore, don't think becoming a millionaire by retirement is out of reach.

You've now got to calculate your life expectancy, health care costs, market returns, withdrawal rate, and living expenses. These are five variables that must be figured out.

There are 120 different ways to arrange these variables to make them work if each is a stand alone permutation. Let's say each of the variables has multiple permutations. There will literally be hundreds of thousands of combinations to choose from.

Even with the basic assumption of retiring by 65 with $1 million dollars and a 4% withdrawal rate yielding $40,000 a year, this might not be reasonable for many people. Everybody's lifestyles are difference.

The calculations therefore become simply academic gymnastics that help us feel better about our chances of living a comfortable retirement. The more conservative our assumptions (leaving money left over), the better we will feel and vice versa.

Different Retirement Withdrawal Rate Scenarios

It's fun to run various scenarios for retirement as I did with my 401k. You can do so easily since it's free and easy to do nowadays.

Years ago, I ran a Conservative, Base, and Blue Sky Scenario with Empower. I came up with inflation and tax adjusted amounts of $500,000, $1 million, and $2.5 million after 25 more years of saving and investing. A $2 million spread is huge and not something one can easily plan for.

With $500,000, $1,000,000 and $2.5 million inflation and tax adjusted, I will have $20,000, $40,000, and $100,000 a year to live off for another 25 years until I'm 90, assuming I retire at 65. And what do you know? The annual retirement money is based off a 4% withdrawal rate assuming zero growth.

Everybody can probably comfortably live off $40,000-$100,000 a year in retirement in today's dollars. But again, what if we live until 100, or what if health care costs skyrocket further? What if we have an even more aggressive President who decides to raise tax rates on everyone and not just those making over a certain amount?

All of these assumptions are based off other assumptions. If one assumption is wrong, the entire retirement foundation may be off.

If you've ever seen the cult movie Memento with Guy Pierce and Carrie-Ann Moss, you understand exactly what I mean.

Asset Class Returns By Decade (Stocks, Bonds)
Asset class returns by decade

The Ideal Withdrawal Rate Should Be Based On Two Figures

To make things simple, use the below two figures to calculate the ideal withdrawal rate in retirement.

1) The 10-year government bond yield.

The 10 year US Treasury yield changes every single day and is another metric for the risk free rate of return. For the past 30 years the 10 year bond yield has come down due to lower inflation and more efficient economic policies.

I encourage everyone to adjust their annual withdrawal rate based on the average rate for the past 12 months. The 10-year bond yield is currently around 4%.

2) The S&P 500 dividend yield.

The current S&P 500 dividend yield is roughly 1.8%. Dividend yields can rise when dividend payout ratios increase or the market tanks. If what you are mainly focused on is income, then withdrawing at the rate of the market's entire dividend yield will mean that you will never touch your principal.

Your principal might collapse, as many portfolios did between 2008-2010, but your portfolio will never be further reduced by your own doing.

If you look at the historical chart, you can see how a 4% withdrawal rate made sense in the 1970s, 80s, and early 90s, but not now. Not even close. If you are a reader not from America, choose your own market's dividend yield instead.

20-year yield versus S&P500 dividend yield
Post presidential election, the 10-year yield is now higher than the S&P 500 dividend yield

The two figures are at very similar levels as you can tell. It's up to you to decide which asset class is a better investment based on your risk tolerance. If you are an early retiree looking to tap your IRA penalty-free, I wrote about Rule 72(t) and creating a perpetual income stream.

Better To Be Conservative With Your Retirement Withdrawal Rate

Some of you might be thinking that it's foolish to die with too much money. In many ways, you are right. Paying a 40% estate tax is truly a waste when you could have donated your money while living or spent the money on a better life.

But remember, we are talking about financial security and leaving money to those we care about. Our loved ones don't have to be our daughters and sons. They can be a cause we care about such as fighting cancer, supporting the arts, helping an alma mater, or providing funding for foster children.

Retirement Withdrawal Rate Table

If you end up old and broke, there's little hope of getting back on your financial feet for the remaining years of your life.

Using the S&P 500 dividend yield or the 10-year treasury yield as a safe withdrawal rate will ensure that you do not run out of money in retirement. When you are in retirement, only then will you truly know how much you will need to be happy. Just go about your adjustments in baby steps.

A Lower Safe Withdrawal Rate Is Better

If you would like to do a deeper dive into the proper withdrawal rate, then I suggest you read my post: The 4% Rule Is Outdated: Consider A Lower Withdrawal Rate Instead. It was meant with a lot of backlash, but the logic behind lowering the ideal withdrawal rate is sound.

When we shift our retirement withdrawal rate to a level which does not touch principal, we suddenly start changing the way we view money. We save more because we're not only thinking only about ourselves anymore.

A lower withdrawal rate makes us invest more carefully because people are counting on us. We also do more research and invest more carefully with a lower ideal withdrawal rate.

Inflation is a perpetuity, so too can your retirement funds become through CDs, real estate crowdsourcing, stock dividends, and royalties. The more income streams you can produce the better. With relatively low interest rates still, retirees need to inch up the risk curve to find higher yields. My favorite way to do so is through a private real estate fund that invests in the Sunbelt.

When it's time to start sleeping in because you no longer have to work, you just might not need to withdrawal any of your retirement funds at all!

Generate More Retirement Income Through Real Estate

Real estate is my favorite retirement income source because it is a tangible asset that is less volatile, provides utility, and generates income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.

Today, real estate makes up 40% of my net worth and generates over $150,000 a year in passive retirement income. Without real estate, I wouldn't have had the courage to retire early in 2012 and live free.

Take a look at my two favorite real estate crowdfunding platforms.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and manages over $4 billion for 500,000+ investors. It predominantly invests in residential and industrial real estate in the Sunbelt region where valuations are lower and yields are higher.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities that have higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. Just make sure to due extra due diligence on each sponsor and deal.

Manage Your Finances Better

I recommend signing up with Empower, a free online wealth management tool that tracks your net worth, aggregates all your accounts so you know where your money is going, and provides useful analysis on your investment portfolios. I ran my 401(k) through their “401(k) Fee Analyzer” under the Investment tab to discover $1,700 a year in fees I had no idea I was paying!

You can also run very useful retirement scenarios based on various return assumptions in your retirement accounts through their Retirement Planning Calculator. Unlike other calculators, Empower uses your real data and Monte Carlo simulations to produce realistic financial results. There's no better free online wealth management tool.

Retirement Planning Calculator
How's your retirement planning results? Make sure you link all your accounts to get a realistic picture

For more Financial Samurai, you can sign up for my free weekly newsletter here. The Ideal Withdrawal Rate For Retirement Does Not Touch Principal is a Financial Samurai original post. I've been helping people achieve financial independence since 2009.

106 thoughts on “The Ideal Withdrawal Rate For Retirement Does Not Touch Principal”

  1. Quadian Warrior

    **Portfolio Half-life**

    I honestly think the 4% rule is a very nice rule, its easy to calculate…..and will get most of us part of the way there, but at the end of the day it does decimate principle, it just takes approximately 15-30 years to do so. I want to draw bond coupon payments and dividends if at all possible and not touch the principle, otherwise my investment goes from being a financial perpetual income producing asset to having a “half life”.

    By my rough back of the envelope calculations a 2% withdraw should be sustainable, and at four percent we are likely to erode two percent of the principle annually. At this rate, a two percent of erosion of principle, assuming few severe market crunches(that’s assuming a lot), it would take approximately 35 years to eat your principle down to half of its size. That doesn’t sound bad until one notices that the monthly withdraw has also been reduced by half. This gives us about a 35 year half life for a portfolio with a safe withdraw rate of 2% and an actual withdraw rate of 4%, and that’s assuming that people don’t cheat and withdraw more as their financial core assets become depleted. You can calculate doubling and halving times by dividing your percentage by 70 to speed test this.

    Of course asset appreciation can step in and ease this a bit, adding another thirty years if one is strategic about selling their shares……but this is not nearly as elegant as simply drawing money off of dividends and bond coupon payments.

    **Mostly-Passive Income: Real Estate**

    Real estate is a wonderful investment with good earnings potential, but depreciation which we can write off is an actual cost that must be considered later, the “principle” is being eroded if one doesn’t save enough money from the rents to upkeep the structure…….and the worse we let a structure get the faster that depreciation can occur. Let the roof get trashed and soon we have water damaged walls, ceilings, electrical system damage, and potentially even foundation issues where freeze and thaw is an issue. Cash land rent is attractive, but has a lower price to earnings ratio than most house rentals offer, at least where I live.

    **One of the Best Investments A Person Can Make**

    However there is, at least in my opinion, a powerful real estate investment that trumps almost all other real estate investments in its adjusted Price to Earnings ratio: buying your first family home, large enough that it can be built onto for additional family or even duplexes. Warren Buffett had said that his home he bought for a reasonable price was one of the best investments he ever made……

    When we pay rent to a land lord we have to pay to upkeep their structure(naturally, I build upkeep into rents on my cash rent land lots) and give him/her a certain profit. We actually pay more than the properties PE ratio, without getting any equity. From the perspective of the renter, unless we have to move often for career reasons, we are throwing money away. When we buy a home that we are living in we get equity, property appreciation, and an instant savings after it is paid off, a savings of what we would have to pay a land lord, thus our price to earnings ratio in money saved is actually more than renting out a property.

    Furthermore if we bought a home that could have rooms and floors added to it, then we can rent out a sleeping room, or storage space, if our family members move out. Thus the first home if bought in a good area, and bought with space for additional work and rooms, is in my opinion one of the best real estate investments a person can make.

    Pensioners that don’t have to pay rent see less of their checks devoured by rent. Property taxes are a concern, but for the most part you lower your cost of living, your overhead, and have more options, and can make your SS and pension checks go farther than someone who is paying rent. As Jack Bogle has said regarding investments: Cost Matters.

    As a land lord(cash rent from farm ground) I have a very high opinion of real estate. If we can get a price to earnings ratio of 14 or better, generally I consider it a good investment. My target PE ratio on real estate is 10………….The PE ratio on a the home you live in with family due to its tax exemptions and the money saved by family that live there mostly rent free is far better than 10, possibly around 5, at least by my rough back of the envelope calculations.


    People may want to look for jobs that offer pensions, even tiny ones, a pension can be worth a lot more than it looks. Regardless of your political stance on unions, one thing most union jobs offer that other jobs do not is pensions. Where I work it is in the private sector and it is unionized, people I know there do not save for retirement, and do not care about the pension they get from working there, I however have turned down better paying jobs because of four things:

    1. I get a pension, and while its small ($400 a month after ten years of service) it is guaranteed income, from a very large company, if I had to use a portfolio to get this with a safe withdraw rate of 2% or 4% then I would have to have a portfolio of at least: $240,000 or at 4% $120,000, I therefore see that pension as a free hundred thousand dollars or so, and all I have to do to get it is go to work and pay my union dues, which I can deduct on my taxes……pensions are rare in today’s day and age, I greatly appreciate that opportunity and don’t intend to leave it on the table.
    2. Virtually guaranteed job security and other benefits packages from both the union and the employer
    3. Short drive distance, cost matters in employment, just as much as cost matters in investment.
    4. Our health insurance package currently costs around $20 a month and covers almost any essential medical need……..this is almost free insurance.

    For me any new job I choose will almost exclusively be jobs that offer pensions or high matched 401ks that I can max out. I would take less pay now for a defined benefit pension any day. Its not necessarily going to let me retire early, but it means that I will have a guaranteed retirement amount.

    My friends and co-workers that were combat veterans have guaranteed retirement programs, thrift-savings investment plan, deals on medical care, deals on housing, and in some cases guaranteed disability payments……..while their pay might not have been stellar, their defined benefit and defined contribution plans are actually worth a lot of money when one considers the cost of planning retirement.

    **The True Cost of a College Education**

    A person can take free classes or learn things themselves by using a library or the internet. Its not that difficult to read a book, listen to professor lectures online……so its not about the knowledge as much as it is about the shiny degree, a hunting license for a job……and that hunting license is very pricey, its like the opposite of a financial nut, debt you cant escape from, not even with bankruptcy. I worked my way through community college, and found that the career I went for in medical paid less than the warehouse work I used to pay my way through college……and while I paid very little and have no debt, it have lost time and overtime in the work force, and spent money for a degree that doesn’t do a whole lot, especially because experience and a degree trumps just a degree and an internship any day.

    I would only go for STEM, not including anything in medical, or take a skilled trade that is desired in your area that has low competition. Psychology and a few business courses are great side courses to take that can spruce up a STEM degree or skilled trade.

    **My Personal Investment and Retirement Plan**
    This is not a perfect retirement plan, but it should have a high chance of success. It won’t sound sexy or magical, but it should work well:

    1. Minimize Costs of Living and Investment
    *Cost matters, live frugally and lower costs of living and work whenever possible
    *Use cheap index funds and cheap brokers
    *Buy and own my home, make sure its a home that can be enlarged. Pay off debts as rapidly as possible, especially large home debt. Use a down payment of at least 50% if possible.
    *Buy used vehicles, not new, a new vehicle looses half its value just driving it off the lot. New vehicles cost more to insure and are the enemy of making money because debt is often used to purchase new vehicles.
    *Maintain employment
    2. Maximize Defined Benefit and Defined Contribution Retirement Products
    *Choose places of employment that offer pensions, or at least a matched 401k.
    *Keep an eye on Social Security benefits and delay using them.
    *Buy Medi-gap insurance when older
    *Max out 401k and IRA
    *90% in low cost S&P500 index fund, 10% in low cost bond fund, rebalance only annually using contributions
    *When approaching retirement move to a 50/50 asset allocation
    *Withdraw dividends and bond fund dividends and avoid drawing principle if at all possible
    *When PE ratios for real estate are better, acquire more cash rent real estate or storage real estate
    4. Retirement
    *Keep costs of living low, primarily draw from pensions and social security to avoid drawing down portfolios.
    *Maintain part time employment to offset potential costs of living. Working two or three days a week really isn’t that difficult and will make my retirement go much farther. It also keeps work gaps out of my resume and might give me a better deal on health insurance.

    1. Wow! Great thoughts. You have put alot of planning and thinking into this.

      My only disagreement is on *Keep an eye on Social Security benefits and delay using them.*

      I think it is pretty well established that the best option is to take them as soon as possible…IF you don’t need the money for living expenses and can/do invest it instead. It is likely it will grow larger in 5 years of investing then if you wait say 5 years to take the larger payment.

  2. I’ve been wondering about this. I see 4% as the gold standard withdrawal rate everywhere. I am in the boat where I don’t want to die with no money. I’d like to die with a legacy that will live for generations. Be able to fund charities and sponsor local events. This is the goal. Looks a like a lower withdrawal rate is the best way to go to achieve that goal.


  3. Hi :)
    Your article is very interesting, but I’m looking for something in opposite direction and I want to know if you can point me to the right place.

    Here is the thing: I’m looking for a way to calculate a safe withdrawal rate where my principal will diminish and end – on purpose – by the time I am like 100yo.
    I don’t want to leave any money, I rather retire a bit earlier and/or spend a little more.

    Do you have anything about that?
    Thank you!

    1. Praveen Chawla

      Marcia, There is a calculator launched by Morneau Shepell (a very large HR benefits company in Canada) which help calculate the safe withdrawal rate.

      The author found that a large number of people end up over-saving and wasting their years in miserable and stressful jobs when they could have left the rat race years earlier. You have one life to live and being yoked to plough till 65 does not make a lot of sense if you could have had your freedom at 50.

      1. I enjoy what I do (trading, research, investments, startups) and do not plan to retire. Folks obsessed with retirement maybe should find what they love. As Bukowski said: “Find What You Love and Let it Kill You”.

  4. interesting article. What do you think of this? what I thought I would do. I have most of my assets at Vanguard. I am not working but my wife is. When she retires, i plan to roll over her 401K into Vanguard which currently is only a couple hundred thousand dollars since she has only been there a few years. Vanguard on their performance page has a market gain (loss) column by month for ten years and there is a column for income earned also (on the entire portfolio)., so if I look at the income column for the last year it shows 81,098.00 dollars. So, that would be how much I could spend that year from the portfolio which by coincidence comes out to 2.4% of the portfolio. That is kind of what you are doing I believe, just taking what should be income and not spending any more.

  5. 4% seems like a fair number to use for understanding where you stand with respect to your retirement odds. The general thrust of the article seems to be that one should plan for unlikely outcomes. Of course one can do that, but the consequence of doing so itself becomes pretty dire. Suppose you solution-eer a safe withdrawn rate of 2-3%, the implication I suppose is you can feel secure if you have reached those bounds, but on the other hand are at risk if you are relying on 3-5%. If you fall into the latter category you have just allocated another large swath of time working to diminish your model failure rates. This additional amount of work is then a certainty.

    What isn’t certain is the future. I could be there are some bad years where you need to potentially make adjustments (though down the road in 15-40 years). On the other hand, things may really turn out awesome. If you want a laugh equal to your fear check out present day dollars return for your portfolio with an upside probability equal to the negative outcome you are offsetting; it is crazy large. What is the top 5% return value on your current model?

    Also, missing from the considerations above is all the unpredictable outcomes that could happen. Could WW3 break out? Implication? Could you draw a terminal cancer card from the deck? So on and so forth, exogenic risk not accounted for by the existing data. And how large is that risk cumulatively?

    Net net, if you are going to concern yourself with the outlier scenarios on the down side, you should also balance them out with the other equally unlikely outcomes. My feeling is that the article above doesn’t do proper justice to addressing the risk of waiting too long to retire. And in the end, all these models are just that models. They inform us and help us understand there is uncertainty with the outcomes of choices we are making. If you can’t assume any risk, you are very likely cutting your life experiences short.

    1. The risk of waiting too long to retire? What does that mean exactly? The risk of not retiring early enough b/c you might die soon thereafter and regret your life? If that’s the case, read this post: The Fear Of Running Out Of Money In Retirement Is Overblown

      Also, it’s been 5.5 years since I left my day job in 2012. I haven’t touched a single penny of my retirement money or interest/dividend income due to a severance I negotiated that just finished paying out in 2017, and my hustle to create many new income streams, see: Ranking The Best Passive Income Investments

      My goal is to create financial buffers for my financial buffers. The greatest fear is having to go back to work now that I have a family. Family will always be first. And money helps buy time to raise a family.

      1. The risk of waiting too long to retire is just that; the path not taken. It could be the trip to Egypt you promised yourself to take in your 30’s that you didn’t. It could be that post occupational freedom career you didn’t pursue, those walks you didn’t have with your kids, etc.

        Building financial buffers and legacies for others is a pursuit, and perhaps a noble one. I just don’t think overrotating on downside risk scenarios makes much sense. Ultimately there isn’t any ‘certainty’ to be had. In my mind the best guidepost is simply what the past can tell us with an acknowledgment that if you want to get to the new world you have to set sail…else you just live out your days where you are.

        1. Cool. At what age did you retire and do you have a family?

          I thought I was gonna retire at age 40, but after discovering the joy the online world, I left at 34. I have no regrets.

    2. I live off of my dividends. I am fifty-seven. If I had to, I could live off half of the dividends. I am still reinvesting 33% of my income back into the market on a DRIP. It’s working out well. My income works out to 4% of what I have invested in stocks. It’s nice to be able to travel and relax while I am still feeling young and healthy. I think living on $20,000. a year for most of my life trained me to be disciplined and frugal in retirement. Great article…I agree.

  6. Dividends from the S&P 500 and interest from US Treasuries are apples and oranges.

    Dividend amounts largely trend up and exceed inflation. Their yield will fluctuate based on “Mr Market” prices but the dividend amounts largely track corporate earnings and the long-term trend line is up. Interest paid on a bond is constant. The nominal UST interest rate (its coupon rate) includes an implied amount for future inflation that must be reinvested to maintain a real (inflation adjusted) income.

    Your article says to use either one interchangably to determine safe draw rate but they say very different things.

  7. Agree mostly with OhioDale about quality of life and time are essential factors to consider. The underlying assumption that people are incapable of managing theor own money if given access is ridiculous. The burden has already been passed and given to them.

    Denial of access to their own monies while taxing them equates to anarchy and slavary. Basically you stating that you do not trust people and their behavior.

    Well I say, the system is designed not to help them but denied them of their monies. Mortality stats shows that at least half of the people die before accessing their money. Government borrows against it to pay recurring bills and as the population dwindles the funds dry out and their monies are gone.

    Social justice can only be achieved by the preservation of our freedoms and denial to monies we pay is contrary to the principle. Just my two cents.

    Agree with your withdrawal analysis preservation of capital for the first 10 years then the withdrawal becomes less important.
    Trading money for time work but trading time for money in the third of your life doesn’t.

  8. I do not subscribe to the idea of not touching the principle. I also do not believe science will come up with a means to expand life expectancy by 20 years in the next 30 years. I plan to withdraw 4.5% and increase it every year by 2% and will make my money last at least 20 years. I can easily earn 2% on my investments with little to no risk so I my money will actually last much longer than 20 years.

    I will not take my social security until I reach 70 so for me and my wife that is $56k in today’s dollars. If my 401k runs out I will easily live off the $56. By the time I am 87 I doubt I will be traveling.

    I am not saving my entire life to die with millions in the banks and this is very bad advise. My advise is to live life to it’s fullest but do not live beyond your means. What I mean is everyone should save 10% of their income, pay off their house, and exercise to have a good retirement.

    1. ohiodale. Agree. I don’t think I need to work my entire life so someone else can enjoy my money I earned. I plan on using it up and soon as I have enough. At 2.3 m, a withdraw rate of 6.5% should work out just fine for me.

        1. I just would never put much or any of my money into Bonds. I have done a lot of research on stocks and bonds, right now it is best for me to be 100% in stocks. These are Vanguard EFTs, so basket of stocks, diversified. Even with a down year or two I have plenty of savings to cover expenses for those years. I just do not see the point in not being 100% in stocks. Over the last 7 years I have not made less than 12% on them, and last year I made 46.2%.

          1. Thanks Carol! Thats exactly my plan… The last few years have been amazing earning 17-28.5 % each year. YTD I’m up 21%. I’m 66 and never touched my 401k started in 1990… Just took my pension in a lump sum and have invested in good dividend stocks that’s done very well. I received this money in Dec 2020 and invested most of it 1st qtr 2021… So far I’m exceeding the month to month benefit payout combining gains and yields YTD… It’s been fun. And, if I die my kids will get the money, not the company :) Thinking about starting withdrawal, 4-5 % would never touch my principle I’m thinking. Even in a bad bad market, the recovery has always been quick in my opinion.

      1. The one who plants trees knowing that he will never sit in their shade, has at least started to understand the meaning of life.

        Rabi Tagore

  9. I ran across this post today. 2015.

    I’m not a savvy investor and would like to know how (the steps needed) to invest in treasury bonds and how (the steps needed) to withdraw 3 percent per year.

    Based on what I have saved and the chart you show above I believe I can retire for about 75 years. I don’t have anywhere near that much to live so I will have the rest to leave for others.

    Can you guide me to where I can learn the step by step or someone who can show me this?

      1. Thank you. I read that article several times.

        It does not tell me the step by step. I have saved that much and more.

        How do I get the 2% safe return?

        In the chart of the original article you say if I withdraw 4% of assets I would have to take out 10K in principal but the money would still last 50 years. My question is what asset allocations will allow for that specific situation or 3.5% with money lasting around 70 years or so? This way I can leave some for others.

  10. Honestly, for me, any money left over when I die is a complete waste of money. I worked hard for my money, and I’ll be damned if I’m going to die and leave a million bucks on the table.

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  14. Ken Carlson

    I find it interesting that no one brought up RMDs…..for those of us with almost all of our retirment in traditional 401ks our withdrawl rate is only for us to decide on the first few years of retirement assuming a person retires at full retirement age! In my case, I will only be able to decide this for 4 years before I am forced to wirthdrawl based onlife expectancy….I know I know I will hear that this can be reinvested or some may have Roth accounts but by and large the masses in the private sector won’t control the withdrawl rate for long.

  15. Again, I LOVE this blog, just have to say that.
    There are many variable on how to draw down your portfolio in retirement. There are many drawdown models to consider:

    First, the draw rate does not have to be constant. I will semi-retire at age 56. My life expectancy is 96. So I need at least 40 years worth of income. But the income I need is not constant. My wife and I view retirement as phases (active, passive, and declining), based on what we have seen happen to the elderly in our own families (we all get old and die). Active is roughly age 56 – 70. Passive is roughly 70 – 80. Declining is 80+. During active years you will travel, spend money on your kids and the grandkids, and just have fun. In passive years you are hopefully still able to get around, but let’s fact it, things are going to get pretty slow. In the declining years. you will sit around and watch TV, hopefully healthy enough to stay out of assisted living. So your draw rates are going to vary quite a bit based on what your needs are during these phases of old age. I’ve done spreadsheets on my portfolio and can easily handle a 5% active, 4% passive, and 2% declining drawdown profile.

    Another drawdown model I like is to only draw what you actually need. So if you are taking a big vacation you draw just the money you need for that expense. No point in pulling a set amount if you are not going to spend it.

    Another model is to drawdown no more than 1% less than what you earned in the previous year. So if you made 5% in the previous year the most you would draw is 4%. This gives you a whole year to adjust your portfolio as the markets change.

    Assuming your house is paid for, another model is to use your house as a cash reserve at the end of the declining period. This is when you are 90 and in assisted living. Most people won’t be able to live in any house by yourself any longer at that point.

    In practice, I believe it is a combination of multiple drawdown approaches that will work the best. But you do need to be active in the management of your money, or get someone you trust to help you with it as you get older.

    As far as an inheritance goes. Well, we are planning on preserving our principal for out own safety net, not for our children’s. If we need to spend it up for fun or necessity, so be it. Our first order inheritance is to provide a college education and possibly beyond that. This is how the stealthy wealthy manage their money. If we happen to die prematurely and leave a bunch of money to our kids, well how lucky they will be. But it is total foolishness to purposely plan to leave money to your kids – especially if it will cause you to compromise your own retirement goals or lifestyle. Research shows that this practice is demeaning and demotivating to young adults. There are exceptions. For example, we may plan to gift money to help fund our daughter’s IRA and other retirement tools or to contribute to our grand children’s 429 plans, but not for spending money that she can use in her working years – that she will have to earn.

    Best to everyone. Work hard, play hard, and be balanced in all aspects of your life (health, wealth, and relationships).

  16. With a mixture of stocks and bonds, how is a withdrawal rate of 4-6% difficult to maintain whilst preserving capital? Seeing as how the stock market returns around 9% on average, why would it be so hard to maintain a 4-6% withdrawal rate? Sure, you would need to adjust with the market. If the market is doing bad, don’t take as much cash out (thats what your bonds and dividend paying stocks are for). But seeing as how the market is up ~22% this year, you could have withdrawn anywhere from 0-22% and still preserved your capital.

    1. Ricky – this has always been my question also. I’ve never seen it answered in a way that made sense.

      1. They factor in inflation so that you have the same buying power 30 years down the road. So I believe they’re going with the historical 7% average market return minus average inflation 3-4% which puts you close to 4%. People are now saying choosing 3.5% to 3% withdrawal is safer.

      2. Yes! I too, Am struggling to understand this.

        No where do I read anything that addresses this.

        Your capital should be untouched or go untouched if you’re simply withdrawing the proceeds from your stocks.

  17. This is quite a thought provoking. I’ve never thought about leaving a legacy or endowment behind but I can clearly see the benefits it would give to the future generations especially if the money was not split too much. I have an only son and it would be great to leave him the entire principal so he could do the same. thanks for sharing, interesting piece

  18. Shobir | Find Some Money

    I’d love to leave a financial legacy or at least try to leave one. This post has made me think about something after retirement. It would be great to leave the principal intact or have enough principal so I’m living off the interest that’s accrued from the interest, this means the principal with continue to rise. I really enjoyed this post, thanks for sharing.

  19. Why not consider a SPIA? That would ensure you are always guaranteed a SAFE withdrwal rate and you dont need to save as much either

    1. The Single Premium Immediate Annuity (SPIA) is a tough one for me. It is sold as a product (Life Insurance), and the company has teams of actuaries and reams of historical data to make sure that the odds are in the company’s favor for making more money than it will pay out.

      If you have checked out Annuity payouts lately (I have, very discouraging returns just like every other investment class), they do not keep up with inflation. There are products that do incorporate an inflation factor, but the buyer pays dearly for this.

      In the meantime, the risk goes to the buyer for an early demise (in which the lump sum stays with the life insurance company), that the lump sum won’t ever be needed for anything else, and that the risk/return/inflation snapshot in which the SPIA is negotiated will always be sufficient to provide for the buyer’s future needs.

  20. I prefer to look at retirement as needs based vs income (withdrawal based). Safety doesn’t matter when you have a non-discretionary monthly nut that equals 10% of the portfolio.

  21. We computed portfolio outcomes in a similar manner for each of the 100 scenarios. Although most scenarios resulted in portfolio success (the portfolio was able to sustain a 4 percent withdrawal rate over the 35-year period), we were surprised by the proportion of scenarios that resulted in portfolio failure—18 of the 100 scenarios. In order to be consistent with some of the other studies mentioned previously, we redefined portfolio success by shortening the retirement period to 30 years. The portfolio failure rate dropped to 14 percent, but is still higher than Milevsky and Robinson’s 9 percent (2005), Spitzer, Strieter, and Singh’s 6 percent (2007), and Scott, Sharpe, and Watson’s 5.7 percent (2009). We also computed the portfolio balance (in real dollars) at the end of the 35-year retirement period for successful scenarios. Finally, we inverted our model to calculate the sustainable withdrawal rate (the maximum rate at which a given portfolio may be drawn down without depleting the portfolio before the end of the 35-year retirement horizon) for each of the 100 scenarios. Portfolio outcomes for the six previously described retirement scenarios are presented in Table 3.

  22. Arnold Reynolds

    When it comes to retirement planning, the key question is how much the client can safely spend out of his or her portfolio during the golden years. The rule of thumb is that 4% is a safe withdrawal rate. However, given that many bond yields are well below 4% — and retirees tend to invest heavily in bonds — the appropriateness of this rule has been called into question.

  23. Anton Ivanov | Dreams Cash True

    I’ve been waiting for somebody to write about not touching your retirement principle for a while! This is the strategy I have always used when conducting my retirement planning and have never imagined myself drawing on my portfolio principle. A 3-5% yield (achieved through dividend stocks or, most likely, bonds) is the number I use to calculate my estimated yearly retirement income.

    I do agree with the other commenters that for those who don’t have enough saved to use this strategy, drawing on their principle is the only viable options. But that’s poor planning on their part, in my opinion.

  24. Great post.

    I use 4% as an estimate, that’s it.

    My current dividend yield is around 4.5%. Will it always be that way? Maybe, maybe not.

    I figure a 3% withdrawal rate is what I need. I plan to have a $1 M portfolio in about 20 years, before my 60s. Once I hit that value, I will retire.

  25. This post will answer the question, after I got my ‘hand-wringing’ done previously. My only comment on the table is that it seems pretty severe. Not many people that pulled $1 million together are going to be happy pulling out $18,000/yr.

    My own strategy is to take the longest life-expectancy for me and my wonderful wife, add 5, and divide by our net worth (including home equity). i.e., one of us is expected to live another 35 years, plus 5 equals 40. The ’40’ equates to a withdrawal rate of 2.5%. This is our starting point. The 5 year margin, plus the ‘shadow asset’ of Social Security payments not counted against future spending, will give us flexibility if we need to make a serious deviation. A previous poster noted that spending is likely to decrease as we age. Like the FS example, our strategy assumes 0% appreciation (our very conservatively invested nut is in cash instruments, and we assume a wash with inflation) and 0 contributions going forward. Recalculating as needed, we live modestly, and this will work for us for now.

    Of course, this is quite conservative and assumes a bottom 1% performance. At one point in years past, we made plans for a charitable trust; it is kind of embarrassing now, and seems grandiose in hindsight. But at the time, we had the money to do it. Now, not so much and we are happy just to enjoy our time together. “The future’s uncertain, and the end is always near!” – Jim Morrison, ‘Road House Blues’

  26. Giddings Plaza FI

    I’m usually on board with you, but this time I fully disagree. I think that, unless you have loved ones that require care (because of developmental or severe physical disability), you should do yourself the favor of not having to fund their lives, and do them the favor of finding their way through the sometimes delightful, sometimes excruciating experience of making a living. I have a niece with Down’s who will require care for the rest of her life, so I’ll make some provision for her. But for others, we are not doing them a favor by protecting them from the needs of working.

  27. As a retiree, I have to say it’s not that simple b/c things change all the time. Dividend payouts may decline, companies might go out of business, your life situation might change. But yes, to my Target Withdrawal rate #2, if you withdrawal no more than the market dividend yield, then one should be able to create a perpetual income machine.

  28. I agree. If you lose a binary event, you are screwed as there is no back button. Better to be safe than sorry. I have little edge on annuities, but perhaps someone with deep knowledge can write a post.

  29. Rich In The Heart

    I once read an article a decade or so ago, which stated that wealth builds up within a family and within 3 or 4 generations it is squandered away due to various reasons.
    I did find this one regarding Chinese:

    Now, perhaps that has changed but we will need at least another 100 years until I could come close to seeing that. While I’ve reached about 1/2 of my lifespan at this point, I don’t know that I want to live another 100 years since the human body wasn’t designed for such things. Even if you replaced everything but our brains, the brain has a limited lifespan as well.

    In all honesty, 500 years would be insanely long and I see no need to target it that far out. I believe somewhere in the 3%-4% rate indexed to inflation should work for 99.9% of the folks out there.

    As for donations of monies to charities, why wouldn’t a person just set up a trust fund that paid the charity for the next 100 years or so? That would seem to make more sense than to just say here’s $5M, do what you want with it.

    1. Good thing you don’t have to worry about living until 200!

      An endowment or trust is exactly what I discuss in the beginning paragraphs. Why not set up our retirement goals like an endowment that gives forever?

  30. The book “Risk Less and Prosper” has an idea to stratify your retirement goals and invest accordingly. For example, if SS plus $10k is a must-have scenario, then you should be allocating $10k a year per retirement year in TIPs or i-bonds. You then allocate the remainder of your savings to more and more risky assets commesurate with your willingless to not see the potential benefits in retirement. Although I think it’s a bit of overkill when you’re young, I will scale into this at 10 years pre-retirement. If the markets do collapse at exactly the wrong time, do you trust your future vulnerable non-income generating self to not panic and cut your losses at the bottom? Instead, knowing that the worst case scenario would at worst leave you living a simple, secure life would help you control your emotions in difficult market conditions. I think FS also thinks along these lines, as his expenses are paid for using mostly risk-free assets.

    Regarding leaving something to heirs, there are lots of comments here about the pros and cons. However, I haven’t seen the goal I want for my kids: leave them enough that they will not have to be worried about saving for a modest retirement, but that they will still have to work to live. Not much different than an old fashioned defined benefit pension, no?

    1. Perhaps we should move beyond the focus of kids, but of living something for humanity? For leaving the world better off than when we came. Imagine if everybody gave a little instead of took a little, would our future not be brighter?

      1. Agreed. Much better to give than to take. My thinking is that by setting the kids up with a backstop for their golden years, they wouldn’t have to prioritize saving the way I have been, and instead could take jobs they enjoy and (i hope) they think are useful in society. The rest (if any) can go to charity. To me, your “giving to humanity” falls below my “familial duty” but is above buying a convertible sports car at 50.

    2. @Jason S, how much money would be needed to for each kid to have a modest retirement? $1 million each? $2 million each? Just curious if you have put a number on this goal, and how the goal would be attained while your primary goal for your own retirement is met?

      1. @JC, I don’t have a hard number yet — rather than a hard pre-retirement goal, it’s more something that would inform my retirement consumption habits and would go into my will if I’m fortunate with the markets. In terms of standard of living, I think it would be something along the lines of the “must-have scenario” I mentioned above. Maybe SS + $20k, with the $20k assuming a 3% withdrawal rate. That’s a $670k annuity each, which would be $64k discounted back 60 years at 4% real return. I’m much more given to use these standard 3% and 4% numbers for nice-to-haves over 60 years than must-haves over 20 years.

    3. The fundamental issues of the next generation are debt-free education, a solid start at retirement by age 30, and long-term care costs. These are the costs that usually fall unfunded in favor of housing and household expenses.

      If we, the current generation, were to leave the next generation a secure platform (security in retirement) on which to build the future there is no telling the good that would/could come from that. The alternative, having each generation attempt to build from “zero”, limits our impact because it takes so much energy to start from zero to get to where we were when we retired. I prefer to have the next generation “stand on our shoulders” to make the world better for everyone.

  31. CA Financial Planner William Bengen published a study in 1994, showing a portfolio with a 4% withdrawal rate could blah, blah, blah. A new study published by Morningstar shows the updated US stock market performance since then (which includes 50% decline in 2003 and 57% decline 2007-09) can now survive a 2.8% withdrawal rate over 30 years. Check it out here.

    The thing about Monte Carlo simulations is that they don’t cover outliers. Forgive me if you have read me say this before, but it bears repeating. I plugged my data into four commercial calculators, and built my own model. None of them predicted the financial devastation that occurred in 2007-09. Huge national banks shuttered, bankrupt, corporations that employed thousands wiped out, TBTF reinsurers bailed out with taxpayer money, amazingly flawed misallocation of resources financing pipedream “Green Energy” companies with no product, and no market even if they did have a product, etc. There is still a huge disconnect between Equity performance and the real economy, and it is all built on false money. At $85 billion a month in Fed subsidy, the party continues. But does anyone think that the last month’s $85 billion has nearly the same impact as the first month’s injection of $85 billion? For those who say “it has worked”, I have to ask; then why don’t we stop?

    In any event, savers have been crushed. The nut required to throw off $100,000 a year is almost $4 million. For those who say the 2.8% is the low-end probability, I am compelled to reply that for the past 15 years that is not a probability; it is a historical fact.

    Other than that, I’m pretty optimistic about the market, the government, the country and the future. Continued investing success, everyone!

    1. Great response JayCeezy.

      I noticed you are optimistic about the government, care to elaborate why? I think Congress has a 9% approval rating as people feel it can get almost nothing done. Is this gridlock what makes you optimistic about government or something else? I believe my question is relevant to Sam’s and your post as the government has a big impact on the economy – the economy has a big impact on interest, dividends and stocks – which have a big impact on how much you can withdraw from your savings.

      Regarding 20007-9, of course virtually no one predicted it, unfortunately. The vast majority of people will always believe the good or bad times will continue. We are in for many more cycles of boom and bust in the overall economy and individual parts of the economy like housing, stocks, etc – however, most people will not realize this, until another boom or bust occurs.

      I agree with you and other, Monte Carlo, not worth much here. We are talking about 1 person and a big decision – like being able to pay the electricity and buy bread – I know I do not want to HOPE that the prediction of my money lasting 50 years with an x percent withdrawal is accurate. Because if not accurate, I might starve.

      Better to follow Sam’s advice and try not to dip into principle! Again Sam thanks for this post, it might keep me from starving in the future and it will leave other people/organizations to have my $ after I’m gone!

      1. I’m surprised by the government optimism as well.

        However, the markets are on fire after Obama won and after Sequestration, so maybe all is good in DC after all!

        Even if we come up short in building the Perpetual Income Machine David, we will have gone farther than if we didn’t have such a goal in mind.

    2. @David and FS, my apologies! My last sentence was intended as a joke and should have indicated as such, along the lines of “other than that, Mrs. Lincoln, how did you like the play?” I’m not optimistic about any of those things (market, govt, country, future), but after my bummer of a post (about the Potemkin market, govt junkie-behavior, country’s amazing devastation to institutions, employers and citizens, and the dismal future) I wanted to end on a laugh. Hey, they can’t all be gems!:-)

  32. When I retire I expect to withdraw at 2-3% rate. I expect to live for 30 years in retirement, but I want to hedge a little. I don’t think I will “need” the money so a low withdrawal rate will be fine. I do expect to help educate my grandchildren with some of those funds. They are not born yet and no plans at the moment. Everything could change in the next few years so I want to remain flexible.

  33. Great post. I’ve been a long time reader and have been moved to make my first two comments within one week.
    I am in agreement with you; plan for the worst and be prepared. If all works out for the best then you have a nice ‘gift’ to leave to others to help them get ahead in the world. I am fortunate that my father also had this philosophy and it ‘rubbed off’ on me.
    But we are the fortune ones; we understood and planned. I know so many people who are not even able to retire at 65 because they didn’t save and plan ahead. They live pay check to pay check, when they should be preparing to retire. I’m not sure what the right answer is but in another 5-10 years there are going to be a lot of ‘seniors’ struggling struggle when they can no longer work. If they don’t have family to take care of them, the ‘government’ will have to step in??? How to change this now before the next generation does the same??

  34. These touchy withdrawl-rate calculations are exactly why I never thought that net-worth was a useful number. I only track it because of vanity. :)

    In simplest terms, you just have make sure your monthly passive income is higher than your monthly expenses. That’s been my investment “guiding light”.

  35. Keep in mind that the 4% or 3% rule (mine is 3% because I have possibly 50 years to cover rather than 30), is on your investable assets only. Many of us also have homes that are or will be fully paid off by the time they die. I am perfectly happy counting on possibly exhausting my investable assets and leaving the home I live in to my heirs and charity. After all, I am the one responsible for saving the nest egg in the first place, shouldn’t I get first dibs on it? If I die with only my home left, that is still a tidy sum that will do my heirs and/or some charities a lot of good. And as a few of your readers pointed out, odds are there will still be something left from my investable assets as well, as they would only be exhausted, under the 3% rule, if my future is as bad as the worst 50-year period in history. And there will be plenty of time to make adjustments over the next 50 years if it’s looking like we’re headed in that direction . . .

    By all accounts, most Americans are having trouble accumulating anything near what they will need for retirement. Telling them they should also make sure they have something to leave heirs and/or charity, I think is more than most people need to worry about for an already difficult task.

    1. Good point on leaving the house as a great paid off asset for your heirs.

      Even if we fail to come up with a perpetual equities giving machine to leave for others, the end result will be much better than if we only focused on ourselves. This is a key mindset I want to convey in this post.

  36. The First Million is the Hardest

    First off, I love “Memento”! It’s been a favorite of mine for a long time.

    I’m in complete agreement with you on this one. It’s long been my goal to save enough that I’ll be able to live off the dividends & other income my investments produce in retirement. I want to be able to go as long as possible in retirement without having to touch much of my investment principle because I want to be able to pass that along to family, charities, etc.. after I pass on.

    I never put much stock into “one size fits all” numbers from the financial industry such as the 4% rule. Everyone has to calculate their own specific needs and run though multiple scenarios as you’ve suggested often.

    1. Good stuff. There is never a one size fits all. However, it’s better to shoot for the ideal withdrawal rate that touches no principal and fail than be too aggressive as there is no reverse button!

  37. The trick is that most people DO NOT need a ton of money to live on in retirement. The notion that you will need $80k or $100k is kind of ridiculous, and short-sighted. With proper planning, you should have no debt whatsoever, and only need to cover basic necessities, fun money, and healthcare. Given that health care DOES cost a LOT (Thousands per month in some cases), you should plan for the worst. But when you’re dropping $5k a month on healthcare facility, you probably won’t be around for 20 more years.

  38. Withdrawing without drawing down the capital is my ultimate goal too. We are still adding to our saving because Mrs. RB40 is still working. Once she retire, we’ll see if we can really make it work. Of course, I think it’s ok to splurge once in a while and take a big trip or something like that.

  39. Jane, not being a burden is a great goal, and a topic I would like to discuss in the future b/c parents should never feel a burden either since they took care of us for 18+ years.

  40. Sam, these are great points, and something I think the “early retirement” community has long embraced. Build a big enough nut so that you have the freedom to do as you wish without actually cracking said nut.

    Additionally, I wholeheartedly agree that the 4% withdrawal rate is something that cannot be relied upon (much like social security for us younger folks). That being said, I think many people, myself not included, will question the altrusitic side of this. I can hear the ERP screaming about, “It’s my money, why should someone else get it after I die! I EARNED it!”

      1. Depends. Do you have flexibility to spend less than 4% if you need to? If you can live off 2-3% for 5-10 years (or forever) *if you need to* then you probably less than 1% chance of running out of money by the time you are 95 (and most likely significantly less than 1%). I’m planning on using 4% at retirement in 22 years (55 years old) but the wife and I could live off 1.5-2% and 0 social security very comfortably so I’m not too worried about using 4% to start.

        I don’t think using the risk free rate is really a good bogey either. I certainly wouldn’t expect market returns (5% bonds, 8% stocks) but something north of 2% is likely over 10-15-20+ years. I’ll probably do 40% in government bonds, 25% corporate bonds, 25% S&P index and 10% in a dividend stock index and expect closer to 4-5% annual returns. If I have a few bad years early on, I’ll just drop to 2-3% withdrawal for a while or even pick up a part time job (which should help keep me occupied as well).

        Overall, good advice, though.

  41. Jenny @ Frugal Guru Guide

    You are misrepresenting the “4% rule.” The rule is about probability. Over half the time, withdrawing 4% per year historically would result in the principal never being touched, even when you account for inflation. 5% of the time, it would drain the account before you reached age 95. That’s because nothing in life is certain, investments among them. It’s not possible for retired people to simply not withdraw money when the stock market is down. The 4% figure gives people a guide of historical performance that sets–or at least set–a reasonable level that they could continue to use when their portfolio takes a dip. If you adjust for inflation, your dividend rule means that people shouldn’t be withdrawing ANYTHING right now. (There’s little point in merely preserving principal if it’s going to be eroded by inflation.) What most people want is a STEADY, predictable retirement income. Your advice doesn’t give them that, which is well and good if you’re cutting your income from $200k a year to $40k for a few years, not so practical if you’re cutting from $40k to $8k.

    And David, my SS already is being spent before I get it–on other people. Of course I want private SS. Then I have a prayer of getting some of what I pay in. My parent’s generation will get out right at what they paid in. My generation? We’ll get out $.50 on the $1, and that’s only if the rules aren’t changed. That’s not an “investment.” That’s a guaranteed loss.

    1. This is where you and I are different. I’m not willing to gamble that there’s a 50% chance using the 4% rule that my principal will be gone by the time I’m 95. I want as close to a 100% chance that 100% of my principal will still be there to pass on to others for as long as possible.

      1. My house is paid for , my kids will be middle aged adults themselves by the time my wife and I are dead. They’ll get to split the proceeds from that. Other than that I can’t imagine why I would want to live a Frugal and sad retirement to provide charities with a gift. I’ve contributed to charity my whole life, and will continue to with time if not with money in my retirement. But to reduce my spending for things like entertainment, and vacations or even better food for some Anonymous charity is mind-boggling to me.
        I’m retiring in a few months and have more saved than the vast majority of people we know. I’ll get a small pension in a couple of years from a previous employer and my wife will will keep working for a couple more years will get a bigger pension.
        the only thing I’m debating is whether to take more, perhaps 5% until my full Social Security kicks in or to take Social Security now at 62 and only go with 4%..
        Because I like safety I’m planning on putting half of my IRA and 401K into annuities and then doing the actual 4% with the other half. Contrary to the chicken littles of the world I don’t see Social Security ever running out of money for those already collecting, they never talk about welfare running out of money do they? That is , under the current plan , inflation adjusted, and you can buy annuities that are too.
        And people speak about all the big medical bills and stuff they can expect as they get older. Have none of you heard of Medicare supplemental insurance? With a decent plan you shouldn’t have much if anything out of pocket regardless of bad health.

        I inherited nothing from my parents, my wife inherited nothing but a few bills from her parents. We provided my kids with good educations, debt free. If we do live to be a hundred instead of 95, they can kick in a couple of bucks a month for a old folks home.

        1. You could wipe out your kids if they din’t do well. The cost of a year or few of old folks home and cancer treatment related costs for instance could wipe out many people.

    2. Good points from Jenny (though I’m not going to discuss the social security issue). If you look up the original Trinity Study (easily found online), you’ll find it nowhere recommends a 4% withdrawal rate as an absolute. Instead it uses historical data from 1926-95 to compute the probability of portolfio success given several variables (length of retirement, withdrawal rate, and stock/bond allocation).

      Examples: 100% stock allocation, 15-year period, 3% withdrawal rate: 100% probability of success. 100% bonds, 30 years, 4% withdrawal: 20% probability of success.

      What *is* true is that the authors posit that at a 3-4% withdrawal rate, *any* allocation has at worst a 95% chance of success for any period from 15-30 years, and most combinations have a 100% success rate (inflation-adjusted).

    3. If we give you your money in a private account – were do you propose that the government get the $$$ to pay for your parents?

      Only if Congress made it that you ABSOLUTELY could not get a penny of your private account prior to retirement do I think it makes any sense. Then, assuming that Congress set is up that way – are you OK with your income tax going up 5% points to pay for the people that are currently retired?

      I will admit that SS is a ponzi scheme or generational transfer program – and that this might be less than ideal. HOWEVER, it was created that way and thus there is no easy way to get out of it.

      BTW, you are 100% it is not an investment. It is Social Security!

      1. Just because something sounds good, doesn’t make it true:


        1. I agree not a ponzi scheme — but even if it was — which many people believe – I think we are in it for the long run. Unless we raise other taxes – big time!

  42. And I’m scratching my head at why you’re scratching your head. The 4% safe withdrawal rate (based on the so-called Trinity University study from 1998), is only one of several rough guidelines and has been widely criticized by other academics, as well as revisited by its original authors. Retirees (as you rightly point out) must take a variety of circumstances into account which may or may not support a 4% annual withdrawal rate. I also don’t know where you’re getting the notion that “becoming a millionaire is fast becoming a rule rather than the exception.” Maybe that’s true for you and some of your financially responsible readers, but it surely isn’t true for the vast numbers of Americans who have less than $50,000 put away for retirement. And this situation is becoming worse as pensions are rapidly becoming a thing of the past, life expectancies along with accompanying health care costs are increasing, and even social security is facing a crisis point.

    As for leaving money for your loved ones or various noble causes, that in my opinion has to be solely a matter of individual choice. What I have done is to structure my will so that it leaves percentages of my assets to certain family members as well as various cultural and educational institutions I wish to support. In this way, if I die five years past retirement and have exhausted 20% of my assets using the (again, very rough) 4% rule, the remaining 80% automatically gets distributed to my beneficiaries. If I die 20 years from now, my “heirs” get 20%. And if I die without a dime to my name, well, them’s the breaks.

    1. We’re not talking about “the vast numbers of Americans.” We’re talking about our own little community on the web of folks who want to create financial independence sooner, rather than later.

      I like your inheritance strategy.

      1. Regarding paragraph 1: Perhaps it was only your own little community in your mind, but that distinction was not specified in the original post. And in any event, I would think a good theory of retirement should account for the more difficult cases as well, not only those that are probable to have a successful outcome.

  43. Interesting topic…I struggle with this idea because like most people that I imagine read your blog, I earned the money…creating a legacy of family who does not have to provide for themselves goes against my core beliefs. I sort of equate it to thinning of the herd, you make people fat dumb and happy if they don’t have to work for it…why sacrifice that 3 week trip to Europe so your great grandchild can sit around the house at 27 smoking pot and going to the club. I will create a legacy and there will be a pile of cash left over but the vast majority will go to deserving charities…a nice headstart will go to my immediate family. My withdraw rate plan is the rule of 33, essentially multiply what your yearly burn rate will be by 33. That is number is how large your nut needs to be to have a 99.99% probability based on the last 100 years of data to be guaranteed to never run out of money no mater if you retired into the worst bear market in history. In the vast majority of simulations you end up with a crazy amount left over. People, enjoy life to the absolute fullest it will be over before you know it.

    1. Do you mind expanding on the Rule of 33? Is the Rule of 33 not more a target savings goal rather than a withdrawal rate goal giving you are multiplying your annual burn rate by 33?

      For Example:

      $100,000 annual burn X 33 = $3.3 million.

      Is the withdrawal rate you are using therefore 3.03%?

      1. Essentially yes, I left out one detail, that is based on a 50 year expected retirement. Reality is people don’t really consider that when they get to be 80 years old, they are probably not spending at the same burn rate…so a higher % could probably used and still get you there. I am so conservative that I’ll probably blow right past my goals and have that just be my liquid investment accounts and not any business holdings or rentals.

        1. AT 80 you are burning thru money: doctor bills, pills, surgeries, services for things you can no longer do like house cleaning or yard work. Another thing to plan for is travel to see family.Nowadays the youngsters end up living where the jobs are, often another state far away. The travel money adds up. If you’ve lived in your house a long time, the big ticket repairs hit during your 70s and 80s. If someone tells you that you can live on 70% of your previous income don’t believe him. Go
          talk to a real old person. You’re also paying for funerals and nursing homes.

    2. Interesting post

      I do see the point of not leaving a legacy to someone that didn’t really work for it. My sister recently had a daughter. If I left it to her, who knows what could happen? Bad spending habits, divorce, you-name-it, could blow the whole thing. Plus, I think it would make people a little spoiled and entitled. Reminds me of a good quote: “Leave them enough so they can do something, but not enough so they can do nothing.”

      I do like the idea of helping a foundation, scholarship, non-profit, whatever to benefit a worthy cause. That would certainly make me feel good. In fact, I can think of no better use of an early retirement to set up *your own* non-profit. It gives you something to do with your time and after you pass on, that’s your legacy.

      1. Having a left over pile of money at the end is a good problem to have, the reality is if everybody super responsible, there would be no debt in this country and everybody would be financially independent. (sometimes I really wonder what that type of economy would look like…would it even work???) That is never going to happen…so if I were to leave this earth today, each of my family would get enough to have zero debt including their mortgage pay for kids college and a trust that would help smooth out the bumps in life. I even told my parent who want to leave each of us kids a nice inheretance to spend it on themselves…I warnend them that I will just spend it on more fast cars and women (I’m half joking)…but really if you are at the level of creating a legacy, enjoy your life, don’t perpetuate a society that feels they are entitled, that is definitely not how this country became so great.

  44. I will definitely agree with you that erring on the conservative side is much better than using starry-eyed numbers with little chance of real success. But while never touching your principal is a nice ideal and certainly a reasonable goal for some, I’m not sure it’s a necessary goal for many.

    I won’t argue with you that the 4% withdrawal rule is just a starting point and that there are many other factors to be considered. But, that rule doesn’t assume that you will draw down to $0. In most cases, over 30 year periods it actually leaves you with MUCH more money than you started out with. I don’t think you can just ignore that point, just like you can’t ignore the very few cases where it brought you very close to $0. Again, I’m not arguing that 4% is right for everyone, but it’s certainly not a pie-in-the-sky number that leaves you destitute at 90.

    You are absolutely correct that current interest rates are lower than the norm, but that’s just the case now. What will they be 10 years from now? We have no idea. So to me, basing your withdrawal rate of off current interest rates is great if you can do it, for all of the reasons you mentioned. But I think it’s far from necessary and is unrealistic for many.

    Your point about income streams is a very good one. If you can build those up, the market and interest rate movements just don’t really have to affect you.

    1. This is the beauty of my method in following the 10-year treasury yield or S&P 500 yield. These figures don’t operate in a vacuum. If inflation shoots up, so will Treasury yields and then market dividend yields. Your withdrawal rate will always automatically account for inflation and economic health among many other factors.

  45. Sam,

    Great post – I can not argue with anything you have written. If possible, why not preserve principle and give the remainder to people and/or organizations? Tough to argue with that!

    Why do people use 4%? Because the VAST majority of Americans are not saving as much as Financial Samurai readers. These people desperately want to retire and they want to create a senerio where it seems like they can retire and have enought money for the rest of there lives – thus they are using a rate that is no longer realistic.

    I listen to financial podcasts and I hear people in retirement with mortgages – and these are NOT mortgages of choice – it is VERY sad.

    On these podcasts I also always here about people borrowing money from and/or making withdrawals from their IRA/401K to pay for this or that. Again so sad, retirement $ should only be used for retirement!

    What I have written about above, is why I absolutely believe we should not allow private/individual Social Security accounts. If we give people access to their retirement money – sadly – some fairly substantial percentage of Americans will find a way to spend it prior to retirement.

    I know, don’t let them access it! Don’t forget – the American Congress needs to get elected – if private/individual accounts are set up – Congress ABSOLUETLY will allow people to withdraw the $ prior to retirement!

    1. Hi David, I do wonder though whether people “desperately want to retire.” If you desperately want to retire, you would aggressively save and invest as much as you can no? Can’t spend everything you make and then ask, what’s up.

      I agree with you on not letting most folks be left up to their own devices when it comes to SS and touching their retirement accounts. The temptation to splurge and have emergency parties is great. Imagine if the Gov’t didn’t have a monthly income tax withholding system. Our country would go broke!

      1. I agree with your logic that if you wanted to retire you SHOULD save and inves as much as you can.

        However, I think you, me and the people that read and post on your blog, are the exception, not the rule.

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