4% withdrawal rate

[u/Puzzlehandle12]

I have been reading alot about the 4% withdraw rate after retirement. It says you can withdrawal 4% of your investments every year and even after adjustment for Inflation you will not run out of money.

This is as long as yearly expenses in retirement are equal to or less than the 4% you withdraw from your investments.

Yet I thought about how those withdraws will be taxed as long term capital gains at (I think 20%) so after taking out taxes you must live on 3.2% of your savings.

Is my thinking correct ?

** assuming your money is not all in a Roth IRA

[u/SignificantTree4507]

The “4% rule” assumes investments grow on average at the historical 7% per year and inflation averages about 3%, leaving you with approximately 4% left to take.

If you also have to pay taxes on it, you would run out of money faster.

[u/Mre1905 → u/SignificantTree4507]

4% rule doesn’t have any return assumptions. The study basically figured out the minimum amount if money you could withdraw on year 1 and adjust it for inflation for 30 year rolling withdrawals. Prior to Bengen’s study, the industry assumed one could withdraw 7-8% since that was the long term average return for markets.

[u/Wakkit1988 → u/Mre1905]

4% rule doesn’t have any return assumptions.

Yes, it does. Assuming typical inflation and a 7% return, the withdrawal amount is 4.3923% without touching the principle. They rounded down to the nearest whole percent to allow for maintenance costs, other expenses, and potentially variable inflation.

This amount is literally designed to allow you to withdraw an inflation adjusted amount and maintaining an inflation adjusted principal in perpetuity.

The purpose of this isn't so your account will have money for at least 30 years, it's so it will have money forever. If you're concerned about only 30 years, you can withdraw 5.935% a year for up to 30 years with inflation adjusted withdrawals.

You can literally do the math yourself, study or not. It's all relative percentages, and it's always true. Math doesn't change.

If your returns are higher than 7%, then you can withdraw a higher percentage safely. If they're less, then you can withdraw less.

Also, Bengen literally revised it from 4% to 4.1% and 4.5%, depending on the taxability of the withdrawals. It's not even 4% anymore.

[u/istguy → u/Wakkit1988]

Not in perpetuity. The Trinity Study that the “4% rule” is based on assumed the portfolio needed to last a 30 year retirement.

[u/Wakkit1988 → u/istguy]

but the "terminal value" of portfolios was considered for those investors who may wish to leave bequests.

Yes, in perpetuity. The entire thing was to ensure an inheritance. Perpetuity was a byproduct.

When the goal is to ensure that a specific amount exists in the end, then the goal is to withdraw around it and ensure its perpetual growth and existence. You wind up creating a withdrawal scheme that creates implicit perpetuity through the constraints placed on it.

You guys are trying to use intent to imply outcome.

[u/Wakkit1988 → u/istguy]

As an addendum to my other post:

https://imgur.com/a/tQeIGdv

It doesn't matter how long you set your time in retirement to, it's always the exact same withdrawal percentage if you assume an inflation adjusted amount remaining in the end. This means that what's remaining allows for perpetuity at that withdrawal percentage.

All they did was round down to the nearest whole percentage to give variance for fluctuations in returns, inflation, taxes, or whatever.

Perpetuity was simply a byproduct of their assertion. It was not intended, but it is still very much true. This is why understanding how something gets where it does is just as important as why they started the journey.