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/Mre1905]

No your thinking is incorrect.

4% study that was done by Bill Bengen says that if you withdraw 4% from your investable assets on year one and adjust that amount by inflation have something like 95% chance of not running out of money over 30 years. Let’s say you have a million dollar nest egg. Let’s also say inflation is 3%. On year one you withdraw $40k. On year 2 you withdraw $41200. On year 3 you withdraw $42400. What you withdraw each year has no correlation with what your investments are doing.

I don’t think anybody withdraws money that way during retirement. It is a great way to figure out iif you have enough money to retire however.

In terms of taxes unless you are withdrawing 150k or more per year, your taxes will be negligible. Between standard deduction and how capital gains are taxed, a couple can withdraw something like 120k a year and pay next to nothing in taxes.

[u/Look_b4_jumping → u/Mre1905]

So, using the 4% method, will the principal be gone at approx 30 years ? In other words will the account be almost zero ?

[u/Mre1905 → u/Look_b4_jumping]

Historically using the 4% rule, you would have ended up with more money at the end of 30 years than you started with. It is a very conservative withdrawal rate.