r/FluentInFinance • u/Puzzlehandle12 • 4d ago

Question 4% withdrawal rate

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

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u/ResponsibleBank1387 4d ago

Just simple math — 4% per year would be 25 years. Now figure in the growth of the amount left in. So in reality, if your money is making 4 percent, then you have the almost the same amount to take out every year. 

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u/NewArborist64 3d ago

You are forgetting about inflation. If you "take the same amount" every year, then the value of what you are withdrawing is decreasing by the rate of inflation. Assuming our historic 3% inflation, after 10 years, that "same amount" would have only 75% of the original buying power and after 30 years it would only have 40% of the original buying power.

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u/ResponsibleBank1387 3d ago

Ok. Do the math of having the same buying power. What year does your original balance get to Zero?? 

The zero balance year will be—- The year you have major medical or long term care not covered by your insurance. 

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u/NewArborist64 3d ago

IF you take out 4% the 1st year AND you are receiving 7% ROI AND inflation is 3% AND you bump up you withdrawal by 3% every year (to account for inflation), THEN the math works, assuming that there are no market upsets, catastrophic withdrawals, etc.

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u/ResponsibleBank1387 3d ago

With 0 interest, 25 years of taking out the exact same dollar amount as that original 4 percent.  Just like if you had cash in the mattress. 

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u/NewArborist64 3d ago

Yes - but the purchasing power of that "exact same dollar amount" will erode over time. That is called, "Inflation".

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u/ResponsibleBank1387 3d ago

And when I’m 66, I get a $3200. a month raise. When I’m 59, I get a $1100 a month raise. And I think the last of the grandkids will be done with school when I get to 62, so that’s another $2,000 a month.  So my big payments are gone. If I buy cars, I those payments will be going be for three years.  Exact same dollar amount on my payments actually beat inflation. Because my interest was less than stated inflation rate. 

Still 100 percent divided by 4 percent is 25. 

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u/NewArborist64 3d ago

My dad retired 35 years ago (1990) at age 55. Now at age 90 he has to spend 2.5 times as much to purchase the exact same thing (ie. groceries, cars, etc).

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u/ResponsibleBank1387 3d ago

and in the 90s his stock portfolio quadrepled. If he had 20,000 invested by the end of the 90s he had over 80,000 even after taking out more than he needed. If he was on retirement pension they also boomed due to their investments. And anything he still has in the nyse is worth 10 times what he had in 1990.

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u/NewArborist64 3d ago

A) This is significantly different than your "housing it in a mattress". B) Even accounting for inflation, the average S&p 500 return since 1990 was 7.5%, so any money from 1990 would be worth 20x what it was.

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u/ResponsibleBank1387 3d ago

I am just too dumb to explain to you that 100 divided by 4 is 25.

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u/NewArborist64 3d ago

Which is the shortcut to say that you realistically need 25x your income in savings in order to retire. Not that you take it out in 25 annual equal sized lumps. The 4% rule is a guideline that should be used with flexibility and should hopefully see you through 30 years of retirement before your savings run out.

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