Is 4% the Correct Safe Withdrawal Rate at Retirement?
“I’ve got all the money I’ll ever need if I die by four o’clock this afternoon.”
Since William Bengen’s authoritative study of the subject, the rule of thumb for a safe withdrawal rate in retirement has been 4% of assets. Oftentimes, such as in the textbook for my financial planning class, it is cited as ground truth with very little else to explain why we should accept the number as ground truth.
Despite the vast importance of the safe withdrawal rate – meaning the amount of money that you can withdraw from your assets each year without running out of money – scant little is dedicated to it in textbooks. Pull out too much, and you’ll run out of assets and have to live on whatever you get from pensions and Social Security. Pull out too little, and you’ll have sacrificed an improved standard of living and potentially leave a much higher amount of money to your estate than you intended.
Why is the number so difficult to calculate? There are three main driving factors. The first is that you don’t know when you are going to die. According to the U.S. Centers for Disease Control, in 2009, the median age of death was 78.5 years old. This means that 50% of people in the U.S. will die before that age and 50% of people will die after that age. So, planning for success until age 78.5 gives you a 50% chance of outliving your money.
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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
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Hull Financial Planning is a Fort Worth, fee-only hourly financial advisor. The cities we serve in the Dallas-Fort Worth area include:
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