The 4% Rule, does it work for early retirement?
I have been looking into the safe withdrawal rate for retirement. The standard 4% Rule seems fairly mainstream for when you turn 65, but how about for early retirement? Say 40 or 50 years of retirement, not the standard 30 year figure everybody seems to use. The 4% Rule uses a 50/50 bond equity asset mix adjusted for inflation which should last 30 years of retirement. Another early retirement blog that has written extensively on the subject is Early Retirement Now (everything you need to know about safe withdrawal rates you will find there).
Bill Bengen was the creator of the 4% Rule, his research is based on data going back to 1926. He tests the withdrawal rates for retirement dates beginning with January 1, 1926. The average safe withdrawal rate is 5% However, if you experience a major bear market early in retirement, as in 1937, 1968 or 2000, or add in heavy inflation, as occurred in the 1970’s, and it takes you down to 4.5%. If you retired in 1968, you went thru two bear markets early on and the inflation of the 1970’s. Those who experienced big bear markets early in retirement, appear to be doing okay with 4.5% withdrawal rate. But if we were to have decades of high inflation, like the 1970’s then things could change. Inflation and a bear market are the retiree’s worst enemy. Bill’s quote is “that if you plan to live forever, 4% should do it.”
Others say a 3% withdrawal rate will be safest if you expect a longer retirement, because there are many unknowns and there is the Sequence Of Returns.
What we plan to do;
Plan for the worst and expect the best. If there is a few good years we will travel a little more and if there is a few bad years we will cut back on our expenses. We have many hidden back-up/emergency scenarios in our retirement plan. The 4% Rule seems to still work, but I will be getting professional advice before make any major decision.
The 50/50 asset mix is a little too conservative for us, I think in retirement we will go with a bucket approach and have a few years of our basic living expenses in a laddered GIC. Keeping a 60/40 equity bond asset mix and taking a 4% withdrawal rate till I have the mandatory rate at age 71.
There should be some sort of government old age pension and CPP to collect but that is more of a guesstimate. We will have to figure that out when we are closer to collecting as there will be changes before we are ready to collect it in 20 years.
We do not consider our TFSA in any figures as that will be for our fun money and hope to never touch the principal. Just spend the dividends. You can see our portfolio structure Here. I never equate our home in our retirement plan as that is our emergency back up plan if ever needed. That’s tentatively our plan but many things can change. There is two great articles one by Jonathan Chevreau and the other by Michael Kitces that you should read. It covers the 4% Rule in a lot more detail than I have here. Also check out the word of the week definition of the 4% Rule.