"The 4% rule makes a number of assumptions that could render it less effective. It assumes a fairly even mix of stocks and bonds and certain market conditions. Orman thinks markets are unpredictable, interest rates aren't what they were back when the 4% rule was established, and Americans are living longer. This combination makes the 4% rule a bit dangerous, in her opinion. Orman therefore recommends starting with a 3% withdrawal rate, or even less, depending on how your portfolio is invested."
"What does that mean for you? Let's say you retire with $1 million in savings. With the 4% rule, you'd be looking at about $40,000 a year in income from your portfolio. With a 3% withdrawal rate, you'd be looking at $30,000 a year. Clearly, that's a huge difference, and one you may need to take steps to compensate for."
The 4% rule prescribes withdrawing 4% of a retirement portfolio in the first year and adjusting subsequent withdrawals for inflation to aim for a 30-year portfolio lifespan. The rule assumes a stable mix of stocks and bonds and certain market conditions. Critics contend that unpredictable markets, lower interest rates compared with earlier eras, and longer life expectancy make a 4% starting withdrawal rate risky. An alternative recommendation is to begin with a 3% withdrawal rate or lower depending on portfolio composition. A smaller withdrawal rate reduces annual income, which may require working longer or finding other income sources.
Read at 24/7 Wall St.
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