"This is basically a strategy of taking all of the investments you have and withdrawing 4% of the balance during your first year of retirement. After the first year of retirement, you now adjust the dollar amount to withdraw based on inflation. The prevailing idea is that if you follow the 4% strategy, you are not likely to outlive your money for at least 30 years, which is often longer than most people live during retirement."
"In other words, let's say you have $1 million total for retirement, which in year one, you would withdraw $40,000 to live on. However, if the cost of living rises 2% in the same year, you would increase your percentage withdrawal next year by the same amount, so year two would require a $40,800 withdrawal, and so on for the next 30 years."
The 4% rule prescribes withdrawing 4% of total retirement investments in the first year and thereafter increasing the dollar amount by inflation each year. A $1,000,000 portfolio would support a $40,000 initial withdrawal, rising to $40,800 if inflation is 2% the following year. The rule aims to allow retirees to avoid outliving savings for at least 30 years. The rule assumes a fixed spending path adjusted only for inflation and disallows larger withdrawals in any single year. Market conditions and evolving retirement needs have shifted, raising concerns about the rule's rigidity and suitability today.
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