A lot of people who I talk to about early retirement have concerns about running through all of their money. It’s a fear that keeps them from taking the leap and realizing their early retirement dream. So I want to share my Early Retirement 4 Percent Withdrawal Strategy which is far more than a set it and forget it plan.

First off I want to clear-up any confusion about what the 4% withdrawal-rate guideline is. The purpose of the rule was to set a guideline that could be considered a sustainable withdrawal rate over a 30 year retirement time-frame. There was also other assumptions tied to it. An assumption that your portfolio was a 60% equity/40% bond asset allocation.

Basically the 4% withdrawal-rate guideline goes like this. You take the total sum of your portfolio. Meaning totaling up all of your retirement and non-retirement accounts. Then multiply the sum (your overall total) by 4% or .04 to reveal how much you can safely withdraw. This is the amount you pull and live on in retirement without running out of money. The second part of the strategy is about inflation. Every following  year you can increase your first withdrawal amount by the inflation rate. The 4% withdrawal-rate guideline assumes you want to set your withdrawal rate and keep the same spending power throughout your retirement by adding in inflation.

Note: For more information and other withdrawal strategies see my Withdrawal Strategies page.

Here is an example Portfolio Scenario Using a 4% Withdrawal Strategy

Your total IRA amount is $650,000 and you have another $150,000 in non-retirement accounts so your total portfolio is $800,000.

Multiply that $800,000 by 4% and you get $32,000 that you can safely withdrawal under the 4% guideline.

If in year two of your retirement the inflation rate was 3% then you multiply your $32,000 by 3%. w\Which means in year two you now withdraw $32,960 and you would repeat this inflation calculation every year. If in year 3 the inflation rate was 4% then $32,960 X 4%= $34,278 is your third year withdrawal amount.

Now obviously calculating what you can safely withdraw under the 4% guideline doesn’t necessarily mean much if your lifestyle cost is higher.

If in this portfolio example you needed $40,000 to fund your retirement in year one then you would divide that amount, $40,000 by your total portfolio sum of $800,000. That allows you to figure out what your withdrawal rate is going to be. $40,000 divided by $800,000 means your withdrawal rate comes in at .05 which is 5%.

Would a 5% withdrawal rate mean the End of you safe and sustainable withdrawal rate world? Maybe, maybe not. It depends on what else is happening in the coming years. Which is the point of this post.

My Early Retirement 4 Percent Withdrawal Strategy

The 4% withdrawal-rate guideline is based on a 30 year retirement time-frame. Which indicated to me that it is primarily a guideline for retiring at a more traditional retirement age. I wanted to feel comfortable funding my retirement beginning at age 51. When I retired, the amount I needed to fund my real lifestyle cost turned out to be 4.6% of my portfolio. On the surface you would think I should be worried. Worried because I am at a withdrawal-rate above the recommended 4%. On top of that I am retiring early. Meaning I will need my money to last for up to 40 years not just 30.

But I wasn’t worried and here is why.

The 4% withdrawal-rate guideline is after all just a guideline. It’s a good starting point. For someone retiring early it doesn’t account for changes in income and costs in the many years to come.

For example, when I retired the first time I had a mortgage of $844 which was part of my lifestyle cost. Once paid off I will need less than the 4.6% withdrawal rate and can then reduce it. I will also start collecting Social Security at some point in the future limiting the amount of time that my portfolio is having to fund my entire retirement lifestyle cost. Again reducing the amount of my needed withdrawal rate. All of this assumes I don’t allow lifestyle inflation of which I can have some control over.

Retiring Early and Often

I knew that I would eventually pursue opportunities of interest. Opportunities that I would be passionate about doing. That is what happened and the money I made added to my portfolio. I was able to pay off the mortgage within 18 months after starting a second career When I retired a second time at age 56 my withdrawal rate was now at 4% of my portfolio balance. That’s because I reduced my lifestyle cost of the mortgage and I added to my portfolio. I also experienced investment gains during the time-frame.

So I didn’t lock in at 4.6% of my portfolio and then just set it and add the inflation rate each year. As income and costs change over time I believe in re-assessing the overall withdrawal rate. Then make adjustments as necessary. I also keep one to two years of funding in cash or near cash. That’s so any time the investment markets are down I don’t have to pull money out those investments. Sure that cash is dead money as far as earnings go but it is my peace-of-mind. It’s my early retirement comfort insurance.

Everyone’s Situation is  Different.

When you decide to work through a withdrawal strategy for yourself look at the changes that you see coming in the future that will reduce your withdrawal rate and dependence on your portfolio to fully fund your retirement. Think about things like a mortgage payoff, receiving Social Security, or a Pension/annuity that kicks in at a future date. Maybe you plan on selling your house and downsizing leaving a lump sum to add back into the portfolio or you see a reverse mortgage in your future.

Rather than just setting a withdrawal rate and adding in the inflation rate each year going forward, reassess your needs and the portfolio balance. One way you can do this is take 4% of your balance each year, not a running initial 4% plus adding in the yearly inflation rate. That would mean at times when your portfolio balance was down due to a bad market you would have to live on less. When it was doing well you would have more. That is tough for most people to pull off but it would mean you would most likely never run through your money.

Your investment portfolio can be one that pays out Stock dividends and interest from Bonds. You then only withdraw that passive income money and leaving all investments in place. This is a for certain way to never run out of money. Unless you picked high dividend paying risky stocks or junk bonds and they went bust.

The thing is find YOUR  Early Retirement 4 Percent Withdrawal Strategy. Perhaps because it may not even be 4%, call it your early retirement comfort rate strategy. That way you don’t worry and don’t delay living your early retirement dream.

Use a Good Retirement Calculator to test your strategy

I recommend you run your numbers through the awesome FIRECalc retirement calculator. You can factor in things like future Social Security or changes in spending in the future. You can get a pretty good idea of your chances that your money will last your lifetime. I also have some other pages here on the site that details the various withdrawal strategies and another about using a Bucket Strategy that you may be interested in.

Do you have an Early Retirement Withdrawal Strategy?

Comments are always welcome.