You’ve heard about the 4% Rule - aka 4% Safe Withdrawal Rate - aka the Multiply by 25 Rule. But, is it safe? To answer this, we have to look at where this rule of thumb came from: Back in 1994...
(If you haven't heard about the 4% Rule? Start here.)
In the early 90s an "obscure advisor" (his words not mine) named Bill Bengen published a paper. He did a study to figure out how much money someone could safely take out of a retirement account and not run out of money after 30 years.
The question still persists, is the 4% Rule Safe?
I say yes.
He had strict assumptions so that the study applied to everyone, and anyone would be able to improve on.
To find the SAFE MAX, the percent that anyone could use, Bengen had to test all the combinations of his specified asset allocation, withdrawal rate, and starting year.
The withdrawal rates he tested ranged from 2% to 8%, to see how long they would last with each asset allocation. Each combination was tested for every starting year that data was available for, beginning in 1926. Note: Bengen has since updated his study with the last 20+ years of data.
In Year One, the withdrawal was equal to whichever withdrawal rate was being tested.
In Years 2+, the withdrawal was the dollar amount from the previous year adjusted for inflation. Not the original percent!
Bengen found that historically, 4.15% was the largest starting withdrawal rate someone could take out and still have money after 30 years. He called this the Safe Max, and thus the 4% Rule was born.
This has since been updated to 4.5%, but according to Bengen in 2017:
SO IS IT SAFE?
Let's go over the facts.
The 4% Rule was developed by using the worst times in US history. It is conservative.
The study assumes you'll never have any income, social security, or emergency fund. Conservative (and probably wrong).
It assumes you won't cut back if the market goes south. Conservative (and dumb).
So it it safe? Yes.
For the 4% Rule (should be the 4.5% Rule) to fail we would have to see the worst ever times in US history. And not do anything about it.
Of course it's possible to see worse times than we've seen so far, and to mismanage money. But even after all that you'd still have a Ton of money to get back on your feet with. So it's not totally foolproof, but it is very, very safe.
There are a lot of articles out there about the 4% Rule, here are a few that I like.