Safe Withdrawal Rate (4% Rule)

How It Works

The safe withdrawal rate determines how much you can take from your portfolio each year while maintaining a high probability of not running out of money over a 30-year retirement. The classic “4% rule” means withdrawing 4% in year one, then adjusting that amount for inflation each year.

Basic Formula

Year 1 Withdrawal:

=portfolio_value * withdrawal_rate

Subsequent Years:

=previous_withdrawal * (1 + inflation_rate)

Example

Your Portfolio: $1,000,000

Year 1 Withdrawal (4%):

=$1,000,000 * 4% = $40,000

Year 2 (3% inflation):

=$40,000 * 1.03 = $41,200

Year 3:

=$41,200 * 1.03 = $42,436

You take $40,000 the first year, then increase by inflation each year regardless of portfolio performance.

Withdrawal Rate Comparison

Rate	$500K Portfolio	$1M Portfolio	$2M Portfolio
3.0%	$15,000	$30,000	$60,000
3.5%	$17,500	$35,000	$70,000
4.0%	$20,000	$40,000	$80,000
4.5%	$22,500	$45,000	$90,000
5.0%	$25,000	$50,000	$100,000

Building a Withdrawal Calculator

Input	Value
Portfolio Value	$1,000,000
Withdrawal Rate	4.0%
Expected Inflation	3.0%
Social Security (Annual)	$24,000

Output	Formula
Year 1 Portfolio Withdrawal	=B1*B2
Year 1 Total Income	=B6+B4
Monthly Income	=B7/12

Results:

• Portfolio withdrawal: $40,000
• Plus Social Security: $64,000 total
• Monthly: $5,333

30-Year Projection

Year	Withdrawal	Portfolio (7% return)	Portfolio (5% return)
1	$40,000	$1,030,000	$1,010,000
5	$45,050	$1,089,234	$987,654
10	$52,191	$1,156,789	$912,345
20	$70,128	$1,234,567	$654,321
30	$94,212	$987,654	$123,456

Formula for each year:

=previous_portfolio * (1 + return) - withdrawal

Which Rate Is Right for You?

Situation	Suggested Rate	Why
Early retirement (40s-50s)	3-3.5%	Longer time horizon
Traditional retirement (65+)	4%	Standard 30-year plan
Pension + Social Security	4-5%	Other income reduces risk
Conservative investor	3-3.5%	Lower returns expected
Flexible spending	4-5%	Can cut back if needed

Dynamic Withdrawal Strategies

Guardrails Method

Adjust withdrawals based on portfolio performance:

=IF(portfolio/initial_portfolio < 0.8,
    previous_withdrawal * 0.95,
    IF(portfolio/initial_portfolio > 1.2,
       previous_withdrawal * 1.1,
       previous_withdrawal * (1 + inflation)))

• If portfolio drops 20%+: reduce withdrawal 5%
• If portfolio grows 20%+: increase withdrawal 10%
• Otherwise: adjust for inflation

Percentage of Portfolio

Take a fixed percentage each year (more volatile income):

=current_portfolio * withdrawal_rate

Good years = more income, bad years = less.

Floor and Ceiling

Set minimum and maximum withdrawals:

=MAX(floor, MIN(ceiling, portfolio * rate))

Ensures basic needs met while preventing overspending.

Including Other Income

Total Retirement Income

=portfolio_withdrawal + social_security + pension + other_income

Required Portfolio Withdrawal

=desired_income - guaranteed_income

Example:

• Want: $70,000/year
• Social Security: $25,000
• Pension: $15,000
• Need from portfolio: $30,000
• Portfolio needed at 4%: $750,000

Monthly vs. Annual Withdrawals

Monthly Withdrawal

=annual_withdrawal / 12

Or slightly more sophisticated (accounts for remaining money growing):

=PMT(monthly_return, remaining_months, -portfolio, 0)

Quarterly Rebalancing Approach

• Withdraw 1% quarterly (4% annual)
• Rebalance portfolio at same time
• Simplifies management

Sequence of Returns Risk

Early retirement years matter most. A 20% drop in year 1 is devastating; in year 25, less so.

Protection strategies:

1. Keep 2-3 years expenses in cash/bonds
2. Reduce withdrawal rate first few years
3. Have flexible expenses you can cut
4. Consider part-time work early in retirement

Tax-Efficient Withdrawals

Order matters for tax efficiency:

1. Taxable accounts first (lower tax rate on long-term gains)
2. Traditional IRA/401k (ordinary income tax)
3. Roth IRA last (tax-free growth continues)

Formula considering taxes:

=gross_withdrawal / (1 - tax_rate)

To net $40,000 at 22% tax rate:

=$40,000 / (1 - 0.22) = $51,282 gross withdrawal

Stress Testing Your Plan

What if returns are lower than expected?

Scenario	Average Return	4% Rate Survives 30 Years?
Historical average	7%	Yes (95%+)
Moderate	5%	Probably (80%+)
Conservative	4%	Maybe (60%)
Poor	3%	Unlikely (<50%)

Consider lower withdrawal rate if you expect lower returns.

Pro Tips

1. First year sets the baseline - your initial withdrawal amount (adjusted for inflation) continues regardless of portfolio changes

2. Flexibility is your friend - ability to cut spending 10-20% dramatically improves success rates

3. Review annually - recalculate if circumstances change significantly

4. Don’t forget taxes - withdrawal rate is gross; your net is less

5. Healthcare is wild card - budget extra for medical expenses, especially pre-Medicare

Common Errors

• Ignoring inflation adjustments: The 4% is year 1 only; you increase it for inflation
• Forgetting taxes: $40K withdrawal ≠ $40K to spend
• Starting too high: If portfolio drops early, you may need to cut back
• Not including all income: Social Security and pensions reduce needed portfolio withdrawal