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Why 4% Withdrawals Don’t Work in Retirement

For years it’s been said if you withdraw 4% of your money in the market, you’ll never run out because the market gives you 7%.

Then 2001 and 2008 happened.

Today, many people will tell you varying percentages to take out of your portfolio, ranging from 2.8%-5%.1

If we knew the stock market would go up the way it has in the past ten years, there would be no problem with taking out more of your money. Unfortunately, we can’t be certain what the next ten years will mean for the market. Because every investor has a different set of circumstances ̶ including their portfolio, life expectancy, and financial needs ̶ one basic rule will not work for everyone.

I personally believe we will experience a 50% correction in the market. Nobody knows when it will happen, but a correction is going to happen. The Dow Jones has gone up over 400% since March of 2009.2 At some point, what goes up must come down.

Now, let’s say I’m wrong and a 50% correction never happens. If the market corrects itself by only 10% or 15%, then immediately rebounds like it has recently, we’re still in a very violent market. There have been several “flash crashes” since 2010, including a more than 1,000 point drop in the Dow Jones on May 6, 2010.3 The nature of the market is volatile – it goes up on an escalator and comes down on an elevator. Do not put your money at risk right now without having a game plan for a major correction.

The rules about pulling 4%, 5%, or even 2.8% of your investments implies you have a pile of money you can pull from with no guarantee. This is not a plan, but it’s a great way to run out of money. A better formula would be to generate 4%-5% income from your portfolio and protect it so your money goes to work for you. A formula you could work with would be taking 4% from your investable assets and adding your Social Security or pension.

The key is to not be dependent on market growth for the future just based on the averages from the past ten years. The previously stated formulas do you no good if a significant correction occurs in the future. The percentages you’ve been told won’t apply anymore.

Remember, it’s your money, and you can’t sacrifice what you’ve worked for based on numbers that may not even apply to you. Speak with a financial professional to determine the right plan for you.

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