The general rule from most financial advisors is that if you withdraw 4% of your asset base, then you should have enough assets to last the rest of your life. This is a pretty good plan and it's way better than the 8% withdrawal suggestion that Dave Ramsey advocates.
What's a withdrawal rate? Here's an example: you have $1,000,000 in investable assets (this does not count your house), so a 4% withdrawal would give you $40,000 to live off of each year. With a projected 7% return, that gives you $30,000 to save in addition to keep up with inflation over the years.
Life is very uncertain as you know, so a withdrawal rate of 4% (according to past markets) would give you an 84% success rate if your retirement had to last over 50 years. This is pretty good, but it's still too low for me. I'd like to see a success rate of over 95%. In order to do that we have to look at a more conservative option. The Dave Ramsey plan only gives you a success rate of 3.2%. Now do you see why I think this is dangerous?!
That conservative option is a 3% withdrawal rate. Doesn't sound like much of a difference huh? Well when we calculate the difference via firecalc.com we get just this result. If you have a million in assets, living off of $30,000 plus working part time for $5,000 a year, and then using only a 3% withdrawal rate will come about as close as you can get a bulletproof retirement (with the exception of being a billionaire). If you want to grab that extra 5% though look at adding another 50% to your asset base and then withdrawal at only 2%. When you get to a 3% withdrawal rate or lower you're essentially living totally off your investment return and not using any of the assets. This is the ideal situation!
Start early, maximize your return, and save a lot by living way below your means. These are the 3 keys.
RSS Feed
