The 4% rule for safe portfolio withdrawals during retirement is a widely cited rule of thumb, probably because it’s easy to use and remember. But it also has its share of detractors, who have reasonably pointed out that it is an overly simplified take on an exceptionally complex problem.
Under the 4% rule, retirees withdraw a fixed dollar amount of their portfolios per year, adjusting that amount upward each year with inflation. The trouble is, that static spending rate ignores the fact that the portfolio’s value is fluctuating underneath the surface. By turning a blind eye to market conditions and portfolio performance and sticking with a fixed dollar amount withdrawal, the retiree may be taking out an outsized share of the portfolio in bad years and too little in good ones.