Weekend Reading: How Safe is an 8% Withdrawal Rate?
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
What's your ideal withdrawal rate in retirement? Many experts agree with the four percent rule, while some say higher or lower. On a recent episode of The Ramsey Show, however, Dave Ramsey advocated for an eight percent withdrawal rate in a 100 percent stock portfolio.
READ THE ARTICLERunning the numbers: As author Nick Maggiulli points out, the problem with this withdrawal strategy is that it relies on extreme assumptions. Upon analyzing the viability of an eight percent withdrawal rate using historical simulations, Maggiulli finds a 42 percent probability of running out of money before the end of a 30-year retirement period. This emphasizes the importance of your sequence of returns, particularly in the first decade of retirement.
While Ramsey's eight percent withdrawal rate would have survived every 30-year simulation since 1978, Maggiulli suggests that a 4 percent or five percent withdrawal rate remains a more conservative and reasonable approach, based on tests with a 100 percent equity portfolio.
Anyone that is delivering financial advice and leading with their emotions probably isn’t the best source to help you create a bigger financial future. You want your Advisor to be empathetic, but ultimately, to take an objective, fact-based approach. Exercise caution if anger and personal attacks are the approach used to get you to see it their way.