What is the Safe Withdrawal Rate?
Safe Withdrawal Rate is the percentage of your investment portfolio that you can withdraw annually, ensuring that your nest egg lasts for a specified period, typically 30 years or more. By keeping your spending within a certain range you can ensure that your savings will last.
The 4% Rule: The Foundation of SWR
Originated from the Trinity Study, the 4% Rule posits that a 4% annual withdrawal rate from your investment portfolio is generally sustainable over 30 years, given a diversified mix of stocks and bonds such as the S&P 500. This is because the average returns of a stock market indicator such as the s&p 500 over time have been 7-10%. Although this is a useful starting point, taking into consideration factors such as inflation, market volatility, and personal lifestyle choices is wise.
Does it Work?
Historical Returns: Historically, the S&P 500 has provided an average annual return of around 7-10% before inflation. After accounting for inflation, the real return is somewhat lower but still generally above the 4% withdrawal rate.
Inflation Adjustment: The 4% rule includes an adjustment for inflation, allowing retirees to maintain their purchasing power. Historically, the S&P 500 has provided returns that outpace inflation, making it a good fit for this strategy.
Long-Term Focus: The S&P 500 tends to perform well over the long term, even if there are periods of downturn. The 4% rule is designed for a 30-year retirement period, which provides a reasonable time frame for the market to recover from downturns.
Average growth with 4% withdrawal
Is it safe?
There's no 100% guarantee when it comes to investing, but over time the S&P 500 has been proven to provide relatively consistent returns for investors and is a way to grow your wealth with minimal effort for the long term. Look at the additional sources below to learn more.
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