A 4% Withdrawal Rate in This MarketSubmitted by Mission Financial Planning on August 16th, 2017
A convenient truth of a 4% withdrawal rate in this market is that dividends and bond income will come pretty close to covering it. However, once you start withdrawing more than the income the portfolio can predictably produce, you are relying on growth to fund your spending. If there is not growth, or the portfolio experiences a loss, you could find yourself having to spend the principal, which is analogous to "eating the seed corn" as we might say in the Midwest. You’ll have less money the next year to produce the income you need, which can lead to spending principal again – and a vicious cycle begins.
Once cash outflows are occurring, it’s not enough for investment returns to average out in the long run. There has to be a plan for creating the needed income consistently, or having cash on hand, so principal isn’t depleted in the down years.
Over the next few weeks I'll be writing a series of posts about the 4% withdrawal rate; how we arrived at the 4% target, whether it's still a good number, and when taking more than 4% might work.