Rethinking the 4% retirement spending rule

How much can I afford to spend in retirement? For all but the wealthiest, that’s the big question. 

For guidance, many retirees rely on the so-called 4% rule, which says you can withdraw 4% from your savings in the first year of retirement, and then give yourself an annual raise to account for inflation each year, without running a big risk of running out of money. 

But as asset values plummeted in 2008—and interest rates have remained at ultra-low levels—the 4% rule has been thrown into doubt. The big concern: For those with the bad luck to retire into a bear market, the danger of running out of money rises—even if one faithfully adheres to the 4% rule.

DYI Comments:  The reason is simple.  The 4% rule currently under more normal (lower) valuations makes all the sense in the world. Today of course between animal spirits and the Federal Reserves sub atomic low interest rates bonds and stocks are in nose bleed levels.  Anytime the 10yr estimated average annual return is lower than the 4% withdrawn figure you will be spending down your capital.  Unfortunately bonds are of little help as their expected return is less than the 4% threshold.  Until interest rates rise and/or improved stock returns a withdrawn of 1% or 2% is the most you can do.

Estimated 10yr return on Stocks

Using 5.4% as the historical growth rate of dividends and 4.0% as the ending yield.

Starting Yield*---------return**
1.0%-----------------------(-5.7%)
1.5%-----------------------(-1.7%) 
2.0%----------------1.3% You are here.
2.5%------------------------3.8%

3.0%------------------------5.9%
3.5%------------------------7.8%
4.0%------------------------9.4%
4.5%-----------------------10.9%

5.0%-----------------------12.3%
5.5%-----------------------13.6%
6.0%-----------------------14.8%
6.5%-----------------------15.9%

7.0%-----------------------17.0%
7.5%-----------------------18.0%
8.0%-----------------------19.0%

*Starting dividend yield of the S&P500-**10yr estimated average annual rate of return.

DYI