Fixed Income Withdrawal Rates: 2% vs. 4% Considerations

Retirees should consider a lower withdrawal rate for flexibility and longevity in their financial planning.

### Understanding Withdrawal Rates in Retirement Planning
* 💰 The **4% withdrawal rate**, derived from the Trinity study, is commonly used as a guideline for retirement planning, particularly for those retiring at the **traditional age of 65**.
* 🕒 However, with the rise of the FIRE movement, individuals looking to retire earlier may need to consider a **lower withdrawal rate**, such as **2%**, to ensure their portfolio **lasts throughout a longer retirement period**.
* 📉 It is important to recognize that retirement spending is not static; it can **fluctuate based on lifestyle choices and other income sources**, leading to **varying withdrawal rates each year**.
* 🔄 For instance, some years might require a withdrawal rate of **3%**, while others could see it rise to **5.5%**, and eventually drop to **2%** once Social Security benefits commence.
* 📝 Younger individuals can benefit from "napkin financial planning" as a starting point, using the **4% rule** to set retirement savings targets and metrics.
* 🤝 Engaging with a financial advisor can help navigate the complexities of retirement planning, as they can provide **personalized strategies based on individual circumstances and goals**.
* 📊 Regularly updating financial plans with tools like **Monte Carlo simulations** can help account for life changes and ensure a **tailored approach to retirement income**.
* 🌟 Ultimately, understanding that **each person's financial situation is unique** is crucial in maximizing retirement **enjoyment and security**.

I've often heard 4% used for a fixed-income withdrawal rate. Would it ever be appropriate to use a smaller rate, say 2%, to have increasing income each year in retirement? Can you speak to this at all? But I mean, I think when you say fixed

income withdrawal rate, really it's a safe withdrawal rate based on the Trinity study, and and everybody—and I'll let Bo kind of add where the rules vary—but the Trinity study was assuming a normal retirement age of 65, you know, and and that's where the 4% rule kind of came from. Now, look,

things have gotten a little different because there's trends in personal finance where people are saying, 'Hey, I don't want to work until I'm 65.' But so how does all that—I mean, what would you add to what Tyler's saying, and how does

time impact that? Yeah, so one of the things we've done a lot of episodes on is the FIRE movement, or as we like to call it, the FINE movement for folks who want to exit the workforce earlier than traditional retirement age. And what we said was the 4% rule is a great back-of-

the-napkin solution for folks that are going to have a normal retirement. If you're going to retire at age 65 and you're going to live until 85 or 95, 4% likely works. But if you're someone who is going to leave the workforce early, then

you may want to think about using a lower withdrawal rate because the portfolio is going to have to provide for you for a longer period of time. Now, here's what happens: So, one, yes, could I use a lower withdrawal rate than 4% to be able to account for fluctuations in my

Spending for sure, and I think there were even some inflation assumptions inside the original Trinity study when they said the 4% withdrawal rate. But here's what we find in practice, because we obviously do this as our day job with a number of retired individuals.

Most folks, when it comes to their retirement living expenses, it's not a flat percentage. It's not like, okay, it's January 1st, what's my percentage? Okay, how much can I pull out? Okay, I'm going to do that, and then get to December 31st. We try

to build it to where it's based more on, okay, what's the lifestyle that you want to live in retirement? Then what are the other income sources? And you're going to find that that withdrawal rate varies through time. Some years it might be 3%;

some years it might be 5.5%, and some years it might be 4%. Then Social Security starts, and then your withdrawal rate drops down to 2% or 2.5%. So there are a number of ways, when you get to retirement, where

it's actually much more dynamic than I think we think it is academically. But for planning purposes, when you're trying to figure out your number, you're trying to forecast what should I be saving towards? If you think you want to have a higher lifestyle, or if you think that

you want to have a longer retirement or financial independence period, I don't think there's anything wrong with using a lower than 4% withdrawal rate to do that. Well, here's the reality: I think when you're younger—I'm talking my 30-year-olds, my 40-somethings—it's nothing

Wrong with having what I call 'napkin financial planning' rules, and that's what the safe withdrawal rate, or the 4% rule, does for you. Let you kind of see what the target is so you can start having some metrics to measure yourself by when you get within 5 years

Maybe even 5 years of actually landing the plane. Um, it's just you need more because it gets into everything B said. This is the part where I remember I tell you guys, look, you don't have to go looking for it; it's going to find you

Naturally, this is one of those complexities where the personal/impersonal finance... you don't want—you don't—you've only got one retirement; you don't want to try to figure this all out all by yourself. Go talk to somebody who's done this hundreds, if not even

thousands of times, so that you can know where your blind spots are, know how to handle this. And that's one of the main things we're doing is, you know, we're running the Monte Carlo simulations every year, updating it for what life goals are coming your way, um, because it

sounds cool in practice to say, 'Hey, I'll just make sure I have this,' and in most scenarios it works, but every now and then you need to have something that customizes this for your life because, um, you know, we all look like humans from a

far off, but then when you get really close, your eyes... we all have a lot of differences. You know, we... there's a lot of unique things about every one of us that makes us special. So make sure you're maximizing this time you get on

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Fixed-Income Withdrawal Rates and the 4% Rule

Discussion on the common 4% withdrawal rate for retirement income.

Explanation of the 4% rule's origin in the Trinity study, assuming retirement at 65.

The impact of earlier retirement on withdrawal rates is questioned.

The 4% rule is suitable for traditional retirement at 65, but may be insufficient for early retirement.

Using a lower withdrawal rate (e.g., 2%) to account for market fluctuations and longer retirement periods is suggested.

Retirement spending isn't a fixed percentage; it varies yearly.

Retirement planning should consider lifestyle, other income sources, and the variability of withdrawal rates.

Withdrawal rates can fluctuate (3%, 5.5%, 4%), and decrease with Social Security benefits.

Retirement income planning is more dynamic than academic models suggest.

Planning for Retirement and Using the 4% Rule

Using a lower withdrawal rate is acceptable for planning, especially with longer retirement or higher lifestyle goals.

The 4% rule is a useful guideline for younger individuals ('napkin financial planning').

The 4% rule helps set targets and measure progress within 5 years of retirement.

Complexities necessitate professional advice for personalized retirement planning.

Personalized Retirement Planning and Professional Advice

Seeking professional help is crucial due to the complexities of retirement planning.

Professionals utilize Monte Carlo simulations and adapt plans to individual life goals.

Generic rules may not suffice; personalized planning accounts for individual differences.

Emphasis on maximizing retirement planning to suit individual needs.