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Withdrawal Rate
Definition
The withdrawal rate is the percentage of retirement savings withdrawn annually to fund living expenses, with 4% being the traditional guideline.
Explanation
The 4% rule, based on the Trinity Study, suggests withdrawing 4% of your retirement portfolio in the first year, then adjusting for inflation annually. This approach aims to ensure savings last 30 years. A lower withdrawal rate (3-3.5%) may be prudent for early retirees or conservative investors.
Withdrawal strategy should consider market conditions, tax implications, required minimum distributions, and Social Security timing.
Example
A $1 million retirement portfolio using the 4% rule provides $40,000 in the first year of retirement, adjusted for inflation in subsequent years.