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Retirement Spending
Old 08-21-2007, 01:50 PM   #1
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Retirement Spending

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The idea is that by boosting your withdrawal by the inflation rate each year, you maintain your purchasing power throughout retirement. And it can also make budgeting a little easier since you know how much money will be coming in each year. As to your question of whether that 4 percent plus subsequent increases for inflation should include dividends and interest, the answer is yes. The idea is to draw a given amount of money from your portfolio, regardless of whether you get that amount from interest, dividends or sales of investments.
Starting at a low rate also makes it less likely that the combination of withdrawals and a big market downturn early in retirement will put so large a dent in your portfolio that it can't recover, forcing you to dramatically scale back your draws later in retirement.
On the other hand, if you get through the first five to 10 years of retirement without running into a stretch of lousy returns, sticking to the 4 percent rule could not only prevent you from running out of money; it could also result in you having a huge portfolio late in retirement despite your withdrawals. That might not be such a bad thing if you're able to live the life you want on a 4 percent initial withdrawal rate. After all, having a cushion of assets could come in handy in the event you need some extra dough to handle health-care costs in your later years. Or you may just want to leave some money to heirs. But retiring on the 4 percent plan and ending up with a big fat portfolio balance late in life wouldn't be such a wonderful thing if it meant you had to live like a pauper during most of your retirement. What would be the fun in that? Of course, you can avoid that possibility by starting out with a higher withdrawal rate, say, 5 percent or 6 percent, which will give you more spending cash.
When I started reading this I thought that it was rather simplistic, but as I read on I realized what a nice job the author did in giving a rather complete explantion in a pretty short response to the Q.

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Old 08-21-2007, 05:56 PM   #2
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Originally Posted by mickeyd View Post
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When I started reading this I thought that it was rather simplistic, but as I read on I realized what a nice job the author did in giving a rather complete explantion in a pretty short response to the Q.
Nice article! Thanks. He didn't necessarily say anything new, but put forth a lot of common sense ideas very clearly in an article that was fun to read.
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