Let's say you come up with $1million as nice round number. Again, this could as low as $500K in some countries and just for a very modest lifestyle up to $5 million for US, with many years to live, and with a nice lifestyle.
Daym you need $5m to live in the US?
Wellllll...
The traditional financial advisor .. um ...
advice is to plan on withdrawing 4% annually.
So 4% of $5M is $200K. Is that enough? Before taxes? It's an individual target.
Note that the 4% assumes normal retirement age and life expectancy. If retiring early or planning on living to 268 years of age, you might wanna reduce the percentage for calculation purposes.
I might have different assumptions about the traditional 4%, which I thought was meant to be a perpetually sustainable withdrawal rate because it is presumed that you are going to be able to average at least 4% per year returns (some years higher and some years lower). So, 4% should even work for someone who lives to 268 years old.
Some tricky parts are 1) withdrawing beyond 4% per year (and dipping into principle, and then if you end up living longer after you have depleted the principle).. 2) NOT being able to sustain at least 4% on average returns on your investments, and if you believe that is actually happening to your investment, then you need to reduce your withdrawal rate.. most investment advisors believe 4% to be safe because they believe that they can achieve at least that level of returns in a sustainable way or 3) you have miscalculated how large of a principle that you need.. and the 4% returns is not enough (that is in the $5million $200k per annum is not enough)...
Part of the reason that you would want to error in the high side of obtaining a higher principle before your retire (or pull the fuck you lever) is to attempt to be able to account for the various unknowns, including cost of living increases that might happen or prolonged downturn in the economy that would end up reducing your returns and things like that... Of course, if you expect that you are going to die earlier than you can dip in to your principle and even completely liquidate your principle, but then yeah, you could become kind of fucked if you continue to live..
Needs a bit of an attention span on the subject, but would recommend reading this series in case you want to learn more about the ‘safe withdrawal rate’. The guy really made an effort:
https://earlyretirementnow.com/safe-withdrawal-rate-series/I did a quick glance at the article, and I will concede that the article seems to presume that some capital (principle) depletion will be happening with about a 4% withdrawal rate, so I will concede that there are plans and professionals out there that presume capital depletion happens with a 4% depletion rate - which seems to have been what jbreher had said.
Surely, depletion of principle based on a 4% withdrawal rate was not my presumption, but I still believe that 4% remains a good guideline to consider as a target withdrawal rate - whether you believe that 4% is sustainable forever or not in terms of whether it is going to deplete your principle.
Surely, I was never asserting that timeline should NOT be accounted for, because even I have emphasized that both I expect to die an also that I don't have any intentional goal to leave assets to heirs, but if they coincidentally get assets, I don't have a problem with that. In other words, my personal best case scenario would be to have spent nearly every single penny while NOT being a burden on anyone and just leaving enough to cover the expenses of my burial and the handling of my estate so no one would have had to work for free in wrapping up my affairs.
So, surely everyone has to consider their timeline and also has to consider the extent to which they want to dip into their principle from the beginning of their liquidation period or if they prefer to defer dipping into their principle until a later date, and to have some supplemental plan that involves dipping into their principle or depleting most of all of it within a certain period of targeted time - and how their withdrawal rate is playing out, once they begin to employ their regular withdrawing of their income off of their investments.
The younger that the invest is when s/he begins to attempt to live off of passive investment income, the more potential years that such investor has to plan ahead for, so that would likely mean either erring by having a larger principle amount or monitoring much more closely how well his/her principle amount is holding its value after beginning to withdraw from it.
For example, if the investor is 5 years into making his/her 4% per year withdrawals, and his/her asset is performing way higher than expected, then s/he might want to tweak the withdrawal rate up a bit, and the contrary is true, too.
So, there is no way that I had been suggesting any kind of blind employment of a 4% withdrawal rate, but instead that each person has to monitor their withdrawal rate for themselves, and 4% remains a decent beginning guideline that can be tailored up or down, even before entering into the employment of the plan... and in order to approximate whether such a rate is going to be reasonable for the investor's situation (including considering historical standard of living and how that might be maintained or changed during the anticipated period of withdrawal).
