I’m 48 with a $1 million retirement portfolio – would recalculating my 4% withdrawal every year let me spend more safely?

Finding the perfect withdrawal rate is something that all prospective retirees should do well ahead of time. Undoubtedly, the so-called “4% rule” that entails drawing down 4% of one’s retirement nest egg per year is popular among most. But, as always, rules of thumb aren’t the perfect fit for everybody. Some retirees, especially younger people seeking to embrace the FIRE (Financial Independence, Retire Early) movement, may have a rather limited sum saved up and may be more than willing to go for a higher, more aggressive withdrawal rate as they seek to make retirement a possibility, even with a FIRE number (the net worth one shoots for before aiming to retire) that’s on the smaller side.

Indeed, going after a higher withdrawal rate and a lower FIRE number comes with more than its fair share of risks. And for an early retiree, like this 48-year-old Reddit user who’s thinking about shifting to a 4% withdrawal rate, one could easily live another four decades, making the sustainability of one’s nest egg a top priority. At the end of the day, having a steady passive income stream in perpetuity means more than how young one retires or how lavish one’s lifestyle is in retirement.

As always, taxation and other contingent and unforeseen expenses must be considered in addition to the occasional bump (or crash) in the road with the portion of one’s nest egg invested in risk assets like stocks and even lower-risk assets like gold and real estate. Either way, sticking by the 4% rule or even the more conservative 3.5% rule could prove prudent for many.

Would the 4% rule do the trick for this 48-year-old millionaire?

The “4% rule” is a gold standard for many for making a nest egg last for the long haul, regardless of its size. In the case of Reddit users, it’s more of a matter of whether the withdrawal amount can sustain them. Indeed, 4% on $1,000,000 amounts to $40,000 per year — a modest sum that some people can live on in areas of America where rents and grocery prices are lower. If the person owns their own home already, that’s one massive monthly expense taken out that could make $40,0000 per year more than enough to live on. 

Of course, not everyone is a huge fan of the “lean FIRE” (the most frugal of early retirements) lifestyle, as many head right back to work after a rather limited budget, which makes experiences such as vacations a tad out of reach. In any case, it’s my view that going for a 4% rule can allow their million-dollar nest egg to last. However, the big question is whether the withdrawn amount is enough to meet one’s needs if inflation picks up again. The last thing one wants to do is draw down more than 4% due to higher costs of living, essentially taking money out of markets that may also be in a tough spot.

Being dynamic with withdrawal rates could make sense.

In any case, I think moving the bar on the withdrawal rate between 3% and 4% could be a wise move, provided one can maintain a low-cost lifestyle. If the stock market tanks, cutting items out of the monthly budget could allow you to bring that withdrawal rate closer to 3% ($2,500 per month), so you’ll have more invested and will be in a better spot to bounce back alongside stocks.

And in those incredibly good years for markets, perhaps going to 4% could make a lot of sense as one seeks to find the right balance between growth and lifestyle in retirement.

The bottom line

In my view, the 4% rule should work for this younger retiree, but there are caveats. Market volatility and inflation are factors that may cause one to err on the side of caution. If stagflation is right around the corner, higher costs of goods and a market sell-off could coincide, making the risks of a higher withdrawal rate that much more pronounced. If the math checks out, perhaps drawing down less in bad markets and more in good markets could be a wise plan, given the nest egg still needs the means to grow in what could be a retirement that could span three, even four decades.

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