Savings

While conventional wisdom has it that one can retire and take 7% or more out of a portfolio year after year, this would not have worked very often in the past.[5] [6] When making periodic inflation-adjusted withdrawals from retirement savings,[7] can make meaningless many assumptions that are based on long term average investment returns.

The chart at the right shows the year-to-year portfolio balances after taking $35,000 (and adjusting for inflation) from a $750,000 portfolio every year for 30 years, starting in 1973 (red line), 1974 (blue line), or 1975 (green line).[8] While the overall market conditions and inflation affected all three about the same (since all three experienced the exact same conditions between 1975 and 2003), the chance of making the funds last for 30 years depended heavily on what happened to the stock market in the first few years.

Those contemplating early retirement will want to know if they have enough to survive possible bear markets such as the one that sent the 1973 retiree back to work after 20 years.

The history of the US stock market shows that one would need to live on about 4% of the initial portfolio per year to ensure that the portfolio is not depleted before the end of the retirement. [9] This allows for increasing the withdrawals with inflation to maintain a consistent spending ability throughout the retirement, and to continue making withdrawals even in dramatic and prolonged bear markets.[10] (The 4% figure does not assume any pension or change in spending levels throughout the retirement.)