“When and how did the “4% withdrawal” become the MAGIC number? Why not 5%? Why not 3%?”
Long time ago.
The famous Trinity Study and others analyzed portfolio returns over 30 year periods to determine the appropriate ‘safe withdrawal rate’ from a portfolio that was 50% bonds/50% stock index.
They produced ‘curves’ showing the max rate you could safely take with high probability and survive ‘the worst 30 period in history’. Thus the 4% rule was hatched.
You can do your own analysis using FireCalc and other financial planners.
If you are living off dividends, they are typically 2-2.5% of their value, so you are likely taking less than 4% a year from your portfolio if all dividend paying stocks.
If your time horizon is shorter than 20 years, then you can take more - like 5%.
Put another way, if you don’t spend about 4% of your assets, your heirs likely will after forking over a chunk to the IRS/states in inheritance taxes on estate if it grows too big.
Otherwise, your heirs will get to spend it.
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