Even if you did nothing but stick the money in an S&P 500 index fund, the historical average is about 10% per year.
* With dividends reinvested, before inflation
Say S&P dividends are always 1.5%
10% total return - 1.5% dividends (ignoring the quarterly compounding aspect for simplity) = 8.5% in equity growth
Say you wouldn't reinvest them because you want cash flow equivalent to 4% of your principal
4% drawdown rule - 1.5% dividend paid out as cash and not reinvested = 2.5% drawdown needed
You really only need to pull 2.5% with the 4% rule, no? (0.625% a quarter 4 times a year?)
However, inflation is usually 2%, so you need to pull 2.5% + 2% = 4.5% every year on top of the 1.5% dividends being paid out to you? Is this accurate?
I think it is more a rule of thumb meant to be simplistic for modelling purposes, less a perfectly calculated system. I also believe the 4% rule is with the intention of keeping the principle mostly intact over 30 years of retirement.
Comments
* With dividends reinvested, before inflation
Say S&P dividends are always 1.5%
10% total return - 1.5% dividends (ignoring the quarterly compounding aspect for simplity) = 8.5% in equity growth
Say you wouldn't reinvest them because you want cash flow equivalent to 4% of your principal
4% drawdown rule - 1.5% dividend paid out as cash and not reinvested = 2.5% drawdown needed
You really only need to pull 2.5% with the 4% rule, no? (0.625% a quarter 4 times a year?)
However, inflation is usually 2%, so you need to pull 2.5% + 2% = 4.5% every year on top of the 1.5% dividends being paid out to you? Is this accurate?
I think it is more a rule of thumb meant to be simplistic for modelling purposes, less a perfectly calculated system. I also believe the 4% rule is with the intention of keeping the principle mostly intact over 30 years of retirement.