The 4% rule suggests selling 4% of your principal per year.
No, it doesn't. You misunderstand the 4% rule. The 4% rule states you sell 4% of your principal in the first year, then inflation-adjust the 4% value every year. If the stock market rockets and your portfolio jumps 30%, you still only sell/spend 4%+inflation. If your portfolio drops 20%, you still sell/spend 4% of first year + inflation.
There have been many times in history where the broad index has been flat for years. 2000 to 2010 is a famous more recent period. Would you be comfortable selling 4% a year into year 9, having watched your wealth decline materially over the last decade?
This is exactly why the 4% rule has the allocation be 60% equities, 40% bonds, rebalancing every year. Bonds have their place for reducing volatility.
I guarantee you the retiree in bonds getting 5% and maintaining 100% of their principal is experiencing much less anxiety. And bonds give you the optionality to swap to equities in a down market like 2000 or 2008
If you're 100% bonds, what criteria would you ever use to get back into equities?
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No, it doesn't. You misunderstand the 4% rule. The 4% rule states you sell 4% of your principal in the first year, then inflation-adjust the 4% value every year. If the stock market rockets and your portfolio jumps 30%, you still only sell/spend 4%+inflation. If your portfolio drops 20%, you still sell/spend 4% of first year + inflation.
This is exactly why the 4% rule has the allocation be 60% equities, 40% bonds, rebalancing every year. Bonds have their place for reducing volatility.
If you're 100% bonds, what criteria would you ever use to get back into equities?