If you’ve spent any time in the financial independence community, then no doubt you’ve come across the 4% rule. The rule states that you can withdraw 4% of your retirement portfolio (adjusted for inflation) without running out of money. As such, 4% is known as the safe withdrawal rate.
If you play through the mathematics, the implication of the 4% rule is that you need 25x your annual expenses to retire. So many would-be early retirees structure their entire retirement plan around that 25x expenses number.
More recent studies have questioned the robustness of the 4% rule for U.S. markets. Amongst other things, they have found that 4% very quickly turns into 3.5% or below when you change equity/bond portfolio mix, retirement length and other factors.
But all of this work was done for Americans using U.S. markets data. The question for us Aussies is: Does any of this apply to us? If so, which parts?
In this article we begin to clarify some of the important — but still unanswered — questions about the 4% rule for Australians. We test whether the basic 4% rule applies to Australians and whether it needs to be adjusted for different portfolio mixes.
In future articles in this series we will elaborate on these findings and test follow-on questions, such as ‘what is the effect of retirement length of safe withdrawal rates?’, ‘can we improve safe withdrawal rates by mixing Australian and international investments?’, and more!