Please choose the response below that best completes this statement: If you had a well diversified portfolio of 50% stocks and 50% bonds that was worth $100,000 at retirement, based on historical returns in the United States the most you can afford to withdraw each year is about ____ plus inflation each year to have a 95% chance that your assets will last for 30 years.
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E. Don't know
The correct answer is B. Only 38% of survey respondents answered this question correctly. This question reflects the 4% safe withdrawal rule that has been highly publicized and discussed in the press. The 4% rule is based on research that looks back at investment returns in the 20th century in the U.S. The research indicates that if you retire with $1,000,000, you could afford to take a withdrawal of $40,000 (4%) in the first year of retirement, increase it for inflation each year, and sustain that income stream for 30 years. The rule is good to know as it begins to help retirees understand how much can be safely withdrawn each year. It dispels the common misunderstanding that if the average return on the portfolio was 7%-8% then that amount can be withdrawn each year. Because of the ups and downs of the market, the sustainable withdrawal amount is much less than the average return on the portfolio. The rule also is a quick way to get a sense of just how much income can be provided by a lump sum amount. For example, $1,000,000 under this rule only generates $40,000 of inflation-adjusted income. The research is based on historical returns and many question whether it is sustainable going forward. It is also just one of many factors that should be considered in determining how much can be withdrawn in retirement.