David John MarottaDavid John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
Host: Is 4% a safe withdrawal rate during retirement?
David Marotta: The safe withdrawal rate depends upon your age not all of our clients are aged 65, not all of them are going to take 4% out. What we did is, we like to work backward from your last year, your last year you can spend a 100% of your assets, because that's a year that you are going to die. Let's assume that's age 100. Then at age 99, you can spend a little bit over half of your assets, knowing that the little bit under half will grow and appreciate to have the next year of your last year. So at age 99 you can spend a little over half, at age 98 you can spend a little over third, at age 97 you can spend a little over fourth and on and on backwards. It turns out that because you are counting on growth during those years, it doesn't trail off just as a fraction, it actually trails off sort of gradually. What we have found is at age 65, you can spend about 4.
36% of your portfolio and we call that your safe withdrawal rate. By the time you have reached age 73, then you can start spending about 5% of your portfolio and so every year the percentage goes up and every year you can spend a little higher percentage, and hopefully your portfolio is appreciating at least 3% over inflation. So maybe it's a little higher a percent or maybe even a little higher number at times. And so that will give you a cost of living increase and if the markets do better than our projections, then it gives you cost of living plus a little bit more standard of living increase.