It’s incredibly easy to make a bad decision, the consequences are severe, and you won’t even realize you’ve made a mistake until it’s too late to do anything. While there’s some debate about what a “true” safe withdrawal rate looks like (if one even exists), most investors really don’t have a clue what they’re doing.
Right now, the academics (with our own Wade Pfau leading the charge, and whose work is discussed extensively in this article) are debating whether a 3% or a 4% distribution rate is more appropriate. But neither of those numbers are even in the same ballpark as what Fidelity found that actual investors think is appropriate.
Roughly 40% of the respondent’s to Fidelity’s survey thought that they could reasonably spend 7% or more of their investment portfolio annually. And 19% thought that they could safely spend between 10% and 15% of their portfolios every year.
These numbers simply do not work. As the article notes, “Fidelity estimates [that distribution rates between 10% and 15%] could possibly deplete their savings in less than 10 years.” To say the least.
There’s no way of knowing what the “optimal” distribution rate will be for your portfolio.That’s going to be based on what happens in the markets over the next thirtyyears. But you need to at least use a reasonable number. And clearly, most investors aren’t.
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