Each has a portfolio balance of $1,000,000 and each is entirely invested in the same 4% rule compliant investment fund. Rick retires immediately and withdraws 4% ($40,000) per year with a 3% annual inflation adjustment. Linda waits to retire 3 years later. During that 3 years, there is a significant market drop and Linda’s original $1,000,000 portfolio is now worth $600,000. Rick has faced the same drop, but because he has already taken 3 years of income, his balance is only around $510,000. Under the 4% Rule, Rick is expected to continue to withdraw over $40,000 annually. Under the same 4% Rule, Linda may now start taking her income at only $24,000 (4% of $600,000).
Linda is taking far less income, yet she now has considerably more money even though they have an identical investment portfolio (Linda could be withdrawing more than 4%). Both Rick and Linda each face problems now. Rick may run out of funds early (4% is too high) and Linda may not be able to enjoy the kind of retirement she hoped for because they both believed 4% to be their optimal withdrawal rate.
In cases where the chosen static withdrawal rate proved to be too high (Rick), the result was premature depletion of the retirement portfolio. In cases where the static withdrawal rate proved to be too low (Linda), failure to maximize income may result in unnecessary sacrifices to lifestyle choices.
Conversely there are other instances, where returns in the earlier years of retirement are higher than average, similar to Linda’s outcome, there is an unnecessary compromised standard of living, as the retirees eventually learn they could have successfully taken much more income without depleting the portfolio during their lifetime.
*For illustrative purposes only.