The 4 per cent rule

Based on early research of actual stock market returns and retirement scenarios over the past 75 years, it was found that retirees who draw down no more than 4.2 per cent of their portfolio in the initial year and adjust that amount every year thereafter for inflation stand a greater chance that their money will outlive them.

The analysis also showed that retirees who draw down at a rate of 5 per cent a year (again, adjusted annually for inflation) run a 30 per cent chance of exhausting their income-producing assets.

This model assumes that retirees need a fully-indexed level of income all the way through their retirement, and I have found that this is inaccurate. An additional complication in looking at U.S. models is the inclusion of health-care costs. I want to emphasize that we do have health care – related costs in Canada, but not to the same degree as in the United States.

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