The 4% Rule was about investing in balanced funds (perhaps a 60/40 fund, 60% stock mixed with 40% bonds), but my interest was in the suitability of a 4% Rule for withdrawals from a 100% S&P 500 fund. This article is intended as a guide about planning a safe and sustainable investment and retirement withdrawal plan from a S&P 500 Index fund that would survive typical bad market times (like those which have actually happened). The long term overall rewards are well worth it.
Withdrawals cost far more than just the dollars withdrawn. It also costs all the substantial long term future compounded earnings those withdrawal dollars could have earned. That compounding over the years is a mighty big deal. My opinion of the best plan is of course to start early to have the years, and postpone all withdrawals until retirement, so the fund will continue growing, and will be there when actually needed. Then (if you have planned it early enough) withdrawing what's needed to supplement Social Security. It's only reasonable to plan for affording long term care too, but hoping to be able to leave that to the kids instead. The point here is about the valid concern that continuous withdrawals during earlier years or during bear market downturns (before the fund has grown to be able to afford the withdrawals too) could deplete a fund, ending it prematurely, not lasting until needed for retirement.
The 2nd calculator is the Withdrawal Survival Depletion Test (below the S&P 500 calculator) which performs an examination for S&P 500 Index funds to show how market drops and/or withdrawals have survived in the past bad bear market history typical of the real world over the last 50 years. The Depletion Test runs about 5o times, automatically restarting at every starting year of the 50 years, and uses your fund and withdrawal amounts. The main calculator will of course show any withdrawal depletion crashes for data you enter, but then the Depletion Test tests your withdrawals at every years start over the 50 years (for example 2000 was not a good starting year, but that happens). Experiment a bit and you will see what it does.
But there is also a lot more here. This page is just the calculators (and some history statistics), but the page was far too long as one page, so the introductory material describing the S&P 500 and the market and the 4% Rule was reluctantly moved to a second page at A few Market Things you need to know if you don’t already. If you are new to the market, it's there if you want to see it.
You certainly might be interested in a performance comparison of 100+ stocks and funds. You can also add a few ticker choices of your own there.
My suggestion is: Plan decades early for retirement, because many years of compounding is your best tool. Reinvest all dividends and don't withdraw anything until retirement. Then the final amount available at retirement might be a huge pleasant surprise. Relatively massive withdrawals might be possible during retirement if there were enough investing years (see the Example 4 below).
We can't know future performance, however the overall S&P annual gain has always averaged about 10% a year, even more in its good years, but then with losses in a few bad years. Multiple bad years in a row, combined with fund withdrawals can crash a fund. We have had some pretty bad times since 1979, 1972-74, 1981-82, 2000-03, 2008, the pandemic in 2020, and of course 2022. We cannot repeat those past years, but the same kind of periodic market crashes have always happened, so the past is good as typical examples, and are still routinely expected now and then (the bitter with the sweet, which averages out, and the sweet wins). If your withdrawal strategies survives those past times, it likely survives any future times too. If your withdrawals don't deplete the account when down, then it always recovers, and the good times are sweet. We can't see the future, but the calculator below computes "how much" occurred in past "typical" bad crashes. You might plan for some of it by having more fund money in the fund, and by eliminating withdrawals, especially during bad market times.
Withdrawals as dollar amounts can be dangerous, fixed amounts need to be adjusted lower when the market is down, because a fixed dollar amount can seriously deplete the account when low. For example, withdrawals of only $200 per month (foolishly starting at first year) depletes this S&P 500 fund in 14 starting years since 1970 (meaning, withdrawing soon after starting, before it grows, or in low periods, are dangerous). Withdrawals of course reduce your investment, and it should be obvious that also seriously reduces your future compounded gains. The good plan is to add more investment all along instead of reducing it. So let your investment grow for maybe 30 years, and only start withdrawing at retirement, and that becomes an extremely different picture, and surely matches your retirement goals better too.
Withdrawing a percentage amount (percentage dollars adjusted every year, to be same percentage) is less dollars when low and more when high, but even 10% withdrawal starting at first year does not fail (but withdrawals that about match the growth rate also does not grow either).
So see Example 6 (and also see its Depletion Test failures). Note that starting withdrawal in 2000 faced the worst 10 year decade which overall lost 0.3% (no resulting gain).
There are several guided examples below. More money in the fund (after it grows) will always last longer, but technically, if no withdrawals, the fund does not go bust in the bad periods even if starting with only $300 in 1970 (the Lower Limit of $100 that defines Depletion can affect that test result).
The S&P 500 had 70 record high closes in 2021, but the last record high close was 3 Jan 2022 at 4796.56 (this chart reached $5 Million then, end of 2021). But when the market is down, cashing in at that point simply makes the loss be real and permanent. So sit tight, and it always eventually recovers and continues growth. While it is low now is the time to invest more, before that recovery gain.
See the S&P 500 daily market action, including some past S&P 500 record highs.
2023 is an incomplete partial year so Annualized Return cannot be computed for the current year. The other years represent the full year end values and show the Annualized Return of the span.
So if you're going to invest, then do that, and leave it there until retirement, and watch it grow.
Fund Fees: The fees are also a continuous withdrawal. Try entering your fund fee as zero to see the difference that compounding of lost earnings cost there. Be sure you are entering the correct fee for your specific S&P fund (fees do vary significantly). The cost of the fee every year is much more than just the fee. It also continues to cost the lost earnings on it every year, compounded over the years. You definitely want to find a low fund fee.
The compounding over many years makes the long term expense of regular withdrawals become extremely high, compared to "what could have been". As the withdrawal percent increases, the fund value decreases so then it earns less, and so the dollar amount of any percentage withdrawal total also drops. The 2% case is comparable to just withdrawing all the S&P 500 dividends, the effect is the same. It should be a sobering thought. I don't mean to be preachy, but awareness is my goal. At least evaluate the actual need first. Just because it is there seems the worst reason to withdraw it. The best reason for withdrawals to wait is that your need is likely greater at retirement time. A common purpose of mutual funds is of course for the withdrawals to support retirement, but that idea is to first invest for 20 or 30 years without withdrawals to build up the fund, so you can have something to withdraw in retirement. You can take action on that NOW. Do realize that you are not simply subtracting the withdrawals. The big deal is that you are also subtracting all the years of compounded gains those withdrawals could have earned (which is a hugely larger number). The better idea is to let the fund accumulate something first. See Example 8 below.
The magic of the gains is that the growth is compounded, with the gains earning more gains, year after year, increasing dramatically after a couple of decades. But continuous withdrawals are a real big thing affecting a fund, reducing the gains and the compounding, again over many years. If you withdraw more, you get much less. You can see the result yourself in the calculator above. Imagine investing $25,000 one initial time in a S&P 500 fund for 50 years (historic S&P 500 data from 1970). That span could be at your age 25 to 75. If you're young, you need to realize those many available years are the huge magic opportunity, which diminishes if you wait. Just ten years might be impressive, but 50 years is simply awesome.
Just to be clear, withdrawals during retirement are certainly an expected main purpose of the market funds, but earlier withdrawals are detrimental to that possible "what could have been" retirement income. This is especially true during long term, when the compounding can make so much difference.
This is looking at some choices with investment starting with $25,000, to show the good effect of minimizing withdrawals. The example results are more in agreement with the 2021 totals. The exact result values in these examples will vary from the last 2023 result entered in the calculator chart (the text in these examples below is Not updated with every days current price change, but the calculator itself will recalculate from the last price entered.) You can of course then adjust the values to fit your goals. Again, these results are computed from the past years in history, and future results are not known. The standard qualifying words are: Past success does not guarantee future performance.
1. Start at 1970: (53 years until today) If with no withdrawals of any kind, $25K grew to $6.4 Million today. This is the pages initial default case. The message is: Start your investing early. It will be all-important when you near retirement age.
So try some things in the calculator. The bad years are survivable, but withdrawals may not be. (Again, the future is unknown, but some of the past was pretty bad, until it recovered.)
1 Show this setup in calculator (Example 1 just restores the initial chart).
2. Withdrawing all dividends (from $25K start, but never setting up reinvestment of dividends) instead reduces gains of less money working, which seriously drops to "only" $1.2 Million, plus $343K withdrawals (instead of $6.4 million if no withdrawals). DO NOT ignore the long term importance of reinvesting dividends. The dividend may be small, like maybe 2%, but it repeats and compounds and grows, every year.The point is that in 53 years, withdrawing the $343K of dividends cost $5.2 Million loss of future long term growth. And this certainly applies equally to any and all withdrawals, which are very nonproductive.
2 Show this setup in calculator
3. Or instead of dividends, continuous withdrawal of $100 per month (totaling $65K in 53 years) dropped the fund to $17K first (in 1974 which was particularly bad times), but it survived, and grew to $2.9 Million in 53 years. However that $65K of withdrawals cost $3.5 Million of the gains in example 1 (over 53 years). Give that some thought concerning withdrawals. However withdrawing anything so early is far from wise. The fund needs to build more money to survive bad times.
3 Show this setup in calculator
A few more things you might see here about how things work.
More money in the fund does last longer. Change the $25000 to $30000 and click Test, and the $200/month withdrawal does not fail starting in 1970.
The Main Point here is to know to let the fund grow without withdrawals the first few decades, to first grow enough to survive the bad times, and still be there for the recovery that is coming. That greater growth (without withdrawals) also provides considerably more retirement money too, which should be a major concern. You should realize that early withdrawals are very costly, costing greatly more future earnings than they return now.
While it may not be intuitive during the bad times of gloom and doom and worry about the market, but actually, those low points are exactly the right time to be adding more money then (to buy low), making recovery gains grow dramatically. The low points would be the worst time to sell it off. It recovers, but it could take a year or two.
4. This might get your attention... a more expected procedure. 30+ years S&P 500 investment followed by 22+ years of $60K per year withdrawals in retirement.
Continual withdrawals beginning Day One is NOT a normal plan. To make the fund count with greater gains, let it build for many years until retirement time, and only then start withdrawing to help replace salary. Or maybe if already retired and you have some savings that are not earning anything, but need it to help with immediate withdrawals for living expenses. The S&P is capable with higher gains that have averaged about 10% a year. Some years more, and some years less, and some even negative several times. And BIG negative (near -50%) a few times. Again, the S&P 500 is the stocks of the 500 largest USA companies, relatively safe IMO. Market crashes can certainly still occur, but they always recover eventually. But when moving savings, do realize there is market risk, stocks can lose value (and unless it is IRA or 401, moving is likely a taxable event).
4 Show this example in the calculator
But always check the Depletion test. This example does go bust at 4 start years near 2000. But deferring these withdrawals even five years supports the withdrawals to make a big difference.
This past data includes several really poor years (possibly typical), so caution is advised in the future real world. This idea is to let it grow to a substantial value before starting withdrawals, and then keep an eye out on the gain of future years then. If the average gain is keeping up with the average withdrawal, it will work. The average S&P gain has been near 11%, but 2000 began three years averaging about -15% (which then of course still did recover). Starting 1970 looks real good, but the Test shows a few failure starting years around 1997 (because the new fund had not grown much before the bad years starting at 2000).
5. An IRA account has a $6000 annual contribution limit, which increases a bit every few years. This example starts Dec 31 1979 with first $6000, and then continuously add the maximum tax-free contribution of $500 per month ($6000 per year IRA limit until 2004, contribution totaling $150K in the 25 years). It grew to $1 million in that time (which included the 2000s decade), and to $5.9 Million in the next 22 years until now. There will be a lot of tax owed on the IRA (regular income tax rate too, no capital gains in IRA), but you would like that at retirement time, it certainly seems worthwhile. If it were Roth, it would be tax free and also allow larger contributions.
5 Show this setup in the calculator
6. Start at 2000: About the worst staring year, the entire 2000 decade were poor. But Buy low, when it is down, except it gets worse and more attractive in 2008. The 2000s were really bad times with two severe crashes in the decade (2001 and 2008), so bad it didn't recover until 2010. But if no withdrawals of any kind, $25K still grew to $124K today, which is not too shabby, about 5x, and 7+% annualized return (even starting in 2000). And the Test result shows this same thing (as no withdrawals), starting in every year, same $109K if starting in 2000.
6 Show this setup in the calculator, starting at about the worst time.
But then instead of withdrawing anything, adding more money at the low points is the special opportunity to see dramatically greater gains in the recovery. Adding $25K more in 2002 (doubling original investment when price was down about 40%, and things looked so bad) would total $282K in 2021. We can't time the bottom, so had this been the plan, you'd done it earlier, and continued adding all along.
7. Start at 2009: (12 years) These were the better good times, building from the previous 2008 lows, and if with no withdrawals, $25K in 2000 grew to $165K in about that time. But economic and political pressures can hurt the market, so there is always risk. But so far, the market has always recovered and continued the gains.
7 Show this setup in the calculator
Perhaps of the most interest to the concept, 8 and 9 are results of two of what turned out to be the worst-timed bad investment times (unavoidable because the future is unknown. But it does recover.)
8. Start a $25K investment at 1973 right before the 1974 crash and see it drop 40% then. But don't touch it for 27 years, and then start withdrawing 8% in 2000 (just in time for a really BAD decade, which turned out to be some of the worst scary times, but your fund had resources by then to withstand it). So from 2000, start 22 years of retirement withdrawals totaling $1 M, varying widely but averaging perhaps about $42K annually (about $3500 monthly, but varying). And it still leaves about $670K remaining today, maybe for inheritance (often a goal). The entire cost to you was the original $25K (this is past history, it cannot predict the future, but there are better times than this example hits).
8 Show this setup in the calculator
However, the abnormally large 8% withdrawals in the first three years of the 2000 downturn were detrimental. But if instead of 8%, try withdrawing a fixed $3000 a month (button 2, starting at year 2000 again) works if starting in 1973, but this fails early if not starting until the 1980s. A large fixed withdrawal in a small fund hits the down years heavy. Whereas a reasonable percentage (assuming dollar amount is readjusted each year) is a smaller withdrawal in those down years. Even $200/month starting at Day One (when fund is small) fails several starting years.
So a good plan is to use button option 3, with say BOTH of the same 8% and $3000 withdrawals as limits on each others extremes, which limits a few years to be a little less, but which lets it build more, and then it runs in all years without failure. A percentage withdrawal may not be so much when the fund is low, but it won't go to zero and fail (if withdrawal dollars are adjusted accordingly each year). We can't know the future, but the total of all the many years is the really huge effect.
9. Start investment at 2000 right before those crashes. Start withdrawing 6% in 2003 (right after the first crash), which is 20 years of withdrawals totaling near $28K for average of about $1.4K annually, with $40K remaining today. The last decade (2010s) saw good market growth, doubling in spite of the withdrawals. This growth time is short, but starting with 2x more money would have 2x greater results. To get that greater money (still trying to get your attention), simply starting ten years earlier would have made the 6% be near $6K average annual income assistance, with $175K left. Or 20 years earlier would be about $29K withdrawals with $850K left. Or 30 years earlier for $51K withdrawals with $1.5 Million left. Time is the awesome tool.
9 Show this setup in the calculator
10. Starting the fund just before bad years is Not the best plan, but we can't know the future. It is only shown as a worst case. But one example that works anyway. Start in 1970 with $25K, and then with button 5, contribute $500/month until 2000 ($186K more) when worth $500K, and thereafter withdraw $4000 a month ($48K a year for $1.2 million, but limited to 10%), which still remains worth nearly $321K then Except if it were are an IRA, the large gain would surely make the RMD be greatly higher.
10 Show this setup in the calculator
These are just some examples from past history, but it is suggestive of the way things work, and the things that possibly (or typically) can happen in the future. There are noticeably more good years than bad, and the S&P 500 has always averaged about 10% annual gains, but there are a few down years. The bad times might last a year or two, and might drop 50%, but they have always fully recovered (2009 was special and took several years though). Withdrawing the money when it is down in bad times is the worst thing to do, because it absolutely guarantees that the loss becomes real and permanent. Instead adding more investment money when the market is low is a great opportunity offering large gains when the price recovers (buy low, sell high). Hang in there, stay the course. It can seem dark and gloomy and fearful at the time, but withdrawing all money then ends it all (and makes the loss very real). But the market has always recovered to continue the gains.
Also see next pages: