The 4% Rule is the most well-known guideline for safe withdrawals in retirement. It indicates that you can withdraw 4% of your total wealth in the first year of retirement and, in subsequent years, withdraw the same amount adjusted only for inflation, without depleting your portfolio.
| Year | Initial Investment (Year) | Nominal Yield | Annual Withdrawal (Adjusted) | Final Wealth (Year) |
|---|
Developed based on the famous Trinity Study (1998), the rule was designed by simulating the behavior of diversified portfolios composed of stocks and fixed-income securities in the US market. The study found that the vast majority of portfolios that withdrew 4% in the first year and then adjusted that amount annually for inflation maintained a positive balance after 30 years.
Note that the withdrawal adjusts for inflation. This means you maintain your purchasing power. If in Year 1 you withdraw $40,000 and the inflation for the year is 5%, in Year 2 your withdrawal will be $42,000.00, maintaining the same consumption conditions.
This is known as Sequence of Returns Risk. If the market crashes at the beginning of your retirement, the base of your wealth shrinks dramatically, and fixed withdrawals can accelerate the depletion of your portfolio. In this case, the recommendation is to temporarily reduce the withdrawal rate or maintain a stable liquidity reserve (cash) outside of variable income.
Brazil has historically higher inflation than the US. If inflation is very high, nominal withdrawals will grow very rapidly, which can deplete the investment portfolio if the net return rate does not keep pace. Therefore, in Brazil, it is common to use slightly lower initial withdrawal rates, such as 3.25% or 3.5% per year.