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Zero Percent Withdrawal Retirement Plan

January 25, 2012

In 1994, financial planner William P. Bengen analyzed different withdrawal rates and asset allocations to determine the optimum rate which could be sustained over a 30 year retirement period beginning every year from 1926.  Using a portfolio split evenly between stocks and bonds, he determined that an initial withdrawal of 4% adjusted annually for inflation could allow the retiree to continue withdrawals for up to 30 years without exhausting his funds.  In the years since Mr. Bengen published his results, the 4% rule has become the generally accepted “rule of thumb” for retirement planning.

My preference is to look at this from a different perspective.  I retired near the end of 2010.  In the time leading up to that point, I began to construct a retirement budget in order to arrive at an income number I would need.  So rather than focus on attaining the magic number (total retirement assets) this allowed me to plan for a particular income that I would need in order to stop working.  Here I did not use the “income rule of thumb”, ie.  plan for 80% of your pre-retirement income.  I would suggest that you start with a blank page and construct a bottom up budget.  Once I arrived at a workable spending budget, my objective was to extract the income needed to support that spending from my taxable account.

The full article which explains more about how this works can be found on Seeking Alpha.

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