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A safe withdrawal rate is the percentage of your portfolio you can withdraw annually in retirement without running out of money before death. The standard 4% rule (from the Trinity Study) suggests withdrawing 4% in year one, and adjusting the dollar amount for inflation in subsequent years.
With a $1,000,000 portfolio, you withdraw $40,000 in Year 1. If inflation is 5% in Year 2, you withdraw $42,000.
Test your understanding of the core concept.