[...] but he explained that a 5% retirement portfolio withdrawal rate is perhaps a bit aggressive, but a 4% withdrawal rate should work 95% of the [...]

[...] Cooper, BMO’s chief economist and author of The New Retirement, a portfolio can survive a 4.2% annual withdrawal rate (increasing annually for inflation) for 30 years with a high certainty of success.  This [...]

[...] Rate: 4% (assume only dividends are withdrawn, thus highly efficient taxation [...]

Basically they assume you are using your capital but the probabilities they come up with are based on using Monte Carlo simulations using US stock returns and inflation over the last 85 years or so.

It’s more of a guideline or starting point than a solid “rule”.

http://www.bylo.org/saferetr.html

Maybe the difference is whether or not you use up the principal. The 5.5% rule assumes you use up the principal over 40 years. That is close to indefinite, but not quite the same. If you assume you only use the profits, then a 4% rule possibly assumes a 7% return and 3% inflation.

We would normally assume a conservative 8% return, so with 3% inflation, that would be a 5% rule (instead of a 5.5% rule that uses up the prinical).

Ed

Great comment by the way.

This is an interesting topic. We do the retirement plan custom for everyone, so I had never actually worked out a rule of thumb. If we assume a long term average return of 8% and 3% inflation, we can withdraw 5.5% each year (plus inflation) for 40 years.

Perhaps it should be a 5.5% rule?

A couple of income comments. Dividends may be quite tax-efficient but are less so for retirees, since they are subject to many clawbacks, such as the GIS, the age amount and OAS. Most of their income at different ranges is clawed back at least 15% in addition to regular income tax.

With the new tax rules, the 45% gross-up on dividends means $10,000 in dividends will show as $14,500 of income, on which the clawback will be $2,175.

In effect, there is a 22% clawback on most dividend income for retirees in addition to regular income tax.

As for income trusts or funds paying a mainly ROC distribution, these are mostly non-taxed income and not subject to clawbacks. However, this is mostly an illusion. There is actually hardly any difference between just selling a bit of your equity investment each month and receiving the ROC distributions.

You can do a SWP (systematic withdrawal plan) and much of the money is a return of your capital (depending on how much capital gain has built up over the years). The differences between a SWP and a distribution that is mainly ROC are mostly technical.

However, a SWP can be done effectively on any equity investment, not just the short list of those that pay distributions. This means you don’t need to buy an “income” type mutual fund to get good regular income.

Ed

[...] Carnival of Personal Finance #99 is posted on The Tao of Making Money. My article about the 4% rule was submitted. [...]

[...] The 4% Retirement Rule by FrugalTrader @ Million Dollar Journey. A brief explanation of the 4% rule with a couple of simple examples. [...]

[...] There was a discussion over in the Money Blog Network Forums about different ways to calculate how much to save to allow a particular monthly payment during retirement.  Some people responded with future value and present value functions and the 4% retirement rule. These are perfectly legitimate ways of estimating what you’ll need in retirement. [...]

I’m no expert on the DF strategy but I would think the dividends from mutual funds should count as well.
However, if you are doing the DF strategy then any mutual funds or ETFs that you buy would be dividend stock focused and would hopefully only pay out “dividend” dividends vs interest income, ROC etc. So if you have non-dividend focused funds / ETFs now then I would say their dividend payout might be somewhat irrelevant to what you are planning to do since you will probably switch them to something that pays out more dividends.

[...] FrugalTrader wrote earlier this week on The 4% Retirement Rule, which has stirred up some interesting discussions! [...]

I can tell you the 4% rule applies to withdrawals from the investment pool – doesn’t matter what form it’s in.

From what I’ve read of DF’s strategy, any dividends will represent your income regardless if it’s interest, dividend, cap gain, roc. I think some of the higher paying income trusts were including large amounts of ROC in their payouts which is tax efficient method of withdrawal of principal (no cap gain) but I’d be wary of investing in too many companies that are paying out more than they can earn.

I’m not sure if I understood your question so feel free to correct!

On a case by case basis it has limited value.
As CD said, it all depends on you: the risks you take and the way you invest.

After all what is you current return vs the average investor?