Updated: Oct 5, 2021
If your assets are growing faster than you spend, congratulations, you've now created a never ending Wealth Building Machine!
The market has average about 9.5% compounded annual returns for all of recorded history. However, inflation has eroded your purchased power by about 3% per year. So you have "real" growth of about 6.5%.
You'd think you could withdraw 6.5% per year from your portfolio and be fine... And honestly, on average, you could! However, "averages" can be a scary thing to benchmark. I don't want roughly 50% of my clients to be financial successful! So we need to build your plan and "withdraw rate" to be successful ALL the time.
Through lots of research, a 4% withdraw rate, increasing with inflation every year has survived the worst of market times.
For example, the worst thing that could happen to a retiree is experiencing a massive market crash the day after they retire. Pretend that you retired in 1929, right before the Great Depression, over the next three years you'd experience an 85% market decline of the stock allocation in your portfolio. Fortunately, great market returns would soon follow, but that would be terrifying!
This 4% withdraw rate even survives this!
Which is why, the median portfolio value is almost 2.8x the starting principal when using the 4% rule. I hope this video and article helped build some confidence around using your portfolio as a passive income machine!