Weekend Reading – The 2% Retirement Rule
Well hello!
Welcome to some new Weekend Reading related to an article I read on not 4% rules, not 3% rules but the 2% retirement rule.
In case you missed my recent post…
I recently updated this post about how I built our dividend income portfolio:
Weekend Reading – The 2% Retirement Rule
“The best retirement withdrawal strategy requires flexibility and course corrections depending on the market environment, inflation and your personal spending levels. No one actually follows through with this stuff like it shows on a spreadsheet.”
These are statements that really reasonated with me from Ben Carlson’s post entitled Why the 4% Rule is More Like the 2% Rule.
- I desire flexibility related to our retirement income spending needs.
- I want to use an approach that enables course corrections to happen easily.
- I have never lived my life in a spreadsheet yet some tracking is necessary.
The 2% rule occurs when many retirees who even worry about the 4% rule constantly underspend from their portfolio from fear of outliving their money.
As Ben writes:
“There is a psychological hurdle that exists with some people because you worry about outliving your money, inflation, high healthcare costs, sequence of return risk or something coming out of left field.”
This also speaks to me.
It will be interesting to see how I combat these fears as my wife enters retirement next month and I consider retirement myself from current part-time work in 2026. Lack of a steady paycheque will be new territory to us.
Things we are considering for our retirement income spending as early retirees at least:
- Be flexible with our spending. If markets are good/positive, we’ll consider spending more. If markets are unfavourable, then we’ll spend a bit less. Spending a bit less means cutting back on travel plans.
- Keep a cash wedge at all times. Any money needed for spending in the next 1-2 years will be maintained in cash/cash equivalents. This way, when market corrections happen that I can’t see coming, we are ready to cover spending in advance.
- While we don’t budget (I recently wrote about that) we do track our spending and we’ll continue to do so. This will ensure we are spending money on things we value and/or are aligned to our values.
Retirement will be uncharted waters for us. My wife begins her journey next month. Our psychological and emotional hurdles when it comes to spending money without two steady paycheques will begin very soon – it will interesting to see and feel how we manage that.
I’ll keep you posted.
Other than 1, 2, 3 above, what other advice do you have for me? Words of wisdom from folks that have been there, done that?
More Weekend Reading – Related to the The 2% Retirement Rule
Ben’s post and my reflections of it remind me of this older but goodie post from Mr. Money Mustache about retirement income planning with a fixed chunk of money.
Related to safe withdrawal rates:
“Let’s say you want to be able to spend $40,000 per year, for life, and have that spending allowance continue to grow with inflation. And you never want to make another dollar from work in your lifetime.
In this situation, the following three sentences represent the entire universe of probability for you:
If you retire with $800,000 in investments, you will probably make it through your whole life without running out of money (a 5% withdrawal rate)
If you start with a $1 million nest egg (a 4% withdrawal rate), you will very likely never run out of money
If you start with a $1.33 million chunk (a 3% withdrawal rate), it is overwhelmingly certain that you’ll have a growing surplus for life.”
And finally on this theme for the weekend, Bill Bengen, the author and follower of his own 4% rule mentioned that his rule of retirement income planning quoted by many was actually too low.
This implies to me that anyone retiring today can and should consider retirement spending in the range of 4%-5% withdrawal rates from their portfolio, assuming they have a bias to stocks/equities over fixed income/bonds. Which we do. When in doubt beyond that, keep some cash handy, and be flexible with spending. Which we will also do.
Again, keep you posted. 🙂
Dividend Growth Investor reminded us about the dividend income success story and lessons learned from Anne Scheiber, who worked as an auditor for the IRS. She retired at the age of 51 in 1944, and focused on managing her portfolio for the next 51 years of her life. Anne passed away at the age of 101 with a portfolio of dividend stocks worth over $22 million. That portfolio was generating over $750,000 in annual dividend income at the time of her death.
Finally, a tiny thought on progress and success I read recently:
“Your capacity for excellence is inversely proportional to the number of your commitments.”
Have a great weekend and I’ll be back next week.
Mark
Related Reading (Fun Case Study):
I am looking for an etf/fund to put about 20% of my money to guard against a sudden pull back of the market. I usually withdraw about 15% of my investments each year which along with my pension income is sufficient for my yearly needs and with some left over for vacations and other luxuries. Ideally I want something that will be safe ( nothing is perfect) and will still pay some interest/dividends as I ill be taking from it at intervals over the year.
Any suggestions would be most welcome.
Thanks,
Marcel
Gosh, a few to consider but please do your own due diligence.
I like money market funds for my cash wedge, Marcel. Very liquid and free to buy with most brokerages.
I welcome other readers to chime in.
I also like CBIL ETF and own it myself in my LIRA for my cash equivalents. I will be withdrawing from my LIRA to LIF in a few years and want the first few years ready to go without touching equities should they be lower in value.
There are certainly many others and I contributed to a MoneySense article for that this year too – that include some best “cash alternative ETFs”. 🙂
https://www.moneysense.ca/save/investing/best-etfs-in-canada/
Hope that helps your reserach and objective setting.
Cheers,
Mark
I have nearly 12 yrs of full retirement, and my wife an extra year. Our asset withdrawals have been somewhat erratic with a number of major expenditures (house, driveway, new outbuilding, 2 vehicles etc. and with Covid knocking off our travel for 3 years). I don’t pay a lot of attention to withdrawal rates (had to work these out for this exercise), instead keep up a spreadsheet utilizing the VPW method the past 6 years for a loose guide that we stay below. A work pension has changed, but some CPP/OAS are/will be coming on line, making some impact on asset withdrawals. We recognize its time to increase our spending, with no planned heirs.
Here’s our asset withdrawal rates to date including a good estimate for ’25:
2014 2.67%
2015 3.33
2016 3.78
2017 2.41
2018 1.56
2019 3.64
2020 0.93
2021 2.89
2022 1.71
2023 3.21
2024 5.24
2025 6.27
VPW seems like a great tool, will leverage a bit for our own purposes although the VPW withdrawal criteria seems VERY high for us in our early 50s! I will be a bit more conservative than 5% or so out of the gate. The VPW factor for someone like me, early 50s, is about 5% with > 90/10 equities/fixed income mix = which is what we have now.
Seems a bit high but maybe not too high…?
“We recognize its time to increase our spending, with no planned heirs.”
Yup, we’ll be doing the same as we age.
Thanks for sharing and I’m sure Bob will write back to you on his data.
Mark
I would agree on it being a high starting point, in the more critical early years of retirement. I didn’t discover and decide to utilize VPW until 4.5+ years into retirement so didn’t experience that. The calculations are only a recommendation of course, but depending on retirement timing luck one might expect to have to greatly accelerate withdrawals the more conservative and lengthy the starting “adoption period’ is. And consider the tax implications of this regarding ‘tax smoothing”.
As you can see I’ve stayed way below suggestions until these last two years, and still remain below them. We’ll see what happens in the years ahead, but I’m optimistic, and best of all we’re very adaptable and appreciative however we are likely to live lifestyle wise.
I just looked at the VPW table – you will recall someone helped me with this! 🙂
https://www.myownadvisor.ca/how-to-draw-down-a-portfolio-using-variable-percentage-withdrawal-vpw/
The first column is age, the second column is 80/20 asset allocation, the third column is 90/10 asset mix:
50 4.8% 5.0%
51 4.8% 5.0%
52 4.8% 5.0%
53 4.8% 5.1%
54 4.9% 5.1%
55 4.9% 5.1%
56 4.9% 5.2%
57 5.0% 5.2%
58 5.0% 5.2%
59 5.1% 5.3%
60 5.1% 5.3%
61 5.2% 5.4%
62 5.2% 5.4%
63 5.3% 5.5%
64 5.3% 5.5%
65 5.4% 5.6%
I think taking out at least 5% of your portfolio in your mid-60s knowing most have CPP and OAS online or that will be online soon by age 70 seems about right to me…given RRIF min. withdrawals are 5.28% at age 71+ and that’s “forced” withdrawals, the very bare minimum.
You seem very, very adaptable to your plan from what I know!
Mark
With VPW the table numbers appear to apply only when there isn’t other income sources. They change based on other income like pensions and the timing of those in retirement. Higher withdrawal rates earlier with delayed pensions, lower withdrawal rates after pensions paying out.
I verified this by modelling VPW with different scenarios on our pensions.
Agreed, re: VPW seems to change when you tinker with pension values, CPP, OAS and other related income streams.
Our seems rather high (!) in early 50s.
I suspect next year (2026) I will start at 4% ish (all in cash/cash equivalents now) and go from there.
Just putting the finishing touches on all planned 2027 spending (also in cash/cash equivalents) in the coming months.
So, to summarize, we’re starting at ~ 4% withdrawal rate or so out of the gate but won’t be selling any equities is the goal until 2028.
All withdrawals are in cash/cash equivalents across various accounts.
I hope I’m doing it right!?
We shall see!!
Mark
The suggested withdrawal rate is safe since the actual future withdrawal amounts will always be relative to the size of the portfolio as you know. The variable aspect. Selecting a lower rate of 4% to start leaves more of your pile for the future and with these markets (for now) actually growing that, even after your withdrawal. Having cash ready for a couple of years withdrawals gives you even more of a safety valve and likely peace of mind, especially if that changes. IMHO for your withdrawal rate its a decision of what you’re comfortable with.
You’re a pro. You’re doing it right. That’s for certain.
Thanks very much – it “feels” right to start around 4% or so and go from there – including spending cash and not touching/selling any capital/equities. I will report if I change my mind or have to with market conditions. 🙂
Ha.
Best wishes,
Mark
Right on!
No “Words of wisdom” I’ll settle for some semi organized banter:)
First off, I think this is something we do not talk about enough. Decumulation can be hard to wrap your head around. WD rates are quite individual and depend on how your portfolio is build/works as well as your personal circumstance and goals. So I’d interested to see how you are getting along with this, my prediction is that you will find a higher rate quite comfortable.
People tend to save too much, retire too late and spend too little, when I talk to retirees I hear that all the time. They are getting wealthier and wealthier and seriously going to outlive their money. (even with suboptimal portfolios and paying too much tax)
I’m sure there is a lot of psychology under the surface, multi decade long habits are hard to break. Savers are often bad spenders, spenders typically aren’t good savers. That is slightly problematic b/c if you are unable to spend your well earned money that you worked for your entire life for than what’s the point? You might need to adjust your saver mindset starting with figuring out how you are going to extract your wealth during all sorts of market conditions well in advance.
There seems to be a bit of self induced (cultural?) phobia regarding not having a job. I said it before any decent portfolio can be a lot more secure vs. private sector jobs esp. in a commodity/cyclical economy as ours. Fear is rarely a good motivator.
My rule of thumb; your wd rate ~ portfolio income/size. If you are still predominantly indexing you are looking at 2%-3%. Dividend investors can likely sustain 5%-6% (BTSX like). Income investors can probably get away with 7%-8%. Ours is 5.8% at the moment, 7% when we are fully retired but note we will get >60% of our income needs from guaranteed sources. We have a low Beta portfolio (~0.6) so less susceptible to market swings/corrections. We can reinvest a good part of our surplus income at any time this particularly helpful post correction. If any of these were different the equation would drastically change. I know cliché but it’s personal/situational and therefor does requires quite a bit thought, work and rework. Defaults are a good starting point but rarely the best setting.
Ben
Yes, well put: “Savers are often bad spenders, spenders typically aren’t good savers.”
I know we’ll spend the money…just not right away.
I won’t mind not working at all as long as I know our portfolio can deliver income > expenses. Not quite there yet, but certainly if I add up all incomes streams we’d be quite close – part of the issue is I don’t want to spend from our TFSAs for about 20 years…would like to let them compound away.
I do know for a fact that if our portfolio can deliver 5% returns annualized, then “we’re good” since at 5% returns the income generated by our portfolio is > than our expenses today. That’s without CPP or OAS or my small DB pension at age 65 as well.
I also agree with your conclusion: defaults/rules of thumb are a good starting point but rarely the best for detailed planning.
Thanks for your thoughtful comment.
Mark
Hi Mark. Our withdrawal rate is fairly erratic. Covid sent it plummeting, and buying a vehicle made it spike, but as our pensions come online it should stabilize and perhaps even go negative if we don’t increase our spending. If we get to that point, we’ll likely look at helping out our kids more or ramping up our grandkids’ RESP contributions.
Here’s what our withdrawal rate looks like:
2021 -2.5% <- Negative due to reinvested unused 2020 funds.
2022 3.1%
2023 3.2%
2024 6.4% <- Vehicle purchase.
2025 4.7%
2026 6.2%
2027 6.5%
2028 5.6%
2029 5.5%
2030 1.0%
2031 1.5%
2032 -2.2%
2033 -1.9%
2034 -1.8%
Pretty detailed! Based on past comments, very well organized so I’m not too surprised!
I suspect we’ll start 2026 around 4% withdrawal rate and go from there – but that will be all in cash/cash equivalents so we’ll keep pretty much all capital intact until at least end of 2027. That’s our plan anyhow.
Mark
Did you mislabel a decade or are you projecting forward? For your withdrawals are these percentages of portfolio or change in portfolio balance? I’m trying to understand the negative withdrawals. I use percentage of portfolio assets withdrawn from start of year balance.
Deane, the years are correct. 2021 to 2025 are the actual withdrawal rates, adjusted for any money added back into the portfolio, such as transfers from a RIF to a non-registered account as part of my RIF meltdown strategy. Years beyond 2025 are of course projections.
The values are percentages of our total portfolio value as of January 1 of that year. The amounts vary because our actual and projected annual spending changes. For example, after 2027 we stop paying into an overseas pension scheme, in 2030 we stop paying into grandchild #1’s RESP, and in 2032 we stop paying into grandchild #2’s RESP. There is also some variation in the taxes owed to CRA each year. We will also benefit from the Federal Pension Income Tax Credit at age 65, reducing the tax bill, and reducing the amount we need to withdraw.
The negative withdrawals are where we added to our portfolio. For example, in 2020 we couldn’t travel and hardly spent anything, so the unused money was carried over to 2021. Income from a work pension plan covered most of our living expenses, so whatever remained from 2020 went back into the portfolio in 2021. New pension income sources will begin in 2028, 2029, 2030, and 2031. If everything goes to plan, the total of this additional pension income will exceed our spending, so the surplus will go into the portfolio, creating those negative percentages.
If it looks like we’ll consistently have more coming in than going out, we might consider making a few changes, such as helping our kids more. It’s too early to say what we’ll do, as there are many events that could disrupt our plans, such as, tax changes, currency fluctuations, the death of one of us, inflation, and so on.
Hopefully my explanation is clear, if not let me know.
Bob
Thanks for the detailed reply Bob. Very clear. Makes sense to me now.
Well done.
I don’t underspend (whatever that means) because I fear running out of money. I spend what I spend. If I want something, I buy it. But the list of things I need (or want) to buy is increasingly shorter. In fact it’s exactly the opposite, I need to get rid of a lot of the junk I already have that I’ll never use again. I suspect a good number of people that are deeper into their retirement are becoming more aware that buying/having stuff isn’t as much of a deal as it was in our yoot.
Excellent, Lloyd, you are in an enviable position I believe!
Mark
Yes, good article by Ben C. We are definitely in that category.
Spending less than 3% of liquid net worth for now and that accounts for making meaningful contributions to kids’ weddings and house purchases. At 55, we have enough in investments and pensions to retire but I will carry on for as long as work continues to be fun and clients treat me well.
If I do retire then 3% seems like a better number than 4% as 1) we might have more than 30 years left 2) markets are doing better than economies and 3) nursing homes and healthcare costs could be large and unknown.
I agree on the healthcare stuff. A bit of a long-term wildcard here even in Canada. Things are changing.
I suspect in Year 1 of retirement = 2026? we’ll be close to 4% withdrawal rate and move it up higher in the coming 30 years.
The sum of my x1 DB pension + CPPx2 + OASx2 for us starting at age 65 should be at least $70k after-tax per year so spending some capital from our portfolio will make some sense in our 50s and early 60s.
Mark
Hi Mark,
Good to see you and your wife are getting closer to retirement.
I retired twenty years ago at the then age of 56. I don’t miss being in the work force at all. Nobody tells me what to do anymore.
The only thing we withdraw from the portfolios is the government mandated minimum from the RRIF’s. Other than that, we live within our means and financially are doing just fine.
As for Anne Scheiber, I first read her story in Money Magazine about thirty years ago and apparently the figures given in the article at the time turned out to be incorrect. All in all she still did well with her portfolio. To be honest all it really shows is the power of compounding over a period of many years. That’s all found in the now century old book “The Richest Man In Babylon”.
Anne was looking for the “best” growth stocks. With our all-Canadian taxable stock portfolio I don’t have anywhere the stock market diversity to choose from that is in the American equity markets. I buy a lot of what I would term second, third and fourth tier stocks. Thirty five businesses now, with perhaps more to come. Many of them are not anywhere near the best. A mix of low and high dividend yields. Some grow their dividends consistently, others no sign of growth at all. If it’s cheap or reasonably priced, I may actually add to or buy shares in the business. No financial analysis done. All I want to know is the P/E ratio and the dividend yield. Not much more. If the business is showing in the spreadsheet it needs more cash injection, then it becomes a target for just that. As easy as passive investing with very, very low portfolio turnover.
For the last twenty two years I’ve been just trying to do what our Government is finally and slowly now doing. Build Canada.
For international we have the much smaller registered plans invested in global ETF’s.
Thanks very much. You have been kind with your comments all these years. 🙂
Impressive: “I retired twenty years ago at the then age of 56. I don’t miss being in the work force at all. Nobody tells me what to do anymore.”
My wife will be 52 when she retires next month.
It is our hope the dividends and distributions paid every year are largely “enough” for our spending means.
We have a LIRA to invest in a few months (wife’s DC pension) and depending on how I invest that, that will bump the dividend income I report from existing registered accounts much higher. Thinking a mix of “Build Canada” with 10 or so CDN stocks (RY, TD, FTS, CPX, EMA, BN, CNQ, TOU, etc.) and then some XAW for global diversification. Thoughts???
That’s largely the makeup we have now as you probably read: 27 CDN stocks + XAW + cash/cash equivalents.
https://www.myownadvisor.ca/how-i-built-my-dividend-portfolio/
I may further simplify the CDN stocks in 2026 and 2027 via capital gains.
Good stuff on Anne, whether the figures are 100% correct or not is not the point (I agree) but rather the moral of the stay invested story.
If you have 35 CDN stocks, that’s a few more than me!
My guess is, and I know we’ve written back and forth on this a few times, we probably have about 20 or so of the same Canadian stocks. Most DIY dividend investors or hybrid investors do. Just the way it goes. Very low and little portfolio turnover here too.
My plan for 2026 TFSA investing if I can afford it is to buy more XAW for the TFSA again.
Otherwise, cashflow from the portfolio will need to occur since that is our new paycheque in our early 50s.
I look forward to your reply and wish you continued investing and retirement success.
Mark
Regarding your choice of CDN stocks Mark, they look pretty good to me.
Only problem is, I never know which are going to be successful and which are not over the next five years and more.
If you have a portable skill set in demand (if necessary) in retirement, you can always decide to go back to work part time, whenever you choose.
Cheers.
Ya, I hear ya. You never know. I figure 27 is a decent number for CDN stocks to hold but I might get that down to about 20 or so in the coming years to be honest. Then own XAW for everything else. That would be very easy for my wife and I to navigate.
Project management should always be in demand but I have other skills too which could be useful in the future but we’ll see. I like the idea of working at a golf course x1 day or so per week. 🙂
Mark
Hi Mark: No hard and fast rules here. I see a stock fairly priced I buy it. If I need something I ask myself if I really need it. Sometimes I say ” what the hell” and splurge but mainly just bank most of it. Expenses come out of the checking account and if I have a large bill or purchase then the funds can be transferred from the cash account to the checking account. The dividend check at home are the ridisual of the 5 stocks I have left at home as up until ’90 I dealt with a full service broker. If I need extra cash then there is usually some laying around to put my hands on. On retirement your fears are real. Personally I didn’t like to get up to go to work and there are a lot of people who work at jobs they don’t like but when the cord is cut and you no longer have to go to work it is a funny feeling. At first I was fine but after a couple of weeks you’re home and your friends are going to work. I remember asking my dad a dumb question “what will I do?” and he said that I had enough to worry about just looking after my portfolio” and he was right. Well there really is not much to worry about. Like I said managing my portfolio is one of my hobbies.
That’s been a bit of my own thesis for many years. When in doubt, when I have the money, just keep buying. 🙂
My wife retires next month. I know she is looking forward to not answering to anyone. Including me – LOL. Kidding aside, I’m sure there will be a honeymoon phase for her but then reality will set in and new routines will be established. It will be an adjustment for both of us.
I know portfolio management will continue to be one of my hobbies but I hope to impart some knowledge to my wife a bit more as well so there is more of a shared role over time. I know she is interested moreso from the tracking spending side of things which is great.
Mark
Great post Mark! Exvitong to hear your wife is soon retiring and you’ll do so next year. If you haven’t listened to this podcast episode, it is a good one. It provides a rebuttal to Bill Bangan’s revised safe withdrawal rate: https://open.spotify.com/episode/2LqkpU1jgbwcNwxuK84Q5y?si=X-2eo4KxQVOGk4goAvaNfg
Thanks for your comment, Moe!
Yes, exciting times. A bit nervous too!
Ya, not really into the ChooseFI guys and their marketing stuff but I’m sure they hit on some good points.
Bengen’s work is well counter-documented in that if you increase the weight of the stocks from 50% to 75% or higher, and go more international vs. just U.S. stock market, then you’re very likely going to have a “safe withdrawal rate” that is higher than 4%. That’s a good thing. Bengen’s work was done in a different era with a 50/50 mix of you probably know.
That said, while the 4% rule is a decent rule of thumb for sure, I will likely have a withdrawal rate somewhere in the 4-5% range myself starting in 2026 and we’ll go from there. Ideally, if I can live off dividends and distributions for a few years, that will be a good litmus test too to see how much more we can take out of our portfolio.
What is your own retirement number? Do you have one?
Cheers,
Mark
Thanks for sharing Mark.! 🤛 My retirement number is close to $2M, and my wife and I have the goal of early retirement (or at least gradually reducing our work hours) in the next 10 years.
By the way, I have listened to ChooseFI podcast for years. I think they are one of the few podcats that do not try to sell you anything (course, paid membership etc). What aspect of their contents did not resonate with you?
Anyway, thanks for all your great posts. I appreciate your blog posts. 🙏 I look forward to reading your updates and how your withdrawal rates pan out.
$2M invested in an excellent retirement number to shoot for.
Money at 7% or so returns doubles every 10 years so assuming you continue to stay invested/invest over the coming 10 years then if you have $1M already you should “get there”.
Ya, paid memberships are OK I guess. I just don’t bother with them. 🙂
ChooseFI is OK but I guess it’s just the same messages over and over in the FI community: be frugal, optimize savings for investing, index invest and then you’re FI.
I just try to share different stuff here, that’s all and I sense you do as well – which is good.
Thanks for the kind words and nice to engage with you!
Mark