## Three Percent Rule

A conservative modification to the Four Percent Rule for people who want to play it on the safer side and give their portfolio more space to absorb market downturns.

A conservative modification to the Four Percent Rule for people who want to play it on the safer side and give their portfolio more space to absorb market downturns.

Table of Contents

1. | What is the Three Percent Rule? |

2. | How long will my money last? |

3. | Examples |

4. | FAQs |

The Three Percent Rule takes the benefits of the original safe withdrawal rate and applies a more conservative spin to increase your chances of having a long and successful retirement strategy.

This is a simple and straightforward strategy to employ for risk-adverse investors.

Although the Four Percent Rule has a long track record of success, some investors expect future market returns to be lower than historical returns or simply want an option where they can play it more safe. This is where the Three Percent Rule comes in.

If you end up having your portfolio take off more than you expected, then you should consider that increase as gravy on the top. You can always start withdrawing more from your portfolio if it grows, but a conservative minded investor does not want to have to put themselves in a situation where they planned for higher investment returns that weren't realized, and then has to start withdrawing less in order to make up the difference.

One of the great features of the Three Percent Rule is the fact that the low withdrawal rate will likely result in the portfolio increasing in value. Due to the fact that you are withdrawing less money from the portfolio, it will allow your investments to grow more than aggressive withdrawal strategies.

In other words, given the small withdrawal rate, it becomes more likely that the portfolio balance will not only remain stable but actually has a better chance of increasing.

Therefore, the hidden benefit of the 3% withdrawal rate is that the conservative start actually increases your chance of pulling out higher yearly withdrawals in the long run.

If you find that you portfolio has doubled, multiple times throughout the duration of your retirement, you could consider increasing your withdrawal amount. For example, let's say that you start out with a $1,000,000 portfolio and a $30,000 withdrawal in your first year. After 20 years, your portfolio could potentially have tripled, quadrupled, or even more. If it had increased four-fold to $4,500,000, you could then choose to reset your strategy at an even more conservative withdrawal rate of 2% and your yearly withdrawal would become $80,000. So not only has your withdrawals almost doubled, but you have actually reset to an even more conservative withdrawal rate.

Of course not all eras of the stock market will see that kind of growth, but you significantly increase your odds when you utilize a low withdrawal rate.

Due to the low withdrawal rate, the Three Percent Rule sets you up to have a portfolio that will last well into the future.

Durations | ||||||

20 years | 30 years | 40 years | 50 years | 60 years | ||
---|---|---|---|---|---|---|

Withdrawal Rates | 2.5% | 100% 83/83 | 100% 73/73 | 100% 63/63 | 100% 53/53 | 100% 43/43 |

3% | 100% 83/83 | 100% 73/73 | 100% 63/63 | 100% 53/53 | 100% 43/43 | |

3.5% | 100% 83/83 | 100% 73/73 | 100% 63/63 | 96% 51/53 | 98% 42/43 | |

4% | 100% 83/83 | 100% 73/73 | 89% 56/63 | 75% 40/53 | 74% 32/43 | |

4.5% | 100% 83/83 | 89% 65/73 | 67% 42/63 | 49% 26/53 | 56% 24/43 | |

5% | 100% 83/83 | 71% 52/73 | 51% 32/63 | 36% 19/53 | 37% 16/43 |

As long as you don't withdraw more than 3% and as long as there isn't a considerable, unprecedented, long lasting market downturn, this strategy should be an almost surefire way to live off of your saving for decade after decade, and maybe even for centuries.

This strategy is so good, that it has not failed for a single year throughout history (assuming January 1st beginning dates).

Durations | ||||||

60 years | 70 years | 80 years | 90 years | 100 years | ||
---|---|---|---|---|---|---|

Withdrawal Rates | 2.75% | 100% 43/43 | 100% 33/33 | 100% 23/23 | 100% 13/13 | 100% 3/3 |

3% | 100% 43/43 | 100% 33/33 | 100% 23/23 | 100% 13/13 | 100% 3/3 | |

3.1% | 100% 43/43 | 100% 33/33 | 100% 23/23 | 100% 13/13 | 100% 3/3 |

You could choose to make the strategy even more conservative by reducing your withdrawal rate to 2.75%, 2.5%, or even all the way down to 2%. This would give your portfolio an even greater chance to grow, at which point you could have more breathing room to increase your withdrawal rate down the line if you so choose.

You can start by either looking at your savings to see how much you can afford to withdraw, or you can start by setting a withdrawal goal which will tell you how much you need to save.

If you start with a withdrawal goal then the formula for how much you need to save is:

**Savings Goal = Withdrawal Goal / 0.03**

So, if you want to withdraw $45,000 in your first year of retirement, then you would take 45,000 and divide it by 0.03 (your withdrawal rate) to get $1,500,000 which is how much you would need to save if you want to withdrawal 45,000 per year with the 3% rule.

If you start with your current savings amount and want to know how much you will be able to spend, then the formula is:

**Withdrawal Goal = Savings Goal * 0.03**

So, if you have $1,000,000 saved, then you would multiply 1,000,000 by 0.03 (your withdrawal rate) to get $33,333 which would become your first year's withdrawal amount.

Once you have determine your withdrawal and savings goals, then next step is determining how much you want to increase your withdrawal amounts per year.

Most people choose to increase their withdrawals in line with inflation in order to maintain their buying power throughout the length of their retirement. Others choose a more simplified approach and increase their withdrawals by 2% or 3% each year which is typically where the U.S. inflation rate falls.

The starting yearly withdrawals amounts will be lower for conservative withdrawal rates. However, as discussed above, because your portfolio is retaining more of it's balance, it could be the case that lower starting withdrawal rates, give you the choice to take higher yearly withdrawal amounts as time goes on.

A lower withdrawal rate will mean a lower withdrawal amount. So, a portfolio of $1,000,000 with the 4% rule will withdraw $40,000, but with the 3% rule will only withdraw $30,000.

The tradeoff, however, is that you are pulling less money out of your savings which will increase the odds that your portfolio will survive for a longer period of time.

In summary, a lower withdrawal rate provides you with less up front withdrawal amounts, but lower risk, as well.