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Greetings, Patrick, and welcome. You asked:

How does this 4% rule work? Is there somewhere in Fool that I can go to get an explanation? If the money is earning 8% a year then withdrawing 4% the principal would be increasing. When a major purchase is needed such as a car would you then draw cash from the principal?

A number of studies have been done on the issue that basically say you may take an intitial withdrawal of 4% to 6% of a portfolio consisting of roughly 75% stocks and 25% bonds. In each subsequent year, you may then increase that dollar amount by the inflation rate for the most recent year. By doing so you will have a high probability the portfolio will last as long as you do.

You can read more about the issue in "How Much Are You Gonna Take" at http://www.fool.com/retirement/manageretirement/manageretirement8.htm. That missive explains the concept and provides some links to some studies explaining the process. You will find some great material in ""The Retire Early Study on Safe Withdrawal Rates" at http://www.geocities.com/WallStreet/8257/restud1.html.

Note that the safe withdrawal rates do NOT accomodate lump sum withdrawals of principal for the purchase of things like cars. Those should be planned for in your annual budget.

Regards..Pixy
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