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I'm confused - If I have 1mil in the bank and I make 6% annually on my money and I with draw 4% (of principal before interest added), I'm withdrawing less than my returns, how would I ever run out of money?

In this scenerio, I don't think you would run out of money. I think the problem is that there is no guarantee that you can continually make 6% year after year.

The other problem is inflation. Every year, inflation will go up some yet to be determined amount. Let's say an average of 3%. If you do not increase your withdrawals, over time you will lose your purchasing power. If you increase your withdrawals to match inflation, then that means you are only effectively getting a 3% return <6% - 3%> and if you withdraw 4% you are losing money.

The 4% Safe Withdrawal Rate is what was determined to be a safe rate after studying historical records and returns. As you know, the market will flucuate year after year. After looking at all 30 year periods during a more than 100 year time period, 4% was found to be the rate that would have survived any 30 year time period. This included the depression of the 30's and all other time periods.

I hope this helps a little, but if not, I'm sure someone else who can explain better will join in.

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