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I thought that the 4% rule had to do with only the first year of retirement. After that year, one would adjust the number of dollars that could be extracted from retirement savings upward by the percentage of the yearly inflation (or downwards by the rate of deflation).

The idea, I take it, is that this arrangement would have allowed for a "safe rate of withdrawal" for a thirty year period -- one that may or may not include world wars, depressions, inflation, etc. These thirty year periods are all in the past, but we figure (or hope!) that the future will not be worse than the worst of the past. If all we have to do is put up with things like world wars, the inflation of the 70s, gas shortages, stock market bubbles, etc., then our situation won't be all that much worse than historical situations.

It seems to me that the key to the 4% rule is to keep allowing, each year, for inflation. Thus, for example, if one had taken one's 4% the first year of retirement, and that amounted to $40,000, then, if inflation ran at 5%, one could take $42,000 the next year. (Note that this $42,000 isn't 4% of anything, so the rule is misinterpreted if it is thought of as allowing 4% of something each year.)

During one's retirement years, of course, one's portfolio will be up sometimes and down sometimes. Rates of inflation too will vary. But the historic "safe withdrawal rate" (the one that starts with 4% or maybe 3.9%) is supposed to have held up even in very bad situations (e.g., retiring at the height of a bubble, and right before many years of strong inflation). It's definitely a pessimistic view, anticipating worst-case scenarios. (It recognizes that your portfolio could be up by 8% in one one year -- but also that inflation could be 9% in the same year.)

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