The 4% Rule: Should You Withdraw Annually or Quarterly?

An Analysis of Impact on Withdrawal Rate by Withdrawal Cadence

(My book “Optimizing the 4% Rule” is available on Amazon now. It covers many aspects of designing and building a financial independence portfolio. Grab a copy if you are interested.)

In one of my articles, I talked about how to optimize the 4% rule to search for better Safe Withdrawal Rates (SWR). There are plenty of resources on how to build a 4% rule-based portfolio, but there is very little information online about how to withdraw. Withdrawal is the second most important part of executing the 4% rule, following building the portfolio.

One of the questions regarding withdrawal is when I should withdraw and how often I should withdraw. In this article, I will analyze data and explore withdrawal cadences.

(If you would like to skip the data analysis and go straight to see which cadence is better, scroll directly to the conclusion section.)

Base Case and Hypothesis

If we look back at the definition of the 4% rule, we know it is based on an annual withdrawal cadence:

In the first year of your retirement, you can safely withdraw no more than 4% of your stocks + bond portfolio. For each subsequent year, for 30 years, you can continue to withdraw the same amount with inflation adjustments without depleting your portfolio.

The base scenario for withdrawal cadence is annual.

Then, the question is, what if we withdraw more frequently, say quarterly? Would we achieve a better SWR? This way, we don’t need to withdraw a large lump sum at the beginning of the year, but instead, we can leave three-quarters of the annual withdrawal in the market to compound.

As an old adage says, “It’s not about timing the market, but about time in the market.”

This is the hypothesis of this experiment: Quarterly withdrawals may achieve a better SWR than annual withdrawals.

Let’s prove whether it is true or not!

Methodology

We will simulate withdrawals from a $100 portfolio invested in the S&P 500 (Large Cap) on both an annual and quarterly basis, with the goal of determining the maximum withdrawal rate that depletes the portfolio over a 20-year period. Then we will compare…