The 4% rule is not absolute and depends upon the timing of the success or failure of your investments as well as your mix of investments (% of bonds vs equities). The concept is to withdraw no more than 4% of your portfolio on a yearly basis. If you do so then it is likely the portfolio will last 30 years or more. If you modify you withdrawal to a maximum of 4% OR the lesser amount if your portfolio grew less than 4% it will improve you probability of having your portfolio last longer. There are several white papers that suggest that 3% is a safe withdrawal rate and will ensure your portfolio lasts at least 30 years. The other change that is happening in portfolio management is that the old rule of you should hold your age in bonds and the rest in equities has been shown to not last as long as a portfolio with much higher %'s of equities. I retired at 55 in 2009 and need my portfolio to last 40 years I have chosen initially to follow the 3% to 3.25% withdrawal rate.
The 4 percent rule is based on a probability of a 90 percent success rate of not running out of money over a 30 year retirement duration. This probability is based on data from many previous historical market cycles.
The withdrawal rate that has a probability of over 95 percent of not running out of money after 30 years or more is about 2.7 percent.
You can confirm this by running scenarios through a retirement calculator at T Rowe Price, Vanguard, or Fidelity among others.
The 4% "rule" is based more on life expectancy than interest vs. principal.
That depends on your investments. If they are paying more than 4% interest, you won't be touching the principal. Otherwise, you will.
Go into excel and use the financial functions. Plug in various numbers and see what happens.
In retirement, is the 4% withdrawal rule touching the principal or are you living off interest without the principal being touched? How many years does the 4% rule last?
