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If we agree that our goal is scenario C, we could have spent considerably more than 4% historically. Let’s keep using the same example. If your dad had withdrawn 4% a year since 1988, his $200,000 would have grown to $612,000 by 2014. If he had withdrawn double that amount, 8% a year, he would still have had $220,000 left at 90, an amount which most of us will agree is far more appropriate. You only live once.

You might be wondering whether the period 1988 to 2013 was an exceptionally favourable time to be investing. It certainly started that way as equity returns were splendid in the 1990s, bonds did well for the whole period, and inflation was mercifully low. On the other hand, we also suffered through the 2001-2002 ‘perfect storm’ and the 2008-2009 financial crisis.

To double-check, let’s see what a different period would have produced. Assume it was your grandfather instead and that he retired in 1967 with $50,000 tucked away in RRSPs (we will have to pretend that RRSPs were around since the late 1930s so that he had a tax-sheltered vehicle to save in). The years following 1967 contained many challenges, including the oil price shocks of 1973-74, the 1987 market crash, and soaring inflation and rising interest rates.

Even in this case, your grandfather could have withdrawn 8% a year and still have had $75,000 left over 25 years later, more than when he started.

So does that mean an 8% rule makes more sense than a 4% rule? Not quite. While the two historical periods were very different in many ways, they did have one thing in common, which is an average nominal return of a little over 8% a year. As any actuary will tell you, the next 25 years will almost certainly offer a lower return. Inflation and bond yields are near historical lows and stocks are not expected to perform quite as well as growth slows in the developed world. After fees, the real return in a diversified portfolio might be closer to 3% and the nominal return between 5% and 6%. There is no way you can expect an 8% payout but a payout of 4% or even 4.5% a year will probably be safe, at least under the following conditions: