The standard 4% rule and corresponding mechanism are based on work done by Bill Bengen (
I'm Bill Bengen, and I first proposed the 4% safe withdrawal rate in 1994. Ask me anything! : financialindependence ) in 1994 (
http://www.retailinvestor.org/pdf/Bengen1.pdf ), and later analyzed by the "Trinity Study" (
Trinity study - Wikipedia ) in 1998.
Here's how it works: During the first year of retirement, you withdraw up to 4% of the total portfolio worth. During the second year, you adjust that resulting dollar amount by inflation (the "CPI"). For "normal, good" portfolios this will last you at least 30 years. The Trinity study back-tested this plan using historical data. Other studies have used Monte-Carlo simulations as a test, but the problems with that are they present scenarios that are unlikely and even almost impossible to happen.
This assumes you are invested in a market-tracking vehicle like the S&P 500 (one example is the VOO ETF from Vanguard). If you invest better, you can withdraw more. If you invest poorly, you run out of money.
Because the first year withdrawal is 4% of the portfolio, the rule of thumb is that you need 25X the amount of money you spend in a year to retire. Note that Bengen subsequently revised the number upwards to 4.5%, so you only need a bit over 22.2X a yearly amount.
The issue on which most people focus is when you have a couple/few bad years in your portfolio, yet continue to withdraw the same CPI-adjusted amounts. As we've seen even in the 2008 "Great Recession," portfolio balances can be dramatically cut in size, say by 50% or even more. Imagine your portfolio being cut in half, yet you continue to withdraw money from it - the results can be you run out of money even when the portfolio starts earning again. This is especially true early on - the math works out that having your portfolio balance drop significantly in the first few years of retirement can be devastating. With the current 10 year plus economy boom still going, some people expect another recession soon, so retiring now may (or may not) be riskier.
Remember, being retired is different. When you're working and earning money outside the market it's easy to say "well, I'll just withdraw less each year," but if that's your ONLY source of income (outside of Social Security, which frankly isn't much), then withdrawing less means a serious hurt to your lifestyle. And if you're still paying a mortgage or have other obligations, that may simply not be practical.
The other side of this, of course, is whether you keep doing the kind of investment style that landed you in TSLA in the first place, or whether you become more risk-adverse. Again, when you're young and earning money from a job/business you have high tolerance for a portfolio that is stagnant or loses money for a few years. But, when you depend on that portfolio as your primary source of income, you may find you have less tolerance for losses. Most of us won't want to re-enter the workforce in our early 80s, for instance. That said, I personally do expect to continue to be more aggressive in at least part of my portfolio. This is a personal choice, but everyone should understand the risks and look at the history of returns. Note that Bengen himself thinks the number can be as high as 7% for the initial withdrawal if you don't run into a bear market early on in retirement.
In terms of history, this is a decent article:
https://seekingalpha.com/article/4319198-retired-retiring-soon-yes-worry-correction which identified the best-performing period as starting in 1900, which caught the rise of the market to its peak in 1929. Unfortunately, the next 4 years wiped out roughly 85% of those gains. However, outside of that one period, all of the other periods fared worse than investing at lower valuations. (Note: starting at 1993 is still currently running, as its 30-year period will end in 2023.)
Those able to retire younger than 65, or expect to live well past 90, need some different math for a few reasons: 1) a portfolio that lasts only 25 years might run out for them at 65 or 70, and 2) since they retire young they're more likely to spend a lot during the early part of their retirement since they're more active. It costs more to ski in Switzerland than to take a bus tour through some vineyards in Italy. And 3) Healthcare costs since you won't have a employer-sponsored health care plan.
From Bengen's reddit post:
The "4% rule" is actually the "4.5% rule"- I modified it some years ago on the basis of new research. The 4.5% is the percentage you could "safely" withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you "throw away" the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year's inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950. Now, on to your specific question. I find that the state of the "economy" had little bearing on safe withdrawal rates. Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement. Both factors drive the safe withdrawal rate down. My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%! However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970's, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree's worst enemy. As your "time horizon" increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006, but I know Reddit frowns on self-promotion, so that is the last I will have to say about that. If you plan to live forever, 4% should do it.
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