95% Rule

The 95% Rule is a withdrawal strategy designed to help your portfolio last while limiting sudden cuts to your annual withdrawals.

Unlike the Percent of Portfolio strategy, which bases each withdrawal directly on your current portfolio value, the 95% Rule also considers the previous year's base withdrawal. This can reduce sudden year-over-year changes when the market falls.

In the first year, the strategy calculates your base withdrawal from your initial portfolio value and your chosen rate (4% by default). In later years, it plans the greater of that rate times your current portfolio value or 95% of the previous year's base withdrawal.

With the default setting, the strategy's calculated base withdrawal can fall by at most 5% from the previous year's base withdrawal, even after a sharp market decline. For example, if last year's base withdrawal was $40,000, the 95% floor would be $38,000 this year.

The rule uses only the previous year's base withdrawal. Any configured extra withdrawals are added separately to your total spending and are not included when calculating the following year's 95% floor.

Strengths

• Limits year-over-year cuts to calculated base withdrawals with the default 95% floor
• Allows base withdrawals to rise when the chosen percentage of the current portfolio value exceeds the 95% floor

Weaknesses

• A prolonged downturn can deplete the portfolio despite the rule's percentage of current value
• Annual withdrawals can become too low for essential spending without a minimum withdrawal limit; setting one can increase depletion risk