Question about length of retirement period (my first post!)

[coast2coast]

Hi MMM forum dwellers -- I was linked to the blog about three months ago through some random website my dad sent me and am so impressed not only with the blog, but also with these comments.  This site and all of the support and enthusiasm have  thrown me into gear and changed my financial thinking, priorities, and even encouraged me to start looking for a new job with a higher income.  Bring on the future!

So, for my first post, I have what may be a very simple question about the hallowed 4% safe withdrawal rate.  I understand that the 4% figure allows you to calculate the size of your needed retirement stash, once you have established your annual expenses.  As an example: if I anticipate annual expenses of 20K, I will need a stash of 500K in order to begin the retirement phase.  Right?  My question is how does the anticipated duration of the retirement phase affect the necessary size of the stash?  Does the 4% SWR rule assume a particular length of retirement?

This would seem to be an easy question but, for the life of me, I am struggling to figure it out.  Intuitively, I would think the longer the retirement phase, the larger stash I would need.  But is this the case? 

[pbkmaine]

Most of the research that has been done on safe withdrawal rates has used 30-year periods.

[SnackDog]

The longer you spend the higher your chance of running out of money at any given rate.

[Ishmael]

Some people advocate a lower SWR, like 3%, to make sure that their stash won't run out. I'm more of a fan of MMM's "Safety Margins" approach (http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/). If you need $20k for your bare minimum expenses, technically at $500k you're FI. I don't think that means you have no more need to earn an income ever though. I think it means that you can retire in your mind, and know that no matter what happens with your job, everything is going to be OK. Or, that you can pursue employment/income generation at a more leisurely pace, and at something you enjoy.

Here's my plan, in the case it helps at all. When calculating my retirement numbers, I divided my retirement expenses into 3 levels: core ($18k), luxury ($25k) and ultra-luxury ($33k). Then, I used the ultra-luxury spending level to come up with a retirement number of $825k based on the 4% rule. (I'm planning on a 40+ year retirement.)

When I hit that number, I know that's I'm free to do whatever I want with the rest of my life. However, I might choose to hang on at the job for a while (as I'll be at a nice level of vacation leave by then), or even try out another one (perhaps in an exotic location) - I've found that starting a new job is interesting and invigorating for a while, until the novelty wears off.

I plan on doing something to earn at least $10k between my wife and I. Worst case (at minimum wage of $11/hr), that's 22 weeks work combined, but more likely will be an interesting small business or some contracting work in our current field of software development.

I'm going to base our spending on the previous year's investment results and extra earning. In years following tough investing years, I plan on sticking to the core expenses - no vacations, eating basic food, etc., if required. Years that are mediocre means simple vacations and somewhat better eating. However, I'm expecting that I'll be able to spend most of my retirement in my ultra-luxury level of spending, with nice vacation(s) and money to pursue a few non-mustachian hobbies that I enjoy (there are lots of great activities you can do for free, but some are funner with a bit of money to throw at them).

Also, there is CPP when we get older that will be nice to have coming in. (This is the Cdn version of Social Security).

So, in short I say to use the 4% rule but make sure to build flexibility and safety margins into your plan.

[coast2coast]

Thanks very much for the responses!  Am I right that there is nothing "magical" about the 30-year anticipated retirement period?  Sounds like it is basically a rule of thumb drawn from the traditional "retire in your 60s" model.  So, if you think you'll be without steady income for a longer period, you simply have to adjust your spending behavior accordingly, monitor investment stash, and perhaps pick up some extra inflow on the side?  I wanted to make sure I was understanding correctly that the 4% rule isn't *strictly* tied to a fixed retirement period, but the responses seem to confirm that.

Thanks!

[footenote]

Check out firecalc.com as well. It illustrates how your portfolio would have performed for a period of any length (not just 30) during actual historical windows of time.

Varying the time length with the same portfolio size, you'll see that lengthening the period always increases the chances of portfolio failure. That makes common sense: it would be less likely for a portfolio to survive the period 1913 - 2013 (two major crashes and many contractions) than it would for the same-size portfolio to survive any random 10 years period within 1913 - 2013.

Which is a long-winded way of saying, yes, there is nothing "magical" about 30-year retirement periods. (Our longevity being the ultimate illustration of "your mileage may vary"!)

[matchewed]

The study the 4% rule is based on used a 30 year time frame for the success criteria. Nothing magical about it.

Give this thread a read as your question was asked already in a slightly different manner.

https://forum.mrmoneymustache.com/ask-a-mustachian/swr-retirement-age-dependent/

[pbkmaine]

This discussion on the Bogleheads forum might help:
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=89030

[SnackDog]

Which is why annuities make sense - if one million people pool  their funds they can probably pay out at a 5-7% rate confidently, because so people will live to their expected age.  Some people will die early, leaving more money in the kitty for those who live longer.   This is much better than the rest of us trying to plan our retirement years on a volatile stock market which might 10% chance of bankruptcy at age 80 and another 10% chance of $10 million in the bank at that age.

[matchewed]

Annuities aren't structured like that to my knowledge. You give them a lump sum and they essentially pay it back to you. There are other particulars but I'm pretty sure it is not grouped based.

Also if the company you have your annuity with fails in your time frame you don't get money.

Also what company is going to sign up for a 60 year annuity?

[footenote]

For a "life certain" annuity, the annuity company's actuaries calculate how much return the company can give a pool of annuitants per dollar invested starting at investor age x. They forecast that a certain percentage of people will die relatively early, allowing the company to pay longer-living annuitants a total of more than the annuitant's original investment alone would have supported.

Unfortunately, annuities are often bad for investors who do not understand all the implications of the contract, or who grasp for yield and invest with a less-than-stable company. For example, if you need to reverse your decision and "surrender" your annuity to get your principal back, the surrender fees can be massive. Please read lots of reviews and understand all the implications before you purchase an annuity. An annuity can be ok for some investors for a portion of their portfolio if risks and options are well understood and the money is invested with a AAA rated insurer.

(I have oversimplified to answer the basic question of how annuities work. There are many different types of annuities. One type, called a variable annuity, allows investors to trade on the underlying assets. And even relatively vanilla annuities offer many options like  including spouse or not, "life certain" vs defined payout period, beneficiaries after annuitant dies / no beneficiaries, etc.)

[DoubleDown]

OP, I'd just like to add that while the studies that have been done to determine viability of different SWR's were done over 30-year periods, you should be targeting an "infinite" retirement period. If you are going to retire early, and could be looking at a 50, 60, or 70+ year retirement span, you will want to choose an SWR that effectively leaves your accumulated principal (your "stache") intact. That is, you should be living solely off the passive income generated by your savings. Otherwise, you run the risk of running out of money.

Now, in theory, if you can live off 4% of your savings each year, and you can get an average annual return on your savings/investments of 7%, and if you assume 3% average inflation over your lifetime, then your savings will last and provide enough income for you forever. I would plan some flexibility in there as safety margins (reducing expenses in down years, not taking out more in up years, possibly some part time work to offset expenses, and so on).

There are lots of discussions on this forum about whether 4% is reasonable, or if 3% is right or too conservative, and so on, so read away and enjoy!

[coast2coast]

Thanks for all these responses.  I now see why I should approach the goal of an "infinite" retirement period, i.e., obtain a sufficient stash such that you are always "in the black," so to speak, living off the earnings/passive income.  It looks like the 30-year number that gets batted around in discussions of the 4% rule arises simply because that is the "ordinary" duration of retirement for someone who retires at 60. 

Thanks again all!