Author Topic: Are you tempted to adjust your 4% SW to this year's increases?  (Read 2829 times)

Rollin

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Are you tempted to adjust your 4% SW to this year's increases?
« on: November 15, 2017, 06:37:16 AM »
I'm holding fast on my 4% SWR from January 1, 2016's stash, but have been tempted to take a little more out this year due to the great returns. I'm just curious if any of you post-FIREs have contemplated doing so.
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2Birds1Stone

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #1 on: November 15, 2017, 06:50:53 AM »
This is how you end up living off of cat food from sequence of returns risk.

Unless you're willing to drop your savings rate significantly during a pullback? But then you have to ask yourself, "is this part of my plan?"
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Linda_Norway

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #2 on: November 15, 2017, 06:51:49 AM »
I'm holding fast on my 4% SWR from January 1, 2016's stash, but have been tempted to take a little more out this year due to the great returns. I'm just curious if any of you post-FIREs have contemplated doing so.

I recently listened to a financial podcast (probably on the Mad Fientist). Some financial expert said that this could be done. He sometimes let his clients take out 5%, instead of 4%. Similarly, you could reduce your 4% a bit in big downtimes.

I advice you to find back this podcast. I don't remember who said it.

Rollin

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #3 on: November 15, 2017, 07:31:27 AM »
This is how you end up living off of cat food from sequence of returns risk.

Unless you're willing to drop your savings rate significantly during a pullback? But then you have to ask yourself, "is this part of my plan?"

Yeah and I don't think I'd want to do that (i.e., eat cat food. Heck the cat doesn't even like it much!), so I'm letting it ride. I just got my "plan" from Vanguard (just switched the stash from Personal Capital) and they say my scenario has a 99% chance of success until I'm 100. So, if it looks like my stash doubles or triples (as the chances are good that will happen, or better) I'll adjust then. However, in my first few years of FIRE I plan on adding to the stash when possible, keeping expenses in check, and sticking to the 4% SWR.

I recently listened to a financial podcast (probably on the Mad Fientist). Some financial expert said that this could be done. He sometimes let his clients take out 5%, instead of 4%. Similarly, you could reduce your 4% a bit in big downtimes.

I advice you to find back this podcast. I don't remember who said it.

I'd like to listen to that.

As far as adjusting up or down depending on the year, I might find that stressful so I'll try and live within my means for now.

It is still tempting though, given the great returns has year, and my VG forecast for such a high success rate to 2061 (which is still five years short of my planned expiration date :).
« Last Edit: November 15, 2017, 07:33:07 AM by Rollin »
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Mr. Green

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #4 on: November 19, 2017, 08:58:17 AM »
It would depend on how far over my original stash amount I was. If you're at 200% of your original amount, a one time increase of $5,000 won't even move the needle on outcomes. I wouldn't permanently increase spending though.
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TempusFugit

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #5 on: November 19, 2017, 01:22:46 PM »
I think this is the Mad Fientist episode referenced above.   This one is encouraging on several points

https://www.madfientist.com/michael-kitces-interview/

Regarding the original question, I think it definitely depends on how flexible you can be when the market goes the other way, how far into your retirement you already are, and how much of a safety margin you have in your plan. 

terran

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #6 on: November 19, 2017, 09:17:37 PM »
If you believe in the 4% rule (this is the big assumption here), then it seems that you could withdraw last year's withdrawal plus inflation (following the 4% rule as planned) or 4% of your current portfolio value (effectively resetting the 4% clock as if you had retired this year), whichever is greater. Personally, I would be more comfortable with a 3.5% withdrawal rate per Early Retirement Now's safe withdrawal rate series.

Cookie78

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #7 on: November 19, 2017, 10:03:50 PM »
I think this is the Mad Fientist episode referenced above.   This one is encouraging on several points

https://www.madfientist.com/michael-kitces-interview/

Regarding the original question, I think it definitely depends on how flexible you can be when the market goes the other way, how far into your retirement you already are, and how much of a safety margin you have in your plan.

I really enjoyed this podcast!

Rollin

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #8 on: November 19, 2017, 10:30:00 PM »
I think this is the Mad Fientist episode referenced above.   This one is encouraging on several points

https://www.madfientist.com/michael-kitces-interview/

Regarding the original question, I think it definitely depends on how flexible you can be when the market goes the other way, how far into your retirement you already are, and how much of a safety margin you have in your plan.

I really enjoyed this podcast!

I was in the vehicle for many hours recently and listened to this and others. Yes, very good. I'm new to podcasts so these are great discoveries for driving (which I do little of) and I even listened to one riding my bike the other day. It was downwind so easier to hear though .
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Rollin

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #9 on: November 20, 2017, 04:11:49 PM »
I've changed my mind and went with 5% for 2018. I will change it back if needed. I actually went lower than 4% for 2017.  In 2021 our income increases significantly (about 30% due to final payments on owner-financed house sale) and then in 2024 about 25% (SS for two), so we might have a different situation from those of you that have a stash and have mainly the 4% SWR to go on. We only need to bridge a few years to that increased income in other words. I may take that extra income in 2021 and reinvest it (to replace anything I might have lost over the intervening years).
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2Birds1Stone

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #10 on: November 20, 2017, 05:05:14 PM »
I've changed my mind and went with 5% for 2018. I will change it back if needed. I actually went lower than 4% for 2017.  In 2021 our income increases significantly (about 30% due to final payments on owner-financed house sale) and then in 2024 about 25% (SS for two), so we might have a different situation from those of you that have a stash and have mainly the 4% SWR to go on. We only need to bridge a few years to that increased income in other words. I may take that extra income in 2021 and reinvest it (to replace anything I might have lost over the intervening years).

If you're 7 years from SS that's a whole different story! Likewise if your 4% already has a big buffer built into it.
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Rollin

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #11 on: November 20, 2017, 06:17:17 PM »
I've changed my mind and went with 5% for 2018. I will change it back if needed. I actually went lower than 4% for 2017.  In 2021 our income increases significantly (about 30% due to final payments on owner-financed house sale) and then in 2024 about 25% (SS for two), so we might have a different situation from those of you that have a stash and have mainly the 4% SWR to go on. We only need to bridge a few years to that increased income in other words. I may take that extra income in 2021 and reinvest it (to replace anything I might have lost over the intervening years).

If you're 7 years from SS that's a whole different story! Likewise if your 4% already has a big buffer built into it.

When I pulled the FIRE trigger I was really feeling like I was stepping out on a ledge, as I really didn't have anyone around my life that understood what I was doing and offer sound advice. It was mostly shock. I did get a lot of help here though, but with all the sources of income and the variation in each over the years it was hard to use a lot of the same analysis that others do. But to my point, I was very conservative in my numbers and actually forgot a couple of times that all I needed to do was cover that gap. So adding 1% this year, while being a small amount overall for these short number of years, feels wild to me. I thought long and hard and long and hard again before I finally decided to FIRE so any variation challenges me a bit.

Anyway, one year in and we are doing better than I anticipated so I feel okay about it.

Thank you as well.
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soccerluvof4

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #12 on: November 21, 2017, 02:49:25 PM »
I did 5% this year. Was able to get ahead on some home improvement projects that needed to get done and didnt want to touch my cash stash. If market doesnt do so well in "18" then I will back off and if it dips I will add to my holdings.
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Laura Ingalls

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #13 on: November 24, 2017, 03:32:31 PM »
We have worked less and not been actively accumulating but we have had a withdrawal rate about 1.5%.  I feel comfortable calculating a safe withdrawal rate of 4% of the current total vs the total from 3 years ago when we scaled back on paid employment.

Bicycle_B

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #14 on: November 24, 2017, 06:58:59 PM »
Hell no.

Then again, I feel like my FIRE is a bit thin.  Not enough wiggle room to feel completely comfortable.  So the increase just calms my Inner Bag Dude.


HawkeyeNFO

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #15 on: November 25, 2017, 11:12:02 AM »
I even listened to one riding my bike the other day. It was downwind so easier to hear though .

Headphones and bikes are a recipe for disaster if riding on the streets, or even many of the trails around my area.  Need to hear what's going on around you.

Rollin

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #16 on: November 25, 2017, 07:56:43 PM »
I even listened to one riding my bike the other day. It was downwind so easier to hear though .

Headphones and bikes are a recipe for disaster if riding on the streets, or even many of the trails around my area.  Need to hear what's going on around you.

Local MUP (no cars) and I was just about the only one for 10 miles, but thank you for your concern.
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skip207

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #17 on: November 26, 2017, 03:16:31 PM »
I think you really do have to stick to your SWR to cover yourself in the times when there is a downturn.
If you are older and have built massive reserves then fine, but if you are recently FIRE'd then I would be cautious.
I plan to fire around 42 ish and cant touch my pension till I am 57.  So until I am well into my 50s I will be sticking with my SWR.  Once I get closer to pension age then I might start to spend that excess - if there is any excess that is.

gerardc

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #18 on: November 30, 2017, 07:23:15 PM »
I did the calculation before and by resetting to 4% every year the market is at a new high, you're lowering your 95% success rate down to roughly 37%. Don't do it

Laura Ingalls

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #19 on: December 01, 2017, 03:14:30 PM »
I did the calculation before and by resetting to 4% every year the market is at a new high, you're lowering your 95% success rate down to roughly 37%. Don't do it

Thatís brutal.  I would wonder what happens if you revert back to your original withdrawal rate in down years?

gerardc

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #20 on: December 01, 2017, 06:40:54 PM »
I did the calculation before and by resetting to 4% every year the market is at a new high, you're lowering your 95% success rate down to roughly 37%. Don't do it

Thatís brutal.  I would wonder what happens if you revert back to your original withdrawal rate in down years?

It depends how much of a correction you need to revert back.

I calculated that if your stash sustains a new high for 5-6 years, it's fine to reset your 4% then without hurting your success rate. You can probably reset sooner but revert if the stash doesn't sustain for similar success. You'll still increase your WR in a relatively large fraction of cases, IIRC.

sherr

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #21 on: December 01, 2017, 07:14:01 PM »
I did the calculation before and by resetting to 4% every year the market is at a new high, you're lowering your 95% success rate down to roughly 37%. Don't do it

Can you explain this? Because the 4% rule is worst-case historical rate-of-return, is it not? So it seems to me like you should be able to reset what "4%" means each year from when you retire until the first down year, because the up years are not "worst case" sequence-of-return years.

gerardc

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #22 on: December 01, 2017, 07:21:54 PM »
I did the calculation before and by resetting to 4% every year the market is at a new high, you're lowering your 95% success rate down to roughly 37%. Don't do it

Can you explain this? Because the 4% rule is worst-case historical rate-of-return, is it not? So it seems to me like you should be able to reset what "4%" means each year from when you retire until the first down year, because the up years are not "worst case" sequence-of-return years.

The reason is that 4% WR does not actually have a 100% success rate; if you take a 3.6% WR (or so) which does have 100% success rate, then you're right that you can reset anytime. But since 4% only has 95% success rate, there are a few starting years that fail historically. Those years are typically right before a crash or a long stagflation period, where there is typically a market spike. So if you reset every time the market is up throughout your retirement, chances are you'll eventually hit one of those years and fail then. Those failure years are well distributed throughout history so many retirement periods will include them.

aGracefulStomp

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Re: Are you tempted to adjust your 4% SW to this year's increases?
« Reply #23 on: December 06, 2017, 03:48:49 AM »
I did the calculation before and by resetting to 4% every year the market is at a new high, you're lowering your 95% success rate down to roughly 37%. Don't do it

Can you explain this? Because the 4% rule is worst-case historical rate-of-return, is it not? So it seems to me like you should be able to reset what "4%" means each year from when you retire until the first down year, because the up years are not "worst case" sequence-of-return years.

The reason is that 4% WR does not actually have a 100% success rate; if you take a 3.6% WR (or so) which does have 100% success rate, then you're right that you can reset anytime. But since 4% only has 95% success rate, there are a few starting years that fail historically. Those years are typically right before a crash or a long stagflation period, where there is typically a market spike. So if you reset every time the market is up throughout your retirement, chances are you'll eventually hit one of those years and fail then. Those failure years are well distributed throughout history so many retirement periods will include them.

that is an incredibly succinct and clear answer - thank you