Recent Retiree - 4% of Which Amount?

[Turkey Leg]

Mr & Mrs weirdlair retired in March 2018. Upon retirement, their company paid them accrued bonuses and also pay out for unused vacation. They have been living on these payouts during the remainder of 2018.

Starting in January 2019, we will need to draw from the stash (investments). If it were you, what would you use in your 4% calculation?

• The amount in our stash the day we retired (March 2018), OR
• The amount in our stash the day we start to withdraw (January 2019)?

I'm thinking we'll use 4% of the March 2018 amount as an absolute maximum, but we'll try to use 4% of the January 2019 amount. (We are mid-50's and have social security waiting for us as a safety net, so it's kind of a moot point, but I'm curious.)

[Much Fishing to Do]

4% is a rule of thumb, the percentage of success that come from a 4% SWR that makes it a rule of thumb is based upon one random point in time being chosen.  So if you flip a coin to determine which one to use (the March balance or the current balance) it would be the same.  If you intentionally chose the number that gives you the higher withdraw then you've obviously distorted chance of success slightly, but not probably not much, look and see what the difference is.  To compare, An extreme distortion I know I've seen some discuss is to retire & continue adjusting your 4% SWR upward every year with your growing portfolio, and then during a sharp downturn continue with the 4% of the highest portfolio balance.  At that point you're obviously fooling yourself if you still think you're following the 4% rule of thumb that gives you 95%+ chance of success.  You've intentionally chosen a "bad" valuation of your portfolio to base your 4% on and have affirmatively placed yourself in a position to experience a worse case return.

Given March was after the year's first drop, I assume you're not talking about a very big difference here.  In my mind 4.5% is still a VERY safe SWR (especially with SS coming before long) so I'd take the higher withdraw either way.

[maizefolk]

To satisfy the exact assumptions that go into regular calculations of the success rate at 4% (or other percent withdrawal rates) you'd want to use the number at the date you started making withdrawals (so #2 in your example).

But I agree with Much Fishing that A) the difference is quite minor in this particular case and B) if you've only got to last 10-15 years until social security kicks in and presumably drops the two of you well below a 4% withdrawal rate, you're going to be fine regardless.

[BTDretire]

I'd start fresh with 2019, but, are the amounts all that much different?
 We just adjusted our daily bank account to start this year with $50k.
 We hope to live on this for one year, I don't expect it to be a problem.
 But, what I want to find out is, How much do we spend?
 My wife is very frugal, but I could never get her to track her spending,
so, this will be my way to find out what it costs us to live.
  I opened a second checking account and funded it, this will be for bills
we won't have over the long term. Mainly the kids college expenses and
home repairs that we need because of Hurricane Michael.
I expect not to have a need for that account in about 3 years.
Please kids, please graduate and get done with school!!   :-)

[Dicey]

I'd start by figuring out how much I needed and work backwards from there. If you can comfortably live on less that 4%, why wouldn't you?

[FreshlyFIREd]

Mr & Mrs weirdlair retired in March 2018. Upon retirement, their company paid them accrued bonuses and also pay out for unused vacation. They have been living on these payouts during the remainder of 2018.

Starting in January 2019, we will need to draw from the stash (investments). If it were you, what would you use in your 4% calculation?

• The amount in our stash the day we retired (March 2018), OR
• The amount in our stash the day we start to withdraw (January 2019)?

I'm thinking we'll use 4% of the March 2018 amount as an absolute maximum, but we'll try to use 4% of the January 2019 amount. (We are mid-50's and have social security waiting for us as a safety net, so it's kind of a moot point, but I'm curious.)

Congrats on your retirement. Me and the Mrs are in exactly the same boat as you: same ages, same retirement dates, just took our first withdrawal for January (we are using a more conservative 3.25%, but that does not really matter). My process is to take monthly distributions. I track the total monthly and pull out 1/12 of 3.25%. If the market goes up, I get a raise, down - a little less. We are actually pulling out more than we need, so we will end up somehow saving some of the withdrawals.

I don't think it matters much how you do it. Whatever works best for you.

[MrThatsDifferent]

I thought the 4% was determined initially by your projected budget during retirement? That was the number you multiplied by 25. So just determine your yearly budget, which should be aligned with your original position, adjusted for inflation (generally 2%)  and then take that amount out.

[Linea_Norway]

I'd start by figuring out how much I needed and work backwards from there. If you can comfortably live on less that 4%, why wouldn't you?

+1.

Intending to spend 4% sounds like federal companies having to spend their whole budget every year, otherwise they won't get the same amount the next year.

Just spend what you need for a low cost, comfortable enough life and watch out that it isn't above any 4%. Otherwise, consider taking up a side-gig of some kind. In a year with market crash, I would personally look at the 2019 4%. But many retirees on this site say they spend less than they planned for, so why not you, too?

[Turkey Leg]

I'd start by figuring out how much I needed and work backwards from there. If you can comfortably live on less that 4%, why wouldn't you?

Because we try to give what we don’t spend to charity.

[Dicey]

I'd start by figuring out how much I needed and work backwards from there. If you can comfortably live on less that 4%, why wouldn't you?

Because we try to give what we don’t spend to charity.

We are big fans of charitable giving, so we budget for it. If sweeping all unspent money to charity is causing you angst, or worse still,  jeopardizing your ability to provide for yourselves in your latest years, maybe you can collect any unspent monies inth a designated account, earmarked for future giving. Need will always exist, alas. Best to make sure the need is not your own.

[MrThatsDifferent]

I'd start by figuring out how much I needed and work backwards from there. If you can comfortably live on less that 4%, why wouldn't you?

Because we try to give what we don’t spend to charity.

We are big fans of charitable giving, so we budget for it. If sweeping all unspent money to charity is causing you angst, or worse still,  jeopardizing your ability to provide for yourselves in your latest years, maybe you can collect any unspent monies inth a designated account, earmarked for future giving. Need will always exist, alas. Best to make sure the need is not your own.

+1. Yes, charity should be a budget item like everything else. Otherwise, draw up a will that leaves a remainder of your estate to charity after you both pass. I think you’re hurting your flexibility while alive by sweeping all remainder into charity. As someone said above, it’s not about getting to 0 or having to spend 4% each year, that’s a rough guide.

[stoaX]

I'd start by figuring out how much I needed and work backwards from there. If you can comfortably live on less that 4%, why wouldn't you?

Because we try to give what we don’t spend to charity.

We are big fans of charitable giving, so we budget for it. If sweeping all unspent money to charity is causing you angst, or worse still,  jeopardizing your ability to provide for yourselves in your latest years, maybe you can collect any unspent monies inth a designated account, earmarked for future giving. Need will always exist, alas. Best to make sure the need is not your own.

Well said.

I would add that the first few years of "living off of the 'stash" have a much bigger impact on the financial success of your early retirement than later years do.   So that argues in favor of using the more conservative approach. 

[Turkey Leg]

I'd start by figuring out how much I needed and work backwards from there. If you can comfortably live on less that 4%, why wouldn't you?

Because we try to give what we don’t spend to charity.

We are big fans of charitable giving, so we budget for it. If sweeping all unspent money to charity is causing you angst, or worse still,  jeopardizing your ability to provide for yourselves in your latest years, maybe you can collect any unspent monies inth a designated account, earmarked for future giving. Need will always exist, alas. Best to make sure the need is not your own.

Angst wasn't mentioned. Giving the extra we don't spend is in addition to what we already plan to give each year.

[SnackDog]

4% is a quite general rule of thumb to help determine when you might be ready to stop working.  What you need, now that you are retired, is a plan, budget and withdrawal strategy specific to your assets and needs.  You need some targets on how long you may live and what needs you may have along the way. This should be comprehensive and include all assets, social security, pensions, real estate, health care, taxes, long term care, children, relatives and heirs.  You will need to develop a flexible plan with milestones and road signs.

[Unique User]

I'd use current day figures, but I'd also encourage you to run your numbers through cfiresim.com.  I was shocked to see that a 5% withdrawal still gave us a 100% success rate, probably due to age.  This is our last year and I'll be 50, even delaying SS to full retirement year had the same result.  I plan to rerun every year so we know the max we can take out, even if we don't. 

[Car Jack]

My understanding from the first Trinity study is that if you have a 60/40 AA and withdraw 4% (of your balance on the day you take it) annually, that you most likely will be able to do so for 30 years.

The new study uses a lower %, but I have only heard about it and not read it.

It seems that "common knowledge" is that 4% allows you to withdraw forever, which isn't the case.  With future returns expected to be lower than returns of the past (according to Jack Bogle and others), most are revising that 4% to a lower percentage.

I'm a big pessimist and safety net guy, which is why I won't even consider bailing from work until I hit 50X spending (2% withdrawal).  With the market as of late, that's extended my working years a bit.  2019 was my initial ejection point, but with negative return for 2018 and 2 personal black swan events, we're not on track.

[BicycleB]

Personally, I'd take the lower amount because I can always give more later, and wouldn't be sure at first.

I applaud your plan regardless.