Author Topic: Dip into principal?  (Read 26063 times)

canadian bacon

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Dip into principal?
« on: April 22, 2015, 07:49:39 AM »
I am running the numbers and feel that my investments are completely skewed toward the 401K side.   Approx 850K in 401K and 220K in normal investments

Ideally, I would like to leave the 401k for post 60 years old and live off of the normal investments from FI to post 60... 

Now the question becomes:   Should I PLAN to use the normal savings principle to help fund my FI.  If I call the principle "EMERGENCY FUND" and try not to touch it, I will need to almost double the amount that I would need in my normal investment account before I can be financially independent.

Ex.  Using Interest + Principal, I can retire at 43, Interest only, I retire at 47

How are you all planning FI?

StAugustine

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Re: Dip into principal?
« Reply #1 on: April 22, 2015, 08:07:14 AM »
Are you leaving your job soon?  If that's the case, you can start withdrawing from your 401(k) in a mere five years time.

Leaving your job is a qualifying event that allows you to rollover the 401(k) into an IRA.  Now you can convert a portion of that IRA into a Roth each year by paying the taxes on it at your normal rate.  In five years, that "Roth contribution" becomes withdraw-able.  Perform the Roth conversion each year and now you're drawing down your retirement accounts early.   You can top-off this money with withdraws from your taxable account, since those are taxed at the lower long-term capital gains rates (which may be 0% for a low-income early retiree).

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Eric

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Re: Dip into principal?
« Reply #2 on: April 22, 2015, 08:14:52 AM »
I don't understand your use of the term principal in this case.  You should consider all of your investments, and their gains, to be part of the number you need to hit to retire.  The investments don't care whether they reached their amount because you contributed your earnings or they themselves contributed through capital gains and dividend reinvestment, so you shouldn't make the distinction either.
« Last Edit: April 22, 2015, 08:17:53 AM by Eric »

canadian bacon

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Re: Dip into principal?
« Reply #3 on: April 22, 2015, 08:27:54 AM »
Eric, I may be using the word principal incorrectly here but the idea is, do people plan to live off interest ONLY or let the total balance lower each year (ie: the interest amount is not sufficient to fund yearly expenditures)

dcheesi

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Re: Dip into principal?
« Reply #4 on: April 22, 2015, 08:54:11 AM »
Seems like as long as you have that 401k money in reserve, you should be okay drawing down principal (or whatever we're calling it) in the taxable account(s). I probably wouldn't be comfortable aiming for $0 at age 59, but some degree of draw-down should work out fine.

You might also want to start the Roth pipeline StAugustine mentioned at the same time, just in case you hit a snag and exhaust your taxable account funds sooner than expected. Belt + suspenders, and all that.

r3dt4rget

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Re: Dip into principal?
« Reply #5 on: April 22, 2015, 09:05:31 AM »
Eric, I may be using the word principal incorrectly here but the idea is, do people plan to live off interest ONLY or let the total balance lower each year (ie: the interest amount is not sufficient to fund yearly expenditures)
If for whatever reason you decided to not rollover your 401k and use that money to live off of until 60, your 401k would still be generating income and reinvesting it. So you may be draining that 200k taxable account over the years until it's 0, but that is offset by the gains your 401k is making. Don't think of it like 2 separate accounts because in your FIRE planning the SWR applies to your entire portfolio. So yes, in that sense you will be tapping into "principle" but in reality you are still living off interest because it's being generated in your 401k which you are not using.

ChaseJuggler

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Re: Dip into principal?
« Reply #6 on: April 22, 2015, 09:14:05 AM »
Well said,  r3dt4rget. While it's obvious to me now, this idea took several months to sink in.

As long as your net worth goes up each year and beats inflation (on average), you're doing FIRE right.

Retired To Win

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Re: Dip into principal?
« Reply #7 on: April 22, 2015, 09:26:24 AM »
I think no matter how you figure it, you have to include in your financial planning an Emergency Reserve Fund, held in cash and sequestered in something like its own savings account.  That Emergency Fund may be the only thing that keeps you from having to sell of some of your investments for living money when the prices of those investments are unnaturally depressed.

I recommend you plan for an Emergency Cash Reserve that will cover 6 months of your basic living expenses.  I maintain a 12-month reserve.

Good luck.

canadian bacon

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Re: Dip into principal?
« Reply #8 on: April 22, 2015, 11:00:23 AM »
I think that I got it.

So as long as my yearly expenses are less than 4% of my total investments (401K + taxable), I SHOULD be able to live off my investments indefinitely. 

Now the new part:   to avoid the tax penalty, I should have in a taxable account (or Roth) enough to last me 5 years. (or 6 years to include the emergency cash reserve that Retired To Win recommended)   

The instant that I leave my job, I begin the 401K to Roth ladder that would take over as the primary supply of retirement income in year 5

Ex:  if I live off 40K a year, I need 1MM in investments and 240K in non-401K.  Day one  after I retire, I convert 40K of my 401K IRA to Roth and do this on a yearly basis.   After 5 years, my taxable account will be more or less depleted except for the emergency fund. At this time I can withdraw up to 40K per year from my Roth

*in new tax year
**yes I ignored any interest in this account for simplicity

mjb

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seattlecyclone

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Re: Dip into principal?
« Reply #10 on: April 22, 2015, 11:23:59 AM »
Yes, that's basically it. Spend money out of your taxable account at the beginning of your retirement. Make Roth conversions each year equivalent to the amount you plan to spend it five years. This amount will probably be larger than the amount you plan to spend this year because of inflation. Once your taxable account is empty, you can start spending money out of your Roth account.

Once you hit 55, the Roth conversions are no longer necessary to avoid early withdrawal penalties (since you'll be 60 by the time the money has been there for five years), but you may decide to do it anyway to reduce the amount of your RMDs down the road.

OldPro

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Re: Dip into principal?
« Reply #11 on: April 22, 2015, 11:53:37 AM »
I have several simple rules I follow.  Rule number 1 is NEVER spend the capital.  Which means however you want to look at it, you must live off the income your capital generates. 

My next rule is the 'Rule of 3's' which translates to 1/3 expenses, 1/3 discretionary spending and 1/3 savings.  So I actually live off of only 2/3 of income.  After 26 years of retirement from age 43, I can tell you that changes will occur which you cannot anticipate from where you are now.  To think that spending all your income on the basis of a 4% ROI average will work till age 90 just makes no sense.

There were lots of people who discovered that in the 08/09 recession.  Suddenly, their expenses exceeded their income from investments and a lot of them found themselves having to try and go back to work.  I believe that happens because people confuse the goal.   The goal is not to FIRE.  FIRE is simply the means to an end.  The goal is to live the rest of your life happily without having to work.  If you live on or near 100% of your income and given the reality of unforeseen changes in the next 20-30-40-50 years that you hope to live,  your chances of achieving the real goal are much lower.

For those who not only spend all or nearly all of their income but don't even really have much of a discretionary spending cushion, it's even worse.  The closer to the 'bone' you live, actually means the more important a cushion becomes.

Eric

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Re: Dip into principal?
« Reply #12 on: April 22, 2015, 12:22:43 PM »
I have several simple rules I follow.  Rule number 1 is NEVER spend the capital.  Which means however you want to look at it, you must live off the income your capital generates. 

My next rule is the 'Rule of 3's' which translates to 1/3 expenses, 1/3 discretionary spending and 1/3 savings.  So I actually live off of only 2/3 of income.  After 26 years of retirement from age 43, I can tell you that changes will occur which you cannot anticipate from where you are now.  To think that spending all your income on the basis of a 4% ROI average will work till age 90 just makes no sense.

I'm sorry OldPro, but this is the most conservative (read: worst) idea you've had yet.  If anyone followed your advice, they'd have to work so many extra years that it wouldn't even be FIRE any more, just FIR.  You're cutting out the "early", and I suspect it's because you're just shooting from the hip here and haven't actually done the math.  So let's do the math, shall we?  We'll use djcrawfor's example of $40K per year spending.

Using the basic 4% rule, you save $1,000,000 and you can spend $40,000.00 per year, adjusted for inflation.

Using your rules, first, you only use what your capital generates.  I'm assuming you mean dividends (which in itself is silly since there's no difference between collecting a dividend and selling that same amount of shares, but let's run with it) so VTSAX pays a dividend of 1.87%.  If you wanted to spend $40,000 per year with a 1.87% withdrawal rate, you'd need to accumulate a stash of $2,139,037.  Over twice as much.  That's a lot more money!  BUT WAIT!  We didn't apply your rule #2.  That is, you should plan for 3 times your basic spend rate.  So you'd plan to withdraw $120,000 per year.  To support a $120,000 per year withdrawal amount on a 1.87% withdrawal rate, you'd have to accumulate $6,417,112.

Accumulate $1,000,000 or $6,417,112 to cover the same $40,000 spend rate.  Hey, you have a 100% chance of not running out of money with a $6MM stash.  Of course, you also have a 100% chance of working 20 years too long because you were so conservative that you couldn't take even the most minor risk. 
We can leave it up to the readers to decide which is a more reasonable plan. 


waffle

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Re: Dip into principal?
« Reply #13 on: April 22, 2015, 12:42:08 PM »
I have several simple rules I follow.  Rule number 1 is NEVER spend the capital.  Which means however you want to look at it, you must live off the income your capital generates. 

My next rule is the 'Rule of 3's' which translates to 1/3 expenses, 1/3 discretionary spending and 1/3 savings.  So I actually live off of only 2/3 of income.  After 26 years of retirement from age 43, I can tell you that changes will occur which you cannot anticipate from where you are now.  To think that spending all your income on the basis of a 4% ROI average will work till age 90 just makes no sense.

I'm sorry OldPro, but this is the most conservative (read: worst) idea you've had yet.  If anyone followed your advice, they'd have to work so many extra years that it wouldn't even be FIRE any more, just FIR.  You're cutting out the "early", and I suspect it's because you're just shooting from the hip here and haven't actually done the math.  So let's do the math, shall we?  We'll use djcrawfor's example of $40K per year spending.


I think that OldPro actually meant that if you have 1 million saved when you retire you have to live off of what that generates regardless of how its generated, and you shouldn't ever dip below that 1 million mark.

Eric

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Re: Dip into principal?
« Reply #14 on: April 22, 2015, 01:00:55 PM »
Since I can feel this thread moving into debate mode, might as well tackle this too...

I think no matter how you figure it, you have to include in your financial planning an Emergency Reserve Fund, held in cash and sequestered in something like its own savings account.  That Emergency Fund may be the only thing that keeps you from having to sell of some of your investments for living money when the prices of those investments are unnaturally depressed.

I recommend you plan for an Emergency Cash Reserve that will cover 6 months of your basic living expenses.  I maintain a 12-month reserve.

Good luck.

That emergency cash reserve actually makes your stash have a greater chance of running out than keeping everything invested.  This is the best article I've found about it:

https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/

The money quote:
Quote
In the end, the reality is that while cash reserve strategies appear psychologically appealing, their actual benefits as an enhancement for retirement income sustainability appear to be a mirage upon closer inspection. The buffer zone approach appears to do little to effectively "time" the market, and/or to the extent it does, the benefits are overwhelmed by the adverse consequences of a large allocation of cash in the portfolio that drags down long-term returns.

TheAnonOne

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Re: Dip into principal?
« Reply #15 on: April 22, 2015, 01:13:00 PM »
I have several simple rules I follow.  Rule number 1 is NEVER spend the capital.  Which means however you want to look at it, you must live off the income your capital generates. 

My next rule is the 'Rule of 3's' which translates to 1/3 expenses, 1/3 discretionary spending and 1/3 savings.  So I actually live off of only 2/3 of income.  After 26 years of retirement from age 43, I can tell you that changes will occur which you cannot anticipate from where you are now.  To think that spending all your income on the basis of a 4% ROI average will work till age 90 just makes no sense.

I'm sorry OldPro, but this is the most conservative (read: worst) idea you've had yet.  If anyone followed your advice, they'd have to work so many extra years that it wouldn't even be FIRE any more, just FIR.  You're cutting out the "early", and I suspect it's because you're just shooting from the hip here and haven't actually done the math.  So let's do the math, shall we?  We'll use djcrawfor's example of $40K per year spending.


I think that OldPro actually meant that if you have 1 million saved when you retire you have to live off of what that generates regardless of how its generated, and you shouldn't ever dip below that 1 million mark.

This is how I read it too, however in bad crash years you won't have a choice, your million might turn into 800k and suddenly you will either need to accept the dip or get another job.

Eric

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Re: Dip into principal?
« Reply #16 on: April 22, 2015, 01:28:46 PM »
I have several simple rules I follow.  Rule number 1 is NEVER spend the capital.  Which means however you want to look at it, you must live off the income your capital generates. 

My next rule is the 'Rule of 3's' which translates to 1/3 expenses, 1/3 discretionary spending and 1/3 savings.  So I actually live off of only 2/3 of income.  After 26 years of retirement from age 43, I can tell you that changes will occur which you cannot anticipate from where you are now.  To think that spending all your income on the basis of a 4% ROI average will work till age 90 just makes no sense.

I'm sorry OldPro, but this is the most conservative (read: worst) idea you've had yet.  If anyone followed your advice, they'd have to work so many extra years that it wouldn't even be FIRE any more, just FIR.  You're cutting out the "early", and I suspect it's because you're just shooting from the hip here and haven't actually done the math.  So let's do the math, shall we?  We'll use djcrawfor's example of $40K per year spending.


I think that OldPro actually meant that if you have 1 million saved when you retire you have to live off of what that generates regardless of how its generated, and you shouldn't ever dip below that 1 million mark.

This is how I read it too, however in bad crash years you won't have a choice, your million might turn into 800k and suddenly you will either need to accept the dip or get another job.

Feel free to test this on your own via cFIREsim, but even on a scenario with a 100% chance of success (for example, $33,000 on $1,000,000, all else default), the chance of hitting 800K is 49%.  So if your going back to work threshold is 20% below your starting amount, then you're going back to work half the time.  And this is on a portfolio that has succeeded 100% of the time in the past.  Therefore, I'd say that this is too conservative for me, and I wouldn't sweat a 20% drop.  Trying to make sure your portfolio value never dips below the initial amount is pretty conservative.

I'd also recommend reading this 5 part series starting with Part 1 from the blog LivingaFI.  (warning, it's long, but very well done)  It can help you visualize what it will be like to draw down and the seriousness of dropping below your initial portfolio value.(or lackthereof).

Candace

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Re: Dip into principal?
« Reply #17 on: April 22, 2015, 01:36:44 PM »
To the OP:

You can withdraw money from your IRA penalty-free if you follow IRS Rule 72t. This has been discussed in many threads on here, so if you're not familiar, please do a search. In short, the IRS has rules for how you do it, but you will end up making "substantially equal" withdrawals between when you start and when you reach 59 1/2.

This is one option for you if you feel you have too much in your IRA versus taxable accounts. I have the same issue. Most of my money is in my IRA. I'm only 48 and plan to FIRE in about three years. I'll use the 72t rule to take out money from my IRA basically in the same way I would do it if I were 59 1/2 already: about the same amount each year.

I was relatively well-informed on personal finance before I started reading this site, but reading this forum is how I learned of Rule 72t. It's going to make my life a lot better.

canadian bacon

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Re: Dip into principal?
« Reply #18 on: April 22, 2015, 01:59:51 PM »
The cFIREsim chart and data is kind of scary.  The variability in the entire thing....  It is good though to run numbers to get the idea of what withdraw rate would historically succeed.  I suppose it shouldn't be scary if it points to a likelihood that I desire.

Candace, yes thank you.  The SEPP option could be helpful if I got into a pinch.  This gets taxed the same as if there is a Roth Conversion right?
 

Eric

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Re: Dip into principal?
« Reply #19 on: April 22, 2015, 02:08:55 PM »
The cFIREsim chart and data is kind of scary.  The variability in the entire thing....  It is good though to run numbers to get the idea of what withdraw rate would historically succeed.  I suppose it shouldn't be scary if it points to a likelihood that I desire.

It can seem menacing, but it's a wonderful tool.  It uses the same process that the Trinity Study researchers used to come up with the original 4% safe withdrawal rate rule, but has be ability to enter and adjust based on variables for your own personal situation. (like receiving SS or paying a mortgage payment for only 15 years or whatever)

And yes, there's a lot of variability, but it's important to realize that the vast majority of that variability is on the upside.  Most portfolios with an acceptable success rate to start with end up with a ridiculous sum of money. (check out the median portfolio terminal values)

Or course, the only thing guaranteed about the future is that it won't look like the past.  So build in a few safety margins as well and you should be all set.  This is what OldPro is alluding to, albeit with an extremely conservative bent.

canadian bacon

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Re: Dip into principal?
« Reply #20 on: April 22, 2015, 02:28:16 PM »
Ha ha. 
differences in opinion are healthy.  I think that I get the idea of what OldPro is trying to say.   I think that I am better off than I originally thought.  Seems many people would feel that I could pull the trigger already if I wanted.

r3dt4rget

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Re: Dip into principal?
« Reply #21 on: April 22, 2015, 02:37:51 PM »
Ha ha. 
differences in opinion are healthy.  I think that I get the idea of what OldPro is trying to say.   I think that I am better off than I originally thought.  Seems many people would feel that I could pull the trigger already if I wanted.
You can't prepare for every scenario. Sticking to the basics of living well below your means, obeying the SWR, and being able to adjust for unexpected situations will give you a very high chance of success. Working "one more year" to add to that safety cushion seems pretty silly when you look at your chances as you stand right now. And that assumes you won't ever earn anymore money, which is highly unlikely. Have you read the Safety is an Illusion post on the MMM blog? We have a natural desire to create safety and security, usually at the expense of rational decisions.

WildJager

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Re: Dip into principal?
« Reply #22 on: April 22, 2015, 04:23:12 PM »
Since I can feel this thread moving into debate mode, might as well tackle this too...

I think no matter how you figure it, you have to include in your financial planning an Emergency Reserve Fund, held in cash and sequestered in something like its own savings account.  That Emergency Fund may be the only thing that keeps you from having to sell of some of your investments for living money when the prices of those investments are unnaturally depressed.

I recommend you plan for an Emergency Cash Reserve that will cover 6 months of your basic living expenses.  I maintain a 12-month reserve.

Good luck.

That emergency cash reserve actually makes your stash have a greater chance of running out than keeping everything invested.  This is the best article I've found about it:

https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/

The money quote:
Quote
In the end, the reality is that while cash reserve strategies appear psychologically appealing, their actual benefits as an enhancement for retirement income sustainability appear to be a mirage upon closer inspection. The buffer zone approach appears to do little to effectively "time" the market, and/or to the extent it does, the benefits are overwhelmed by the adverse consequences of a large allocation of cash in the portfolio that drags down long-term returns.

Thank you for posting that.  That is one of the final pieces of the puzzle that I've been trying to figure out.  As I finish up my earning years, I am driving with 100% equities for a maximax approach.  Balancing my portfolio in FI for a minimax approach does make more sense than having a cash reserve if (in my opinion) market timing is impossible. 

With that said, any words on what is a smart withdrawal rate for the ER'y?  As in, sell for what I need for the month every month?  Every quarter? 6 months or year?

SwordGuy

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Re: Dip into principal?
« Reply #23 on: April 22, 2015, 04:42:43 PM »
I think that I got it.

So as long as my yearly expenses are less than 4% of my total investments (401K + taxable), I SHOULD be able to live off my investments indefinitely. 

NO.

I know where you got that idea.  You got it from every financial hack who was too lazy to actually read the original study and understand what the SWR (Safe Withdrawal Rate) of 4% actually means.

The original study assumed a retirement of 30 years.  It assumed you would be DEAD at the end of those 30 years and therefore would not need money any more.  Therefore, if your investments went to $0.00 on the last day of the 30 year window, victory was declared, because you were now assumed to be DEAD.

For those who want to retire early, and therefore (hopefully!) have a retirement that is MUCH LONGER than 30 years, the 4% "rule" is inadequate.

Go back and read MMM's posts on this topic and pay especial attention to how he has many different risk mitigation strategies built into his retirement plan.   Pay attention and then set up risk mitigation plans to cover your butt.

Eric

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Re: Dip into principal?
« Reply #24 on: April 22, 2015, 05:48:53 PM »
It's not dichotomy.  You can decide to follow the 4% rule and still have risk mitigation plans.  In fact, you should.

It's true that the original studies only covered 30 years, but of course they also didn't count any Social Security payments, any withdrawals that were variable (i.e. spend less if there's a market crash), or the fact that most retirees spend less as they age.  While that last factor may not matter initially for early retirees, it should certainly factor in down the road.  Plus, we can use cFIREsim to look at periods longer than 30 years.

As someone who as read every word of both the original and updated studies, along with just about 1000 articles analyzing and commenting on both, I don't see the problem here.  In fact, you're misrepresenting the Trinity Study by stating that death happens after 30 years.  All that happens after 30 years is that they stop testing withdrawals.  But the fact remains that the median portfolio amount after 30 years is SIX TIMES more than what you started with.  (4% 75/25, the AA that produced the 4% rule)  That's the median!  So it's not a stretch to assume that the vast majority of people will still be able to continue their withdrawals for many many more years, essentially forever.

Have a look:


« Last Edit: April 22, 2015, 05:50:45 PM by Eric »

OldPro

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Re: Dip into principal?
« Reply #25 on: April 23, 2015, 10:24:22 AM »
Well, let OldPro speak for himself.

First, Eric, do not assume I am referring to 'dividends'.  I am not, I am referring to income from investments.  In my case that includes no dividends whatsoever. 

Second, another rule I have is NOT investing in the stock market in retirement.  That's what got so many in trouble in the recent 08/09 recession.  The recession did not affect my income at all.  It did however affect my capital's value.  It did indeed take a dip but it continued to produce the same income.  Capital value is not what matters though, income is what matters.  Don't make the mistake of tying the two together, that is not always the case.  Simple example, a rental property might take a dip in capital value while rental income remains the same.  On the other hand another example is exchange rates.  My wife has some income subject to exchange rates and it has fluctuated by as much as 25% in the last 9 years.  The capital value (held in a different currency) did not drop but the income (in local currency) did.  Trying taking a 25% hit on your income using the 4% 'rule'.

Next, let's look at the Rule of 3s as it applies to my own case.  We have an income of around $65k (this year) and our actual expenses are around $25k.  To that we add $20-25k discretionary spending and $15-20k savings that can be invested.  Fits what I am suggesting pretty well.

But I did not start out with $65k of income and expect to maintain it for the next 50 years.  I started out with $20k of income derived from $200k of capital invested and expected to grow both the capital value and income over time.  At that time, I figured I could live (single guy) on $12k per year from that $20k income and in fact did so for some years and for as little as zero in a few years along with also supplementing income sometimes for short periods.

You immediately jump to believing I am saying you need to have $6mil Eric.  Why?  You need to have whatevever amount you need to START your RE with the income you want.  Then over time, you need to continue to grow your income as required and also hopefully your capital value although that isn't strictly necessary.

There is a fundamental difference there in how I looked at it.  I saw retirement as no different than working.  You still need to continue to grow your income and you still need to put something aside for 'a rainy day'.  Looking at it as being 'fixed', you FIRE with 4% ROI forevermore is YOUR thinking, not mine.  Do you see that you are saying you are trying to determine what your income 40 years from now will be by 'fixing' it at 4%?

If I had FIREd with $200k capital and $20k income(10% ROI) 26 years ago (which I did) expecting to maintain that $20k(adjusted for inflation) ROI forevermore just by sitting the money in stocks and collecting dividends, there is no doubt I would be broke today.  But things change.  You cannot know what those changes will be down the road.  All you can know is you have enough to live on today if you FIRE and from then on, you are going to have to change and adapt as necessary.  Just like you do before you FIRE.  The 4% Rule is not a rule, it's a joke.

If the 4% 'Rule' was indeed a rule that worked, then how come so many of those using it had to go back to work after the 08/09 recession?  It sure wasn't working for them any more.  Why?  Because as soon as their income dipped below the 4% average, they did not have enough income to cover their expenses.  Their 'plan' didn't have enough cushion in it.  I actually find that somewhat  hard to believe and yet I know it is true.  Those people must not have had even much of a discretionary spending cushion to work with and had their income tied too directly to their capital value.  Like I said, the 'closer to the bone' you live the more imporant a cushion becomes.

SwordGuy, you seem to be on the right track.  I would add this.  You can FIRE when you have enough passive income from investments for next year.  In that regard, I have no problem at all with the 4% 'rule'.  It's a reasonable number to use today to figure out if you can FIRE.  Just as 10% was a reasonable number to use when I FIREd.  Beyond next year you must adjust your tactics each year as required.  I don't know why people cannot understand that you cannot predict 25-50 years down the road without a working crystal ball.  I don't care what any 'calculation' shows them, it's just a guess.

I can tell you that in the 26 years since I FIREd, there have been changes in my life that I couldn't have even guessed at 26 years ago.  To think the same will not be true for someone who FIREs today, is ludicrious as far as I am concerned.  To think they can just assume 4% ROI and sit back is ridiculous as the 08/09 fiasco shows us.  To think  I could have just sat back from 1989 and assumed a 10% ROI would have been equally ridiculous.  What I have done financially over those 26 years has varied a great deal from year to year.  It only makes sense to me that it would have to.  As Spock would say to think otherwise would be 'illogical'.
« Last Edit: April 23, 2015, 10:26:34 AM by OldPro »

Eric

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Re: Dip into principal?
« Reply #26 on: April 23, 2015, 10:37:27 AM »
Second, another rule I have is NOT investing in the stock market in retirement.

I stopped reading after this.  Your retirement looks absolutely nothing like me or the majority of others around here then.  We're speaking different languages.  Good luck to you!

OldPro

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Re: Dip into principal?
« Reply #27 on: April 23, 2015, 11:01:58 AM »
Strictly as a sidebar and not intended to suggest the same might happen to anyone else tomorrow, it might be of interest to some to hear of a few financial examples of things that happened to me over the last 26 years.

I started out invested in Industrial and Commercial properties directly (not REITS in other words).  I did that through having the right 'connections' to allow me to make small and highly leverage investments in multiple properties.  ie. $25k invested to derive income (rent) from $500k of property value.  Do that 8 times ($200k invested) and you have income from $4mil of property value.  That got me FIREd at age 43 having only taken me 7 years from decision to FIRE with zero in my pocket to start with really.  My only starting advantage was having zero debts either.

A few years into FIRE, I was living in Greece and discovered that I could buy Greek government bonds that paid 21% and the income was tax free!  Yes, 21% is correct.  So guess what I did, moved the money.  Over the next 5 years that decreased each year as Greece moved towards joining the EU.  In 1999 when I withdrew everything it was down to around 13%. 

Then I left Greece, moved to the UK and got married.  It was quite amusing when I first arrived in the UK and went into a bank with a certified bank draft for the capital I had built up in Greece.  The first bank asked me for proof of residence, utility bill, phone bill, etc. as necessary to open an account.  I said I had just got off the plane that morning and had no such thing but I did obviously have a sizeable deposit to make.  The reply was that I couldn't open an account without meeting the necessary requirements.  I asked if they knew what business they were in.  That got me a strange look.

So I went to a second bank and asked to see the Manager.  I explained the situation, showed her the draft, showed her my passport and asked if she wanted my deposit or not.  She made a call to head office and opened an account.   Even banks don't always know which side their bread is buttered on it seems.

Anyway, after getting settled, I looked for something to invest my money in.  Bank interest certainly wasn't appealing.  So I invested in real estate again but Residential this time.  Flats (apartments) as they call them in the UK.  They provided a reasonable income even after paying a management agency.  I had no interest in being the landlord as such. 

At the end of 2005 after 6.5 years of ownership, I sold up and made over 100% profit on the capital.  We were moving to Canada.  I'm not going to go into what happened since then but it's all positive including another property sale IN the 08/09 recession that still realized a 25% profit.

The thing is I could not have predicted that I would live in Greece and find 21% tax free bonds.  I could not have predicted that I would live in the UK and property prices would rise steadily for 6.5 years.  I could not predict I would get married 10 years into FIRE.  But they all happened.  I also cannot predict what will happen in the next 25 years but I'm sure things will happen. 

At all times, I (and now we) have lived on less than we earned in income.  No ROI 'rule' has been followed and no 'rule' could have possibly anticipated those changes. 

Eric, re your short response that you 'stopped reading' and wish me good luck.  I'm 26 years in and doing well so far.  I don't think I need luck.  I do wish those relying on any '4% rule' luck though, I think they are going to need it.
« Last Edit: April 23, 2015, 11:04:41 AM by OldPro »

OldPro

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Re: Dip into principal?
« Reply #28 on: April 23, 2015, 11:07:32 AM »
I wrote, "I do wish those relying on any '4% rule' luck though, I think they are going to need it."

Maybe that's unfair.  I'm sure most here are not stupid.  I think or at least hope what will happen is they will discover that they have to make changes and will be smart enough to make those changes.  It's just all those people who got caught in 08/09 that make me think they might learn the hard way.

Aussiegirl

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Re: Dip into principal?
« Reply #29 on: April 23, 2015, 12:29:55 PM »
Wow, OldPro, great story!

They do say that those who get along the best in life are those that embrace change and can roll with the punches.  You've certainly mastered that!

Scandium

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Re: Dip into principal?
« Reply #30 on: April 23, 2015, 01:27:30 PM »
So investing in the stock market in 10,000 companies all around the world is risky, but putting all your money in 21% Greek bonds, and real estate in a single city in England during a property boom is not?
Yeah good for you, but I don't think that's how the majority, or anyone, here plan their FIRE.

DoubleDown

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Re: Dip into principal?
« Reply #31 on: April 23, 2015, 01:29:19 PM »


Second, another rule I have is NOT investing in the stock market in retirement.  That's what got so many in trouble in the recent 08/09 recession. 

If the 4% 'Rule' was indeed a rule that worked, then how come so many of those using it had to go back to work after the 08/09 recession?  It sure wasn't working for them any more.  Why?  Because as soon as their income dipped below the 4% average, they did not have enough income to cover their expenses.  Their 'plan' didn't have enough cushion in it.

We don't have the full story on these retirees you mention that "had to go back to work after the 08/09 recession." They likely either had a poor plan, were fearful, or did not understand that the 4% SWR accounts for recessionary periods like they experienced. Given the recovery in the stock market since then, it is completely probable that a person invested 100%/0% or 75%/25% in stocks/bonds could have continued to withdraw 4% (inflation adjusted) every year right through the recession and today be sitting on more money than they had prior to the recession. That is, they could have gone right through it according to plan, as the 4% SWR predicts.

I'm not a 4% SWR apologist, and agree with others (and you) that flexibility is a desirable thing as an early retiree (and that income is what really matters, not a straight withdrawal rate). However, the fact that some people went back to work during the recession is in no way an indictment of the validity of the 4% SWR.

BBub

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Re: Dip into principal?
« Reply #32 on: April 23, 2015, 03:01:16 PM »
Oldpro. 

If you had retired in 1990 using the 4% "rule", you would have needed $500k.  Assuming you invested 100% in the S&P then withdrew $20k the first year, and increased each year by 2% to account for inflation, your portfolio value would be $2,731,673 on December 31, 2014.  You would have surpassed $1 million in 1998 and never dropped below it again - even in 2008.  You could have afforded to give yourself many pay raises along the way - today's balance would be lower, but it could have been accomplished.

Even if you retired in 2007 with $500k and 4% withdrawals increasing at 2% for inflation, you would have been back over $500 by 2013 and your balance today would be $557k (year-end 2014).

You can run the calcs yourself using actual returns.  It's easy to say that stock investing is hogwash, but the numbers speak for themselves.

And, ok, maybe you'll say I did it on $200k and didn't need $500.  But can you provide a repeatable, tested formula that other's can replicate?  If so, great.  If not, your advice is akin to a post-IPO tech baby proclaiming "I sold my company for millions and retired - you can too!".




« Last Edit: April 23, 2015, 03:03:01 PM by BBub »

canadian bacon

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Re: Dip into principal?
« Reply #33 on: April 24, 2015, 06:54:45 AM »
Well, I am now convinced to invest in Greece. 

I will be 100% vested in flaming cheese.    opa!
My retirement is going to ROCK

OldPro

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Re: Dip into principal?
« Reply #34 on: April 25, 2015, 10:06:38 AM »
Interesting numbers BBud but irrelevant.  Can you run the numbers for $200k and 10% return plus adjust for inflation from 1989 and tell me what you get?  That would show a 'real' picture of what would have happened.

The 4% 'rule' is only today's rule.  In 1989 someone using a 10% 'rule' would have been just as likely, so how would they have done?  I'm interested to see the answer to that and you obviously are good at doing the calcs.  So I'm seriously asking you to tell me what it would have resulted in.

Eric

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Re: Dip into principal?
« Reply #35 on: April 25, 2015, 11:31:07 AM »
Interesting numbers BBud but irrelevant.  Can you run the numbers for $200k and 10% return plus adjust for inflation from 1989 and tell me what you get?  That would show a 'real' picture of what would have happened.

The 4% 'rule' is only today's rule.  In 1989 someone using a 10% 'rule' would have been just as likely, so how would they have done?  I'm interested to see the answer to that and you obviously are good at doing the calcs.  So I'm seriously asking you to tell me what it would have resulted in.

It's okay if you don't understand where the 4% rule came from, or the underlying concepts behind it, but it would probably be better if you refrained from disparaging it until you at least had a better grasp on how it works.

The 4% rule is not today's rule.  It was derived from all previous periods of history.  The financial professors at Trinity University backtested all years and determined that in almost any starting year, if you had a balanced stock/bond portfolio, you could withdrawal 4% of your initial balance, adjusted each year for inflation, and still have money left over after 30 years.  You can read the whole study, including methodology and results here.  It has been revised, picked apart, and continuously analyzed since then, so it's now a well known idea that has held up to much scrutiny.  In essence, 4% was the worst case scenario withdrawal rate that survived every period in (modern) history.  If you'd like to use that same methodology in an interactive calculator, you can do that here.

If you used a 10% withdrawal rate, you'd run out of money well before 30 years, no matter what your starting year was.

And yes, many of us need our money to last longer than 30 years.  However, that's where a little flexibility and safety margins enter the picture.  But of course, most of the time, even those won't be necessary.  As I mentioned above, the median ending portfolio after 30 years is about 6 times the starting one.

lordmetroid

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Re: Dip into principal?
« Reply #36 on: April 25, 2015, 12:21:52 PM »
If I can live for 25 years on principal alone, I doubt I will ever run out of capital.

BBub

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Re: Dip into principal?
« Reply #37 on: April 25, 2015, 07:47:43 PM »
Interesting numbers BBud but irrelevant.  Can you run the numbers for $200k and 10% return plus adjust for inflation from 1989 and tell me what you get?  That would show a 'real' picture of what would have happened.

The 4% 'rule' is only today's rule.  In 1989 someone using a 10% 'rule' would have been just as likely, so how would they have done?  I'm interested to see the answer to that and you obviously are good at doing the calcs.  So I'm seriously asking you to tell me what it would have resulted in.

Yeah i'll run the official numbers for you Monay when I get back to my desktop. I'm kind of in the middle of nowhere this weekend hanging w/ friends at a cabin.  Before running the numbers I can tell you that using 10% linear returns with 2% inflation will only result in eroding the principal at a compounded 2% rate.  Another way of looking at would be you'd get a -2% ror.  So, you'd run out eventually.  I'll plug it in on monday & report back with an exact fugure.

However, the real question is where to get 10% linear returns.  If I can figure that out I won't even need my desktop anymore!

OldPro

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Re: Dip into principal?
« Reply #38 on: April 25, 2015, 11:55:17 PM »
I understand the rule Eric but it is useless in terms of telling you how to retire on $200k and generate $20k of income per year and  then not go broke.  The 4% 'rule' did not exist in 1989, that's why it is today's 'rule'.  You use it because you are ultra conservative, something you have in fact accused me of.  I'm not the one who is conservative.  I did not decide when to FIRE based on a 'rule'. 

I saw $200k as enough to provide me with $20k of income to begin with.  I did not expect it to do so forever more.  I knew I would have to continue to figure out how to continue to earn enough from my capital to keep ahead of the game.  You see your 4% 'rule' as being the end as opposed to a beginning.  Get there, sit back and the 'rule' will take care of maintaining your income ahead of inflation.  I saw my $200k and $20k income as simply the beginning.  It let me BEGIN my FIRE years far sooner than the 4% 'rule' would have done.

The 4% 'rule' would not have allowed me to retire on $200k in 1989.  Yet, I did and so far so good.  So the question then becomes, why do you feel you need the 4% 'rule' today?  Sounds seriously risk averse to me.  Why not look for a higher % ROI from something and FIRE as soon as your capital will produce the income you want to begin with? 

I had nothing telling me in 1989 that my $200k would generate enough income for the next 26 years (and counting) when I FIREd.  Why do you need a 'rule' that tells you when you can quit?  You can FIRE whenever you have enough passive income to meet your needs today.  After that, you figure out how to continue generating the income you want each year.

Thanks BBud.  Regarding, "However, the real question is where to get 10% linear returns.  If I can figure that out I won't even need my desktop anymore!" 

That's the point, you can't get 10% linear returns, that's why it is a 4% 'rule'.  But I never intended to play by any 'rule.'  The key is that word 'linear'.  It's a risk averse bible word, along with guaranteed and safe.  I understood I was taking a risk and happily did so.  Again, so far so good. 

So if you want to know where to get 10% returns, the answer is don't look for it on any table of 'safe withdrawal rates' but there are plenty of ways to get a 10% return today.  If someone is smart enough to accumulate enough capital today and find where to invest it to give them the passive income they want today, WHY would that person suddenly become too dumb to figure out how to do it next year and the year after that?  Why would the person not be smart enough to figure out how to hedge their bets by keeping expenses to something like 1/3 of income, disposable to 1/3 of income and savings to 1/3 of income so that in good times, their capital increases and in bad times they can ride the low out. 

The bottom line is that the 4% 'rule' requires you to amass more capital than you need to FIRE today if you can find a higher ROI and aren't afraid to worry about tomorrow, tomorrow.

Lordmetroid actual has almost quoted my thoughts 26 years ago verbatim.  "If I can live for 25 years (or 17 in my case, I figured I actually needed $12k per year to live comfortably at that time) on principal alone, I doubt I will ever run out of capital"  I simply had a belief that all kinds of things would change and of course they did and I have never run out of capital or had to go back to work.   

Eric

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Re: Dip into principal?
« Reply #39 on: April 26, 2015, 03:03:39 AM »
OldPro, I will hand it to you.  You are a bullshitter supreme.  You have your own "rules", but not a single one is actionable by anyone else but you.  You retired with $200K when you needed $20K per year?  And anyone who doesn't is ultra conservative?  Sure buddy.  Whatever you say.  Sounds totally legit to me. 
« Last Edit: April 26, 2015, 03:05:15 AM by Eric »

TomTX

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Re: Dip into principal?
« Reply #40 on: April 26, 2015, 09:28:03 AM »
I am running the numbers and feel that my investments are completely skewed toward the 401K side.   Approx 850K in 401K and 220K in normal investments

Ideally, I would like to leave the 401k for post 60 years old and live off of the normal investments from FI to post 60... 

Now the question becomes:   Should I PLAN to use the normal savings principle to help fund my FI.  If I call the principle "EMERGENCY FUND" and try not to touch it, I will need to almost double the amount that I would need in my normal investment account before I can be financially independent.

Ex.  Using Interest + Principal, I can retire at 43, Interest only, I retire at 47

How are you all planning FI?

The "interest versus principal" conundrum is not really relevant unless you are a nobleman (mostly british) in the 1800s where you could get ~4% real return on bonds (effectively bonds.)

OldPro

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Re: Dip into principal?
« Reply #41 on: April 27, 2015, 07:56:40 AM »
The proof as they say is in the pudding Eric.  I'm 26 years in and doing fine.  Where are you?

matchewed

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Re: Dip into principal?
« Reply #42 on: April 27, 2015, 08:08:12 AM »
I'm confused, you simultaneously retired in 1989 and you're currently 26. So you had 200k when you were born and have been withdrawing 20k each year and are doing fine...

How did you decide at the ripe old age of 0 what investment to pick?

In other words your claims don't make sense.

Furthermore the idea behind FIRE is having enough money to not work, ever, if you don't want to. You saved up enough money to take a break, you are temporarily FIRE, far from permanently. The 4% rule allows for a much longer time frame than your 10% withdrawal rate.
« Last Edit: April 27, 2015, 08:10:12 AM by matchewed »

dcheesi

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Re: Dip into principal?
« Reply #43 on: April 27, 2015, 09:28:17 AM »
He said 26 years in, not old. I misread it the first time, too.

matchewed

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Re: Dip into principal?
« Reply #44 on: April 27, 2015, 09:28:49 AM »
Yep my bad.

BBub

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Re: Dip into principal?
« Reply #45 on: April 27, 2015, 10:17:18 AM »
Ok oldpro, I ran the numbers for you.  $200k beginning in 1990 and withdrawing $20k the first year, adjusted upwards by 2% each yr for inflation.

Invested 100% in S&P: Money lasts until 2011 - or about 21 yrs.  So not too bad, but obviously unsuitable for the Early retiree.

10% straight line: Money also lasts until 2011 (The similarity seems a bit surprising, but long term avg stock returns hover around 10, so I guess it's not that coincidental).

Using the straight line method your balance continually decreases by 2% compounded.  Using the stock method your balance climbs to $343k by 2000, then declines to $163k by 03 and you never really catch back up due to the high withdrawals.  By 2003, you are withdrawing $26k/yr on a 163k portfolio or about 16%.

Regretfully, I must declare the 10% rule a failure.  I could backtest it to 1928 and provide rolling 30yr outcomes, but I'll spare everyone the suspense.


OldPro

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Re: Dip into principal?
« Reply #46 on: April 27, 2015, 02:41:25 PM »
Thanks BBub.  I was not suggesting 10% would last forever.  I am suggesting however that 4% is not guaranteed to last forever either.  It is an assumption that it will unless you can prove future performance.  Any number you choose is an assumption if you try to predict the future.

How about someone be who had retired on January 1, 2000 with a pot of $1mil and using the 4% rule?  Given that, the S&P 500 shed 46 percent from August 25, 2000, to October 4, 2002 and then just five years later, during the housing bust, the S&P 500 lost 56 percent of its value from October 12, 2007, to March 6, 2009, what would their pot look like today and what percentage would they have to withdraw to maintain their initial $40k of income?

I am far from the only person saying forget the 'rule'.  I don't know why people think they can predict the future based on the past.  Nor am I the only person who disagrees with the 4% 'rule'. 

http://www.cnbc.com/id/102082938#.
http://www.marketwatch.com/story/the-4-retirement-myth-2013-04-15

I particularly like this explanation and the concluding paragrapgh.
http://seekingalpha.com/article/2258403-the-dangerously-miasmic-myth-of-a-4-percent-safe-withdrawal-rate

You can use any method you want including the 4% rule to tell you when you are ready to FIRE.  I used the simple rule of having to be able to generate $20k in income when I started my retirement.  But ALL it told me was when I had enough to quit.  NOTHING will guarantee you that you can then just sit back and the income will continue to roll in at the same (adjusted for inflation) rate.  There are far too many variables that can impact you over the years and which you cannot predict and which the 4% 'rule' ignores.

Take hyperinflation for example, what if that happens?  http://www.forbes.com/sites/mikepatton/2014/04/28/is-u-s-hyperinflation-imminent/  Or if you believe that is not likely, what if inflation simply increases by a few percentage points.  Or does anyone seriously want to try and argue that past performance shows inflation can never reach 5%, 6% or more.

The issue I see with the 4% 'rule' is that people think all the have to do is amass enough capital to get them the income they want in year ONE of having FIREd and they can then sit back and the 'rule' will take care of everything.  That to me is contrary to common sense.  What makes sense is that every year you will have to figure out what to do so that you do not need to work next year.  That's what I have done for 26 years now and hope to continue to do. 



« Last Edit: April 27, 2015, 02:43:29 PM by OldPro »

matchewed

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Re: Dip into principal?
« Reply #47 on: April 27, 2015, 03:03:39 PM »
Thanks BBub.  I was not suggesting 10% would last forever.  I am suggesting however that 4% is not guaranteed to last forever either.  It is an assumption that it will unless you can prove future performance.  Any number you choose is an assumption if you try to predict the future.

How about someone be who had retired on January 1, 2000 with a pot of $1mil and using the 4% rule?  Given that, the S&P 500 shed 46 percent from August 25, 2000, to October 4, 2002 and then just five years later, during the housing bust, the S&P 500 lost 56 percent of its value from October 12, 2007, to March 6, 2009, what would their pot look like today and what percentage would they have to withdraw to maintain their initial $40k of income?

I am far from the only person saying forget the 'rule'.  I don't know why people think they can predict the future based on the past.  Nor am I the only person who disagrees with the 4% 'rule'. 

http://www.cnbc.com/id/102082938#.
http://www.marketwatch.com/story/the-4-retirement-myth-2013-04-15

I particularly like this explanation and the concluding paragrapgh.
http://seekingalpha.com/article/2258403-the-dangerously-miasmic-myth-of-a-4-percent-safe-withdrawal-rate

You can use any method you want including the 4% rule to tell you when you are ready to FIRE.  I used the simple rule of having to be able to generate $20k in income when I started my retirement.  But ALL it told me was when I had enough to quit.  NOTHING will guarantee you that you can then just sit back and the income will continue to roll in at the same (adjusted for inflation) rate.  There are far too many variables that can impact you over the years and which you cannot predict and which the 4% 'rule' ignores.

Take hyperinflation for example, what if that happens?  http://www.forbes.com/sites/mikepatton/2014/04/28/is-u-s-hyperinflation-imminent/  Or if you believe that is not likely, what if inflation simply increases by a few percentage points.  Or does anyone seriously want to try and argue that past performance shows inflation can never reach 5%, 6% or more.

The issue I see with the 4% 'rule' is that people think all the have to do is amass enough capital to get them the income they want in year ONE of having FIREd and they can then sit back and the 'rule' will take care of everything.  That to me is contrary to common sense.  What makes sense is that every year you will have to figure out what to do so that you do not need to work next year.  That's what I have done for 26 years now and hope to continue to do.

Take a walk around this board long enough and you'll realize that very very few people advocate a mindless SWR. Most people talk about using it as a point in which to orient yourself around. Understand why it was successful in the past and understand the circumstances which caused it to have the small failure rate. Recognize those factors and then adjust accordingly if/when they happen in the future.

OldPro

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Re: Dip into principal?
« Reply #48 on: April 27, 2015, 03:50:45 PM »
If that is true matchewed, then you are saying most people only see it as a starting point.  That is not the impression I have been getting.  My impression is that people see it as THE answer.  'The 4% 'rule' is how to determine if you can FIRE, so do this and you won't have to worry.'

But even as a starting point I also see it as a conservative FIRE plan in that it requires you to amass a fair amount of money before you believe you can FIRE.  By accepting the 'rule' and embracing it, you then follow that path to FIRE.  If I accepted that rule back in the 80s (fortunately, the 'rule' didn't exist then to distract me) I would have had to amass $500k in order to quit with an income of $20k.  I would be told that to quit with only $200k and expect to maintain an income of $20k (plus adjusting for inflation)was foolishness.

As this discussion develops and I read more of how people seem to be looking at it as 'the answer', I'm beginning to conclude that using the 4% 'rule' to determine when you FIRE, is for the 'investing challenged'.  It indicates no confidence within the person that they can manage their own money to provide a better than 4%(after inflation) return.  Managing to make better than 4% net return is not hard, so what else can I conclude?   

matchewed

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Re: Dip into principal?
« Reply #49 on: April 27, 2015, 04:04:18 PM »
If that is true matchewed, then you are saying most people only see it as a starting point.  That is not the impression I have been getting.  My impression is that people see it as THE answer.  'The 4% 'rule' is how to determine if you can FIRE, so do this and you won't have to worry.'

But even as a starting point I also see it as a conservative FIRE plan in that it requires you to amass a fair amount of money before you believe you can FIRE.  By accepting the 'rule' and embracing it, you then follow that path to FIRE.  If I accepted that rule back in the 80s (fortunately, the 'rule' didn't exist then to distract me) I would have had to amass $500k in order to quit with an income of $20k.  I would be told that to quit with only $200k and expect to maintain an income of $20k (plus adjusting for inflation)was foolishness.

As this discussion develops and I read more of how people seem to be looking at it as 'the answer', I'm beginning to conclude that using the 4% 'rule' to determine when you FIRE, is for the 'investing challenged'.  It indicates no confidence within the person that they can manage their own money to provide a better than 4%(after inflation) return.  Managing to make better than 4% net return is not hard, so what else can I conclude?

So what investment strategy do you suggest which gives this consistent 13%+ return?