Author Topic: Going from accumulation stage to yearly draw in retirement?  (Read 1116 times)

montgomery212

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For the sake of round numbers, say my assets are 1,000,000: current 401k + cash + non 401k investments (I own no property).  How do I translate that to – what would my yearly “income” be if I retired today.  Is that what people use the 4% rule/25x expense rule for? If that’s right, then 4% would give me 40,000/yr on which to live.  However for the sake of round numbers and assuming no lifestyle changes, my current expenses are 50,000/yr (adding in 1k/month to carry my own health insurance just as a rough # bc who knows how much higher those costs will go) – meaning I’d need to aim for assets of at least 1.25 million.

Is this how the 4% rule and 25x expense rules are applied? Thing is I’m 38 – do these rules still apply? Or do these rules only apply for people retiring at 65 and if you retire much younger, you need to have like 50x expenses or something?

And most importantly, how do people do this mechanically? Do they start selling assets/stock and taking out 4% each year – under the premise that the remaining 96% will grow more than 4% and make up for the 4% that you took out? Or do you have to take your portfolio that may be all S&P and put it into dividend stocks or something so that it throws off the 50k/yr that you need?

I’ve been a live below your means + put the full 18.5k into 401k type of person since I graduated law school 13 years ago.  But I guess I never thought about how the assets you’re gathering actually translate into use for early retirement.  While I want to be done way earlier than normal, I never set a goal of retirement by 35 or 45.  And now I think it would be for my own small business or something (so I’d have to use some of my assets to buy said business but then it would generate an income stream of some kind, even if less than my lawyer salary).  But as I got past the 1mil mark and realized that I’m getting closer to 25x my yearly expenses, I guess it occurred to me that this is doable.  I mean right now, 4% would throw off something like 40k.  Living in NYC and DC, I know 40k wouldn’t be particularly comfortable, but reality is there ARE families in NYC and DC living on 40k or less (whereas I'm single).  And if I were to take that 40k and move to say Richmond (where I lived for a few yrs) or a small town in Florida or whatever, that becomes much more comfortable.  So I guess as the numbers are becoming more “real,” I wanted a reality check on whether I’m thinking of it the right way.

RedmondStash

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Re: Going from accumulation stage to yearly draw in retirement?
« Reply #1 on: July 11, 2018, 08:00:32 PM »
The 4% rule isn't about income; it's about spending. The idea is that if you can spend 4% or less of your stash each year, it will likely become a perpetual money machine, assuming a 7% average return and 3% inflation, because 7-3=4.

Also there are some studies about spending indicating that 4% is a fairly conservative guideline leading to like a 96% success rate over a 30-year retirement. The numbers wouldn't necessarily change much for a longer retirement, if you do end up with your perpetual money machine either holding steady or gradually increasing over time. Realize, though, that the 4% rule is hotly debated in numerous threads on this forum. Not everyone is comfortable with it; it does not guarantee success, just suggests a high probability of success based on historical data. Some folks aim for 3% or 3.5%; some aim for 5%.

There are some other potential issues, like sequence of return (like if the market tanks during the first 10 years of your retirement, your odds of using up your stash too early increase); you can look that stuff up. But for the sake of round numbers, if you spend $40k per year, a $1M stash would be the goal, yes.

You might want to peruse the Bogleheads wiki for some more info:

https://www.bogleheads.org/wiki/Main_Page

And the JL Collins stock series is good reading too:

http://jlcollinsnh.com/stock-series/

In terms of the mechanics of it, you can take dividends from your investments, which typically account for about 2%, and then sell assets for the other 2%. Different people use different approaches. Some take money out quarterly; some monthly; some as needed. Big caveats here are to consider tax implications, and to think about converting your IRA or 401k into a Roth account so that by the time you hit 70.5 years old, your RMDs (required minimum distributions) will be small or even nonexistent, if that's something you want to do. So there's more to consider than just the funds you need to live on; there's some preparation for the future and tax strategizing too. And, yeah, unpredictable increases in health care costs are a big concern for those without employer-sponsored healthcare segueing into Medicare at 65.

Hope that helps.

Dances With Fire

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Re: Going from accumulation stage to yearly draw in retirement?
« Reply #2 on: July 12, 2018, 03:52:23 AM »
For the sake of round numbers, say my assets are 1,000,000: current 401k + cash + non 401k investments (I own no property).  How do I translate that to – what would my yearly “income” be if I retired today.  Is that what people use the 4% rule/25x expense rule for? If that’s right, then 4% would give me 40,000/yr on which to live.  However for the sake of round numbers and assuming no lifestyle changes, my current expenses are 50,000/yr (adding in 1k/month to carry my own health insurance just as a rough # bc who knows how much higher those costs will go) – meaning I’d need to aim for assets of at least 1.25 million.

Is this how the 4% rule and 25x expense rules are applied? Thing is I’m 38 – do these rules still apply? Or do these rules only apply for people retiring at 65 and if you retire much younger, you need to have like 50x expenses or something?

And most importantly, how do people do this mechanically? Do they start selling assets/stock and taking out 4% each year – under the premise that the remaining 96% will grow more than 4% and make up for the 4% that you took out? Or do you have to take your portfolio that may be all S&P and put it into dividend stocks or something so that it throws off the 50k/yr that you need?

I’ve been a live below your means + put the full 18.5k into 401k type of person since I graduated law school 13 years ago.  But I guess I never thought about how the assets you’re gathering actually translate into use for early retirement.  While I want to be done way earlier than normal, I never set a goal of retirement by 35 or 45.  And now I think it would be for my own small business or something (so I’d have to use some of my assets to buy said business but then it would generate an income stream of some kind, even if less than my lawyer salary).  But as I got past the 1mil mark and realized that I’m getting closer to 25x my yearly expenses, I guess it occurred to me that this is doable.  I mean right now, 4% would throw off something like 40k.  Living in NYC and DC, I know 40k wouldn’t be particularly comfortable, but reality is there ARE families in NYC and DC living on 40k or less (whereas I'm single).  And if I were to take that 40k and move to say Richmond (where I lived for a few yrs) or a small town in Florida or whatever, that becomes much more comfortable.  So I guess as the numbers are becoming more “real,” I wanted a reality check on whether I’m thinking of it the right way.

Yes, you are thinking of it the right way. This is almost exactly what the DW and I plan to do (Low COLA area) Keep flexibility in mind for possible years of lower returns,If you are more comfortable with 50k a year let the stash grow a bit more. Also many here have side gigs that do produce some amount of income for even more flexibility. You are still young, keep that in mind. Some who think that they need 50x expenses is overkill IMO. And as Redmond Stash has pointed out, the 4% rule is hotly debated here and other forums. However, some new studies have shown it to still be a good guideline for planning purposes and having the ability to earn extra cash if/when needed gives you a great chance of meeting your goals. Hope that helps, good Luck...

Schaefer Light

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Re: Going from accumulation stage to yearly draw in retirement?
« Reply #3 on: July 12, 2018, 07:55:29 AM »
Withdrawing the money in a way that doesn't involve paying a 10% penalty is the tricky part if most of your money is in tax-advantaged accounts.

One

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Re: Going from accumulation stage to yearly draw in retirement?
« Reply #4 on: July 12, 2018, 09:29:32 AM »
I think it could work if you owned your house. Doesn't historical housing costs increase faster than inflation? I think that would make it hard in future years as the rent compounds. If I were single like you I'd probably do it because it's easier to make adjustments on the fly. Check out firecalc.com to run the numbers.


montgomery212

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Re: Going from accumulation stage to yearly draw in retirement?
« Reply #6 on: July 15, 2018, 03:17:31 PM »
Thanks all. Will look at some of the links you all have provided on this thread. For all these years for me it's all been about maxing out, saving/investing as much as possible and I guess that it just occurred to recently that -- hmm these are sizeable numbers now, is some kind of FI or RE actually doable? It's like when you toil away for something for so long, you start to focus on the details (in my case accumulation) rather than the big picture.

CoffeeAndDonuts

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Re: Going from accumulation stage to yearly draw in retirement?
« Reply #7 on: July 15, 2018, 07:18:00 PM »
Bug ern at Early Retirement Now should really be mentioned and so I am.

https://earlyretirementnow.com

Amazing technical work.