Lots of discussion at Bogleheads about MMM

[arebelspy]

Arebelspy:

How much of your proposed SWR will come from income earned on your investments and how much from potential decumulation of principal?  My guess is your net rental income will provide the bulk of the necessary funds.  Your taxable paper accounts will contribute interest and dividends.  How likely will you be to have to sell off paper assets or (heaven forbid) a house to accommodate the desired withdrawal rate? 

In addition, as your tenants pay down the loans, your "principal" increases.  Any decumulation on the paper side, especially in the early years, may be offset by the equity paydown of the real estate loans.  My thought has been for a long time that the SWR is the rate at which you can avoid decumulation.  Increasing equity may avoid net decumulation in your case.

I see where you're going with this, but I would point out that in almost every case, the 4% SWR won't decumulate any principal, and it will generally leave much more than what you started with (again, at least historically, in the U.S.)

To answer your question directly, I'm planning on having my expenses covered 100% by rental income (with conservative amounts set aside for maintenance, vacancies, etc.), and not drawing down at all.  Any appreciation, principal pay down and equity gains from a paper portfolio will all be "extra" buffer.

But if you take the percent I'm spending as a total of my whole portfolio (net worth), it's way above 4% (simply because my cash-on-cash rental returns are way above that).

So I'm not really a good example. I'm talking about a more typical early retiree (which I'd recommend be an 80/20 equity/bond portfolio or so).  With a 4% SWR, they aren't drawing down any principal in most historical cases.

[Another Reader]

On the contrary.  You are the best example of how to achieve FI. 

In your case and mine, spending as a percentage of portfolio is not a useful ratio.  Absent a black swan event that destroys all real estate value, it's irrelevant.  If you never touch the assets that generate your income and the assets consistently increase the amount of cash they throw off over time, you will be fine.  You won't sit around like so many of the folks at the ER forum do, wringing your hands, wondering if you have "enough."  You will be too busy looking for new ventures to invest the excess.

[Crash87]

I think the 4% SWR is fine if you base it off a realistic budget that accounts for variations in spending and has places you can cut costs if needed. In application I agree with Arebelspy.

If the debate here is strictly about an imaginary person that spends the exact same amount every year regardless of market and life changes then 4% doesn't seem very safe. In theory I agree with Moorebonds.

[arebelspy]

In your case and mine, spending as a percentage of portfolio is not a useful ratio.  Absent a black swan event that destroys all real estate value, it's irrelevant.  If you never touch the assets that generate your income and the assets consistently increase the amount of cash they throw off over time, you will be fine.  You won't sit around like so many of the folks at the ER forum do, wringing your hands, wondering if you have "enough."  You will be too busy looking for new ventures to invest the excess.

Yeah, I neglected to mention in that 2.5% SWR scenario (aka working an extra decade past my current plan) I'd probably actually only spend about 20% of my income at that point, and have an 80% savings rate (without counting equity pay down, probably over 100% savings rate with that counted in).   It'd just be silly for me to work that long and only spend 20% of the money coming in.

But that's an artifact of nice cash-on-cash real estate returns that can be had with the proper knowledge and willingness to take risk.

I do plan to diversify more outside of RE, but it is definitely a nice base.

Nords brings up a good point with the SPIA (if you're worried about sequence of returns and such causing you to hit portfolio failure) - use that for your base spending, then whatever your portfolio kicks off is extra fun spending.  Wade Pfau has been on that horse for awhile, and I find myself agreeing with the idea in theory more and more (for most people - I think I personally would rather have control of my money, but I also have a higher risk tolerance than most).

[Another Reader]

You are actually a really conservative guy, whether you realize it or not.  You won't be spending $24k a year from a $600k paper portfolio.

[Mr Mark]

To original post, and the main comments after that,

The SWR %  is a bit beside the point. MMM takes a sizeable part of his stash and buys quality real estate. One house to live in, with no mortgage, and a rental that is low maintenance and throws off enough rent and tax benefits to meet all their typical needs.

His effective Return on this rental is a lot more than 4%, even un leveraged.

So Mrs MM was right that they do not currently even draw from their stock portfolio. And the dividends compound away.

Like MMM, I think part of this is being a financial omnivore. And the hyperlocal environment you live in may offer several ways to earn passive income that are tax advantaged and pay way higher returns. These can enhance the portfolio in several ways. And as FIRE calc shows, the historical analysis is pretty sensitive to small changes in withdrawal strategies.

So the purist stock portfolio stuff, with subtle withdrawal strategies, allocations, etc etc, may be fine, but with a more commonsense approach, the complaints seem to be mainly pretty anal complainypants...

True FIRE priorities are lifestyle, absolute expenditures, and savings rates. Tax management perhaps. Asset allocation and swr are just not that important if you manage the portfolio risks in a mustachian way! The bogleheads prefer being very important.

[arebelspy]

You are actually a really conservative guy, whether you realize it or not.  You won't be spending $24k a year from a $600k paper portfolio.

I won't be, no.  I'll have rental income.  I would feel comfortable doing so, however.  Especially cause I could easily make 4k or reduce spending by 4k, and doing just one of those drops you to a 3.3% SWR.  Doing both of those drops you to a 2.7% SWR.

That's why I feel okay for someone who has saved 25x their expenses, if they're willing to be flexible in earning income and spending.  Because their actual SWR won't be 4%, despite the fact that they only have 25 times expenses saved up.

We're actually in closer agreement than it seems, there's just lots of nits to pick when it comes to FIRE.  ;)

So the purist stock portfolio stuff, with subtle withdrawal strategies, allocations, etc etc, may be fine, but with a more commonsense approach, the complaints seem to be mainly pretty anal complainypants...

Well said, agreed.  So much is theory, but practical application is more important, and I just don't see most people keeping their spending the same (or even upping it, per the actual Trinity study) in a year when the market drops 20 or 30%.  Commonsense, as you say, will help a portfolio tremendously.