Author Topic: 4% Rule Question  (Read 15111 times)

Rollin

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4% Rule Question
« on: March 19, 2013, 07:40:56 PM »
I just started this calculation to see how much retirement money I have today at 51 and every year up to age 92 (62 "standard" retirement age plus 30).  I would like to retire earlier than 62, but I'm building a spread sheet that has all the proper calculations and would be a worse-case-scenario (retire at 62).

So when I calculated the 4% on my $500,000 estimated to have at 62 (more on other sources later) I come up with $20,000 in year 1 (63 years old) to be spent.  If I calculate this out 30 years I end up with about $475,000 (I assumed this nest egg would get a conservative 4% return per year) at age 92.

Some of you may think "duh!", but I guess I was surprised that most of my original $500K was still there in the end.  Assuming you don't want to give that away to your heirs, why would you want to have that much at 92?  In other words, why wouldn't you take out more each year so that you use that up (most of it at least)?

I have four other sources of retirement income to add to the total: 1) from my employer (Florida Retirement System); 2) Social Security; 3) 2 rentals grossing about $1200/month; and 4) life insurance annuity.  I also own both rentals free and clear and plan to have my current house paid off by age 62.  No other debt.
« Last Edit: March 20, 2013, 07:26:51 AM by Rollin »

kiwichick

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Re: 4% Rule Question
« Reply #1 on: March 19, 2013, 08:01:22 PM »
The 4% SWR is meant to give you a secure income without reducing capital. It works best when retiring earlier than the "standard" age. I agree with you that you likely wouldn't need that much capital in your 90s, but that's assuming you don't have any health problems etc. It's good to have a safety net.

That being said, if you're comfortable with the risk of running out of capital very late in life, and/or you have other income sources available, there's no reason you can't use a higher withdrawal rate or retire earlier.

arebelspy

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Re: 4% Rule Question
« Reply #2 on: March 19, 2013, 08:29:12 PM »
Run FIRECalc.. historically a 4% SWR succeeded 95% of the time.  Those times it succeeded almost always had more capital than you started (i.e. you retire with 1MM, die 30 years later with 1.5MM).

Yes, you may increase your withdrawal rate later.  For a very early ER though, you'll probably want a lower WR.

It all depends on one's circumstances, including, among other things, life expectancy.

Actuarial tables and discussions thereof are common on the e-r.org forums.
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Jamesqf

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Re: 4% Rule Question
« Reply #3 on: March 19, 2013, 10:37:40 PM »
IAssuming you don't want to give that away to your heirs why would you want to have that much at 92.

So you'll have something to spend in the years from 93 onwards, of course.   If you're an optimist, you plan your spending so that your stash stays constant (allowing for inflation), and you only spend the income.

Baylor3217

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Re: 4% Rule Question
« Reply #4 on: March 19, 2013, 11:33:18 PM »
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

Rollin

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Re: 4% Rule Question
« Reply #5 on: March 20, 2013, 05:21:26 AM »
IAssuming you don't want to give that away to your heirs why would you want to have that much at 92.

So you'll have something to spend in the years from 93 onwards, of course.   If you're an optimist, you plan your spending so that your stash stays constant (allowing for inflation), and you only spend the income.
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

I like the way this sounds and have made it my goal - "One-hundred and five and still alive!"  I plan to be active and healthy for a long time.  I heard Fred Birchmore say this many years ago as he was walking his property at maybe 95 years of age (he was happy and healthy), but he only made it to 99.  BTW - he's known for more than this, but he rode his bicycle around the world just prior to WWII.

The 4% SWR is meant to give you a secure income without reducing capital. It works best when retiring earlier than the "standard" age. I agree with you that you likely wouldn't need that much capital in your 90s, but that's assuming you don't have any health problems etc. It's good to have a safety net.

That being said, if you're comfortable with the risk of running out of capital very late in life, and/or you have other income sources available, there's no reason you can't use a higher withdrawal rate or retire earlier.

kiwichick - that's a very clear response - and what I was thinking.  I guess that I'm happy to see that (principle still there) because I will likely withdraw more or retire earlier.  Oh, these retirement calculations are exciting and eye opening!

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Re: 4% Rule Question
« Reply #6 on: March 20, 2013, 07:15:14 AM »
The 4 percent rule does NOT mean that your principal remains intact.  It just means in almost all projected outcomes based on history, after 30 years you will not run out of assets to liquidate and spend.  At the end of 30 years, if you have $1.00 left, that's counted as a success.  In many of the projections, you end up with more than your initial principal, but not all.

If you are a conservative person that sees slower growth in the future, or you want to preserve your principal and maintain your cost of living at 95, you need to ratchet the SWR down.  A different mix of assets is something to consider as well.

Dynasty

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Re: 4% Rule Question
« Reply #7 on: March 20, 2013, 11:00:20 AM »
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

People with LOW stress.

Stress more than smoking cigarettes, drinking too much, not getting enough exercise, not eating right will kill you faster than anything.

Being able to sleep in, not HAVING to work, nap when you want, and a having a relaxing life will lead to a low stress, long life.

Jamesqf

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Re: 4% Rule Question
« Reply #8 on: March 20, 2013, 11:27:04 AM »
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

The point is not what percentage of the population lives to be 90+, it's planning for the case in which you live to be 90+.  Now of course if you know something about your life expectancy that we don't, or are really, really sure that you'll be willing & able to pull your plug when you run out of money...  Me, I prefer optimism :-)

tooqk4u22

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Re: 4% Rule Question
« Reply #9 on: March 20, 2013, 12:09:38 PM »
The 4% SWR is meant to give you a secure income without reducing capital.

The 4 percent rule does NOT mean that your principal remains intact.  It just means in almost all projected outcomes based on history, after 30 years you will not run out of assets to liquidate and spend.  At the end of 30 years, if you have $1.00 left, that's counted as a success.  In many of the projections, you end up with more than your initial principal, but not all.

If you are a conservative person that sees slower growth in the future, or you want to preserve your principal and maintain your cost of living at 95, you need to ratchet the SWR down.  A different mix of assets is something to consider as well.

Seconded - the studies on the 4% SWR are based on starting withdrawals of 4% of your portfolio and increasing them for inflation each year over a 30 year period (it ignores whether markets go up or down) - and as AR said if you have $1 left its a success.  It is highly debated as to what is the best SWR and/or what it is derived from, but the 4% SWR is based on a specific timeframe and assumptions.

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Re: 4% Rule Question
« Reply #10 on: March 20, 2013, 06:44:37 PM »
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

You might want to rethink your outlook on life:

Quote
According to data compiled by the Social Security Administration:

    A man reaching age 65 today can expect to live, on average, until age 83.
    A woman turning age 65 today can expect to live, on average, until age 85.

And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
source: http://www.ssa.gov/planners/lifeexpectancy.htm

clutchy

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Re: 4% Rule Question
« Reply #11 on: March 20, 2013, 07:17:55 PM »
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

Only one of my grandparents hasn't made it into their 90's(89).  The best one so far is 99.

I think my plans should take that into account.

CanuckExpat

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Re: 4% Rule Question
« Reply #12 on: March 20, 2013, 07:46:21 PM »
If you don't care about leaving an estate, I think it's reasons like that annuities (SPIA) are a good option as you get older. It's a relatively "safe" way of drawing down more money than a SWR would allow without worrying about running out of money.
I mean they'd make also be great for even earlier retirees, but I don't think they are really offered to people at young ages (someone correct me on this)

arebelspy

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Re: 4% Rule Question
« Reply #13 on: March 21, 2013, 07:07:11 AM »
If you don't care about leaving an estate, I think it's reasons like that annuities (SPIA) are a good option as you get older. It's a relatively "safe" way of drawing down more money than a SWR would allow without worrying about running out of money.
I mean they'd make also be great for even earlier retirees, but I don't think they are really offered to people at young ages (someone correct me on this)

Sure they are, but the payout rates are crap since your life expectancy is so long (think of insurance in reverse - if you buy insurance when you're young, it's very cheap for you because you'll probably have to be paying premiums for a long time before they pay it out, if you buy when old, it's very expensive - opposite for annuities - get it when you're young and they'll pay you very little because you'll collect for a long time).

Generally not worth it.  And with annuities you have the risk of outliving the insurance company, and the longer your ER, the more likely that happens.

Annuities can be useful (SPIA is basically the only way to go there, IMO), but not in today's interest rate environment, and not until one is older.  YMMV.
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Rollin

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Re: 4% Rule Question
« Reply #14 on: March 26, 2013, 10:47:26 AM »
Older?  What would that be defined as - relative to the annuity that is?

arebelspy

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Re: 4% Rule Question
« Reply #15 on: March 26, 2013, 12:44:46 PM »
Older?  What would that be defined as - relative to the annuity that is?

I probably would not consider an SPIA before I was 60, if not later.

YMMV based on many factors.
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chucklesmcgee

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Re: 4% Rule Question
« Reply #16 on: March 26, 2013, 06:52:32 PM »
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

Life expectancy is very socio-economically dependent. For instance, more than 50% of Asian-American women living in Bergen County NJ will make it to 90. Life-expectancy for women there who have already made it to 50 or so is probably much higher than that.

There's nothing especially magical about Bergen County aside from the fact that's there's a concentration of wealthy, well-educated people.

CanuckExpat

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Re: 4% Rule Question
« Reply #17 on: March 27, 2013, 11:47:33 AM »
Older?  What would that be defined as - relative to the annuity that is?

I probably would not consider an SPIA before I was 60, if not later.

YMMV based on many factors.

Just curious, have you seen quotes for SPIA available before that age? I once checked the usual suspects and all the quotes online listed 55 as the earliest. I only made a cursory glance, but it made me think that insurers didn't offer SPIAs to younger people.

happy

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Re: 4% Rule Question
« Reply #18 on: March 30, 2013, 04:51:59 AM »
Having close relatives who have made it into their 90s, is an important factor in estimating longevity.
I know of  a few couples in their late eighties who get nervous every time there is a "downturn" and they think they might have to eat into their capital.
On the other hand average life expectancy is just that... equally likely you won't make it to the average....which is good for the stache.

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Re: 4% Rule Question
« Reply #19 on: March 30, 2013, 05:34:08 AM »
Doing a bit of genealogical research is not a bad thing when trying to get an idea of your own likely life expectancy. I realized I'd better plan for the long haul when I started seeing a pattern of near and over 100 years going back five generations. Well, either that lifespan or violent accidents and wars, but I already knew I wanted to avoid those!

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Re: 4% Rule Question
« Reply #20 on: March 30, 2013, 05:16:24 PM »
The 4 percent rule comes from an article in the January 1994 Journal of Financial Planning by Bill Bengan called: "Determining Withdrawal Rates Using Historical Data." Googling "William Bengan" and the article title will take you right to it.  He has done some follow up articles using the term SAFEMAX.  For the really geeky among you, I recommend a book edited by Harold Evensky and Deena Katz called: "Retirement Income Redesigned."  It is a collection of articles by many of the thought leaders in financial planning. The authors take the 4 percent rule and dive into its assumptions.

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Re: 4% Rule Question
« Reply #21 on: March 31, 2013, 12:46:06 AM »
For the really geeky among you, I recommend a book edited by Harold Evensky and Deena Katz called: "Retirement Income Redesigned."  It is a collection of articles by many of the thought leaders in financial planning. The authors take the 4 percent rule and dive into its assumptions.

And their broad conclusion is? (please!)

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Re: 4% Rule Question
« Reply #22 on: March 31, 2013, 10:54:00 AM »
For those who haven't seen it, the Bogleheads Wiki has a nice short little entry on Safe Withdrawal Rates. It provides snippets from the original studies, links to the articles, and updates from the authors.

pbkmaine

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Re: 4% Rule Question
« Reply #23 on: March 31, 2013, 11:42:02 AM »
Hard to summarize, but generally the 4% rule holds.  You can up the percentage if 1) you buy a fixed annuity to cover part of your expenses or 2) take out less in years when your portfolio declines.  Harold Evensky also favors holding two years of expenses in cash and equivalents so that you do not have to take money out in the depths of a market decline.  Makes sense to me.

The fixed annuity strategy is also covered in an article for TIAA-CREF Institute by John Ameriks (now with Vanguard), Bob Veres and Mark Warshawsky, written in 2001.  It's called: "Making Retirement Income Last a Lifetime".  Again, Google the title and you will go right to it. 

Lots of discussion by financial planners about the "new normal"; that is, higher volatility in the markets going forward. Some favor a more conservative approach for that reason. Anne Lester, who runs the JPMorgan SmartRetirement funds is one of those. You might want to Google her. She's a Fullbright scholar and super smart, so interesting to listen to.  She thinks tail risk is the big issue.  Others worry more about longevity risk.  That's a big part of the reason why target date funds differ so much from fund family to fund family.  Some are more worried about volatile markets and others about making sure you do not outlive your money. 

Financial planners have big debates about what the "right" percent of equity is at the target retirement date. They are generally talking about age 65 for that date though, so you early retirees need to take that into consideration.  Think of the median point for the discussion as 40% of your money in equity at age 65.  Then there is endless debate about how much to have in "alternatives" like commodities.  I tend to favor a vanilla approach and put my friends and family in Vanguard target date funds.  I think cost is very important, and Vanguard target date funds are very low cost.

Ozstache

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Re: 4% Rule Question
« Reply #24 on: March 31, 2013, 03:39:28 PM »
Hard to summarize, but generally the 4% rule holds.  You can up the percentage if 1) you buy a fixed annuity to cover part of your expenses or 2) take out less in years when your portfolio declines.  Harold Evensky also favors holding two years of expenses in cash and equivalents so that you do not have to take money out in the depths of a market decline.  Makes sense to me.

The fixed annuity strategy is also covered in an article for TIAA-CREF Institute by John Ameriks (now with Vanguard), Bob Veres and Mark Warshawsky, written in 2001.  It's called: "Making Retirement Income Last a Lifetime".  Again, Google the title and you will go right to it. 

Lots of discussion by financial planners about the "new normal"; that is, higher volatility in the markets going forward. Some favor a more conservative approach for that reason. Anne Lester, who runs the JPMorgan SmartRetirement funds is one of those. You might want to Google her. She's a Fullbright scholar and super smart, so interesting to listen to.  She thinks tail risk is the big issue.  Others worry more about longevity risk.  That's a big part of the reason why target date funds differ so much from fund family to fund family.  Some are more worried about volatile markets and others about making sure you do not outlive your money. 

Financial planners have big debates about what the "right" percent of equity is at the target retirement date. They are generally talking about age 65 for that date though, so you early retirees need to take that into consideration.  Think of the median point for the discussion as 40% of your money in equity at age 65.  Then there is endless debate about how much to have in "alternatives" like commodities.  I tend to favor a vanilla approach and put my friends and family in Vanguard target date funds.  I think cost is very important, and Vanguard target date funds are very low cost.

Thanks for the summary and the extra links. I am aiming to invest my ER stash quite heavily in shares, living mostly off dividends rather than drawing down on the equity base, and (try to) stomach any large market swings. I will be fortunate to have a small but stable pension that can tide me through any long financial market droughts, giving me a good head start on a 2 year living expense buffer.

pbkmaine

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Re: 4% Rule Question
« Reply #25 on: March 31, 2013, 04:51:01 PM »
That pension is your fixed annuity.  It gives you the freedom to invest more heavily in equity and/or to withdraw more than 4%, perhaps as much as 5%. I recommend the Ameriks, Veres, Warshawsky article for advice on how to do it. 

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Re: 4% Rule Question
« Reply #26 on: February 25, 2016, 06:33:09 PM »
I have a question about the 4% rule. If you have 1.5 million saved up and you have no debt and spend $50000 per year with no other expenses and you are 30 years old can you retire? Because 40000 times 25 is 1.25 million. And is this what this means

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Re: 4% Rule Question
« Reply #27 on: February 25, 2016, 06:55:48 PM »
What % of people live to their 90s?  Has to be less than 1% or so. If so, I hope to be one of those mean very old 1%'ers

In 2014, Canada, approximately 23.5% of deaths were for people aged 90 and over. (men and women0

Average age at death, for women who make it to age 65, is 88 years old.

http://www.cia-ica.ca/docs/default-source/2014/214013e.pdf

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Re: 4% Rule Question
« Reply #28 on: February 25, 2016, 07:02:44 PM »
I have a question about the 4% rule. If you have 1.5 million saved up and you have no debt and spend $50000 per year with no other expenses and you are 30 years old can you retire? Because 40000 times 25 is 1.25 million. And is this what this means

Yes, but only if you have a plan to limit withdrawls in poor performing years, especially in the first 10 or 20 years...  Why?  The scenario for 4% shows that 95 times out of 100 scenarios (of historical returns), you DONT run out of money within 30 years.

If you need to stretch that to 60 or more years, then the "fail" scenario would happen more often, and may approach a risk that exceeds a conserative tolerance.

You can offset this risk, by allowing for lower withdrawl and preservation of capital in poor years, at the start.

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Re: 4% Rule Question
« Reply #29 on: February 26, 2016, 12:04:04 AM »
How much of this 1.5 million is it expected to return, does the calculation assumes this money goes to a index 500 fund or can this all go to a cd? If it goes to the CD rather than a market do you know how much a CD needs to return ?

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Re: 4% Rule Question
« Reply #30 on: February 26, 2016, 01:47:42 AM »
It assumes a healthy mix with stocks and bonds. Putting your money in something with a guranteed lower return will of course be a problem. Guranteed higher return is always nice...

to the 30 years topic: 30 years is such long time, that you only need a little more favorable numbers to stretch it out to infinity. Earn some money in downturns, spend a little less, start with a 3,5% SWR all are viable options.

arebelspy

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Re: 4% Rule Question
« Reply #31 on: February 26, 2016, 08:58:36 AM »
I have a question about the 4% rule. If you have 1.5 million saved up and you have no debt and spend $50000 per year with no other expenses and you are 30 years old can you retire? Because 40000 times 25 is 1.25 million. And is this what this means

Yes, but only if you have a plan to limit withdrawls in poor performing years, especially in the first 10 or 20 years...  Why?  The scenario for 4% shows that 95 times out of 100 scenarios (of historical returns), you DONT run out of money within 30 years.

Sally cited a WR of 3.3% (50k/1.5MM), which has never failed historically.

In other words, Sally, to answer your question: yes, that's what the 4% rule means.

If you are in America, and you retired in any year between 1890 or 1985 (that 90 year span), and had 1.5MM (in real dollars, so whatever that was equivalent to at the time) and spent 50k (in real dollars), you would never have run out of money.  You would have survived the great depression.  The inflation of the 70s.  Multiple world wars.  The tech boom, and bust.

It's not guaranteed; if the future is worse than ever in the past, it might not work out.  But you'd have to be pretty pessimistic, IMO, to think that will be the case.  Indications seem to be that things are only getting better, and even if the economy stagnates, will it be worse than the great depression?  I'd think probably not, personally.

How much of this 1.5 million is it expected to return, does the calculation assumes this money goes to a index 500 fund or can this all go to a cd? If it goes to the CD rather than a market do you know how much a CD needs to return ?

The original 4% rule had a mix of 60/40 stocks/bonds, but there have been studies ranging from 0% stocks up to 100%.

Having your money all in a CD is very, very risky, almost guaranteed to fail.  Having it in stocks is risky in the short term, if you had to take it all out at once, because, as you know, the market can "crash"--that means, temporarily, people are undervaluing things.  It's bad to sell at that point.  But stocks are ownership in businesses--real businesses selling goods and services to people.  Electric companies.  Grocery stores and restaurants.  Clothing companies and construction firms.  Tech companies.  And on, and on, and on. Those companies may have a little dip in their profits as the economy deals with the crash, but overall they'll keep doing what they're doing.  And people will notice, and go "hey, these companies are making money, I want to own some of that," and prices will come back.

You can recover from a stock market crash.

On the other hand, you cannot recover from inflation eating away at your principal.  We're very unlikely to have massive deflation to bring back the buying power of your dollar. So if you invest in a CD paying 2%, and inflation is 3%, suddenly your money is "worth" 1% less in buying power.  That 1.5MM gains 2% (30k) in nominal dollars, but loses 3% (45k) to inflation.  Suddenly your money lost 15k without you spending any.  The 4% rule works because the stock market, on average, gains 7% above inflation.  So if you only spend 4% + inflation, you'll never run out of money--in fact, your money will grow and grow.  It won't every year (and you need to only take 4%, rather than that 7%, because of this--if it's down early in your retirement, taking too much out then could handicap your portfolio's ability to come back). The market rarely returns its average.  But over time, your money will grow, and grow.  It just won't in a CD.

So what about TIPs?  These are paying approximately 0% right now, but the benefit of them is they're tied to inflation.  So you get inflation + X% (where X is the going rate--like I said, about 0 right now).  That's much better, overall, than the 2% of a CD.  So let's say you did that.  How much would you need invested?  Well, you'd need your overall expenses x the number of years you have left.  You're literally going to pre-fund each year of your life, earn 0% real on it, but have it keep up with inflation.  So if you think you're going to live 50 more years, you take your annual expenses and multiply by 50.  So in your case, 50k x 50 = 2.5MM.  This, again, has the risk that you guess too low, and outlive your money (whereas a sub-4% rule very likely has your money grow and grow).

I'd suggest, for someone thinking of retiring and worried about the stock market, to begin to learn about it.  What it actually is.  It can be gambling, if you're buying and selling, or "investing" on a short time frame (days, or weeks).  If you're long term purchasing shares of companies and viewing it as ownership of those companies, with no plans to sell (buy and hold), and ignoring the short term fluctuations, you'll do just fine.

Hope that helps.  :)
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Axecleaver

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Re: 4% Rule Question
« Reply #32 on: February 26, 2016, 10:40:54 AM »
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I just started this calculation to see how much retirement money I have today at 51 and every year up to age 92 (62 "standard" retirement age plus 30).  I would like to retire earlier than 62, but I'm building a spread sheet that has all the proper calculations and would be a worse-case-scenario (retire at 62).

So when I calculated the 4% on my $500,000 estimated to have at 62 (more on other sources later) I come up with $20,000 in year 1 (63 years old) to be spent.  If I calculate this out 30 years I end up with about $475,000 (I assumed this nest egg would get a conservative 4% return per year) at age 92.
Rollin, I think prior comments are missing a key element of your question. You said you calculated a worst-case scenario, and that you assumed a static 4% RoR.

But this is not a worst case scenario.

A worst case scenario involves sequence-of-returns risk. (See: http://www.marketwatch.com/story/retirement-the-sequence-of-returns-2013-02-08). For example, let's say you take your 500k and retire. The market drops 20% over the course of the first year, then enters a long, slow ten year period of zero or slightly negative growth. You're getting chewed up by inflation, you're spending 20k a year, and you aren't getting any benefit of the stash, which you had hoped would be growing by 4% per year.

This worst case scenario is what the 4% rule is designed to help you survive. You can see this a bit better with cFireSim. Since you can't know what's going to happen to your portfolio in the future, you have to hope for the best and plan for the worst. This shows you lots of different potential outcomes- many in which your stash grows, some in which it stays about the same and generates a predictable 7%, and a few outliers where sequence of returns kills you. In those bad situations, 4% will make sure you survive them.

You could also decide to retire with a 5% WR, and if sequence of returns hits you within the first ten years, you go back to work for a couple of years and re-retire. I'm currently looking at a scenario where a life event coincides with a stash that isn't quite where I need it to be for 4%, so either I'll do some part time work, lower my expenses, or roll the dice on a slightly higher WR and understand that I might have to go back to work if it doesn't work out.

sallylee

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Re: 4% Rule Question
« Reply #33 on: February 26, 2016, 02:04:29 PM »
Yes, worst case isn't it possible for the market to hit recession in 10 to 20 years and lets say those years are the years you are 70 to 90. You can wait but wait till after death?

arebelspy

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Re: 4% Rule Question
« Reply #34 on: February 26, 2016, 02:41:24 PM »
Yes, worst case isn't it possible for the market to hit recession in 10 to 20 years and lets say those years are the years you are 70 to 90. You can wait but wait till after death?

No, that's not the worst case at all, or even a bad scenario.  Because if that happens, and you didn't inflate your lifestyle, but kept spending your spending at 4% of the original stache + inflation (i.e. kept spending in real terms the same, didn't increase it as your stache grew), by the point that hits, your WR would be so much lower than 4% because your portfolio has grown so much that a recession in 10 or 20 years doesn't bother you in the slightest.
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thd7t

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Re: 4% Rule Question
« Reply #35 on: February 26, 2016, 03:15:37 PM »
The 4% SWR is meant to give you a secure income without reducing capital. It works best when retiring earlier than the "standard" age. I agree with you that you likely wouldn't need that much capital in your 90s, but that's assuming you don't have any health problems etc. It's good to have a safety net.

That being said, if you're comfortable with the risk of running out of capital very late in life, and/or you have other income sources available, there's no reason you can't use a higher withdrawal rate or retire earlier.
The 4% rule is not meant to give a secure income without reducing capital.  It is meant to give a very good chance of your capital surviving a 30 year (and longer) retirement, but the rule is considered a success if at the end of 30 years there is $1 of capital remaining.

sallylee

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Re: 4% Rule Question
« Reply #36 on: February 26, 2016, 03:30:09 PM »
Is it true the biggest potential cost hitting your future lifestyle is healthcare? If that is so couldn't you prevent any mishap with insurance? And if the key is capital preservation is it best to diversify? Or invest in assets that can produce dividends so even in down years you would never have to touch the principal but live off the dividends? So it is good to have dividends from rental, stocks and bank interest?

arebelspy

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Re: 4% Rule Question
« Reply #37 on: February 26, 2016, 03:40:03 PM »
Is it true the biggest potential cost hitting your future lifestyle is healthcare?

I can't see the future, but no, I don't think that's true.

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If that is so couldn't you prevent any mishap with insurance?

Yes, health insurance today in the US is better than ever.  Still not as good as most countries out there, but at least you can't get dropped now.

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And if the key is capital preservation is it best to diversify?

Yes, diversification is important.

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Or invest in assets that can produce dividends so even in down years you would never have to touch the principal but live off the dividends?

Yes, this is a fine strategy, but it will require you working longer than necessary to bank up enough to have your expenses covered solely by dividends.

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So it is good to have dividends from rental, stocks and bank interest?

Sure, diversity of income streams couldn't hurt.  It's not necessary, but it's not bad, either.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.