Author Topic: 4% rule questions - break it down for me  (Read 2320 times)

Buckwheat

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4% rule questions - break it down for me
« on: February 19, 2017, 09:01:31 AM »
There's a lot of content in this forum, and I'm learning a lot.

The 4% rule makes intuitive sense to me.

I'm hoping somebody can answer a few general questions (I'm sure the answers are buried in all of this forum's content somewhere, so please feel free to direct me somewhere that provides them).

Questions:

1) In order to FIRE right now, how do I handle the case where a significant part of my portfolio is in a 401K.  I obviously can't touch that without penalty until age 59 1/2 at the earliest.

2) Based on #1 and the 4% rule, do I need a portion of my portfolio to be able to directly fund my costs and style of living on a monthly / yearly basis?  For example, do I need semi-liquid investments where I am able to immediately access the earnings?

3) How does the 4% rule account for social security which I take to technically be part of my portfolio, but it does not kick in until age 62 at the earliest.  All conversations about the long term viability of SSI aside, how does the 4% rule account for this added money kicking in at a later point?

4) If I know that I have 401K and SSI kicking in at a later point of life, it seems like I should be looking at things from two different perspectives.  First, the period of my life between now and say age 59.5 and then, second, the period past 59.5.

I know the 4% rule is probably designed to bundle all of these questions and more into a simple calculation, but I'm curious how it accounts for these types of things.

Thanks in advance.


Hargrove

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Re: 4% rule questions - break it down for me
« Reply #2 on: February 19, 2017, 09:29:24 AM »
The 4% rule is not the calculation where "all other things factored in, you need THIS much."

The 4% rule is the calculation where your portfolio is basically unlikely to shrink. Ergo, all other considerations, like Social Security or inheritances etc, are extra padding to your income beyond what you generate from your 4% situation, and are not at all accounted for by the 4% rule. Very aggressive and optimistic investors could lower the 4% rule by such considerations if that was their thing, but we don't generally recommend it. You take the 4% rule and apply it to your own annual spending and spending projections. 4% is just the Trinity Study's verdict on a safe withdrawal number, not an explanation in any way evaluating what YOU need annually, which you have to determine, plug into the 4% rule, and get your target savings goal.

See above post for your 401k conversion options.

Yes, you need to pay for living before you access your 401k, silly. You can do that with Roth withdrawals, you can do that with liquid savings (but that's an awfully investment-growth-poor choice), you can do that by withdrawing from a separate, pre-normal-retirement-age taxable brokerage account. Many people have a post-59.5 bundle of investments and a pre-59.5 bundle, especially if they're not big in real estate properties.
« Last Edit: February 19, 2017, 09:31:44 AM by Hargrove »

HipGnosis

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Re: 4% rule questions - break it down for me
« Reply #3 on: February 19, 2017, 11:43:41 AM »
The 4% rule is the calculation where your portfolio is basically unlikely to shrink.
The 4% rule (as I far as I can tell) does NOT mean your portfolio will not shrink.  There probably will be lean (bear market) years.  It means your portfolio (most probably) won't shrink into oblivion, and therefore will recover in strong - bull markets (which does not mean you can withdraw more than 4% BTW).

Hargrove

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Re: 4% rule questions - break it down for me
« Reply #4 on: February 19, 2017, 01:01:33 PM »
The 4% rule totally means the value of your portfolio will not likely shrink over the long term. That's the point of it.

Your portfolio will FLUCTUATE all the time, because it's in the stock market, but drawing 4% out of it annually should leave it intact or larger in the long term.
« Last Edit: February 19, 2017, 01:04:06 PM by Hargrove »

MDM

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Re: 4% rule questions - break it down for me
« Reply #5 on: February 19, 2017, 01:08:36 PM »
3) How does the 4% rule account for social security which I take to technically be part of my portfolio, but it does not kick in until age 62 at the earliest.  All conversations about the long term viability of SSI aside, how does the 4% rule account for this added money kicking in at a later point?
In short, it doesn't.  Simple rules of thumb don't cover all situations.  See below for more.

Quote
4) If I know that I have 401K and SSI kicking in at a later point of life, it seems like I should be looking at things from two different perspectives.  First, the period of my life between now and say age 59.5 and then, second, the period past 59.5.
Yes, you are on the right track.  You could apply the 4% rule to the difference between your expenses and your SS income, starting when SS kicks in.

See
http://www.retailinvestor.org/pdf/Bengen1.pdf,
https://incomeclub.co/wp-content/uploads/2015/04/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf,
https://www.bogleheads.org/wiki/Trinity_study_update, and
https://www.bogleheads.org/wiki/Safe_withdrawal_rates
for more on this.

Retire-Canada

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Re: 4% rule questions - break it down for me
« Reply #6 on: February 19, 2017, 03:59:36 PM »
There's a lot of content in this forum, and I'm learning a lot.

The 4% rule makes intuitive sense to me.

I'm hoping somebody can answer a few general questions (I'm sure the answers are buried in all of this forum's content somewhere, so please feel free to direct me somewhere that provides them).

Questions:

1) In order to FIRE right now, how do I handle the case where a significant part of my portfolio is in a 401K.  I obviously can't touch that without penalty until age 59 1/2 at the earliest.

2) Based on #1 and the 4% rule, do I need a portion of my portfolio to be able to directly fund my costs and style of living on a monthly / yearly basis?  For example, do I need semi-liquid investments where I am able to immediately access the earnings?

3) How does the 4% rule account for social security which I take to technically be part of my portfolio, but it does not kick in until age 62 at the earliest.  All conversations about the long term viability of SSI aside, how does the 4% rule account for this added money kicking in at a later point?

4) If I know that I have 401K and SSI kicking in at a later point of life, it seems like I should be looking at things from two different perspectives.  First, the period of my life between now and say age 59.5 and then, second, the period past 59.5.

I know the 4% rule is probably designed to bundle all of these questions and more into a simple calculation, but I'm curious how it accounts for these types of things.

Thanks in advance.

1) http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

2) Most people saving aggressively for early retirement run out of tax advantage account room and naturally start building up a taxable account.

3) The 4% Rule doesn't account for government benefits at all. You can run customized simulations at cfiresim.com where you can add in SS.

4) Possibly. Depends how early you plan to retire.

teen persuasion

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Re: 4% rule questions - break it down for me
« Reply #7 on: February 20, 2017, 08:30:05 AM »
The 4% rule totally means the value of your portfolio will not likely shrink over the long term. That's the point of it.

Your portfolio will FLUCTUATE all the time, because it's in the stock market, but drawing 4% out of it annually should leave it intact or larger in the long term.

Not quite.  The 4% SWR counts "success" as your account does not hit zero in 30 years.  Having $1 in year 30 would be a success.  Generally, it could be larger, but there is no guarantee that your account will not shrink. 

Hargrove

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Re: 4% rule questions - break it down for me
« Reply #8 on: February 20, 2017, 05:15:06 PM »
Again... of course there is no guarantee your account won't shrink.

Yes, you're right, the 4% would count $1 as a success because that was the question of the study, but the answer the study got was a little more interesting.

http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

As you can see, the 4% value is actually somewhat of a worst-case scenario in the 65 year period covered in the study. In many years, retirees could have spent 5% or more of their savings each year, and still ended up with a growing surplus.

This brings me to a critical point: this study defines “success” as not going broke during a 30-year test period. To people like you and me who will enjoy 60-year retirements, that would not be successful – we want our money to last much longer than 30 years. Luckily, the math in this case is pretty interesting: there is very little difference between a 30-year period, and an infinite year period, when determining how long your money will last.

Shrinking compounds just like growth compounds (because lost money is money not compounding). The target of 30 years is less important than that the "minimum withdrawal number" turned out to be 4%. A slightly shrinking portfolio would only need a very small tweak prior to FIRE to make it an everlasting portfolio according to what trends we can measure and if those trends continue and no there are no guarantees and so on and so on.