Acceptable "safe spending rate" for a long time horizon?

[inquisitiveinvestor]

Basically I'm trying to determine what level I can sustainably "live it up" to while retaining the ability to stop working at any point in time. I've saved up enough to where I could use the "traditional" SWR rate of 4% with some modest changes to my current spending habits (relocation within the same metro area). Although this is difficult to account for, this includes an assumed 10% of spending on health care (assuming health insurance subsidy of premiums above 9.5% of income through the PPACA exchange subsidies).

However, a lot of what I've read has me second guessing, as 3% is becoming the more commonly stated SWR for a typical retirement age, and many even reporting 1% or 2% as their SWR.

The likelihood that I would stop working completely and never go back (which would be a very early retirement) is relatively low, as I would probably want to do something part time for a while just to keep myself active and reduce the temptation to spend during idle time. I also want to avoid getting used to a higher spending level in the short term only to have to reduce it later, but would like to be able to enjoy as much as possible without endangering my financial independence.

[arebelspy]

If you're willing to earn more, 4% should be fine (because it won't actually be 4%, it'll be lower, since the earned income means you don't have to withdraw 4% when you have work).  If you're done for good very young, I believe 3% is much more appropriate, and even then you may need some flexibility in your spending.

It's a tradeoff, and depends on many factors (family members you're supporting, how much you hate your job, risk tolerance, ability to adjust spending, etc.)

Run your numbers through FIRECalc.  Pick where you're comfortable, and pull the plug.

If I were you, given what you said about being willing to earn some more income, if you don't like your job, I'd jump ship now to what you do want.  Figure out what's right for you.

And welcome!  There are other threads discussing this that you can find searching the forums that might help you decide (lots of debate about 3% vs. 4%, see which arguments sway you.)

[MooreBonds]

It's a discussion that has been tossed around every so often on the forum.

I tend to lean more towards the conservative side of the SWR debate, because my personality craves 'predictability' and 'certainty' (knowing that even a lower SWR doesn't guarantee 'certainty', but only greatly reduces the chance of running out of money). And the bigger factor is not so much the prospect of running out of money, but rather the situation of "what would it be like then if I have to get a job to supplement the portfolio later on?"

Some people have truly toxic careers, and will live a shorter life if they worked till 60. They don't want any prospect of having to return to that lifestyle. Or, perhaps, they have a fairly lucrative career currently, and know there's no way they could expect to land a simliar job after being out of work for 10-20 years, and would rather work a few more years now and get a thicker layer of kevlar to make the withdrawal rate more bulletproof for a 40-50 year withdrawal period, rather than try to compete with many others for an alternative career that won't offer nearly as much compensation.

Other people have either no aversion or perhaps a very optimistic view of the "what then" scenario of going back to work. They don't cringe at the thought of having to settle for a close-to minimum wage job to supplement the declining portfolio at age 45 (possibly having to work 30-40 hours a week and become a wage slave again), or of having to deal with the stress of looking for a job after being out of work for 10-20 years. They also may have a slightly optimistic view of black swans that may descend on their expenditures, and will simply head back to work if/when needed, and aren't concerned with withdrawing 4% of their portfolio based on their current expenses, rather than perhaps a slightly higher long-term average expense might be.

[Nords]

... this includes an assumed 10% of spending on health care (assuming health insurance subsidy of premiums above 9.5% of income through the PPACA exchange subsidies).

If this assumption (or rather, both assumptions) would make or break your ER, then I'd hold off and build a bigger portfolio that can handle higher healthcare expenses.

However, a lot of what I've read has me second guessing, as 3% is becoming the more commonly stated SWR for a typical retirement age, and many even reporting 1% or 2% as their SWR.
The likelihood that I would stop working completely and never go back (which would be a very early retirement) is relatively low, as I would probably want to do something part time for a while just to keep myself active and reduce the temptation to spend during idle time. I also want to avoid getting used to a higher spending level in the short term only to have to reduce it later, but would like to be able to enjoy as much as possible without endangering my financial independence.

The 4% SWR does not usually include Social Security, variable spending during retirement, or part-time employment.  All of those factors are enough to push an 80% success rate over 100%. 

You can also improve your odds by developing a couple of different budgets:  one for bare bones and the other for the retirement activities you'd prefer to enjoy.  Buy an annuity (or create a reliable cash flow) for the first, and use investments/savings for the second. 

I wouldn't hesitate to retire just because financial research is changing the 4% number to 3%, and I wouldn't even get wrapped up in the debate.  The probabilities & statistics don't apply to individuals, only to large groups of ERs.  Instead I'd treat 4% as a tripwire.  If you reach that point without having to use the word "assume" a bunch of times (especially for assumptions involving political risk) then you're probably good to go.  If you're willing to vary your spending and bring in a little part-time income, then you should start drafting your resignation letter.

There are many anecdotes of "Just one more year" and "Bag Lady With Cats Syndrome" which are filled with regrets-- regrets at having worked longer than necessary.

[tdawkins]

Question as someone getting ready to pull the trigger:  I understand the logic behind 4% and then adjust for inflation each year.  If 3% is statistically almost 100% over a long time period, could you just reset your spending each year to 3% based on your portfolio and not worry about inflation? 

[neo von retorch]

Question as someone getting ready to pull the trigger:  I understand the logic behind 4% and then adjust for inflation each year.  If 3% is statistically almost 100% over a long time period, could you just reset your spending each year to 3% based on your portfolio and not worry about inflation?

You could almost certainly do that... but you wouldn't like it. As each year goes by, you actually need less money left over, as there are fewer years left. And there could be large swings along the way that make 3% a lot less than what you planned to live on.

The initial 4% rule was based on what you had at retirement, and you don't adjust the monetary amount drastically lower if you happen to burn through some principal.

i.e. you were planning to spend $40k/year and reached $1m, but you're extra cautious and frugal so you cut corners and can live on $30k.

But the market happens to go down 10% in the first year, and you've got ($1m-$30k)*90%=$873k. Next year, you're going to have to live on just $26,190! Oof. That was more than you thought you could cut. Realistically, you can still spend the full (inflation-adjusted) $30k, because historically there'd be a large enough recovery to your nest egg in the subsequent years to make up for the shortfall.

Obviously S.O.R.R. still applies (i.e. the first several years after you stop earning a paycheck, the market goes down, and there won't be a big enough recovery for your stash to last for the rest of your retired life.)

[ixtap]

I believe ERN's studies put the historical US perpetual withdrawal rate at about 3.5% (making inflation adjusted withdrawals as outlined above). We are aiming for a regular budget somewhat below that, to allow for the fact that we won't make even withdrawals and some years will be expensive. My personal goal is to keep the expensive years to 4%, but since DH downshifted, I have learned that while he can go for months (years, probably) without spending anything, he sucks at budgeting, or even estimating costs, when he does find something he wants to spend money on.

[ChpBstrd]

New forum necropost record?

10 years 4 months!

[Dicey]

New forum necropost record?

10 years 4 months!

Best of all, the thread was started by someone who created an account, asked a question, and was never heard from again. If that isn't a warning to think twice before starting a new thread, I don't know what is.

[GilesMM]

New forum necropost record?

10 years 4 months!

Best of all, the thread was started by someone who created an account, asked a question, and was never heard from again. If that isn't a warning to think twice before starting a new thread, I don't know what is.

Perhaps they took the advice, retired, and never looked back.