Author Topic: clarity on the 4% SWR  (Read 2104 times)

nereo

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clarity on the 4% SWR
« on: April 10, 2014, 12:27:05 PM »
Hi Folks

I've been following the discussion on the firecalc and cFIREsim both lie? thread and going over the stuff on the 4% SWR, and I realized that there's one aspect I've never fully understood. Maybe someone can help me puzzle it out.

The firecalc and cFIREsim both rely on a base amount being withdrawn each year, and that amount can be indexed to inflation, adjusted for things like SS, etc.

But is there ever a time after retirement to 'readjust' your SWR?
Here's a hypothetical to help illustrate my question.
Let's say "Joe" retires with $1M.  He has a 4% SWR of $40k, indexed to inflation. 
Never a big spender, Joe finds that he and his family can live off a bit less - maybe $36k.  He also picks up some side income selling the furniture he builds as a hobby - another $10k a year, so Joe needs to withdraw even less from his account.  Time marches on, the stock market has an 'average' decade, and then one day Joe looks at his retirement accounts and finds that he now has $1.6M
At the same time the community center near his house needs donors.  Joe looks at his current balance, does the 4% SWR calculation ($64k annually on $1.6M), and thinks to himself "sure, I can give $25k a year to the community center, have $39k for myself ($39k is the inflation-adjusted $36k), and still be living on 4%, even without considering side income."


In my head I can argue this both ways.  Arguing against I think that it's risky to re-assess the 4% rule ever few years or decades, because an "up" year or decade might give you a false sense of security.  In a manner of speaking the 4% SWR generally works because it stays constant while the market goes up or down, and the average market gain of ~7% will allow for withdrawing in bad years.
OTHO, if you make reassessing a continuous strategy, you'll also reassess during down years, when 4% will give you less overall money.  It's one method of being adaptable.

arebelspy

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Re: clarity on the 4% SWR
« Reply #1 on: April 10, 2014, 01:01:59 PM »
Yes, an adjustable withdrawal strategy is a fairly common idea in ER circles.  If you do some digging through the e-r.org forums you'll see more discussion than you can shake a stick at.

Look at the "adjust spending" option on cFIREsim: http://www.cfiresim.com/input.php

And then Google the ones you don't recognize.  :)

Hope that helps get you started!
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nereo

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Re: clarity on the 4% SWR
« Reply #2 on: April 10, 2014, 02:45:19 PM »
Yes, an adjustable withdrawal strategy is a fairly common idea in ER circles.  If you do some digging through the e-r.org forums you'll see more discussion than you can shake a stick at.

Look at the "adjust spending" option on cFIREsim: http://www.cfiresim.com/input.php

And then Google the ones you don't recognize.  :)

Hope that helps get you started!
Thanks.  Stupid me - I've been playing with cFIREsim for a while, but somehow I never clicked on the "inflation adjusted" tab to see that I could choose things other than inflation.  Exactly the sort of input I was looking for (and was apparently in front of my face this whole time).

arebelspy

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Re: clarity on the 4% SWR
« Reply #3 on: April 10, 2014, 02:50:17 PM »
No problem.  Sometimes it's right under our nose. :)

BTW the one called "Retire again and again" will be useful for you, I believe, based on your post.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, 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.