This answer got pretty verbose. Separate post.
What does your 4 percent SWR include? Do you capitalize the value of your pensions and then apply the 4 percent? Or do you take 4 percent of your personal assets in addition to the pensions, figuring your pensions offer an additional level of security? I have tried capitalizing the value of my pensions and my future Social Security using an estimated lifespan to see what percentage of my net worth these things represent, but I haven't bothered with figuring a SWR, since a large piece of my income is net real estate rents.
If I was you, I'd try to keep it simple. Add up all of your expenses (including taxes, mortgages, rental mortgages, charity donations, everything that was withdrawn from an account to pay somebody). Subtract your pension. Subtract your gross rental income. The remaining expenses should be less than 4% of the value of your ER portfolio.
If you do it that way then your "ER portfolio" is probably going to be the balances in your TSP, IRA(s), 401(k)s, and taxable accounts. It's not going to include home equity, vehicles, or personal property. You might include the value of a HELOC secured by rental property. If you're going to include the
equity of a rental property in your ER portfolio then I would not subtract its rental income from your expenses.
Note that I'm including your rental property expenses in your overall expenses. If you're planning to spend $50K on a major renovation, or if you suspect that it won't rent 12 months per year, then you might want to reduce your estimate of gross rental income. But this is a "simple" example.
In our case-- through many small, innocuous decisions made one at a time-- spouse and I have greatly complicated our accounting. I'm waiting out the next 10 years, when I expect it to get a lot simpler.
For example, we have a portfolio set aside for ER and a separate one set aside for college savings. (We started doing this when our daughter was born.) We pay all the college expenses out of the college savings. NROTC pays tuition & fees. College savings pays room, board, excess textbooks, cell phone, printer bills, and an occasional laptop repair. I think our daughter successfully haggled to have it pay for an iPhone upgrade, too, but that means the college fund has less in it for profit sharing after graduation. I don't think she'll try that again.
In any case, I don't have to make the budget jump through hoops when we visit our daughter (or when she visits us). We pay for all of that out of our entertainment & vacation budget.
We log all our expenses in Quicken. At the end of the year let's say that we spend $100K. (We have a home mortgage, a rental mortgage, and other rental property expenses. We fly back & forth to the Mainland a lot. Our Mustaches are very scraggly.) That includes all taxes, mortgage payments, other rental expenses, charitable donations, everything that was withdrawn from an account to pay somebody else.
My pension is $40K. Our gross rental income is $34K. $26K has to come out of our portfolio, and as long as the portfolio is more than $650K (= $26K/0.04) then we'll probably be OK. This math got pretty exciting in March of 2009.
We can get away with this accounting because of several safety factors. First, we can greatly reduce spending if necessary. Second, our math does not count Social Security (although I'm confident it'll be there for us). I'm pretty sure the federal government is going to pay my pension and my COLA. (If they don't, SWR will be the least of my problems.) My spouse will start drawing her Reserve pension in another decade. Our travel expenses will go down as our ages go up. Hypothetically SS & spouse's pension will cover most of our expenses and greatly ease the SWR demands on our portfolio.
But when we started saving in the 1980s, I couldn't count on pension income and I had no freakin' clue how to estimate Social Security. We didn't have a photovoltaic array or solar water heating to defray an average electric bill of $175/month. When I retired, I couldn't even count on rental income because my parents-in-law were living in our rental home. We had a mortgage and we didn't want to pay it off right then. We had to save pretty aggressively to get the ER portfolio big enough to cover projected expenses, and in retrospect we overshot the mark.
That's the beauty of the 4% SWR-- it practically guarantees that you're going to overshoot the mark. And because of the way I'm doing the accounting, if our ER portfolio goes to zero then we are not penniless. We'll still have my pension (and spouse's), we'll still be able to reduce our spending, and we'll still have Social Security. The key to this (as Wade Pfau and Moshe Milevsky write) is to annuitize some of your ER income for longevity insurance and to guard against a SWR failure. For most people it's Social Security. For us it includes our military pensions, too.
An additional factor in my retirement has been interest rates. When we retired in 2000 we were paying 8% (eight!) on our home mortgage. Today we're paying 3.625%. My military pension COLA has risen roughly 25% over the last decade, but our mortgage expenses have dropped by over 40%. In actual dollars, the refinancing has been worth more than the COLA.
Some would claim that we won the retirement lottery
after I retired. Our earned income plummeted, and so did our taxes. Our mortgage expenses imploded. We had more time to DIY so we cut a lot of service expenses. We had the time to review all our spending and cut some of it, too (like insurance). My parents-in-law moved out of our rental property and we started getting rental income again. My spouse qualified for a Reserve retirement. We installed a PV array and a solar water heater. Berkshire Hathaway stock did great things for the college fund. Our daughter decided to commit to NROTC and did even greater things for the college fund. I accounted for some of this in our ER planning, but there were far more pleasant surprises than unpleasant ones... despite two recessions in that decade.
I don't call that "luck". I call that being ready to exploit opportunities. Note that spouse and I could have gone back to work any time-- blogging income, book income, public speaking, defense consulting, surfing instructor, even door-to-door handyman services. I could even go teach nuclear power classes for Pearl Harbor Shipyard, although I'm gettin' to be a bit of a dinosaur for that group. However I'm beginning to believe that none of our income-producing ideas will be necessary.
A classmate of mine has done quite well for himself after the military, and his bridge career gives him a very healthy six-figure salary. He donates over $100K/year to a Vietnamese orphanage for reasons that must be very important to him-- because he's willing to work for it. But he also enjoys his work. Personally, I haven't found that sort of avocation yet. I tell our daughter that I hope she finds her own avocation, but in the meantime she should be pushing for financial independence.
BTW I don't count book royalties as retirement income, but I have to report them as taxable income. Then I donate the royalty amount to charity and take a tax deduction, so it's close enough for my comfort. $1136.15 (so far) doesn't move the needle much against a $40K/year pension.
You mentioned capitalizing the value of a pension. Doing that calculation for a military pension with a COLA took me three weeks and several blog posts!
http://the-military-guide.com/2011/03/17/present-value-estimate-of-a-military-pension/http://the-military-guide.com/2011/03/21/asset-allocation-considerations-for-a-military-pension/http://the-military-guide.com/2011/03/23/asset-allocation-considerations-for-a-military-pension-part-2/http://the-military-guide.com/2011/03/24/asset-allocation-considerations-for-a-military-pension-part-3-of-3/