Author Topic: The 4% Rule in Practice  (Read 4609 times)

skidlystache

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The 4% Rule in Practice
« on: March 11, 2014, 12:17:18 PM »
I've read MMM's posts on the 4% rule and how one may have to change the percentage he/she takes out of their stasche each year based on market conditions, inflation, state of the economy, yadda yadda.  But how does the 4% rule work in practice?  If approaching early retirement do you set aside a specific sum in a "safe" investment (money market fund, bond fund, ???, what kind?) and move similar sums of money from your stock index fund investments each year into it the safe investments?  I'd like to know how those of you in early retirement are doing this...or how those of you rapidly approaching early retirement plan on doing this. 

Eric

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garrettld

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Re: The 4% Rule in Practice
« Reply #2 on: March 12, 2014, 07:43:47 AM »
You can do this in a huge number of ways. Your 4% can be made up from any combination of interest, dividends, capital gains, rental income, annuities, or whatever else is available to you.

If you buy exclusively high-dividend-paying stocks, for example, you may be able to get most or all of your 4% just in dividend payouts, which is a very simple way to do it. These types of stock also tend to be relatively low risk because they're usually large established companies like these. Generally these stocks do not have as much capital appreciation, which is the trade-off.

Bonds also pay out dividends, which include the interest from the bonds. Vanguard's Total Bond Market Index Fund payed out just over 2.5% with its most recent dividend payout.

Alternatively, you could sell shares of stocks or bonds and realize capital gains.

In practice, you'll likely do a bit of both. If your expected dividend payout is ~2%, you can sell off 2% of your portfolio to get you up to 4%.

For me, I find the prospect of selling shares to be a lot scarier than just having my dividends paid out, so I'm not sure what I'll end up doing.

nicknageli

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Re: The 4% Rule in Practice
« Reply #3 on: March 12, 2014, 09:11:17 AM »
Someone posted a link from this site in another thread.  I found this article there that I thought was interesting.

"The Retirement Calculator from Hell"
http://www.efficientfrontier.com/ef/998/hell.htm

sleepyguy

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Re: The 4% Rule in Practice
« Reply #4 on: March 12, 2014, 09:49:36 AM »

data.Damnation

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Re: The 4% Rule in Practice
« Reply #5 on: March 12, 2014, 05:24:19 PM »
Someone posted a link from this site in another thread.  I found this article there that I thought was interesting.

"The Retirement Calculator from Hell"
http://www.efficientfrontier.com/ef/998/hell.htm

Good article. But what if you do a combination of the two methods? For example, what if you average the 4% withdrawal versus 7% of total value and withdraw that amount every year? That seems like you'd a steadier supply of money than the 7% rule but less risk than the 4% rule.

eefool

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Re: The 4% Rule in Practice
« Reply #6 on: March 12, 2014, 06:37:22 PM »
Good article. But what if you do a combination of the two methods? For example, what if you average the 4% withdrawal versus 7% of total value and withdraw that amount every year? That seems like you'd a steadier supply of money than the 7% rule but less risk than the 4% rule.

I think that would increase the risk. The 4% would be the same amount, but if the market crashes and your 7% total value is lower than the 4% amount, you would end up withdrawing >7% when you would want to preserve your capital.

spoonman

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Re: The 4% Rule in Practice
« Reply #7 on: March 12, 2014, 09:57:34 PM »
For me, I find the prospect of selling shares to be a lot scarier than just having my dividends paid out, so I'm not sure what I'll end up doing.

I second that.  If you construct a portfolio of names like KO, PG, JNJ, CVX, and others, you can safely just count on your dividends without worrying about withdrawal rates.  Every so often you have to let go of one company, but those events are few and far between.

wtjbatman

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Re: The 4% Rule in Practice
« Reply #8 on: March 13, 2014, 05:57:02 AM »
For me, I find the prospect of selling shares to be a lot scarier than just having my dividends paid out, so I'm not sure what I'll end up doing.

I second that.  If you construct a portfolio of names like KO, PG, JNJ, CVX, and others, you can safely just count on your dividends without worrying about withdrawal rates.  Every so often you have to let go of one company, but those events are few and far between.

I look forward to my DG portfolio actually increasing in size in retirement, even as I withdraw money (in the form of dividends) to live on. It will definitely bring me peace of mind and let me sleep well at night.