Author Topic: newbie question about that 4%SWR  (Read 5462 times)

Double Yu

  • Stubble
  • **
  • Posts: 112
  • Age: 50
  • Location: in a city that also starts with W
  • W is for Wanderbird
newbie question about that 4%SWR
« on: July 26, 2017, 02:56:46 PM »
I'm bouncing between forum posts, reading up on all the talk about SWRs and then it occurs to me as I'm sitting here, pencil in hand and scribbles on paper -- am I supposed to be calculating my aimed for stash (25x expenses) based on now or when I (theoretically) retire?

We're a long-haul ways away from retiring (long story summed up: social sciences do not a large income make) and so what we have as expenses now, projected to remain constant for say 15 years, turns out to be a much larger number when I factor in inflation.

For instance - possibly close number: $40,000 per year now in costs (yeah, that counts what we spend on kids who are about to leave the nest, so data is skewed) = a stash of $1 million. 

BUT at 3% inflation, in 10, 15, 20 years, the numbers (extrapolated off that 40,000) do this:

$53,756 = $1.34 million
$72,244 = $1.8 million
$97,091 = $2.43 million

frankly, it will never happen if I'm supposed to reach that highest number. As much as I wish we had the income for it, we don't.

Technically, I don't even know if we can make it to the lower of those numbers, but that's another story altogether - my point here is to ask: when you're all talking about a 4% SWR, are you basing your future-expenses on numbers from today or those that are factoring in inflation?

Thanks and sorry if this has been asked/answered many times before.

bob22

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Re: newbie question about that 4%SWR
« Reply #1 on: July 26, 2017, 03:24:16 PM »
The withdrawal rate is just the withdrawal rate in today's dollars or tomorrows.

In simple terms, Bernstein (the founder of the SWR) assumes that the gains on investments will be at least 4% + the rate of inflation. A simple example: At the end of 2016, you have $1M in investments. To make the example easy, I'm going to assume that you withdraw all of the money at the end of each following year and that there is 3% inflation.
2016  Value of Investments: $1,000,000
2017  Value of Investments: $1,030,000 Amount Withdrawn: $40,000 (4% of $1,000,000)
2018  Value of Investments: $1,060,900 Amount Withdrawn: $41,200 (4% of $1,030,000)

The value withdrawn in 2018 is still 4% of the value of the investments. But it's also 3% higher than the previous year to keep pace with inflation.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10246
Re: newbie question about that 4%SWR
« Reply #2 on: July 26, 2017, 04:38:46 PM »
...Bernstein (the founder of the SWR)...
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 some reading on the actual history of "safe withdrawal rates."

To answer the OP, you can use either today's or future spending as "X" in "25 times X" - just be consistent in your investment return estimate:
For today's spending, use "real" returns.
For future spending, use "nominal" returns.

In other words, do or don't include inflation as long as you do or don't include it in both your expense and investment growth estimates.

Ignoring inflation is usually easier.


Double Yu

  • Stubble
  • **
  • Posts: 112
  • Age: 50
  • Location: in a city that also starts with W
  • W is for Wanderbird
Re: newbie question about that 4%SWR
« Reply #3 on: July 26, 2017, 07:08:41 PM »
Thank you for your replies!

Maybe I'm approaching it backward? At this point it's a theoretical exercise, but it's good practice while I try to learn this language :)

 I'm trying to figure out what I would "need" if I were to stop being employed (retire) in 15 or 20 years -- and given that the amount I'm setting as my baseline WR would NOT have the same purchasing power in 15 or 20 years, then I'd probably want to be able to withdraw MORE (in name, hence, nominally) - requiring, then, a larger stash.

Right?

If I had $1 million right now, I could withdraw that $40,000, let the capital stay as it was and accumulate ideally at 7+% and then each year it would generate the right, inflation-adjusted amount.

The reality being that I don't have that million doing that work of accumulating interest means that I will have to save more than $1 million, ultimately, to do the same amount of work.

Overthinking? or does this sound about right?


Capt j-rod

  • Bristles
  • ***
  • Posts: 338
Re: newbie question about that 4%SWR
« Reply #4 on: July 26, 2017, 07:27:00 PM »
I think the biggest question is how you can reduce your spending. It sounds like there will be two adults. If and when everything is paid off then your numbers should drop dramatically. Also remember that the 4% does not include any outside income. So if you pick up some "voluntary employment" that money is in addition to what you are withdrawing. I have a mixed portfolio of rentals, my wife is in medicine where she can moonlight, and I do heating and cooling. Our 4% will be off investments, but we will supplement as needed. We plan to work as needed while our kids are in school (12 more years) then just let it ride. The coolest part of this is if it all goes to hell in a hand basket the worst possible case scenario is go back to work. Once your debt is gone money is pretty easy to accumulate. We still have a few debts (home and a rental property). The income off the rentals more than washes the bills right now. We live simple and conservative so we are investing heavily. Again, if it all fails, furnaces and A/C's will always break and medicine will always be needed, especially in her field. Honestly if it weren't for health insurance and the fact that my wife has a great employer we might already be done.

Double Yu

  • Stubble
  • **
  • Posts: 112
  • Age: 50
  • Location: in a city that also starts with W
  • W is for Wanderbird
Re: newbie question about that 4%SWR
« Reply #5 on: July 26, 2017, 07:40:32 PM »
I think the biggest question is how you can reduce your spending.

as detailed elsewhere https://forum.mrmoneymustache.com/case-studies/income-challenged-tri-continental-family-e-is-out-of-the-question-but-r/, actually the biggest question is how can we increase our earning. That's going hand in hand with continued decreases in spending but seriously, if there's not much income, there's just not much income. Steps are being taken but I still need to know what I'm aiming for, in the long run.

Also, thanks, MDM, I'll go read through those linked-to pages :)

steveo

  • Handlebar Stache
  • *****
  • Posts: 1943
Re: newbie question about that 4%SWR
« Reply #6 on: July 26, 2017, 07:43:25 PM »
You are overthinking this. You just need to focus on your target today. If that is 1 million dollars that is your goal. My target is 1 million dollars. If I get to that in 3 years time I'm not worried one little bit by inflation. If might mean that I need to get to 1 million plus another 30 thousand dollars but that will all come out in the wash.

Inflation is included in your withdrawl rate and I wouldn't worry about inflation in relation to increasing your target amount. Just think in terms of general guidelines.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10246
Re: newbie question about that 4%SWR
« Reply #7 on: July 26, 2017, 09:41:24 PM »
I'm trying to figure out what I would "need" if I were to stop being employed (retire) in 15 or 20 years -- and given that the amount I'm setting as my baseline WR would NOT have the same purchasing power in 15 or 20 years, then I'd probably want to be able to withdraw MORE (in name, hence, nominally) - requiring, then, a larger stash.
Right?
If inflation occurs, "yes."  If inflation is 0% - or if you choose to do all calculations in "today's dollars" - then "no."

Quote
If I had $1 million right now, I could withdraw that $40,000
So far so good.
Quote
let the capital stay as it was and accumulate ideally at 7+% and then each year it would generate the right, inflation-adjusted amount.
You've lost me here.

Quote
The reality being that I don't have that million doing that work of accumulating interest means that I will have to save more than $1 million, ultimately, to do the same amount of work.
Depends on the definition of the word "save" (e.g., do you mean "accumulate" or "contribute"?) and again whether you are including inflation or not.

Double Yu

  • Stubble
  • **
  • Posts: 112
  • Age: 50
  • Location: in a city that also starts with W
  • W is for Wanderbird
Re: newbie question about that 4%SWR
« Reply #8 on: July 26, 2017, 10:40:29 PM »

Quote
let the capital stay as it was and accumulate ideally at 7+% and then each year it would generate the right, inflation-adjusted amount.
You've lost me here.


haha, principle, I meant principle! :D  see what I mean, I'm learning another language!


 -- uh, maybe still lost you, even with principle...

I guess I'm just thinking that if I want to have enough to retire on (given that I'm about 47 and DH is almost 55 and we have next to no retirement investments ((sigh, it's just sounding worse and worse the more I type it))) ... then obviously the more I have to accumulate.

Maybe the hypothetical is kind of pointless given that really what I just have to do is save next to everything, which I already knew, but, well, I was looking for actual numbers to have as a kind of goal post marker.

You know, an impossible $ 1million is still less impossible than $2 million.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10246
Re: newbie question about that 4%SWR
« Reply #9 on: July 26, 2017, 11:12:13 PM »
...I was looking for actual numbers to have as a kind of goal post marker.
Very reasonable thing to do.

See rows 45-66 on the 'Misc. calcs' tab of the case study spreadsheet to enter your own numbers, but here is one set:

Quick calculation of "Time to FI"
Planned Withdrawal RateWR4.0%
Annual Savings InvestedS40,000$/yr
Annual Expenses in RetirementE30,000$/yr
Current Assets InvestedA0$
Investment returnr_5.0%
Time to FIt13.6yr
Desired time to FIt9.0yr
Annual Savings NeededS68,018$/yr

See Getting Confused Trying to Calculate Savings Rate and FIRE in 8 years? for the math behind the numbers.

ixtap

  • Handlebar Stache
  • *****
  • Posts: 2420
Re: newbie question about that 4%SWR
« Reply #10 on: July 26, 2017, 11:19:47 PM »
When we were just starting to build our taxable account, we stayed focused on whatever it was we wanted to have/do. At one point, we thought we wanted a swimming pool. We figured out the cost of an amazing pool and made that our goal. We changed our plans long before we saved that much, but it gave us a focus. It is much harder to focus now that we are buying time, but we have good habits built up from focusing on that concrete goal.

koshtra

  • Pencil Stache
  • ****
  • Posts: 668
  • Location: Portland, Oregon, USA
    • Mole
Re: newbie question about that 4%SWR
« Reply #11 on: July 26, 2017, 11:39:25 PM »
When people are elderly, like we are -- compared to the typical Mustachian -- it's sensible to reckon up probable social security benefits and throw them into the equation.

Double Yu

  • Stubble
  • **
  • Posts: 112
  • Age: 50
  • Location: in a city that also starts with W
  • W is for Wanderbird
Re: newbie question about that 4%SWR
« Reply #12 on: July 27, 2017, 12:03:55 PM »
wow, MDM, you are a fount of resources. How do you keep track of All the Things? :D

and, yeah... I do need to get my head out of the sand and pull all the random bits and bobs together to get a real sense of what we have (there's a small account here from job A, there's something leftover from job B, there's a dinky amount of SS )

more sighs, lots more sighs

Tyson

  • Magnum Stache
  • ******
  • Posts: 2512
  • Age: 48
  • Location: Denver, Colorado
Re: newbie question about that 4%SWR
« Reply #13 on: July 27, 2017, 12:18:51 PM »
The short answer is "yes, inflation is accounted for in the 4% rule".

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3044
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: newbie question about that 4%SWR
« Reply #14 on: July 27, 2017, 12:43:54 PM »
OP, I understand what you are saying, and you are correct:  the 4% rule does account for inflation *after* you retire, but not between now and then.  And I can see how that can be discouraging because with inflation, the target seems to get further away.

I'll suggest the following as an approach that I used that was helpful:

Figure up your target based on 25x of today's expenses.  Work with your partner to aim for that goal for now.  As you both work towards that goal, you will soon realize that it is easier to reduce spending by $1 than to accumulate $25.  You will then work on reducing spending for a while until you've optimized it to your satisfaction.  Even after this point, you'll still keep an eye on your expenses.  Doing this, you will discover that your personal inflation rate is probably zero, so the target will end up not moving at all.

I was working toward FIRE for about 20 years, and my expenses today are basically the same in actual dollars as they were 10 years ago, so I know it can be done.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 7822
Re: newbie question about that 4%SWR
« Reply #15 on: July 27, 2017, 01:19:21 PM »
...my point here is to ask: when you're all talking about a 4% SWR, are you basing your future-expenses on numbers from today or those that are factoring in inflation?

Thanks and sorry if this has been asked/answered many times before.

I'm shooting for a investment account balance of say $1M and $40K/yr. I am assuming that I'll still need $40K/yr when I FIRE. This is based on our current low inflation situation and the fact that I am continually finding ways to optimize my cost of living. If I get close to $1M and my revised estimate is the need for $41K/yr I'll need to save/grow an extra $25K before I FIRE.

This works for me because my FIRE budget is not down to beans,rice, water and walking everywhere so I have some flexibility and the fact that I am optimizing my costs faster than inflation is increasing them.

DarkandStormy

  • Handlebar Stache
  • *****
  • Posts: 1398
  • Age: 31
  • Location: Midwest, USA
Re: newbie question about that 4%SWR
« Reply #16 on: July 27, 2017, 01:26:12 PM »

For instance - possibly close number: $40,000 per year now in costs (yeah, that counts what we spend on kids who are about to leave the nest, so data is skewed) = a stash of $1 million. 

BUT at 3% inflation, in 10, 15, 20 years, the numbers (extrapolated off that 40,000) do this:

$53,756 = $1.34 million
$72,244 = $1.8 million
$97,091 = $2.43 million

FYI I get different numbers.  At 15 years, it's $60,503 and at 20 years, it's $70,140.  I think maybe you meant 10, 20, 30 and not 10, 15, 20?

Keep in mind there are different methods for calculating inflation.  Some experts think it's closer to 2.8%.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 7822
Re: newbie question about that 4%SWR
« Reply #17 on: July 27, 2017, 01:37:48 PM »
Keep in mind there are different methods for calculating inflation.  Some experts think it's closer to 2.8%.

The only inflation calculation that matters in terms of this question is the inflation of your lifestyle costs. That could be higher or lower than CPI or other general inflation stats.

Acastus

  • Bristles
  • ***
  • Posts: 388
  • Age: 58
Re: newbie question about that 4%SWR
« Reply #18 on: July 27, 2017, 02:35:13 PM »
Several of the good retirement calculators will figure out your needs in today's dollars and future inflated dollars, based on you assumptions. I use Quicken, but I hear FireCalc is good. There are others. Darrow Kirkpatrick's blog has a list with rankings for complexity and utility.

http://www.caniretireyet.com/my-favorite-retirement-calculators/

Basic needs will cost more, due to general inflation, so your final 'stache needs to be 25x whatever your future inflated lifestyle dictates. It may be easier to figure this in today's dollars rather than the inflated dollars. I try to look at it both ways.

The good news is stocks have been a pretty good hedge against inflation historically. If inflation is high, it is because prices are climbing. That usually means companies are making a bigger profit because they are charging more for the same products. If inflation is high, hopefully you will have a higher return.

koshtra

  • Pencil Stache
  • ****
  • Posts: 668
  • Location: Portland, Oregon, USA
    • Mole
Re: newbie question about that 4%SWR
« Reply #19 on: July 27, 2017, 02:46:01 PM »
This is probably unnecessary to say but I'll say it anyway: make sure you multiply all the components out so they're all equivalent. Even a "dinky" Social Security of say $500 a month = $6,000 a year you DON'T need your stash to generate which = $150,000 dollars you WON'T need in order to retire.

Double Yu

  • Stubble
  • **
  • Posts: 112
  • Age: 50
  • Location: in a city that also starts with W
  • W is for Wanderbird
Re: newbie question about that 4%SWR
« Reply #20 on: July 27, 2017, 02:53:16 PM »
Did y'all know you're EMTs in disguise? You seriously arrived on the scene and jump started my heart again.

All is not lost! That impossible $1mil is less impossible and less likely to require $1mil (esp. because the "dinky" SS WILL make a difference, plus, there's plenty to optimize, etc).  Oh I feel like I can breathe again :D

Arioch

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: newbie question about that 4%SWR
« Reply #21 on: July 27, 2017, 03:09:17 PM »
Another point to consider: comparing raw yearly current savings amount + interest with a target of a future inflated amount doesn't take into account cost of living adjustments to your pay. So assuming yearly COLA raises (i know, ha ha, right?) and a constant savings rate percentage still results in more $ saved over time. Hope that makes sense.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10246
Re: newbie question about that 4%SWR
« Reply #22 on: July 27, 2017, 03:30:42 PM »
wow, MDM, you are a fount of resources. How do you keep track of All the Things? :D
1% memory, 99% a document with links more or less sorted by topic.  It's a poor man's wiki.

Double Yu

  • Stubble
  • **
  • Posts: 112
  • Age: 50
  • Location: in a city that also starts with W
  • W is for Wanderbird
Re: newbie question about that 4%SWR
« Reply #23 on: July 27, 2017, 03:34:38 PM »

1% memory, 99% clever enough to think of making a document with links more or less sorted by topic.


There, fixed that for you!

bob22

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Re: newbie question about that 4%SWR
« Reply #24 on: July 28, 2017, 04:17:26 PM »
Yeh, I screwed up--should have said Bengan, not Bernstein :P

bob22

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Re: newbie question about that 4%SWR
« Reply #25 on: July 28, 2017, 04:32:53 PM »
What I first started doing was putting a value (to me) on my expenses. Some expenses gave me absolutely no value, or had less expensive alternatives. For example, I had mutual funds that had over 1% expense ratios that weren't performing as well as index funds that were a fraction of this cost. I was paying for newsletters that I never used. These expenses were easy to cut. This made it much easier for me to save larger amounts of money, quickly.

The first $10,000 saved was much harder than the next; the first $100,000 was much harder than the next. Etc. I know this should seem obvious, but there was a part of me that didn't believe it until I saw the money in my account grow. And my goal isn't to scare you--just to say that you may find that psychologically it doesn't feel like walking up a steep hill all the time, it gets easier. Especially as you get used to saving more and more.
« Last Edit: July 28, 2017, 04:35:00 PM by bob22 »