Author Topic: SWR - 4%? And 4% of what?  (Read 5843 times)

Mr Mark

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SWR - 4%? And 4% of what?
« on: March 13, 2014, 02:10:39 PM »
Query on how people interpret SWR.

If I own my own house, do I include the asset value in the base calculation?

And is there anyone already FIRE who is relying on a SWR and can advise? Ie how are you acheiving your cashflow, and whats your withdrawal rate?
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jfer_rose

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Re: SWR - 4%? And 4% of what?
« Reply #1 on: March 13, 2014, 02:13:23 PM »
I'm not retired yet, but I need to know my planned withdrawal rate in order to plan for my retirement. As I understand it, most of us here plan to base our withdrawal rate on a percentage of our liquid investments-- so excluding home value.

Some here use 4% withdrawal rate, others are more conservative and use a lower rate.

aclarridge

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Re: SWR - 4%? And 4% of what?
« Reply #2 on: March 13, 2014, 02:27:16 PM »
Assuming you own the house outright, I wouldn't include it. It makes sense because you aren't paying rent or mortgage so your expenses are lower so you only need 25x those lower expenses. It's irrelevant what your house is worth if you don't plan on selling it.

It's more complicated if you're still paying a big mortgage balance as you can take into account that you eventually will pay it off and lower your expenses.

Dr. A

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Re: SWR - 4%? And 4% of what?
« Reply #3 on: March 13, 2014, 02:30:41 PM »
I'm not anywhere near FI, but agree with the first two replies.

The basic point is, a pot of invested money should theoretically last forever if you pull out 4% every year. Your home is not invested money, therefore not part of the calc.

Shorter answer, at the end of the day, you'll need 25x spending in an investment account, plus a paid-off house.

Meadow Lark

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Re: SWR - 4%? And 4% of what?
« Reply #4 on: March 13, 2014, 02:31:00 PM »
No, don't include your house.  Only include investments that will make you money.  The Trinity study, which the 4% rule is based on, used allocations of stocks and bonds.  Use the paid off house to reduce your needed or wanted income (ie, instead of $40k, you need $32k or whatever.)

lentilman

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Re: SWR - 4%? And 4% of what?
« Reply #5 on: March 13, 2014, 03:10:49 PM »
IMO, the home value should be included. (As should be retirement accounts.)

MMM himself used home equity in calculating stash size that the 4% relating to.

In the brief history of the stash: http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/
Year 3 includes 47K in home equity, and  year 9 includes 100K in appreciation.

Money in your home is invested, so I guess I disagree with some of the posters above.  If you have money, you can buy stocks, or real estate, or gold, etc.  It just makes no sense to think that money spent on a home is gone.  It will be there when you need it by selling, the same as all the other asset classes. 

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geekette

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Re: SWR - 4%? And 4% of what?
« Reply #6 on: March 13, 2014, 03:53:25 PM »
Although I count our house value in our net worth, I don't count the house to determine the investment base from which we can draw in retirement.  It does reduce our spending requirements, though. 


SnackDog

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Re: SWR - 4%? And 4% of what?
« Reply #7 on: March 13, 2014, 04:06:22 PM »
I treat a paid off home as an insurance policy in my calculations. If I run out of money at 90 and/or require a nursing home, the house gets sold.  In a way, this supports a 4% withdrawal because without it I would follow the recent expert advice closer to 3%.
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. –Thomas T. Munger

arebelspy

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Re: SWR - 4%? And 4% of what?
« Reply #8 on: March 13, 2014, 04:29:03 PM »
This kind of question is tricky.

The best answer is to go to www.cfiresim.com  Run scenarios.  4% may be good.  Or not.  Including home equity may be good.  Or not.

You'll have to find an SWR you're comfortable with based on your assumptions.

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Tyler

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Re: SWR - 4%? And 4% of what?
« Reply #9 on: March 14, 2014, 10:57:29 AM »
No, you should not include your home in SWR calculations. The most important reason is that it's impossible to sell 4% of your house every year to pay for living expenses. Think of the extreme case where someone owns a million dollar home with no mortgage but has no liquid savings and $40k in annual expenses.  They only spend 4% of their net worth, but could never claim to be FI.

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aclarridge

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Re: SWR - 4%? And 4% of what?
« Reply #10 on: March 14, 2014, 11:44:35 AM »
IMO, the home value should be included. (As should be retirement accounts.)

MMM himself used home equity in calculating stash size that the 4% relating to.

In the brief history of the stash: http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/
Year 3 includes 47K in home equity, and  year 9 includes 100K in appreciation.

Money in your home is invested, so I guess I disagree with some of the posters above.  If you have money, you can buy stocks, or real estate, or gold, etc.  It just makes no sense to think that money spent on a home is gone.  It will be there when you need it by selling, the same as all the other asset classes.

You're talking about net worth, which is different from the number used in the 4% rule calculation.

MMM has also mentioned a few times that they stopped working once they had 600k + a paid off house. I assume the reason was because their expenses with a paid off house were about 600k*.04=24k/year, which is about what they spend.

foobar

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Re: SWR - 4%? And 4% of what?
« Reply #11 on: March 14, 2014, 12:01:23 PM »
You can get a money out of a house. There are a zillion products just for that (cash out refiance, reverse mortgage HELOs,....). If you couple with the million dollar house and no cash were like 85 years old, then it might make sense to use them.

Long term the problem with the house is that it's real value tends not to go up (certain areas excluded) by more than 1-2 after inflation%. Thats a good return when your leveraged but it isn't enough to support a 4% withdrawal rate. You would have to play with firecalc to see what a safe withdrawal rate is when one of the assets has a low expected return.

No, you should not include your home in SWR calculations. The most important reason is that it's impossible to sell 4% of your house every year to pay for living expenses. Think of the extreme case where someone owns a million dollar home with no mortgage but has no liquid savings and $40k in annual expenses.  They only spend 4% of their net worth, but could never claim to be FI.

KingCoin

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Re: SWR - 4%? And 4% of what?
« Reply #12 on: March 14, 2014, 12:04:28 PM »
Home equity reduces your living expense and therefore reduces the amount of invested assets you need to support your lifestyle. So no, I wouldn't count it toward the 4%. The home equity is already baked into the equation via expense reduction.

It gets a bit tricky if you own "too much home". For instance, if you own a $500k home, but are planning on downsizing to a $200k home in the future, then I'd be inclined to include the $300k that will be freed up for investment into your 4% multiplier. You can also start tapping home equity if you need to as foobar mentioned, but that would probably start comprising my ability to sleep at night.
« Last Edit: March 14, 2014, 12:16:02 PM by KingCoin »

nicknageli

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Re: SWR - 4%? And 4% of what?
« Reply #13 on: March 14, 2014, 12:15:03 PM »
This guy argues that a fixed 4% withdrawal rate is not right for everyone.  It's quite a long article, but it seems to make sense to me.

http://financialmentor.com/free-articles/retirement-planning/how-much-to-retire/are-safe-withdrawal-rates-really-safe

I include the house in net worth calculations, but I don't include it for calculating an FI date.

Edit:  I'm not related or associated with this person or blog in any way.  Just thought it was an interesting perspective.
« Last Edit: March 14, 2014, 12:17:12 PM by Wannabe »

lentilman

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Re: SWR - 4%? And 4% of what?
« Reply #14 on: March 14, 2014, 12:38:07 PM »
IMO, the home value should be included. (As should be retirement accounts.)

MMM himself used home equity in calculating stash size that the 4% relating to.

In the brief history of the stash: http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/
Year 3 includes 47K in home equity, and  year 9 includes 100K in appreciation.

Money in your home is invested, so I guess I disagree with some of the posters above.  If you have money, you can buy stocks, or real estate, or gold, etc.  It just makes no sense to think that money spent on a home is gone.  It will be there when you need it by selling, the same as all the other asset classes.

You're talking about net worth, which is different from the number used in the 4% rule calculation.


Nope.

MMM converted his equity to an income producing asset by moving to a smaller house and renting out his previous primary.  As Foobar points out, there are a zillion other ways to get cash out of a house.  Selling and renting at the end of life is another option as mentioned by SnackDog.

But Arebelspy is right - you have to run the numbers yourself to make the decision. 

Personal thoughts located at:   www.independentpenguin.com

sherr

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Re: SWR - 4%? And 4% of what?
« Reply #15 on: March 14, 2014, 02:34:30 PM »
IMO, the home value should be included. (As should be retirement accounts.)

MMM himself used home equity in calculating stash size that the 4% relating to.

In the brief history of the stash: http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/
Year 3 includes 47K in home equity, and  year 9 includes 100K in appreciation.

Money in your home is invested, so I guess I disagree with some of the posters above.  If you have money, you can buy stocks, or real estate, or gold, etc.  It just makes no sense to think that money spent on a home is gone.  It will be there when you need it by selling, the same as all the other asset classes.

You're talking about net worth, which is different from the number used in the 4% rule calculation.


Nope.

MMM converted his equity to an income producing asset by moving to a smaller house and renting out his previous primary.  As Foobar points out, there are a zillion other ways to get cash out of a house.  Selling and renting at the end of life is another option as mentioned by SnackDog.

But Arebelspy is right - you have to run the numbers yourself to make the decision.

If you have a paid off house and $X per year in expenses, then 4% of your investments should equal X. You should not include the house's value in your investments, because it is not generating income.

If you want to include the house in your investments and take 4% of your total net worth, then you can, but then you need to increase your real annual expenses by however much it would cost you to rent. That is another fine way of calculating, if your home is an investment then it is generating the amount that you could rent it for each month, and paying off your imaginary rent to live in the house each month.

What you cannot do is include the home in your investments and compare your investment amount to your real annual expenses. If you are you are double-counting the value of your home; once in reducing your expenses by not having rent / mortgage, and once by counting it among your income-generating investments. That's just bad accounting, not to mention not what the 4% rule research is based on.

Mr Mark

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Re: SWR - 4%? And 4% of what?
« Reply #16 on: March 15, 2014, 05:33:43 PM »
Sherr. Excellent way to summarize.  Thank you.
Mr. Mark