The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: G-String on February 05, 2020, 04:00:09 AM
-
It's my understanding that the 4% withdrawal rate rule of thumb in retirement applies if you wish to preserve your capital, for example for those who want to leave an inheritance. But what if you're okay with your capital being reduced in retirement and not concerned with leaving an inheritance? Would the 5% rule be acceptable?
-
For clarity: the 4% rule does not guarantee preservation of capital. It doesn't guarantee anything, of course, but the stated goal is to end up with a portfolio above $0 after a 30 year retirement, based on historical returns. Period.
There are a lot of places that stretch that conclusion beyond recognition, but one person who has usefully expanded upon it is Wade Pfau, who has kept the data series updated as new years of market performance bring more data points. The chart below is from a Forbes article by Wade, expanding the data set through (ending year) 2018. (it's tiny in-line with this message. Click it to expand it to readable size.)
In the chart below, Bengen's original parameters are a 50/50 portfolio, for 30 years.
For more research:
Bengen's original article, defining the 4% rule: http://www.retailinvestor.org/pdf/Bengen1.pdf
The Trinity study, expanding on Bengen's results with retirements of different lengths, and differing asset allocations: https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
Wade Pfau's Forbes article with the latest expansion: https://www.forbes.com/sites/wadepfau/2018/01/16/the-trinity-study-and-portfolio-success-rates-updated-to-2018/
There is nothing that says you can't withdraw 5%; it's just that you have a finite chance of failure, if things get bad. There are a number of ways you could react to that: reduce your spending in a market downturn, go back to work for a time, or ensure you have income-generating assets that enable you to avoid stock withdrawals when markets are down. Nobody can tell you whether you can or can't take a certain strategy; they can tell you implications, but in the end it's your life. There are no do-overs, so it's a gut check for you.
-
It's my understanding that the 4% withdrawal rate rule of thumb in retirement applies if you wish to preserve your capital, for example for those who want to leave an inheritance. But what if you're okay with your capital being reduced in retirement and not concerned with leaving an inheritance? Would the 5% rule be acceptable?
It's intent is not to preserve capital. Often this is the result, but this result is based on preparing for worst-case scenario of market returns, based on past performance. In other words, in preparing for the worst, most people will end up with extra capital.
It's like storing food in the pantry. If you plan to have two weeks of rations because that's the longest that a natural disaster has ever called for in your area, any natural disaster that lasts less than two weeks will result in extra food once the disaster has passed.
-
Very well summarized @reeshau
I’ll add that one can use simulators like cFireSim to see how various withdraw rates would have fared over a range of historical periods. To get at the OP’s assumption about “capital preservation” ignore the “success rate” (which simply measures how many periods had a balance of >$0 at the end of the given time period). Instead take a look at the resulting graphs (which you can download). For example, while a 5% WR will have a 66% “success rate” after 30 years, a bit more than half have an ending balance less than the starting balance (i.e. that time frame failed to “preserve capital”). Roughly 1/3 of the time the investor wound up with considerably more (principle increased).
Virtually all failures come from scenarios where the principle dropped substantially in the first 6 years (Sequence of Returns Risk).
-
There are A LOT of threads here that go into WR in extensive detail.
What it comes down to though is very individual circumstances, goals, and mitigating factors.
For some 4% is far too risky and for others it's far too conservative. So yes, 5% is perfectly fine for someone who has examined their situation closely and understands the trade offs involved in a 5% WR.
I've posited many, many, many times that the WR is almost irrelevant compared to how someone defines their "annual spend" number in the first place.
If one person's annual spend number is based on very bare bones, very lean numbers that depend on life going relatively smoothly while living in a geoarbitrage area like Malaysia forever, and they are planning on living 100% on their returns...? Yeah, 4% may be extremely risky.
If another person bases their annual spend number on a budget where 50% of it is reserved for travel, plus they're not including the value of their expensive paid off home, and half of their stache is a rock solid pension that more than covers their lean expenses, and they're in a couple where one or both could very easily pick up high paying part time work, and they're naturally cautious, so will probably never actually spend their full estimated annual budget, especially if the markets are down, plus they both have massive life insurance policies for some reason...?
Yeah, 4% is probably extremely conservative.
Unless you are looking to retire soon, then don't worry about it quite yet and spend some time reading and asking questions in order to get comfortable with the various factors that you may not have thought to consider.
For now, consider 4% an excellent starting point.
ETA: edited for a really weird previous editing error that resulted in Malaysia being spelled so, so wrong
-
Example thread to read about the 4% rule. A "sticky thread" at the top of the investor alley sub thread.
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
-
The earlier you retire, the more noticeable "ER ending events" will be, and the more time you have to correct.
This means your risk tolerance can be higher.
-
I suppose having a DB pension plan also changes the 4% rule where you could be more risky because a portion of your retirement income is guaranteed with the DB pension.
Really love the chart @reeshau! Thank you :)
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
What happens if you abandon your "5% withdrawal rate" and use a "4% withdrawal rate"? There's plenty of discussion behind the conventional 4% guideline, but you're still focused on 5%. Why?
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
You can try various scenarios for 30 years of retirement. For example:
withdraw 6% / year, expect to fail 2 out of 5 times (no money left in retirement)
withdraw 5% / year, expect to fail 1 in 4 times
withdraw 4% / year, expect to fail 1 in 10 times
withdraw 3% / year, expect to fail 1 in 50 times
Vanguard's simulation isn't guaranteed - the market never is. But it gives you a good idea how dramatically you risk your retirement if you increase your withdrawal rate.
-
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
Sort of, but that's really not right. The reason why it is 4% is because of volatility. If you retired in 1929, you saw your stock portfolio lose 80% of its value in the next couple years. Your portfolio has to be be big enough to survive a down sequence of years. Or to put it another way, your WR has to be small enough to do the same thing.
FWIW, no one knows what the markets are going to do going foward, so I wouldn't worry about that.
-
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Are these thoughts based on the "overperformance" of the last decade? (Which followed the "lost decade" of the naughts) It might be true for the next decade, say, but is highly unlikely to be true for the entire span of the retirements of anyone on this board, given significant opportunities with rising global middle classes, upheaval is a number of industries (i.e. autos) and technological opportunities ahead. And anyone whose FI date is more than 10 years out is probably better served to think long-term averages, as they are not yet at the tactical game of withdrawal rate.
-
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Are these thoughts based on the "overperformance" of the last decade? (Which followed the "lost decade" of the naughts) It might be true for the next decade, say, but is highly unlikely to be true for the entire span of the retirements of anyone on this board, given significant opportunities with rising global middle classes, upheaval is a number of industries (i.e. autos) and technological opportunities ahead. And anyone whose FI date is more than 10 years out is probably better served to think long-term averages, as they are not yet at the tactical game of withdrawal rate.
Just so. The 7% is the average return. Which means that for part of the time returns were below average, by definition. Could the next few years be below average? Sure! But we've had plenty of below average times in the past and the 4% is already baked into that.
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
What happens if you abandon your "5% withdrawal rate" and use a "4% withdrawal rate"? There's plenty of discussion behind the conventional 4% guideline, but you're still focused on 5%. Why?
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
You can try various scenarios for 30 years of retirement. For example:
withdraw 6% / year, expect to fail 2 out of 5 times (no money left in retirement)
withdraw 5% / year, expect to fail 1 in 4 times
withdraw 4% / year, expect to fail 1 in 10 times
withdraw 3% / year, expect to fail 1 in 50 times
Vanguard's simulation isn't guaranteed - the market never is. But it gives you a good idea how dramatically you risk your retirement if you increase your withdrawal rate.
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
-
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
ok- keeping it obvious and looking back to your original post.
your understanding of the 4% rule is incorrect.
Therefore you are wrong about 5%.
try again.
(answered in the tone you just used. You're welcome)
-
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
Intentionally or not, you've stumbled upon one of the more cantankerous subjects in personal finance circles. There has been a ton of discussion and data on using a 4% WR. Some find that too conservative and accept a 5% (or higher!) WR and the added risk that comes with it. Historically 5% has worked out more often than not, and potential failures have been easy to spot fairly early.
Others insist 4% is not nearly conservative enough. Inherent in thier thinking is that there will be many more future scenarios that are worse than the worst scenarios where 4% has failed in the past
As others have mentioned, the 'average' return over long tim\e periods is just one piece of the puzzle. Variance matters a great deal. If your portfolio drops 30% in the first few years it won't matter much if the 30 year average is 6%+, because you've just fallen victim to Sequence of Returns Risk (SORR). OTOH, in a strictly hypothetical example you could be just fine if your portfolio returned 3% every single year and you took out 4% for 40 years, though it would leave you with less principle to pass on to heirs.
No one knows the future, but if you assume it will be no worse than the worst periods of the last 125 years, a 5% WR will work just find *most* of the time, and the best defense to using a higher WR is to build flexibility into your plans - fat you can trim from your budget, extra income you can make should the SHTF, etc.
-
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
ok- keeping it obvious and looking back to your original post.
your understanding of the 4% rule is incorrect.
Therefore you are wrong about 5%.
try again.
(answered in the tone you just used. You're welcome)
Okay sorry your feelings were hurt. Just not sure how else I could have answered your question.
-
There are literally thousands of posts on SWR on this forum. Go read some of them. Go read Early Retirement Now blog (BigErn) which is almost solely dedicated to the subject. Plug your numbers into cFireism and decide from there what level of failure risk you are comfortable with.
Done.
-
Virtually all failures come from scenarios where the principle dropped substantially in the first 6 years (Sequence of Returns Risk).
The failure scenario I worry about is 1966... which also burdened investors with terrible inflation that ate away at people's nest eggs.
I remember the college savings account my parents had for me at the time. It showed steady value, but only in nominal dollars.
Tyler of Portfolio Charts provides some useful modeling of various portfolios' SWRs and some suggest you can draw 5%. I love Tyler's massively excellent contributions to this subject matter. But even after reading everything he's written on subject, I am personally uncomfortable thinking a 5% SWR would work. Even if Portfolio Charts suggests it might.
-
There are literally thousands of posts on SWR on this forum. Go read some of them. Go read Early Retirement Now blog (BigErn) which is almost solely dedicated to the subject. Plug your numbers into cFireism and decide from there what level of failure risk you are comfortable with.
Done.
The chart @reeshau posted was really all I needed...I found that super helpful.
-
There are literally thousands of posts on SWR on this forum. Go read some of them. Go read Early Retirement Now blog (BigErn) which is almost solely dedicated to the subject. Plug your numbers into cFireism and decide from there what level of failure risk you are comfortable with.
Done.
The chart @reeshau posted was really all I needed...I found that super helpful.
It's helpful so long as you understand the underlying assumptions, what "failures" are and where they have historically come from.
You have made several statements since which has caused myself and others to question whether you understand these things. For instance:
"Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?"
That logic is flawed.
It's also wrong to assume that you have "preserved principle" in 72% of circumstances if you follow Wade's chart.
These are important concepts to understand before you pick a WR willy-nilly and execute your retirement (pun intended).
-
I suppose having a DB pension plan also changes the 4% rule where you could be more risky because a portion of your retirement income is guaranteed with the DB pension.
Really love the chart @reeshau! Thank you :)
No, that's really not correct either. If you look at @reeshau 's table, if you go with 100% stocks (which is to say, more risky) the success rate actually goes down. So no, your DB does not allow you to take more risk.
A better way to think about it (and why I think people are confused about your insistence on 5%): The 4% SWR helps answer a central question in retirement planning, namely, How much do I need to retire? 4% SWR doesn't know about your DB plan. It just knows about stocks and bonds. You can include your DB in your retirement income planning, but that is independent of the 4% SWR.
For example, lets say you spend $40K annually, so you need $1 million to retire using the 4% rule ($1MM times 4% = $40,000). If you have a DB plan that will give you $20,000 annually, then you only need $500K to retire ($20K from the DB and 4% of the $500K = $40,000).
In the second example, if you bump up your WR to 5%, you only need $400K, which means you could retire sooner, but with a higher risk of a busted retirement, or at least exhausting your portfolio. So the DB plan never affects the WR itself, although it does count as income for retirement planning.
-
I suppose having a DB pension plan also changes the 4% rule where you could be more risky because a portion of your retirement income is guaranteed with the DB pension.
Really love the chart @reeshau! Thank you :)
No, that's really not correct either. If you look at @reeshau 's table, if you go with 100% stocks (which is to say, more risky) the success rate actually goes down. So no, your DB does not allow you to take more risk.
A better way to think about it (and why I think people are confused about your insistence on 5%): The 4% SWR helps answer a central question in retirement planning, namely, How much do I need to retire? 4% SWR doesn't know about your DB plan. It just knows about stocks and bonds. You can include your DB in your retirement income planning, but that is independent of the 4% SWR.
For example, lets say you spend $40K annually, so you need $1 million to retire using the 4% rule ($1MM times 4% = $40,000). If you have a DB plan that will give you $20,000 annually, then you only need $500K to retire ($20K from the DB and 4% of the $500K = $40,000).
In the second example, if you bump up your WR to 5%, you only need $400K, which means you could retire sooner, but with a higher risk of a busted retirement, or at least exhausting your portfolio. So the DB plan never affects the WR itself, although it does count as income for retirement planning.
Bingo
I'm the one who mentioned the DB pension, and in my example, I specifically indicated that the DB pension actually covers the entirety of the person's base spend, leaving the savings to cover, extras such as travel.
In that case, the person can take much much more risk, because in any given year, they can choose not to withdraw from the savings at all, so they can easily afford to avoid draw down in bad economic years.
So if they are never obligated to draw down their principle, then yeah, their risk is essentially zero.
That example was used to indicate that understanding personal factors are critical in being able to interpret whatever numbers a simulator spits out.
100% success for one person may be far less secure than 85% success for another. It all depends on the foundational basis of their inputs.
-
IMO it's also worth thinking about how you actually plan to spend your retirement. There are very few posters here who won't make at least some money in RE, because they tend to be too involved/active/interested in the world. Fun jobs come out of the woodwork for people who have flexible time and interesting skills.
If you want to sit on the beach or play golf and never do a lick of work again, different story. But I'd be dollars to donuts 90+% of the folks here will never live like that.
I personally was fully FI - and threw it out the window to move to a (much more) expensive house in a neighborhood I felt was better for my kids. But it doesn't matter because I like doing 10-20 hours of work a week anyway. My work habits didn't change when I became FI, and they didn't change when I gave it up again. I consider myself as retired as I'll ever be (and once the kids are all out of the house in 18 years, I'll sell the stupid big house, so there's that).
I think a lot of people are afraid to quit their stressful 60 hour a week gig... but what they don't realize is that they can "retire" to a low stress, fun job (or consulting/part time work) and get many more years of enjoyment than they would working until they have enough for a 3 or 4 or 5% WR. That's a front-loaded FIRE failure, really.
-W
-
I think the DB pension does allow for more risk because there is a zero percent chance the money ever runs out in retirement. My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
-
I've posited many, many, many times that the WR is almost irrelevant compared to how someone defines their "annual spend" number in the first place.
Exactly. The focus is always on the WR but it's not the big issue. Do you have some buffer in your estimated expenses. I think a 3% WR based on bare bones expenses is significantly less safe than a 5% WR with estimated expenses that have some buffer within it.
-
I think the DB pension does allow for more risk because there is a zero percent chance the money ever runs out in retirement. My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
Yes, if your DB pension covers all of your basic expenses, then you are absolutely at much less risk, but if someone needs their savings in addition to a DB pension in order to cover their costs, then their risk based on WR is the same as if the entire spend was coming from savings.
It's a good idea to wrap your mind around what it is that you really need and really want to plan for and then play with the numbers accordingly.
From the sounds of what you are trying to achieve though, 5% does sound conservative. Although, A LOT of people here would argue against spending down substantially before old age, because old age medical support and care is the number one concern around here when it comes to contemplating what is enough.
-
I think the DB pension does allow for more risk because there is a zero percent chance the money ever runs out in retirement. My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
Yes, if your DB pension covers all of your basic expenses, then you are absolutely at much less risk, but if someone needs their savings in addition to a DB pension in order to cover their costs, then their risk based on WR is the same as if the entire spend was coming from savings.
It's a good idea to wrap your mind around what it is that you really need and really want to plan for and then play with the numbers accordingly.
From the sounds of what you are trying to achieve though, 5% does sound conservative. Although, A LOT of people here would argue against spending down substantially before old age, because old age medical support and care is the number one concern around here when it comes to contemplating what is enough.
I'm in Canada so medical care is free.
-
I think the DB pension does allow for more risk because there is a zero percent chance the money ever runs out in retirement. My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
Yes, if your DB pension covers all of your basic expenses, then you are absolutely at much less risk, but if someone needs their savings in addition to a DB pension in order to cover their costs, then their risk based on WR is the same as if the entire spend was coming from savings.
It's a good idea to wrap your mind around what it is that you really need and really want to plan for and then play with the numbers accordingly.
From the sounds of what you are trying to achieve though, 5% does sound conservative. Although, A LOT of people here would argue against spending down substantially before old age, because old age medical support and care is the number one concern around here when it comes to contemplating what is enough.
I'm in Canada so medical care is free.
Yeah, I'm a medical professional, in Canada.
Also speaking as someone with a $600/mo prescription, being sick isn't free. Likewise, assisted living facilities aren't free.
-
I think the DB pension does allow for more risk because there is a zero percent chance the money ever runs out in retirement. My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
Yes, if your DB pension covers all of your basic expenses, then you are absolutely at much less risk, but if someone needs their savings in addition to a DB pension in order to cover their costs, then their risk based on WR is the same as if the entire spend was coming from savings.
It's a good idea to wrap your mind around what it is that you really need and really want to plan for and then play with the numbers accordingly.
From the sounds of what you are trying to achieve though, 5% does sound conservative. Although, A LOT of people here would argue against spending down substantially before old age, because old age medical support and care is the number one concern around here when it comes to contemplating what is enough.
I'm in Canada so medical care is free.
Yeah, I'm a medical professional, in Canada.
Also speaking as someone with a $600/mo prescription, being sick isn't free. Likewise, assisted living facilities aren't free.
My employer plan covers prescription costs for retirees.
-
I think the DB pension does allow for more risk because there is a zero percent chance the money ever runs out in retirement. My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
Yes, if your DB pension covers all of your basic expenses, then you are absolutely at much less risk, but if someone needs their savings in addition to a DB pension in order to cover their costs, then their risk based on WR is the same as if the entire spend was coming from savings.
It's a good idea to wrap your mind around what it is that you really need and really want to plan for and then play with the numbers accordingly.
From the sounds of what you are trying to achieve though, 5% does sound conservative. Although, A LOT of people here would argue against spending down substantially before old age, because old age medical support and care is the number one concern around here when it comes to contemplating what is enough.
I'm in Canada so medical care is free.
Yeah, I'm a medical professional, in Canada.
Also speaking as someone with a $600/mo prescription, being sick isn't free. Likewise, assisted living facilities aren't free.
My employer plan covers prescription costs for retirees.
It sounds like you've got everything figured out.
-
I think the DB pension does allow for more risk because there is a zero percent chance the money ever runs out in retirement. My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
Yes, if your DB pension covers all of your basic expenses, then you are absolutely at much less risk, but if someone needs their savings in addition to a DB pension in order to cover their costs, then their risk based on WR is the same as if the entire spend was coming from savings.
It's a good idea to wrap your mind around what it is that you really need and really want to plan for and then play with the numbers accordingly.
From the sounds of what you are trying to achieve though, 5% does sound conservative. Although, A LOT of people here would argue against spending down substantially before old age, because old age medical support and care is the number one concern around here when it comes to contemplating what is enough.
I'm in Canada so medical care is free.
Yeah, I'm a medical professional, in Canada.
Also speaking as someone with a $600/mo prescription, being sick isn't free. Likewise, assisted living facilities aren't free.
My employer plan covers prescription costs for retirees.
It sounds like you've got everything figured out.
No I'm just responding to your comments.
-
If you are comfortable with 5%, great. You wouldn't be the only one. Just make sure you fully understand what the studies say, what the terms mean, and what your plan B is.
We are tentatively planning on 4%, with half or more of our expense covered by an inflation-adjusted pension. (If your pension isn't inflation-adjusted, that is something to keep in mind and should change the way you look at it.) But after the first few years, we may be comfortable increasing that. And part of the reason for that is our plan B. Our FIRE budget is pretty fat, so there's lots of room to trim it in a down market. That may mean that we feel comfortable going higher, knowing that we can easily cut down to 3% or less in a down market. We just don't take a nice vacation that year, we have meatless Mondays, we crank the thermostat down/up a couple degrees, whatever. That will be easy to do because we will have a ton of luxury in our budget to trim.
You mention that the pension that there is a "zero percent" chance it will run out. If it failed or cut benefits, it wouldn't be the first, so you might also examine your level of confidence about that.
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
What happens if you abandon your "5% withdrawal rate" and use a "4% withdrawal rate"? There's plenty of discussion behind the conventional 4% guideline, but you're still focused on 5%. Why?
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
You can try various scenarios for 30 years of retirement. For example:
withdraw 6% / year, expect to fail 2 out of 5 times (no money left in retirement)
withdraw 5% / year, expect to fail 1 in 4 times
withdraw 4% / year, expect to fail 1 in 10 times
withdraw 3% / year, expect to fail 1 in 50 times
Vanguard's simulation isn't guaranteed - the market never is. But it gives you a good idea how dramatically you risk your retirement if you increase your withdrawal rate.
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
Look at your thread title: "The 4% vs 5% withdrawal rate?"
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
What happens if you abandon your "5% withdrawal rate" and use a "4% withdrawal rate"? There's plenty of discussion behind the conventional 4% guideline, but you're still focused on 5%. Why?
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
You can try various scenarios for 30 years of retirement. For example:
withdraw 6% / year, expect to fail 2 out of 5 times (no money left in retirement)
withdraw 5% / year, expect to fail 1 in 4 times
withdraw 4% / year, expect to fail 1 in 10 times
withdraw 3% / year, expect to fail 1 in 50 times
Vanguard's simulation isn't guaranteed - the market never is. But it gives you a good idea how dramatically you risk your retirement if you increase your withdrawal rate.
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
Look at your thread title: "The 4% vs 5% withdrawal rate?"
Exactly. 4% is conventional thinking. 5% is not, which is what I wanted to explore in this discussion.
-
Exactly. 4% is conventional thinking. 5% is not, which is what I wanted to explore in this discussion.
If so in my opinion in my situation a 5% WR is completely fine. My expenses have buffer in them. I expect my spending to go down. I have too big a house and I can easily downsize. I can receive a pension at 67 which I could live off. I also have 1-2 years with no draw downs within my plan.
I think everyone has to do this calculation for themselves but I see no reason at all to go to a 4% WR. To me that is way too conservative and would be pointless.
-
The only cast-iron way to preserve capital is to do exactly that - preserve the base of the income-generating asset and live off the income only. With individual income-paying shares and with property that is easy enough to both understand and implement, but the concept seems to get lost when you are dealing in accumulation class funds where the income is rolled up into a new higher unit price. Yet another thing I blame JL Collins for.
-
We're currently operating a 7.6% withdrawal rate.
In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.
In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.
Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.
There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>
-
No, that's really not correct either. If you look at @reeshau 's table, if you go with 100% stocks (which is to say, more risky) the success rate actually goes down. So no, your DB does not allow you to take more risk.
Are you looking at the same table as I am? From what I see, 100% stocks have a higher success rate when compared to the 50% portfolios at every withdrawal rate. For example at 40 years length and 5% withdrawal rate, 100% stocks has a 70% success rate versus 50% stocks at a 45% success rate.
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
What happens if you abandon your "5% withdrawal rate" and use a "4% withdrawal rate"? There's plenty of discussion behind the conventional 4% guideline, but you're still focused on 5%. Why?
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
You can try various scenarios for 30 years of retirement. For example:
withdraw 6% / year, expect to fail 2 out of 5 times (no money left in retirement)
withdraw 5% / year, expect to fail 1 in 4 times
withdraw 4% / year, expect to fail 1 in 10 times
withdraw 3% / year, expect to fail 1 in 50 times
Vanguard's simulation isn't guaranteed - the market never is. But it gives you a good idea how dramatically you risk your retirement if you increase your withdrawal rate.
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
Look at your thread title: "The 4% vs 5% withdrawal rate?"
Exactly. 4% is conventional thinking. 5% is not, which is what I wanted to explore in this discussion.
Actually, it isn’t in many places. The 4% WR came from the Trinity study, when many financial advisors used a much higher WR. 6% in many cases, and a higher bond to equities ratio. And many *still* use higher WR as default, but mostly because the “conventional”retirement is designed to last 15 years, not 30+.
You seem to be assuming a lot, and with a lot of errors. But you do not seem to be listening to the wealth of information being provided. Which leads a lot of members - myself included - wondering why you are asking these questions.
~n~
-
I'm already at a point where I could spend what I do now at 2%. Even at this rate, with costs of nursing homes, I expect between me and my wife, we'll leave nothing to our kids. In my mind, inheritances are a thing of the past.....like pensions in the private sector. There are still stragglers here and there, but soon they'll all be gone.
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history. Think 4% rather than historic 7%. What's that mean? It means your portfolio won't return what you might expect, so the date where you run out of money is sooner than you planned.
Okay so if markets returns are only 4% on average going forward, like you say, if I went with a 5% withdrawal rate, that means I'd need to make up the 1% difference myself though my capital, until I die. Am I right, or is my logic flawed?
What happens if you abandon your "5% withdrawal rate" and use a "4% withdrawal rate"? There's plenty of discussion behind the conventional 4% guideline, but you're still focused on 5%. Why?
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
You can try various scenarios for 30 years of retirement. For example:
withdraw 6% / year, expect to fail 2 out of 5 times (no money left in retirement)
withdraw 5% / year, expect to fail 1 in 4 times
withdraw 4% / year, expect to fail 1 in 10 times
withdraw 3% / year, expect to fail 1 in 50 times
Vanguard's simulation isn't guaranteed - the market never is. But it gives you a good idea how dramatically you risk your retirement if you increase your withdrawal rate.
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
Look at your thread title: "The 4% vs 5% withdrawal rate?"
Exactly. 4% is conventional thinking. 5% is not, which is what I wanted to explore in this discussion.
Actually, it isn’t in many places. The 4% WR came from the Trinity study, when many financial advisors used a much higher WR. 6% in many cases, and a higher bond to equities ratio. And many *still* use higher WR as default, but mostly because the “conventional”retirement is designed to last 15 years, not 30+.
You seem to be assuming a lot, and with a lot of errors. But you do not seem to be listening to the wealth of information being provided. Which leads a lot of members - myself included - wondering why you are asking these questions.
~n~
Many posters here are saying a 5%+ WR is perfectly fine. Is it perhaps you who is only reading what they want to read, and are simply ignoring what dos not fit into your personal agenda? Myself, I'm taking it all in, and if someone has an alternative view that I am not sure of, I will challenge that. I'm not the type of person who just does what someone tells me to do. But perhaps you are...
Myself, I have a healthy DB pension, with free health care, and 80% of my prescription drugs covered in retirement, so I think that will make my situation different from a lot of the information being provided here. I think that allows me to take more risk with my WR.
-
I have no agenda other than providing information. As a number of your statement have been flawed I am trying to make sure you understand where your logic has gone astray, and (equally important) to ensure others reading this thread might understand it as well.
One thing that still concern me is whether you understand that having a DB and health care will not change the likelihood of your remainder portfolio being depleted, regardless of the WR you choose. It gives you a floor to fall back on, for sure, but that’s about it. Taken on its face a defined WR strategy operates independently of any other assets or income stream(s) you may have.
-
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
I can't believe I've never seen this simulator before. Very simple. Except for one thing: the "How much do you spend each year" doesn't take taxes into account. I'll be drawing down at least 20-30% more than this calculator shows in order to "spend" what I need .
-
No, that's really not correct either. If you look at @reeshau 's table, if you go with 100% stocks (which is to say, more risky) the success rate actually goes down. So no, your DB does not allow you to take more risk.
Are you looking at the same table as I am? From what I see, 100% stocks have a higher success rate when compared to the 50% portfolios at every withdrawal rate. For example at 40 years length and 5% withdrawal rate, 100% stocks has a 70% success rate versus 50% stocks at a 45% success rate.
It is not clear-cut either way. 50% stocks has more scenarios with 100% success. If you are counting 100% success scenarios, then the optimum is somewhere between 50 and 75% stocks. But when you get to higher withdrawal rates for longer retirement periods, 100% stocks starts to beat them, (with higher chances of success, albeit much lower than 100%) because you need more growth from stocks to keep up with the withdrawals.
-
There is another method, popularized via the forums at Bogleheads - called the Variable Percentage Withdrawal (VPW) rate. They have a great Wiki article on it, with charts, and there is also a Google sheet where you can enter your own data.
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#With_the_VPW_table
The idea is that you *do* have a base income, such as pension or Social Security, and then the withdrawals are for more discretionary expenses.
-
I'm focused on 5% because that's my entire question and purpose of this post. I thought that was obvious.
Look at your thread title: "The 4% vs 5% withdrawal rate?"
Exactly. 4% is conventional thinking. 5% is not, which is what I wanted to explore in this discussion.
Your thread title says you're open to discussing a 4% withdrawal rate, but you haven't said anything about the data I provided. nereo isn't alone - I think you're ignoring my evidence on the "4% vs 5%" question here. And I even provided a link where you can see it for yourself.
-
...snip
Actually, it isn’t in many places. The 4% WR came from the Trinity study, when many financial advisors used a much higher WR. 6% in many cases, and a higher bond to equities ratio. And many *still* use higher WR as default, but mostly because the “conventional”retirement is designed to last 15 years, not 30+.
You seem to be assuming a lot, and with a lot of errors. But you do not seem to be listening to the wealth of information being provided. Which leads a lot of members - myself included - wondering why you are asking these questions.
~n~
Many posters here are saying a 5%+ WR is perfectly fine. Is it perhaps you who is only reading what they want to read, and are simply ignoring what dos not fit into your personal agenda? Myself, I'm taking it all in, and if someone has an alternative view that I am not sure of, I will challenge that. I'm not the type of person who just does what someone tells me to do. But perhaps you are...
Myself, I have a healthy DB pension, with free health care, and 80% of my prescription drugs covered in retirement, so I think that will make my situation different from a lot of the information being provided here. I think that allows me to take more risk with my WR.
It's not just nereo. I think there is still a fundamental misunderstanding of what is meant by SWR and the 4% rule. SWR is the maximum rate at which you can spend your retirement savings, such that you don’t run out in your lifetime. The 4% rule says that an SWR of 4% has historically worked out most of the time(with some assumptions about how you invest).
My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
You're saying the "5% rule" will work because you will eventually have a pension but what I think you're actually trying to say is that you feel comfortable saving 20x annual spend rather than 25x annual spend. Nothing wrong with that, but that's different than the "5% rule".
The "X% rule" is only one variable in the formula you can use to determine your target FI number.
This may seem like nitpicking but I think it's important to use correct terminology so that everyone reading can understand. It may also help you in the future if you have more questions for the forum. If you use the "5% rule" terminology as you've used it here, it will continue to confuse other posters.
And going back to the OP I wanted to add that the 4% rule definitely does not assume you wish to preserve your capital. I'm not sure where that idea comes from but it's popped up in a few threads lately.
-
...snip
Actually, it isn’t in many places. The 4% WR came from the Trinity study, when many financial advisors used a much higher WR. 6% in many cases, and a higher bond to equities ratio. And many *still* use higher WR as default, but mostly because the “conventional”retirement is designed to last 15 years, not 30+.
You seem to be assuming a lot, and with a lot of errors. But you do not seem to be listening to the wealth of information being provided. Which leads a lot of members - myself included - wondering why you are asking these questions.
~n~
Many posters here are saying a 5%+ WR is perfectly fine. Is it perhaps you who is only reading what they want to read, and are simply ignoring what dos not fit into your personal agenda? Myself, I'm taking it all in, and if someone has an alternative view that I am not sure of, I will challenge that. I'm not the type of person who just does what someone tells me to do. But perhaps you are...
Myself, I have a healthy DB pension, with free health care, and 80% of my prescription drugs covered in retirement, so I think that will make my situation different from a lot of the information being provided here. I think that allows me to take more risk with my WR.
It's not just nereo. I think there is still a fundamental misunderstanding of what is meant by SWR and the 4% rule. SWR is the maximum rate at which you can spend your retirement savings, such that you don’t run out in your lifetime. The 4% rule says that an SWR of 4% has historically worked out most of the time(with some assumptions about how you invest).
My plan would be to have a higher withdrawal rate earlier in my retirement, say from age 50-70, and then ramp it down in my 70's when I may only need my DB pension, and if the investments are all gone, then that's fine. This is why I think the 5% rule would be fine, and even possibly too conservative.
You're saying the "5% rule" will work because you will eventually have a pension but what I think you're actually trying to say is that you feel comfortable saving 20x annual spend rather than 25x annual spend. Nothing wrong with that, but that's different than the "5% rule".
The "X% rule" is only one variable in the formula you can use to determine your target FI number.
This may seem like nitpicking but I think it's important to use correct terminology so that everyone reading can understand. It may also help you in the future if you have more questions for the forum. If you use the "5% rule" terminology as you've used it here, it will continue to confuse other posters.
And going back to the OP I wanted to add that the 4% rule definitely does not assume you wish to preserve your capital. I'm not sure where that idea comes from but it's popped up in a few threads lately.
I'm catching up on the ChooseFI podcasts and heard it stated there the other day; that is actually what prompted me to start this thread. Many people on reddit assume this concept as well, so I am glad I came on here to get that clarified with the correct information. Thank you.
-
I like Vanguard's simulator because it's fairly simple, yet useful.
https://www.vanguard.com/nesteggcalculator
I can't believe I've never seen this simulator before. Very simple. Except for one thing: the "How much do you spend each year" doesn't take taxes into account. I'll be drawing down at least 20-30% more than this calculator shows in order to "spend" what I need .
Try 30/70 (Stocks/Bonds) @ 4% and then 70/30 (Stocks/Bands) @ 4%.
-
It's my understanding that the 4% withdrawal rate rule of thumb in retirement applies if you wish to preserve your capital, for example for those who want to leave an inheritance. But what if you're okay with your capital being reduced in retirement and not concerned with leaving an inheritance? Would the 5% rule be acceptable?
The larger the withdrawal rate the more flexibility you need. The paradox is that the longer you need the money the more likely the failure at a fixed % withdrawal. Yet, the longer you need the money, the younger you (likely) are and thus have opportunity to earn additional income and so the higher a withdrawal rate you can risk.
I think the 4% is overly conservative since it assumes no adjustment in spending when markets are down. Almost every does adjusts unless you are extremely leanFI.
-
We're currently operating a 7.6% withdrawal rate.
In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.
In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.
Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.
There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>
except you're not really, for the other assets you then go on to list.
-
We're currently operating a 7.6% withdrawal rate.
In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.
In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.
Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.
There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>
except you're not really, for the other assets you then go on to list.
I think it's correct to call this a withdrawal rate of 7.6%, but not to say it's their safe withdrawal rate.
-
except you're not really, for the other assets you then go on to list.
Realistically very few people will be in a situation that they start off with a portfolio and spend exactly 4% inflation adjusted every year and never have other income or assets at any point in their life too.
Also, I also think people don't realize the success rate that a 4% withdrawal has historically - it's 95% of periods you end up with above $0 at the end. Most of the time, a lot more.
That's a really dang high success rate even if someone blindly starts withdrawing.
-
We're currently operating a 7.6% withdrawal rate.
In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.
In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.
Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.
There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>
except you're not really, for the other assets you then go on to list.
I think it's correct to call this a withdrawal rate of 7.6%, but not to say it's their safe withdrawal rate.
Oddly, I too think it's correct.
I'm not sure you can award the title 'safe withdrawal rate' with anything other than hindsight. The 4% figure came from an historical study.
Remember that your heart has been beating all your life so far... (and I won't entertain tricksy quibbles...)
-
We're currently operating a 7.6% withdrawal rate.
In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.
In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.
Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.
There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>
except you're not really, for the other assets you then go on to list.
I think it's correct to call this a withdrawal rate of 7.6%, but not to say it's their safe withdrawal rate.
Oddly, I too think it's correct.
I'm not sure you can award the title 'safe withdrawal rate' with anything other than hindsight. The 4% figure came from an historical study.
Remember that your heart has been beating all your life so far... (and I won't entertain tricksy quibbles...)
Fine, whatever. In that case it's entire accurate to say there are also FIers out there currently operating on a 20-100% withdrawal rate.
-
Not that I expect to get 100% of what Social Security projects, but even if its 50-75% that's probably $20,000 a year. If your post-FIRE expenses are $50,000 a year, then you only need to withdraw $30,000 a year.
In my case I should get a military pension at age 60 as well so I will probably be looking at a more aggressive 5-6% rate, i.e. saving 17-20x annual savings instead of 25x.
-
You have to define success. The 4% rule is successful if at the end of 30 yrs you have even ONE dollar left.
I don't define "success" as having a buck to my name.
At 5%, the chances of having zero dollars increase. But remember that these are odds. If you fail, you fail BIG. You run out of money. These rules don't really have anything to do with maintaing capital.
Simply put, the study showed that for each of the prior 25 years, if you started withdrawing 4% and maintained that same dollar amount, you would have at least a buck after 30 yrs in all but 2 of those start years. This says nothing about the future or preserving capital. Unfortunately if you are a person who started in any of those 2 start years, you were SOL, with NOTHING left.
-
You have to define success. The 4% rule is successful if at the end of 30 yrs you have even ONE dollar left.
I don't define "success" as having a buck to my name.
At 5%, the chances of having zero dollars increase. But remember that these are odds. If you fail, you fail BIG. You run out of money. These rules don't really have anything to do with maintaing capital.
Simply put, the study showed that for each of the prior 25 years, if you started withdrawing 4% and maintained that same dollar amount, you would have at least a buck after 30 yrs in all but 2 of those start years. This says nothing about the future or preserving capital. Unfortunately if you are a person who started in any of those 2 start years, you were SOL, with NOTHING left.
Of course this fails to take into account any common sense reduction of spending in a down market. If we end up at a 4% withdraw rate, if the market is down by 10% or more, we will spend less. Since we aren't planning a super lean FIRE, that will be easy to do. Cut a vacation for one year (or do a weekend driving trip vs. international travel), go meatless one dinner a week, and lower the thermostat another degree or two in winter.
Heck, maybe if the market is really shit, we walk some dogs for pay.
Suddenly there's $4000 of our 4% that stays in the account.
But I'd still define us as 4%ers, but 4% with common sense adaptations.
-
That's a really dang high success rate even if someone blindly starts withdrawing.
This to me is something that I don't think many people realize when they do the figures. Would anyone who could get to that level really spend 4% blindly without any adjustments in all situations. I don't think so.
One thing I always state though is that you have to estimate your expenses with some buffer. If you state that you are at a 4% WR but there is no buffer at all and things are really tight then it's going to be hard/maybe even impossible to adjust.
-
That's a really dang high success rate even if someone blindly starts withdrawing.
This to me is something that I don't think many people realize when they do the figures. Would anyone who could get to that level really spend 4% blindly without any adjustments in all situations. I don't think so.
One thing I always state though is that you have to estimate your expenses with some buffer. If you state that you are at a 4% WR but there is no buffer at all and things are really tight then it's going to be hard/maybe even impossible to adjust.
That's why the simulations are all really rough guidelines.
It's simply not even close to reality that anyone would spend exactly 4%+estimated inflation every single year, down to the penny with no exception.
That's why the 4% rule is a very good starting point, but all simulations are heavily compromised by input variability factors.
A person with a significant buffer in their budget and capacity to lower spending in down years and a cash reserve may never in reality withdraw a full 4%.
-
There’s lots of follow-up data on how people tend to spend their money in retirement.
For starters, retirees tend to spend less each decade of retirement, and they also tend to reduce their spending in response to bear markets even when they have enough and don’t really need to.. I’ve yet to meet an early retiree who never received any compensation for activities (“work”) in their “retirement”. Excluding the ‘extreme retirement’ sorts, even those with seemingly frugal retirement budgets find there are a myriad of ways to cut spending - if necessary - as they have more time to devote towards financial efficiency.
Like Malkynn and others have said - simulations running a ‘blind’ WR of x% are just starting points. No one actually operates that way - setting up periodic distributions on their retirement day and then never checking their portfolio or noticing the broader economy again.. These are broad guidelines, starting points, ballpark figures. The more flexibility and ‘layers of safety’ you build into your lives the greater your chances of success.
-
<snip>
I can't believe I've never seen this simulator before. Very simple. Except for one thing: the "How much do you spend each year" doesn't take taxes into account. I'll be drawing down at least 20-30% more than this calculator shows in order to "spend" what I need .
I would advise you find a tax calculator (use an your tax prep software for example) and put in your expected retirement scenario. In my case I expect to pay under 5% net Federal taxes until I pay off my mortgage, and 0% after that. Keep in mind things like Roth withdrawals being being tax-free, only having to paying taxes on your actual capital gains for brokerage withdrawals, and a sizeable standard deduction.If you stay in a lower tax bracket the capital gains will be at 0%.
See these links:
https://www.marketwatch.com/story/heres-the-formula-for-paying-no-federal-income-taxes-on-100000-a-year-2019-11-22 (https://www.marketwatch.com/story/heres-the-formula-for-paying-no-federal-income-taxes-on-100000-a-year-2019-11-22)
https://mymoneywizard.com/earn-100000-zero-taxes/ (https://mymoneywizard.com/earn-100000-zero-taxes/)
http://www.moneychimp.com/features/tax_calculator.htm (http://www.moneychimp.com/features/tax_calculator.htm)
There are more write-ups out there, but in short there are low taxes on modest retirement earnings.
By way of example, lets say you have $1M in 401k/IRA's, $200k in Roth, and $200k in taxable with a $100k basis. You can withdraw 5% from everything and have $50k in earned income, $10k from taxable ($5k of realized long term capital gains, or LTCG), and $10k of previously taxed Roth to get to $70k of withdrawals. But how much is left? The moneychimp llink says you pay only $2684 in taxed, just 3.8% lost to taxes of what you cashed in. Not zero, but not that painful either.
But wait, it gets better. You can now withdraw and immediately buy back $90k MORE from your taxable account to realize a grand total of $50k in LTCG for the year and pay $0 in additional taxes while doing it. You have now reset the basis for half of your taxable account in a single year. Within 2-3 years of doing this your taxable account will have a basis that nearly matches the account, making the account much more flexible for lumpy expenses in future years.
-
There is a difference between withdrawal rate and sustainable withdrawal rate.
Most studies of a fixed constant dollar withdrawal rate (i.e. start year 1 by withdrawing x% of your portfolio then increase that amount annually by the rate of inflation), based on historical data, have shown that somewhere close to 4% starting withdrawal will sustain a 30 year retirement with a very low probability of running out of money.
Sustainable withdrawal rate strategies are for retirees that need to live off their portfolio, i.e. they do not have enough guaranteed income from sources like government pensions, workplace pensions and annuities. Such people need a withdrawal strategy that minimizes the chance of outliving their money.
OP has stated he / she has enough other sources of income to live on, so using up their portfolio is not a problem. So a SWR strategy is irrelevant. They can withdraw 5%, 6% or higher as a withdrawal rate, but it should not be considered a sustainable withdrawal rate.
-
Wade Pfau's Forbes article with the latest expansion:
Ugh. Wade always sneaks in some unreasonable handicap on the "4% rule" for his analysis. Add in a 1% management fee removed from the account beyond the 4% withdrawal? Sure! Handicap all returns in your Monte Carlo by 25% below actual historical returns for "reasons"? Sure!
-
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history.
Ah, a follower of the great thorstach!
I direct you to: The Top Is In, an object lesson in why market timing is bad developed in realtime starting April 11, 2017.
https://forum.mrmoneymustache.com/investor-alley/top-is-in/
Spoiler: The Top wasn't in. Nor the next dozen times he called it.
-
What if you are a doddering old drooling fool in your sixties? The money doesn't have to last as long.
AND
I don't think I saw anybody say anything about Social Security. If you are not retiring too young and Trump is not able to implement his "reforms," and you've put enough into the system,........then you should get the check implemented by FDR and his cohorts years ago. You have something to fall back on if the money runs thin.
-
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history.
Ah, a follower of the great thorstach!
I direct you to: The Top Is In, an object lesson in why market timing is bad developed in realtime starting April 11, 2017.
https://forum.mrmoneymustache.com/investor-alley/top-is-in/
Spoiler: The Top wasn't in. Nor the next dozen times he called it.
Still, it isn't a crazy thought. I mean, predicting the top is, but lately stocks have been outstripping the historical average. That means at some point we should seen returns below the historical average, right?
I'm cool with it. The 4% SWR looked at lots of periods when returns were below average. Still worked.
-
That's why the simulations are all really rough guidelines.
I was thinking about this. You are correct in that the 4% level is a great guideline but to me it's a little bit beside the point when it comes to each of us as individuals coming up with our own plans. At the end of the day I think you should dig into your specific situation and your specific plan. The simulators are great to help you with coming up with a plan but there will be stuff that you don't model into those simulators. You might spend more the first 5 years or you might have some buffer for overseas travel that is outside of your model. You might be able to downsize your house.
Maybe it's better to look at a range of potential WR's. This post on the stop worrying thread describes this to me. It's more like anywhere from 3%-6% should be good dependent on other factors.
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843
-
5%? Are you kidding me? Forward returns are widely predicted to underperform compared to past history.
Ah, a follower of the great thorstach!
I direct you to: The Top Is In, an object lesson in why market timing is bad developed in realtime starting April 11, 2017.
https://forum.mrmoneymustache.com/investor-alley/top-is-in/
Spoiler: The Top wasn't in. Nor the next dozen times he called it.
Still, it isn't a crazy thought. I mean, predicting the top is, but lately stocks have been outstripping the historical average. That means at some point we should seen returns below the historical average, right?
I'm cool with it. The 4% SWR looked at lots of periods when returns were below average. Still worked.
You may enjoy this Bill Bengen article on SWR.
https://www.fa-mag.com/news/small-cap-withdrawal-magic-28553.html?section=47
At the end he comments on the likely impending market crash. Then go note the date. VTI is up more than 50% since then.
-
That's why the simulations are all really rough guidelines.
I was thinking about this. You are correct in that the 4% level is a great guideline but to me it's a little bit beside the point when it comes to each of us as individuals coming up with our own plans. At the end of the day I think you should dig into your specific situation and your specific plan. The simulators are great to help you with coming up with a plan but there will be stuff that you don't model into those simulators. You might spend more the first 5 years or you might have some buffer for overseas travel that is outside of your model. You might be able to downsize your house.
Maybe it's better to look at a range of potential WR's. This post on the stop worrying thread describes this to me. It's more like anywhere from 3%-6% should be good dependent on other factors.
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843
The simulators may be kind of useless in terms of actual values, but they have a huge utility in terms of relative values. Meaning, they're amazing for showing the relative impact of variable inputs, which is really helping for guiding decisions in the present.