% of income based on 4% SWR

[Rollin]

I am curious about how others have set up their post retirement income. I know the common way of explaining the SWR as it relates to FIRE is to say that if one had $1,000,000 saved you could rely on $40,000/year for at least 30 years. How many of you do that? Or if not 100% SWR income, what percentage do you count on?

For me in 2017 it is about 9% of my total income (which I've set up to match expenses) and I estimate about 26% in 2018 (and until I hit 62 years of age). I don't plan on following the strict 4% SWR (i.e., taking out a total of 4% each year, plus inflation) of my investments rule and will allow the "nest egg" that is in an IRA to continue to grow until I have a few years of this early retirement under my belt. Also, I'm taking the 9% next year from my taxable investment account, not the IRA.

Not to get into all the income sources I rely on, but pension is 34%, life insurance annuity is 20%, mortgage 34%. I am a mortgagee on a rental I sold and there is a balloon in 2017 and this source drops to 16% of income in 2018, therefore the increase in income taken from investments to make up the difference. Once I get settled on expenses and income(s) I will probably just adjust to the standard 4% SWR. However, the problem (good one to have) is that if I take 4% each year I will simply be taking money out of investment and letting it sit (or spend it, which I have a hard time doing - yet!).

[MrGreen]

We are willing to withdraw up to $40,000, which is roughly 4% of our stash, but given the market conditions right now (expecting some sort of downturn in the near future) I would prefer to be a little more conservative. Knowing the sequence of returns risk during the first 10 years plays a huge role in a stash going the distance, I'd rather be a little tighter for the first couple years and loosen up a bit once it looks like we're not at risk for a portfolio failure scenario. We're pretty young so we'll have a 30 year "retirement" period before Social Security kicks in. Our income is all investment income. We have no rentals, or other sources of fixed income. We'll start withdrawing from taxable accounts for the first 5 years while we spin up the Roth IRA rollover ladder and then after that we'll start pulling from the Roth IRA.

As it happens, I'm starting to build a house (pouring concrete in a couple weeks) so I'm sure much of 2017 will be occupied by house building, lot grooming, etc., so we probably won't spend much because most of my time will be focused on that. The house is being built from a slush fund outside of our stash, so no impact there. With any luck we'll be expecting a kid by the end of the year so that'll probably help keep spending low as well. It would be great timing if we just happened to go though the next downturn at a time when we're naturally spending less because of time commitments.

[Metric Mouse]

Why would you blindly take 4% out if you don't spend it all? I mean, obviously there is sometimes going to be some overage in a withdrawal system, but nothing is stopping you from putting it back into investments if it starts to pile up, or take out more when your spending needs rise.

My spending over the past few years has been much greater than 4%, but my 'stache has continued to grow. So there is no one method that is the only answer for everyone.

[Gunny]

I spent 1.4% of stash since Aug 2015 based on today's portfolio value. This came out of our cash account and used to fund travel.  Daily living expenses are covered by my pension.  90% of out stash is in tax advantages accounts invested in index funds and Wellington fund.  I don't want to tap these for a few years as I too believe a market down turn or period of little to no gain is headed our way. 

[NoNonsenseLandlord]

I am probably an anomaly, but I was able to replace about 2x my W2 wages with my net rental income.  Probably about 4x my spending.  Now that I just retired, I am going to spend it!

I still have SS and a small pension when I am ready to take it.  And I can still take my dividends or 4% of my portfolio at some point.

[Rollin]

Some interesting variations. Pre-FIRE I was thinking that most everyone, including myself, would hit that 4% SWR and then pull the chute. I'm finding that I didn't need the $$ for the remainder of 2016 (FIRE date 8/4/15), and only need a % of the 4% to get by in 2017, therefore allowing the stache to grow. I'll probably get closer to 4% in 2018, as a lump sum payout from my home sale gets me through 2017.

[mgarf]

A comment:

The 4% withdrawal scenario is really meant for the 30 year retirement scenario (ie. retire at 65 and live, at most, to 95). Given the mustachian community, I imagine some people are retiring in their forties. Here, 4% can fail, and fail pretty hard.

For example, if you expect to live to 80, a 4% withdrawal strategy fails 25% of the time over all 40-year timespans simulations in a 60% bond / 40% stock portfolio. You can decrease failure rates with more stocks (and accept the shorter term risk), but even 100% stocks gives a 10% failure rate. If you're retiring at 40 and plan on living to 90 (this is not so uncommon now-a-days) failure rates will be even worse.

If anyone's interested, I've made a simulator found here that shows you these results.

[Rollin]

A comment:

The 4% withdrawal scenario is really meant for the 30 year retirement scenario (ie. retire at 65 and live, at most, to 95). Given the mustachian community, I imagine some people are retiring in their forties. Here, 4% can fail, and fail pretty hard.

For example, if you expect to live to 80, a 4% withdrawal strategy fails 25% of the time over all 40-year timespans simulations in a 60% bond / 40% stock portfolio. You can decrease failure rates with more stocks (and accept the shorter term risk), but even 100% stocks gives a 10% failure rate. If you're retiring at 40 and plan on living to 90 (this is not so uncommon now-a-days) failure rates will be even worse.

If anyone's interested, I've made a simulator found here that shows you these results.

marc that's a good reminder. We often go to 30 in our scenarios and say "yeah!" pull the chute, but there is more life after 30 for many (i.e., after 30+40 FIRE, etc.).

[sol]

A comment:

The 4% withdrawal scenario is really meant for the 30 year retirement scenario (ie. retire at 65 and live, at most, to 95). Given the mustachian community, I imagine some people are retiring in their forties. Here, 4% can fail, and fail pretty hard.

Unless you have social security and a pension, or will follow the near-universal pathway of spending less money at 70 than you did at 50.

In our case, we expect to get two social security checks and two pension checks, and have zero of our three children living at home.  Our retirement checks should cover our future (lower than current) expenses all by themselves, so our investments really only have to last until those checks start arriving.  Which is significantly less than 30 years from now.

I don't understand how someone who is raising a family while paying a mortgage in their prime earning years thinks they will have to spend MORE than that once they are retired, with a paid off house and no more kids at home.  Unless you take up some expensive hobbies your spend rate should go down in retirement, not up.

[Rollin]

A comment:

The 4% withdrawal scenario is really meant for the 30 year retirement scenario (ie. retire at 65 and live, at most, to 95). Given the mustachian community, I imagine some people are retiring in their forties. Here, 4% can fail, and fail pretty hard.

Unless you have social security and a pension, or will follow the near-universal pathway of spending less money at 70 than you did at 50.

In our case, we expect to get two social security checks and two pension checks, and have zero of our three children living at home.  Our retirement checks should cover our future (lower than current) expenses all by themselves, so our investments really only have to last until those checks start arriving.  Which is significantly less than 30 years from now.

I don't understand how someone who is raising a family while paying a mortgage in their prime earning years thinks they will have to spend MORE than that once they are retired, with a paid off house and no more kids at home.  Unless you take up some expensive hobbies your spend rate should go down in retirement, not up.

Yes SOL, for me I need to bridge about 8 years before SS gives us a good raise (about 30%). At that point I can back down the 4% again. Maybe leave more to the kids? We'll see how they act first (JK).

[steveo]

We also just have to hit certain numbers. We have to hit 60 to get access to Super (I'm Australian). Super is our retirement money that is self-funded. Once that is hit we can access social security at 67. We will have an excessive amount in Super so that is really all we have to hit.

To add to that we now currently have 3 kids living at home. I expect that to go back to 0 and I expect our expenses supporting our kids to drop slowly over the next 5-15 years.

We also have a house that we could easily downsize from and have extra money. Inheritance should also be significant.

A 4% WR to me is actually going crazy on the security side and simply isn't needed. I have a target of 5.5% but I think we will probably get to 5% and then retire.

[soccerluvof4]

We planned a 4% withdrawal so we take it since still have 4 kids at home and the market is at record highs so we are building a cash reserve with the extra $ to reinvest. To add to it my DW recently took a very flexible job with great benefits to increase cover Healthcare and increase our cash position for future investment. She loves the job otherwise there is no way this would of been considered AND in either case its 3 years max to when the 2 oldest are gone and a year or two into there college. Shes 4 years younger than me and its something she wanted to contribute since for the most part I put us in the position we are in. To Sol's point I just don't see the need being anywhere close to the 4% or her working max 5 years down the line from now.

[Rollin]

We planned a 4% withdrawal so we take it since still have 4 kids at home and the market is at record highs so we are building a cash reserve with the extra $ to reinvest. To add to it my DW recently took a very flexible job with great benefits to increase cover Healthcare and increase our cash position for future investment. She loves the job otherwise there is no way this would of been considered AND in either case its 3 years max to when the 2 oldest are gone and a year or two into there college. Shes 4 years younger than me and its something she wanted to contribute since for the most part I put us in the position we are in. To Sol's point I just don't see the need being anywhere close to the 4% or her working max 5 years down the line from now.

I had some thoughts about taking a bit more just to shield it from a market drop (by putting it into cash), but of course that is market timing right? :) Anyway, I'm just a bit nervous...

[SwordGuy]

% of target income when we FIRE:

 20% Farm Income
 40% Rental Income
 50% Social Security
 56% Stock
=============
166%

Farm income wasn't in the plan, as was about 1/3rd of the stock.  (I inherited that last year.)  We should reach our Rental and Social Security targets in 2017.

Additional Safety margins:

20%+ My Social Security, depending on whether I take it at 62,66, 0r 70.  20% represents age 62.
?%     Artwork
?%     House Flipping (restore cool houses).
 8%+  Re-investing surplus income into more rental houses, per house.     

[soccerluvof4]

We planned a 4% withdrawal so we take it since still have 4 kids at home and the market is at record highs so we are building a cash reserve with the extra $ to reinvest. To add to it my DW recently took a very flexible job with great benefits to increase cover Healthcare and increase our cash position for future investment. She loves the job otherwise there is no way this would of been considered AND in either case its 3 years max to when the 2 oldest are gone and a year or two into there college. Shes 4 years younger than me and its something she wanted to contribute since for the most part I put us in the position we are in. To Sol's point I just don't see the need being anywhere close to the 4% or her working max 5 years down the line from now.

I had some thoughts about taking a bit more just to shield it from a market drop (by putting it into cash), but of course that is market timing right? :) Anyway, I'm just a bit nervous...

I hear ya! But were in new territory and in the big scheme of things its a small percentage. Some kind of a much needed decline I will add a chunk otherwise Live off it and wont take my 4% for awhile.

[Cassie]

SOL: we found that once the kids are gone and we were not working we have much more time and energy for traveling, entertainment, hobbies, etc.  We are spending more $ on travel and entertainment then we ever did when we worked and were tired all the time.  My Mom didn't slow down her travel until her 80's. We know plenty of people that are traveling more then ever in their 70's so you just never know until you get there.

[sol]

SOL: we found that once the kids are gone and we were not working we have much more time and energy for traveling, entertainment, hobbies, etc.  We are spending more $ on travel and entertainment then we ever did when we worked and were tired all the time.  My Mom didn't slow down her travel until her 80's. We know plenty of people that are traveling more then ever in their 70's so you just never know until you get there.

If you desire lifestyle inflation, and are willing to work longer to support it, that is your decision to make.  I'm just saying that it's not a necessary part of retirement.

[Cassie]

I was trying to share our experience since we have been semi-retired for almost 5 years.  If you have no desire to travel fine. WE did not travel much while working and now is our time.

[sol]

If you have no desire to travel fine.

Quite the contrary, I love to travel!  I've been to all seven continents, most of them several times.  Yes, even Antarctica.

But I did most of that travel as a starving student, on a shoestring budget, and som of it I even got paid for.  Travel doesn't have to be expensive, but it certainly can be.  The same can be said for just about anything else in life.  Don't pretend that this one this requires you to inflate your lifestyle any more than anything else.  We all have choices to make, and you can make them frugally or not.

If your (the generic you, dear reader, not any one specific you) retirement plan is to spend more in retirement than you did while working, that's totally fine.  You can plan for it, you can work toward it, you can accomplish it.  But it's not a necessity.  On average, most retirees spend less money in retirement than they did while working, and the effect is more pronounced after about age 60.  YMMV, of course.

[respond2u]

I'm shooting for 3.4% until social security kicks in. I might give myself a raise in 2018 depending on what happens with the replacement for ACA. OTOH, I'm also practicing frugality. I think I have a year to decide.

www.cfiresim.com says I can take out 4.3% reliably for 50 years, assuming social security kicks in after 10 years.

Play with the calculator there. It will allow you to put in retirement funds, social security, pensions, other sources of income, etc. and backtest them for all the years we have semi-reliable data on inflation, equity return, and t-bill returns.

I'm not going to use that much as the marginal tax rate of the ACA subsidy reduction is about 25% and losing that much to taxes irks me.

[Cassie]

The little travel I did when young was cheap but as you age you want more comfort.  We still shop deals, etc. Actually many studies show that spending goes down for retirees after age 70 when many can't travel or no longer want to. Even MM had some lifestyle inflation with making his travel business related so as to not have to report it as increasing his spending, the new car, etc. I think it is better to have the $ so you can do the things you really want and then you can cut back if needed then to only have enough $ to exist.  As we all know most people have a spending problem but smart people on this site can still quit work earlier then most and still have the $ to do things they really want.

[Metric Mouse]

A comment:

The 4% withdrawal scenario is really meant for the 30 year retirement scenario (ie. retire at 65 and live, at most, to 95). Given the mustachian community, I imagine some people are retiring in their forties. Here, 4% can fail, and fail pretty hard.

For example, if you expect to live to 80, a 4% withdrawal strategy fails 25% of the time over all 40-year timespans simulations in a 60% bond / 40% stock portfolio. You can decrease failure rates with more stocks (and accept the shorter term risk), but even 100% stocks gives a 10% failure rate. If you're retiring at 40 and plan on living to 90 (this is not so uncommon now-a-days) failure rates will be even worse.

If anyone's interested, I've made a simulator found here that shows you these results.

Meh - I'll take a 10% chance I may have to work in the future, for the 90% chance that I don't.

[sol]

Meh - I'll take a 10% chance I may have to work in the future, for the 90% chance that I don't.

I prefer to think of it as a 10% chance that I might have to forego my annual inflation adjustment, or even (gasp!) temporarily reduce my spending level, instead of having to go back to work.  And a 90% chance of never having to control spending ever again.

Once I retire, I don't think "going back to work" is going to be on my list of the top five ways to deal with a potential portfolio shortfall.

[Rollin]

SOL - glad that works for you. Others seem to do things a little different.

[Metric Mouse]

Meh - I'll take a 10% chance I may have to work in the future, for the 90% chance that I don't.

I prefer to think of it as a 10% chance that I might have to forego my annual inflation adjustment, or even (gasp!) temporarily reduce my spending level, instead of having to go back to work.  And a 90% chance of never having to control spending ever again.

Once I retire, I don't think "going back to work" is going to be on my list of the top five ways to deal with a potential portfolio shortfall.

Mine either, but that was the 'worst' case scenario I could think of.