4% rule question - variable or fixed?

[HopefulMustache]

This question started off wanting to ask whether people thought MMM was advocating a fixed withdrawal rate or a percentage withdrawal rate when he was explaining the 4% rule (http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/) because I wasn't sure. I then searched around and it seems like the fixed rate is the "traditional" idea based on the Trinity Study MMM cites. However, people don't seem as big a fan of that as they used to be.

Since I know MMM loves Vanguard and it's where I've begun my own retirement savings, here's a link I found to a Vanguard study comparing the two methods and advocating a compromise idea which I quite like: https://pressroom.vanguard.com/content/nonindexed/2013.10.23_A_more_dynamic_approach_to_spending.pdf

I did some rough math (always a questionable activity for me) and found that if I had retired at the unfortunate moment of 1/2008 with $1MM invested entirely in the DJA (for simplicity) and withdrawn a fixed 4% ($40K) every year, today I'd be sitting on 88% of my original portfolio, which makes me somewhat worried about making it to thirty years, let alone further. If I had instead withdrawn 4% of the value of my portfolio each year, I'd obviously have been making smaller withdrawals, but I'd now be sitting on 97% of my original portfolio... this does seem like it could last almost to infinity, as long as I can manage my expenses.

Obviously, this is not an exact estimator of a likely diversified retirement portfolio, and only a short sample. But my question for the MMM community is, for those in or near retirement, what kind of "4% rule" are you applying or seeking to apply? Have you considered ceiling/floor approaches like that proposed by Vanguard? I'm many years away from retirement but curious about how people have considered their "magic numbers" for safe retirement, and then how that number has treated them.

[matchewed]

Anyone who mindlessly withdraws 4% regardless of circumstances is making a mistake. I doubt many, if any, are strictly doing that. Most would advocate flexibility and adjusting withdrawal strategies based on personal and economic circumstances.

[Fishingmn]

I agree that it's a good guideline but you can't take it as gospel. You should really use a tool like cfiresim.com to analyze the likelihood of a stash lasting.

You really need to look at all income streams as what you spend as a % of your assets will vary. Mine will vary frequently because -

- I have rental income
- At some point I will have RMD's kick in from my IRA's
- At some point I will hire a property manager to manage my properties which will add a significant expense
- I think we will get a rather large new stream of income in the future (social security - we are in early 50's so I think we'll get it)
- I'll probably get some inheritance money
- Finally, I expect my spending to slow down quite a bit in my 70's as I travel & go out much less

[lauren_knows]

The floor/ceiling approach not only better emulates how a real person would spend (no one is spending the exact same amount of money each year, and people who are financial-minded tend to pare back on spending when the market is down), but it generally provides much better success than a flat 4% (inflation-adjusted).

Using http://www.cfiresim.com/, you can choose the Spending Plan of "Variable Spending(new)" and set a defined floor and ceiling value (along with the goal/average value).  It almost always provides a better success rate.

The "4% rule" based on the Trinity Study is usually seen as a rule-of-thumb, not something that is set in stone nor right for every situation.

[HattyT]

I understand the rule to be 4% of the current net worth.  If you are withdrawing yearly, in your example, you’d take 40,000 the first year.  But the next year you take 4% of the current total (, not last years total).  If the stock market tanks, you take 4% of the tanked amount.  Fixed percentage. Variable amount.   If you notice 4% isn't enough and you are spending it down too fast, make adjustments.

[lauren_knows]

I understand the rule to be 4% of the current net worth.  If you are withdrawing yearly, in your example, you’d take 40,000 the first year.  But the next year you take 4% of the current total (, not last years total).  If the stock market tanks, you take 4% of the tanked amount.  Fixed percentage. Variable amount.   If you notice 4% isn't enough and you are spending it down too fast, make adjustments.

In terms of the "rule of thumb" 4% rule, this isn't how it's usually described.  Usually you take 4% of your investments at the beginning of retirement, and then each year just add to that number with inflation.

[Dr. Doom]

I understand the rule to be 4% of the current net worth.  If you are withdrawing yearly, in your example, you’d take 40,000 the first year.  But the next year you take 4% of the current total (, not last years total).  If the stock market tanks, you take 4% of the tanked amount.  Fixed percentage. Variable amount.   If you notice 4% isn't enough and you are spending it down too fast, make adjustments.

In terms of the "rule of thumb" 4% rule, this isn't how it's usually described.  Usually you take 4% of your investments at the beginning of retirement, and then each year just add to that number with inflation.

Yep, can't use home value in the NW figure because it's not an invested asset i.e. you can't touch that money.    4% rule requires at least 50% of your investment pool in US. Domestics as per Trinity Study methodology.  Probability of success goes up as stock % of AA goes to 75%.   The rest in bonds.

BTW, another good reason to use cfiresim.com:  Trinity study only looks at 30 year periods before you hit the end of the road, while cfiresim will let you enter longer time horizons.