Am I Missing Something When it Comes to the 4%?

[Tubby]

I realize the 4% rule is not always hard and fast, and some might say it is just a wise suggestion. But I would appreciate any input from more experienced Mustachians on my circumstances.

We are both 55 years old and I will retire next year, though my wife may continue working 3 days a week. For the sake of the exercise, I am discounting that income stream or any dough I might make working at a pleasant part time job.

We spend $72k/year, and believe me, there's some fat in that budget; cuts could be made in stupid spending without affecting any future travel plans.

Our net worth is $1.8 million and at the 4% rate, we would co-incidentally arrive at the $72k spending figure. Of course, to end up with $72k, we would need to withdrawal more than that due to taxes.

I've run the numbers and discovered that we would have access to a $96k annual income, and our funds would not run out until we are 96 years old, assuming a modest 2% growth. This is because we could take the $96k annually from our funds until age 70, and then withdrawal half that amount each year because our social security benefits would give us $48k.

It seems like a no-brainer, thus, am I missing something?

[patchyfacialhair]

I think you got it. Always include taxes as an expense.

Congrats on doing so well! $1.8MM isn't small potatoes. Plus your safety margins of part time work if necessary (or the obvious low hanging fruit of cutting spending) and you'll be just fine.

[Jack]

We spend $72k/year, and believe me, there's some fat in that budget...

I believe you!

Anyway, considering social security (and the fact that you could cut your budget fully in half and still live well), it definitely sounds like you're done. Have fun FIREing!

[Classical_Liberal]

I'm a firm believer that the 4% rule is very conservative and would have zero problem pulling the plug with it or a even higher WR depending on circumstances. If you're in the US, sounds like you are 10-15 years from some SS as well, which is a huge safety margin, even for a spendy pants like yourself :)

BUT... 

The one thing you may be missing is the concept of sequence of returns risk (which is independant of your "average" 2% real return scenario).  If you have a full understanding of this risk, ignore me. If not, learn about it and look at your AA to ensure you have mitigated this risk as much as possible or as much as you are comfortable with.

Check out the 4% rule thread too!  Lots of info in there.

Congrats and good luck!

[Tubby]

Hahaha, I love the comments!

The current spend rate is based on a backwards look over the last two years, years in which we weren't taking any real measures to economize. Groceries and dining out has cost us $11,000 in the last 12 months. Walking around money, $8000 over the last 12 months. Easy cuts in those two areas alone would save thou$ands. When I showed the numbers to a very skeptical wife, her first comment was, "Well, there won't be any trips to Europe in retirement", which puts a knife into my heart, as I am interested in European art and architecture. Of course, the annual figures for the last two years include 4 trips to Europe during that time. I'd rather eat more meals at home, saving on restaurants, and put the money into real travel.

Unfortunately, my wife is not really on board with the idea, but that is a different thread topic.

Thanks Classical Liberal for introducing me to the "sequence of risk" concept which I guess I "knew", but never knew the term for. Experts might say that we have too much of our portfolio in very safe money market funds. We wouldn't have to touch our equity funds until our 70s, living (and investing) off our money market funds until then. Does that make sense?

[Telecaster]

Thanks Classical Liberal for introducing me to the "sequence of risk" concept which I guess I "knew", but never knew the term for. Experts might say that we have too much of our portfolio in very safe money market funds. We wouldn't have to touch our equity funds until our 70s, living (and investing) off our money market funds until then. Does that make sense?

It does, but the 4% rule is based on a balanced portfolio (usually 60/40% stocks and bonds).  If too much of your port is in money market funds the 4% rule won't work. 

[fattest_foot]

I think a lot of people forget that it's essentially the worst case scenario. It's even saying that with the worst sequence of returns ever 4% will be safe.

[slowsynapse]

We spend $72k/year, and believe me, there's some fat in that budget...

I believe you!

Anyway, considering social security (and the fact that you could cut your budget fully in half and still live well), it definitely sounds like you're done. Have fun FIREing!

Excellent use of really small font in addition to good advice.

[Jack]

Thanks Classical Liberal for introducing me to the "sequence of risk" concept which I guess I "knew", but never knew the term for. Experts might say that we have too much of our portfolio in very safe money market funds. We wouldn't have to touch our equity funds until our 70s, living (and investing) off our money market funds until then. Does that make sense?

If a lot of your portfolio is in money-market funds, your concern isn't "sequence of returns" risk, it's straight-up "lack of returns" risk.

I think a lot of people forget that it's essentially the worst case scenario. It's even saying that with the worst sequence of returns ever 4% will be safe.

Well, it's really something like the the 95^th percentile of return success. In other words, even the portfolio studied to develop the 4% rule failed about 5% of the time, but that's considered "good enough."

The real worst-case scenario is, of course, if you die on the day you retire. (The second-worst case is global Armageddon.)

[Classical_Liberal]

...Experts might say that we have too much of our portfolio in very safe money market funds. We wouldn't have to touch our equity funds until our 70s, living (and investing) off our money market funds until then. Does that make sense?

Makes perfect sense.  Treasuries are so overpriced right now that an investor can get essentially the same yield of a 10 year note in a CD ladder or high interest savings account with zero loss of principal risk.

It does, but the 4% rule is based on a balanced portfolio (usually 60/40% stocks and bonds).  If too much of your port is in money market funds the 4% rule won't work. 

The trinity study was based on a very selected group of stocks and bonds.  There is more to the world of stocks and bonds than US treasuries and large cap US equities. I dont think this invalidates the 4% rule though.  If anything, an intelligent, educated investor can adjust AA given the current economic situation & where that person is at in the lifecycle of their portfolio (ie fast accumulation, slow accumulation, beginning drawdown, late drawdown, etc). 

Tubby, if you like data and backtesting portfolios check out Tyler's site: 

https://portfoliocharts.com/calculators/

Be prepared to waste an entire weekend playing around though!  :) 

PS I wouldn't make any changes on this data alone.  Anytime one goes beyond a completely lazy stock/bond index portfolio he/she should really know what they are doing and why.

[JumpInTheFIRE]

Also keep in mind that the full amount of your yearly withdrawal might not be taxable, depending on where it is.  For taxable accounts, only the gains are taxed (at a lower rate than income), anything that you put in comes back out tax free.  For Roth IRA accounts, no taxes at all.  The only accounts where withdrawals are taxed as income are traditional IRAs/401ks.  So your tax estimate might be lower than actual (or higher) depending on where the money is stored.

[2Birds1Stone]

Are are FI, enjoy the rest of your life :)

[FrugalFan]

A lot of good advice here. Make sure your asset allocation can support the 4% rule. Your taxes will probably be much lower than you expect because of different taxation rules on various types of retirement income. Also, you mentioned 1.8 million net worth. Is some of that net worth tied up in a residence? If so, it can't provide income for you and should not be counted in the 4% total.

[Tubby]

I've read the debates on whether ones residence should count towards the net worth. I figure that I will sell it eventually, so it represents that last $300,000 to tap at the end.

[nereo]

I've read the debates on whether ones residence should count towards the net worth. I figure that I will sell it eventually, so it represents that last $300,000 to tap at the end.

Sure - but just realize that broadly speaking housing values basically just keep pace with inflation.  While you might get lucky, I wouldn't count on my primary residence increasing in value in real terms over the next ~30 years.

[Capsu78]

I was just getting ready to ask that:  I would base the 4% rule more on "investable assets" and not include home equity in the calculations.  I would redeploy home equity as your LTC failsafe.

[oldtoyota]

I've read the debates on whether ones residence should count towards the net worth. I figure that I will sell it eventually, so it represents that last $300,000 to tap at the end.

Did you factor housing payments into your future budget?

[SwordGuy]

Why are you calculating 4% of your net worth?  Unless your net worth is solely composed of stocks and bonds (or will be once you retire), that's a worthless number.


The 4% should be based on your stock and bond holdings (with a majority of stock vs bonds) and nothing else.

Other forms of investment have their own "rules" and their own rates of return and risk profiles.

[tallen]

I think being flexible is key. If you have a bad year or 2, especially when you first start out you need to be able get a part time job or a side gig to help out for a while and/or be able to cut expenses until your portfolio catches up. As long as those options are available (and you use them when necessary) I think it's pretty foolproof.

[Cathy]

I think a lot of people forget that it's essentially the worst case scenario. It's even saying that with the worst sequence of returns ever 4% will be safe.

Well, it's really something like the the 95^th percentile of return success. In other words, even the portfolio studied to develop the 4% rule failed about 5% of the time, but that's considered "good enough."

The real worst-case scenario is, of course, if you die on the day you retire. ...

For the purpose of retirement planning, that may actually be the best-case scenario, because your portfolio is guaranteed to last throughout your entire retirement, regardless of the withdrawal rate (so long as it's not more than 100% per day!).

[Jack]

I think a lot of people forget that it's essentially the worst case scenario. It's even saying that with the worst sequence of returns ever 4% will be safe.

Well, it's really something like the the 95^th percentile of return success. In other words, even the portfolio studied to develop the 4% rule failed about 5% of the time, but that's considered "good enough."

The real worst-case scenario is, of course, if you die on the day you retire. ...

For the purpose of retirement planning, that may actually be the best-case scenario, because your portfolio is guaranteed to last throughout your entire retirement, regardless of the withdrawal rate (so long as it's not more than 100% per day!).

https://www.youtube.com/watch?v=hou0lU8WMgo