I searched but didn't find my answer.
The 4% refers to the portion of the portfolio withdrawn during the first year; it is assumed that the portion withdrawn in subsequent years will increase with the consumer price index (CPI) to keep pace with the cost of living.
Don't confuse the confidence of the informed with the hope of the ignorant.That's a great line.
There is literally no mathmatical justification for going any more conservative.
OK, since we have dumbed this concept down enough that even the mathematically challenged can participate, lets go back to Bob's scenario. He starts with $1000 Wahooties, takes out $30 Wahooties plus a few more Wahooties every year for inflation and he statistically will never run out of Wahooties for 30 years, correct? Or does that mean with market gains, there willstill be $1000ish Wahooties left for pass along to his cat?
OK, since we have dumbed this concept down enough that even the mathematically challenged can participate, lets go back to Bob's scenario. He starts with $1000 Wahooties, takes out $30 Wahooties plus a few more Wahooties every year for inflation and he statistically will never run out of Wahooties for 30 years, correct?Yes, this is the Trinity Study "definition of success." Replacing "statistically" with "historically, based on ~70 years of data" is even more correct, as statistics doesn't often return "never" as a result.
Or does that mean with market gains, there will still be $1000ish Wahooties left for pass along to his cat?Because the answer above is "yes," the answer here is "no."
OK, since we have dumbed this concept down enough that even the mathematically challenged can participate, lets go back to Bob's scenario. He starts with $1000 Wahooties, takes out $30 Wahooties plus a few more Wahooties every year for inflation and he statistically will never run out of Wahooties for 30 years, correct? Or does that mean with market gains, there willstill be $1000ish Wahooties left for pass along to his cat?
OK, since we have dumbed this concept down enough that even the mathematically challenged can participate, lets go back to Bob's scenario. He starts with $1000 Wahooties, takes out $30 Wahooties plus a few more Wahooties every year for inflation and he statistically will never run out of Wahooties for 30 years, correct? Or does that mean with market gains, there willstill be $1000ish Wahooties left for pass along to his cat?
...It's not all wrong, but it is not correct. Kudos for having the self-awareness to acknowledge the possibility. Stick with it and your knowledge will accumulate.
In the most terrible of economies, not the historical 7% average growth, 4% is the known worst case scenario. Meaning
1000 Wahooties in a bad year leaves you at 1040 Wahooties.
...
This could be all wrong, but this is what I've picked up one month into MMM.
You're close.OK, since we have dumbed this concept down enough that even the mathematically challenged can participate, lets go back to Bob's scenario. He starts with $1000 Wahooties, takes out $30 Wahooties plus a few more Wahooties every year for inflation and he statistically will never run out of Wahooties for 30 years, correct? Or does that mean with market gains, there willstill be $1000ish Wahooties left for pass along to his cat?
My basic understanding is this
My father, OTOH, spent his last 3.5 years in assisted living. Fortunately his biggest insurance win in his life was buying long term care 3 years prior to being diagnosed with Parkinsons. While that "full coverage at $140/day" was a God send, the cost of care was closer to $200/day. Certainly a different burn rate than 3%.
+1My father, OTOH, spent his last 3.5 years in assisted living. Fortunately his biggest insurance win in his life was buying long term care 3 years prior to being diagnosed with Parkinsons. While that "full coverage at $140/day" was a God send, the cost of care was closer to $200/day. Certainly a different burn rate than 3%.
...depends on how big your stash is. $60/day is $20.9k/year, which is 3% of $730k. I imagine many of us are planning to support expenses at least that high during retirement.
It's important to remember that there's a lot of variation in the back-tested scenarios. When you pick a withdrawal rate low enough to make it almost impossible to run out of money if you keep withdrawing at that rate, you're also more likely than not to die a multi-millionaire. The multi-year assisted living expense only becomes a problem if you end up in one of the few retirement scenarios where your chosen withdrawal rate would leave you almost but not quite broke at the end of life without the assisted living expense. You're compounding an unlikely event on top of another unlikely event. At the end of the day you'll have to decide how much longer you're willing to work to prepare for this scenario. Remember that it's impossible to protect against every possible risk.
Dad retired in 1988, with a paid off home valued at maybe $140,000. His stache wasn't anything like what many here have or most need. Yes Seattle, the $60 per day gap was manageable... the problem is the "expensive decisions" had to be made 20 years into his retirement and 7 years after his wife passed. He also bought the policies on him and Mom in 1986 and I am guessing they would be considered Cadillac by todays standards.+1My father, OTOH, spent his last 3.5 years in assisted living. Fortunately his biggest insurance win in his life was buying long term care 3 years prior to being diagnosed with Parkinsons. While that "full coverage at $140/day" was a God send, the cost of care was closer to $200/day. Certainly a different burn rate than 3%.
...depends on how big your stash is. $60/day is $20.9k/year, which is 3% of $730k. I imagine many of us are planning to support expenses at least that high during retirement.
It's important to remember that there's a lot of variation in the back-tested scenarios. When you pick a withdrawal rate low enough to make it almost impossible to run out of money if you keep withdrawing at that rate, you're also more likely than not to die a multi-millionaire. The multi-year assisted living expense only becomes a problem if you end up in one of the few retirement scenarios where your chosen withdrawal rate would leave you almost but not quite broke at the end of life without the assisted living expense. You're compounding an unlikely event on top of another unlikely event. At the end of the day you'll have to decide how much longer you're willing to work to prepare for this scenario. Remember that it's impossible to protect against every possible risk.
Yes, the classic 4% SWR as done in the Trinity study takes 4% of the initial portfolio amount and adjusts it upwards for inflation each year, regardless of market performance.the. MMM search bar
Most of us think that's a bit unrealistic.
www.cfiresim.com lets you play with withdrawal scenarios.I searched but didn't find my answer.
That's weird. I searched Google for "where does the 4% safe withdrawal rate come from" -- whaddya know, MMM is the first link. There's a bunch of other ones though (many questioning if it's still "safe") that will help explain it.
https://www.google.com/search?q=where+does+the+4%25+safe+withdrawal+rate+come+from
The Wikipedia page on the Trinity study (4th link on that search) specifically mentions:QuoteThe 4% refers to the portion of the portfolio withdrawn during the first year; it is assumed that the portion withdrawn in subsequent years will increase with the consumer price index (CPI) to keep pace with the cost of living.
What did you search for that you couldn't find an explanation of it?
It is a great quote. Unfortunately it doesn't change the fact that the future does not predict the past 50 years ahead. Thanks everyone for weighing in.Don't confuse the confidence of the informed with the hope of the ignorant.That's a great line.
Yup. So just plan for the most likely scenarios and a lot of the less likely ones so you're planning for like 99% of em and fuck the rest. If nuclear war comes or aliens enslave us or the economy implodes or the cure for cancer actually turns us into zombies, the fact that we didn't have big enough retirement accounts probably won't mean shit anyway.It is a great quote. Unfortunately it doesn't change the fact that the future does not predict the past 50 years ahead. Thanks everyone for weighing in.Don't confuse the confidence of the informed with the hope of the ignorant.That's a great line.
I read in another forum that the Trinity study found the 4% withdrawal rate to be safe while simultaneously assuming a 1% expense ratio. Is this true?
The study did not adjust for taxes or transaction costs. An investor’s own experience would differ depending on how much of his assets were in tax-deferred accounts, and the extent to which transaction costs could be held to a minimum using low-cost index funds.
The stock returns in the analysis are total monthly returns to the Standard & Poor's 500 Index.
Year Portfolio Start 4% Withdrawl Market Return (6%) Portfolio End Living Expenses 2015 $1,000,000 $40,000 $60,000 $1,020,000 $40,000 2016 $1,020,000 $40,800 $61,200 $1,040,400 $40,800 2017 $1,040,400 $41,616 $62,424 $1,061,208 $41,616 2018 $1,061,208 $42,448 $63,672 $1,082,432 $42,448 2019 $1,082,432 $43,297 $64,946 $1,104,081 $43,297 2020 $1,104,081 $44,163 $66,245 $1,126,162 $44,163 2021 $1,126,162 $45,046 $67,570 $1,148,686 $45,046 2022 $1,148,686 $45,947 $68,921 $1,171,659 $45,947 2023 $1,171,659 $46,866 $70,300 $1,195,093 $46,866 2024 $1,195,093 $47,804 $71,706 $1,218,994 $47,804 2025 $1,218,994 $48,760 $73,140 $1,243,374 $48,760 2026 $1,243,374 $49,735 $74,602 $1,268,242 $49,735 2027 $1,268,242 $50,730 $76,095 $1,293,607 $50,730 2028 $1,293,607 $51,744 $77,616 $1,319,479 $51,744 2029 $1,319,479 $52,779 $79,169 $1,345,868 $52,779 2030 $1,345,868 $53,835 $80,752 $1,372,786 $53,835 |
arebelspy - common man... of COURSE you have MMM's explanation is listed 1st on your google search. You're a moderator on the MMM forum and google tailors their results to the user. Tried the same search on a work computer and MMM's post came up third. Wikipedia was 1st, forbes article was 2nd.
That's weird. I searched Google for "where does the 4% safe withdrawal rate come from" -- whaddya know, MMM is the first link. There's a bunch of other ones though (many questioning if it's still "safe") that will help explain it.
... And the SWR is a good guideline, until applied to many real world scenarios. My mothers end of life days included 27 days of hospital and 4 days of hospice- all mostly covered under my parents HC provisions. My father, OTOH, spent his last 3.5 years in assisted living. Fortunately his biggest insurance win in his life was buying long term care 3 years prior to being diagnosed with Parkinsons. While that "full coverage at $140/day" was a God send, the cost of care was closer to $200/day. Certainly a different burn rate than 3%.
I know the article is linked above and I could find out for myself if I took the time to read it. However, it is late and I just thought I would throw the question out in case someone knows the answer because they know the study inside and out. I read in another forum that the Trinity study found the 4% withdrawal rate to be safe while simultaneously assuming a 1% expense ratio. Is this true?
I am wondering about SWR withdrawal rate too. Stock market fluctuates, so what would people do in a bear stock market scenario?
For example, if you have a million dollars in your portfolio, and you are withdrawing 4%...so, $40K. So if there is a huge stock market downturn and your portfolio is down to $700k this year. Then do you withdraw $28K this year? For example, you normally need 40K to cover expenses, in a bear market, you tighten your belt (let's say, no more traveling or selling a car) and you still find yourself needing 32K for expenses. Do you cheat yourself and withdraw extra 4K? (so you are withdrawing 4.57% that year), or should you have a separate emergency/bear Market funds account (for example $10K in a savings account)?
I am wondering about SWR withdrawal rate too. Stock market fluctuates, so what would people do in a bear stock market scenario?
For example, if you have a million dollars in your portfolio, and you are withdrawing 4%...so, $40K. So if there is a huge stock market downturn and your portfolio is down to $700k this year. Then do you withdraw $28K this year? For example, you normally need 40K to cover expenses, in a bear market, you tighten your belt (let's say, no more traveling or selling a car) and you still find yourself needing 32K for expenses. Do you cheat yourself and withdraw extra 4K? (so you are withdrawing 4.57% that year), or should you have a separate emergency/bear Market funds account (for example $10K in a savings account)?
The 4% literature accounts for this generally -- however, there is a higher failure rate if that bear market occurs in the early part of your retirement (see "sequence of returns risk"), which is why many in this forum intend to either keep cash on the side to cover a 1-3 year downturn, or work part-time, or cut expenses to the bone; in each case not selling any equities during the downturn.
I'll take security over having my portfolio invested 100% in stocks.Congrats on your first year of ER. If you don't like the volatility of 100% stocks and your portfolio has increased by an extra 2.5 years of living expenses, why not take those gains and shuttle them aside in a 'safe' account and earmark them for the next recession? Odds are it'll happen sometime in the next 0-4 years. Just a thought....
So far I've been fortunate -- first year of ER had net worth going up quite a bit (an extra 2.5 years of living expenses), giving us a larger buffer to handle down years in the future. I don't ever want to have to go back to work (even part time) or cut expenses to make it.
I'll take security over having my portfolio invested 100% in stocks.Congrats on your first year of ER. If you don't like the volatility of 100% stocks and your portfolio has increased by an extra 2.5 years of living expenses, why not take those gains and shuttle them aside in a 'safe' account and earmark them for the next recession? Odds are it'll happen sometime in the next 0-4 years. Just a thought....
So far I've been fortunate -- first year of ER had net worth going up quite a bit (an extra 2.5 years of living expenses), giving us a larger buffer to handle down years in the future. I don't ever want to have to go back to work (even part time) or cut expenses to make it.
Is the 4% (I know, 7% yield less 3% inflation) based on selling things or taking out dividends?
Another point is that 4% works for the US past performance. It doesn't work for most other countries past performance - for Australia it is 3.6%. Given that 4% is possibly a maximum, that may not hold for the US or any other country in the future, it is reasonable to have a lower SWR.
The last 8 years of life are the most expensive according to multiple things I have read, so you may wish to think about the funds for them as a separate option.
Semi-theoretical question. Background - I haven't worried too much about the SWR because most of my retirement income is pension, and a chunk of the rest is a RRIF, which has a mandated minimum based on the value on January 1 of that year. The mandated minimum goes up every year so at 94 I have to take out 20% - it is set up that way. 4% is the minimum at age 65, by the way.You should subtract any guaranteed payments from your annual expenses and use the difference in any SWR-related calculations.
So - the rest of my income is conservative income-oriented mutual funds and a REIT - and my cash-in is zero. I am living on dividends.
Is the 4% (I know, 7% yield less 3% inflation)...Some times we "know" things that just aren't so - this is one example. Yes, 7 - 3 = 4, just as 1 + 1 = 2, but that is not how the Trinity Study authors (and related researchers) determined that 4% was a "Safe" Withdrawal Rate.
...based on selling things or taking out dividends?Yes. Either. Both.* Whatever it takes to meet your annual expense needs.
Barring extra expenses I could die (30 years down the road) and still leave all my stocks for my estate. And as long as a fund has productive companies, I don't really care what the stock value is, I am not selling it anyway.Makes sense. Enjoy!