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The 4% rule (or is it 4.7% now?) is supposed to be a simple way to figure out how much you can safely withdraw each year, but I’m curious – do HD members really follow it?
While it’s a decent projection, I imagine there are plenty of circumstances where a fixed percentage needs updating – health expenses, market swings, helping family, inflation surprises, or even big life events like moving or starting a new chapter you hadn’t planned for.
For those of you already retired (or closer to it), I’d love to hear if you actually stick to 4%, or is it more of a guideline you adjust as life happens? If you do withdraw more or less, how do you track or budget for potential changes in next year’s withdrawals?
I doubt many people live to the cent on the 4% rule and suspect that underspending rather than overspending is the main risk for those that have built sufficient assets to use it. After all it is a worse case scenario assuming you take all inflation adjustments on income and don’t do naturally conservative things like pare back spending during major market downturns or restrict big ticket discretionary items in the face of high inflation.
I think everyone naturally adjusts the “rule” for their own comfort whether that’s by excluding capital “emergency reserves” from the base or aiming at 3.5% or 3% etc. Of course there may be more bullish types punching for 5% or more – their life, their risk appetite.
But it remains highly useful to all of us who do not have retirement laid on a golden platter for us to contextualise the capital to revenue problem.
No, I am only drawing .75% from my investments. I have been retired for 10 years.
I have a lot of flexibility, if I need to spend more. There’s nothing like not having to worry about money.
I’m not retired yet, but I use the 4% rule-of-thumb for planning; I would never blindly follow it as a method to determine how much to withdraw every year. My plan is to use a more flexible approach, such as Variable Percentage Withdrawal (VPW) or Total Portfolio Allocation and Withdrawal (TPAW).
If I were to retire today, my savings, combined with a small pension and SS, will allow me to live very comfortably on a 3% withdrawal rate. VPW and TPAW both suggest that even if my portfolio were cut in half, I would have enough to meet my needs. It seems that whatever approach one uses, incorporating flexibility to respond to market fluctuations increases likelihood of success.
I’ve been tracking my spending for over 10 years, so I have a very good idea of what my spending ‘floor’ is. Knowing I can spend more gives me confidence to splurge on the things that are important to me: travel and time with family and friends.
I like to think of the 4% thing as a test of my spending plan for the next year. As I have said many times in these discussions, retirement financial planning is all about cash flow. What do I want to do in the next year? Whether it is a bath remodel, a trip around the world, paying for a grandson’s medical school tuition, or anything else, it all takes cash. So the first step is to create a spending plan. It has to include the mundane, the exciting and the potentially unexpected.
The second step is to do a cash flow plan. Where will the cash come from to fund my spending? It could come from existing cash like a savings account, SS or a pension, dividends in my taxable account, RMDs, capital gains from the sale of taxable assets, credit card rewards, gifts from other people etc.
The third step is to forecast the income tax consequences of my cash flow plan. Depending on what the cash flow plan shows, I might need to make adjustments to the spending plan to cover these tax payments, and this might ripple through the cash flow plan needing several iterations so that we can keep the tax collectors happy while I am meeting my goals and paying the minimum amount of tax.
The last step is to look at how the total planned spending including all taxes compares to 4% of the current year expected year end financial assets, plus SS and any pension/annuity payments. If my spending will be significantly less than the 4%+ number, then I need to ask myself if there is anything else I would like to do/buy/gift. I am figuratively leaving money of the table which will increase my assets in the next year if I do not spend more.