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There are alternatives to the 4% rule that are not complicated. Here are three ways to calculate your first-year spending rate. All the calculations show the percentage of your investment assets so you can compare them against each other and the 4% rule.
The first one is from the Society of Actuaries:
Retirement age / 20 / 100
At 65 the calculation would be 65 / 20 / 100 = 3.25% and if you retire at 75, 3.75%. Notice this is more conservative than the 4% rule, and not adjusted annually, so it is simpler to calculate. When you reach the age for Required Minimum Distributions the SOA value does not change, but the RMD amount will still be your withdrawal. The calculation is how much you can “spend” from all investments, not how much you must “withdraw” from your tax deferred investments.
Next is from the American Association of Individual Investors. They are a not for profit in Chicago that educates people on investments:
Age / (20(-((Age-60)/5)))/100
At 65 you would have 65 / (20(-((65-60) / 5))) / 100 = 3.56% and if you retire at 75 would be 4.11%.
The AAII formula does expand more if you retire older, which appeals to people worried about sequence of return risk. At the same time, it punishes you for retiring early.
The SOA also advocates using the IRS formula for Required Minimum Distributions, regardless of age. This IRS table assumes a life expectancy of 120 and that you will still have some of your retirement assets if you reach that age.
Using the table from the IRS at age 65 your life expectancy is 22.9 years. Divide 1 by the life expectancy years to find the percentage. So, this table does not have age 65, but if you retire at 75, 1 / 24.6 * 100 = 4.1%.
Again, remember we are not trying to calculate your RMD from tax deferred accounts. Instead, calculate the amount you can “spend” to ensure you do not run out of money.
Does anyone use any of these alternatives?
Is is possible that you have an incorrect IRS Table chosen. I believe you have the table for beneficiaries… You need the Uniform Table on page 65 of IRS Pub 590 B. It would need to be adjusted for those who retire before age 72……At 65 the divisor would be around 35 giving a distribution of around 2.9%.
You are correct, that is not the correct table. I will try to get this corrected. Thanks.
It has been corrected.
The beauty of the traditional SWR rate is you set it once per your pot at retirement and know that you should be able to draw up to that amount plus inflation each year and never run out.
Obviously you can be conservative in setting a percentage below 4%.
But surely any “rule” is only there to enable you to
I) Model for the future by giving you a notional income figure to compare against expected expenses
II) Help in the first few years of retirement to give reassurance that you aren’t over drawing even if portfolio falls
So the final choice of rule is probably not significant provided you haven’t chosen it to be as aggressive as possible.
FIcalc allows you to model with a wide range of rules. Unfortunately you have to give it a life expectancy but it seems pretty good to me. Allowing you to see how many years you might have drawing above a minimum which you also set.