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Should retirees use a 4% portfolio withdrawal rate?

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AUTHOR: Jonathan Clements on 4/04/2021
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Captain FI
1 year ago

Its a great starting point, but I think we should also consider our flex rate and the ability to earn additional income in retirement, so it should be more of a guide rather than doctrine

Kurt Yokum
1 year ago

I’ve never quite understood how the 4% (or any %) Rule can work in reality. We have expenses. And, the other reality is we are probably going to want to replace 100% of our income in retirement. Over the course of that retirement are going to be life event expenses like a new downsized home, a replacement car or two, Medicare (which could be a reduction in healthcare expense), 529 seed money for a grandchild, etc. And, there is going to be life event income like Social Security, a pension. These are the spikes that naturally occur which invalidates that nice, smooth line of projected spending. The only model that makes real sense is to create a spreadsheet that has for each year the income you have minus the expenses (based on past years). Those life event expenses are sprinkled in at projected times, too. That gap analysis will describe how investment withdrawals will have to happen each year. Yes, not everyone can or wants to do that kind of work, but I think Life shows us that this is closer to resembling how actuals will play out.

corrupt
2 years ago

I’m all for 0%… using dividends and other non-principal $$$ only is my goal.

John Wood
2 years ago

I think retirees (and all savers) should welcome higher interest rates, so that immediate annuities (with a refund feature) can again help solve the retirement income puzzle without requiring an undue amount of capital. Under more normal (non-Fed manipulated) interest rate conditions, this can create secured incomes for life, leave one’s remaining capital available to invest in a portfolio that will outpace inflation, and eliminate the need to answer the withdrawal percentage rate question.

Kingverse
2 years ago

Okay, I have a different related question. So whether its 4% or some other number, what is is it 4% of? For example do you include home equity or other assets, not just the investment accounts? Some would say your 60/40 basis should include other equity, treated as a real estate investment in terms of asset allocation. Also, I’m thinking the 4% or so should be taken out monthly versus annually so it can better be matched with on-going expenses. Thoughts?

Bob Drake
2 years ago

Everyone is different – income sources, spending forecast over time, investment risk tolerance and what actually happens over time. Need to stay flexible, if possible build in a safety factor and stay flexible and adjust over time. I am lucky enough to have a pension, but since not adjusted with inflation, it loses it’s purchasing power over time – so to keep the same inflation adjusted income over time withdrawals from savings would have to increase. I also prefer to discount SSA’s inflation index protection over time as I’m not sure that there won’t be adjustments to the formula down the road. I’m good with numbers and built a spreadsheet that I adjust each year to account for where I am at that time – particularly $ invested. Can play “what ifs” with inflation and investment return projections.
Probably more than most can do themselves, but a better rule of thumb fallback to the 4% rule is using the published RMD percentage. At least that will self adjust if you have a bad investment year. Once you fix the 4% and adjust for inflation a bad investment stretch in the early years could put you at jeopardy. Conversely if you have a good/lucky investment stretch in the early years, it will adjust upwards what you can withdraw.

Elizabeth Adams
2 years ago
Reply to  Bob Drake

Bob I’ve done the same. I also assumed a 35% drop in the market and made sure I could adjust my spending to match. I had additional fallback plans if things got more dire.

I retired 6 years ago at 51 so investment results have been much better than expected. My tax burden and spending have been much lower than I forecasted. I don’t have to be so careful with money now and am allowing myself to spend more on things that really enhance my life. So plan for the worst and adjust upward if you get good/lucky investment results. That was my plan and it is working well.

Rob Jennings
2 years ago

We prefer the simplicity of using the RMD approach even though we aren’t yet 72. The 4% “rule” is a generalized rule of thumb that can be a starting point for discussion but every household is different.

tshort
3 years ago

I like McClung’s method, described in his book, Living Off Your Money. His approach involves choosing an initial withdrawal rate based on a variety of factors, and then modifying it annually in response to your remaining portfolio value and what happened in the market during the previous 12 months.

Rob Thompson
3 years ago

I probably have no right to comment but here goes:

First, my parents raised me as a Boglehead before there was such a thing with a little seasoning from Louis Rukeyser and Bob Brinker.

I personally feel that the withdrawal rate planning should only come after the retirement budget is finalized.

And lastly, I’m a dividend growth investor and have built our portfolio trying to maintain a 70/30-60/40 allocation diversified across all sectors. We strive for 3% income which of course is now mostly supported by our dividend portfolio because of the issues with bond yields. Someone here famously wrote that you hold bonds not for return ON your money but return OF your money so I reluctantly try to follow my parent’s advice with the bond allocation.

Our dividend stocks are carefully chosen and have consistently raised their dividend every year commencing prior to Recession 2009. Many for 25 plus years. If they freeze or cut their dividend they go on probation while I consider the circumstances. This track record is pure hindsight and has little bearing on the future but it helps me sleep very well at night.

With this plan, we exceed our budget and have a 1% buffer (4%-3%…because I calculate it both ways). Any dividends not needed are selectively reinvested back into the portfolio or the enjoyment of the years we have left.

But ask me again in 5 years when I turn 70 and start Social Security…

tshort
3 years ago
Reply to  Rob Thompson

I’ve read some BH threads about dividend stocks, and how their annualized returns end up being less than non-dividend stocks that are otherwise similar.

That aside, I like the idea of passive income, as I have very little. Would love to know what your picks are!

Thomas
3 years ago

Answering this question gets super technical very quickly. I don’t have any strong opinions on what the “right” safe withdrawal rate should be. I think it depends on lots of personal factors such as your age and willingness to reduce spending during a downturn, as well as factors outside your control like the CAPE ratio, interest rates, and inflation.

I defer to the advice of experts since this is fundamentally a quantitative question. Here are a few of my favorite resources on determining safe withdrawal rates:

Dennis Hurley
8 months ago
Reply to  Thomas

Early Retirement Now (ERN) continues to refine his advice on Safe Withdrawal Rates (SWR). Excellent blog with ~1 per month article. Also has a free calculator for SWR. Excellent source.

Rick Connor
3 years ago
Reply to  Thomas

Thanks for the links. The web has a large amount of info on this topic.

R Quinn
3 years ago

If not, what? Recently I have read suggestions from 3% to 5% so why not 4%? The real trick is to start with assets sufficient to generate income greater than needed income using 4% It’s the percentage of what $ that really matters. Besides if funds are in a qualified plan except Roth, RMDs set the withdrawal for you at 72 and they start about 4% and increase. Nothing days one must spend all they withdraw.

Mike Zaccardi
3 years ago

No. I think a lot has changed since the Trinity Study was first published. With current yields on the aggregate bond index near 1.6% and lofty equity valuations, at some point, we are going to have to reduce the expected returns of a balanced portfolio.

9% historically is just not realistic. Maybe 4% going forward. With inflation expected to be near 2.5% over the next 5 years, that makes for lousy real returns for retirees.

Retirees must be flexible with their saving and spending plans so that their withdrawals strategy survives.

David Powell
3 years ago

4% is a very reasonable starting point but retirees should be prepared to adjust this based on real (after inflation) portfolio gains/losses over time.

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