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
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.
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.
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?
The 4% withdrawal rate is based on your investment portfolio’s value as of your retirement date. Under the rule, in subsequent years, you increase the dollar amount withdrawn with inflation: https://humbledollar.com/money-guide/four-percent-withdrawal-rate/ Home equity and other assets shouldn’t be included, unless you plan to, say, downsize and then add the freed-up dollars to your investment portfolio. Withdrawing your 4% over the course of the year isn’t an issue. In all likelihood, you’d have the money for the year ahead already in cash investments, so you could just pull out 1/12th of the target sum each month from that pool of cash.
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.
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.
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.
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.
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
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.
I’m all for 0%… using dividends and other non-principal $$$ only is my goal.
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.
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?
The 4% withdrawal rate is based on your investment portfolio’s value as of your retirement date. Under the rule, in subsequent years, you increase the dollar amount withdrawn with inflation:
https://humbledollar.com/money-guide/four-percent-withdrawal-rate/
Home equity and other assets shouldn’t be included, unless you plan to, say, downsize and then add the freed-up dollars to your investment portfolio. Withdrawing your 4% over the course of the year isn’t an issue. In all likelihood, you’d have the money for the year ahead already in cash investments, so you could just pull out 1/12th of the target sum each month from that pool of cash.
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.
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.
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.
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.