4.0% Annual Savings Withdrawal Rate?

[TimevsMoney]

I have heard many financial experts suggest we can safely withdraw up to 4.0% a year and likely be ok. My question is this: is that 4.0% based on the beginning balance of the portfolio? Or based on the adjusted balance each year? I am 58 and considering retiring in 2 years at 60. With a current 2.0 million portfolio mostly in a 401K pre tax plan that would be $80K a year. (Annual Retirement budget roughly 120K a year which includes 25K for health insurance). Any advise on that 4.0% from you veterans at this withdrawal business would be greatly appreciated.

 

[exnavynuke]

It's calculated based on 4% of the original balance adjusted for inflation each year. It also is based on spending down some of that principal but not running out of money after 30 years.

 

[nun]

You will withdraw 4% from your portfolio the first year. If you have $2M that will be $80k. Then the next year you adjust the withdrawal fro inflation.....so if inflation is 2% you withdraw 1.02*$80k = $81.6k. If you are invested in something like a 60/40 AA you have a 95% chance of having your money last for 30 years for any any combination of historical stock market yearly returns.

 

[Whisper66]

David - the 4% is a good rule of thumb. To get an easy but more accurate idea of what you can spend, go run FIRECalc: A different kind of retirement calculator and/or www.i-orp.com . Both are free web based programs used by many on this site. They will account for things like extra income (social security, pensions, inheritances) and large extra expenses (weddings, new home in retirement etc...), your actual asset allocation, your personal life expectancy if you wish to look at more details than the simple 4% rule suggests. Running these calculators each year provides a nice check for where you are financially.

 

[MrLoco]

Just remember......you will withdraw 4% but you will not be spending 4%.

Taxes will take a big chunk of withdrawals from any 401k or Trad. IRA's.

 

[tmm99]

And my understanding is that the study doesn't take SS into account, so theoretically you could withdraw more than 4% if you get SS.
Firecalc will give you more than 4% if you include SS.

Sent from my iPhone using Early Retirement Forum

 

[Blue Collar Guy]

Just remember......you will withdraw 4% but you will not be spending 4%.

Taxes will take a big chunk of withdrawals from any 401k or Trad. IRA's.

+1

 

[walkinwood]

Here's Bengen's paper that was one of the first that came up with the concept of Safe Withdrawl Rates & that's where the "4% rule" comes from. It isn't a difficult read, but its no thriller either
https://www.onefpa.org/journal/Docu...ng Withdrawal Rates Using Historical Data.pdf

Remember, this "4% rule" applies to:
- specific Asset Allocations ie. a stock (index) allocation of between 50% & 75% & the rest in a bond index.
- 30 year retirement duration
- does not include investment (mutual fund, advisor etc) fees
- does not include taxes.
- worked historically. There is no "fundamental truth" here that will apply to future returns.

Welcome to the forum. I learned a lot here - enough to ER myself. And I'm sure you will too. I had no idea what SWR meant.

 

[urn2bfree]

This curve from Wade Pfau's recent Forbes article on Retirement planning
https://www.forbes.com/sites/wadepfau/2017/04/25/what-is-the-appropriate-planning-age-for-retirees/
suggests that the drop off in SWR is pretty shallow after 30 years. In other words, whatever you think about whether 4% is true or not for a 30 year retirement, it seems whatever number you accept, it is not MUCH MUCH lower for longer retirements.

Historically.

 

[samclem]

And my understanding is that the study doesn't take SS into account, so theoretically you could withdraw more than 4% if you get SS.

?? Withdrawals from the portfolio have nothing to do with SS. If the portfolio will only safely support 4% withdrawals, then that's all a retiree can safely take out regardless of whether they are also drawing SS.
Obviously, if the retiree withdraws 4% and gets the equivalent of another (say) 3% from SS, then they can safely spend 7% (and spending includes taxes, investment costs/fees paid to advisors, etc).

 

[audreyh1]

And my understanding is that the study doesn't take SS into account, so theoretically you could withdraw more than 4% if you get SS.
Firecalc will give you more than 4% if you include SS.

Sent from my iPhone using Early Retirement Forum

Since any SS income is not coming from the portfolio, it does not increase the withdrawal rate.

 

[samclem]

My question is this: is that 4.0% based on the beginning balance of the portfolio? Or based on the adjusted balance each year?

David - the 4% is a good rule of thumb. To get an easy but more accurate idea of what you can spend, go run FIRECalc: A different kind of retirement calculator . . .

The "X% of starting balance and adjust each year for inflation" vs "take X% of whatever the year end balance is" are the two major methods
most folks here subscribe to. Play around with FIRECalc and you can try each method out (including a popular variant using the "95% Rule" by Bob Clyatt). Both approaches (and others--you can search here for the "VPW" method, too) have adherents, plusses, and minuses.

 

[tmm99]

Obviously, if the retiree withdraws 4% and gets the equivalent of another (say) 3% from SS, then they can safely spend 7% (and spending includes taxes, investment costs/fees paid to advisors, etc).

That's what I meant to say. Or rather, if you flip your thoughts around, since you can still meet your expense requirement by withdrawing less than 4% from your portfolio when SS starts, you could most likely withdraw more than 4% before SS starts and still make your money last for 30 years. How much more? I don't know, but more nonetheless. That's what I used Firecalc for and it tells me 6% although I am trying to be under 3.5% for now.


Sent from my iPhone using Early Retirement Forum

 

[Koolau]

I actually used the "4% rule" to see how much I needed to save. I set proposed retirement spending at 4% and then calculate how much needs to be saved to make it happen (or you can just multiply spending by 25). Once retired, I didn't pay much attention to the 4% rule anymore. I took what I needed unless it was significantly greater than 4% in any given year.

I haven't gone the "adjust for inflation" route. Again, I just take what I need. As I age, and my time horizon is no longer 30 years - probably NOW, heh, heh - I think that 4% can go up rather quickly - something like the RMD tables, but so far, I'm not doing that. IIRC I've taken as little as 2% and as much has 6% in any given year. YMMV

 

[Live And Learn]

View attachment 25904

This curve from Wade Pfau's recent Forbes article on Retirement planning
https://www.forbes.com/sites/wadepfau/2017/04/25/what-is-the-appropriate-planning-age-for-retirees/
suggests that the drop off in SWR is pretty shallow after 30 years. In other words, whatever you think about whether 4% is true or not for a 30 year retirement, it seems whatever number you accept, it is not MUCH MUCH lower for longer retirements.

Historically.

There have been updates to the study and a much lower WR is recommended

https://blogs-images.forbes.com/wadepfau/files/2015/06/trinity-study-column.jpg?width=960

 

[Nightcap]

Because I am a few years away from collecting SS benefits, I added a conservative net present value of Social Security benefits to my total assets. This smooths the annual withdrawal rate number.

Another option is the ORP Retirement Planner. This is a bit different, in that you run it every year to see how much you can safely withdraw. Full details are available on the site. https://www.i-orp.com

Personally, I look at it like I looked at my first mortgage. Just because the bank was willing to lend me $XXX didn't mean I would be comfortable actually borrowing $XXX.

 

[Nightcap]

There have been updates to the study and a much lower WR is recommended

https://blogs-images.forbes.com/wadepfau/files/2015/06/trinity-study-column.jpg?width=960

The "new" study suffers from two problems, IMHO. One is that it actually confirms the worth of the 4% rule of thumb. Check those numbers again, and notice that a 50/50 blend of S&P 500 and bonds has a 96% chance of seeing you through 35 years of retirement. The difference between a 100% chance and a 96% chance of success (success in this case meaning dropping dead before you empty your bank balance) is really not worth mentioning.

The second problem is that it is based on predicting that which is by nature unpredictable: the market. Yes, you can draw broad inferences, but the idea that you can give a 96% score is absurd, lending a false sense of precision where none is possible.

 

[braumeister]

the idea that you can give a 96% score is absurd, lending a false sense of precision where none is possible.

Very true. It's actually much closer to 95.327, plus or minus a whole bunch.

 

[Fedup]

Some of you are risk takers. When I see 100% success rate on multiple calculators,very typical me, I wasn't sure whether to believe the calculators or not. I even withhold some extra accounts, I only put my main IRA account, before I ran these calculators. Just in case I'm wrong, the calculators are wrong, who am I to blame when I have to eat cat foood in my old age. Nobody. With that said, I spend what I need. Not 4% withdrawal rate. It's a lot lower, I only calculated the percentage for kicks, to see what I actually spent this past year.

 

[samclem]

The second problem is that it is based on predicting that which is by nature unpredictable: the market. Yes, you can draw broad inferences, but the idea that you can give a 96% score is absurd, lending a false sense of precision where none is possible.

+1. The past is the best guide we've got, but ascribing a tight precision to how well the future will resemble the past is not warranted. Continued monitoring and flexibility is the best defense against a future that turns out different than the past.

We'll use a modest "% of year end value" withdrawal method and track our nest egg's real (inflation-adjusted) value over the years. We'll watch the trend of the balance, and if it threatens to dip below a "minimum needed to support baseline future spending" amount, we'll cut back. Once we get older (80yo?), we'll probably start using the RMD withdrawal rate to assure we don't leave a lot on the table when we check out, and might even consider a SPIA depending interest rates and on the needs of DD and grandkid(s).

 

[GravitySucks]

Very true. It's actually much closer to 95.327, plus or minus a whole bunch.

And it's 95.327 of the previous years that succeeded.
In reality the individual is taking this journey Pass / Fail.
Who among us would be so bullheaded as to stick to a straight 4% withdrawal while watching the meter move to $0?

I used 4.5% to see if I was ready while in accumulation, and as a bumper setting up my first six years worth of access to the portfolio. I'm not foolish enough to think I'm going to use that rate forever. Most years will be skittle less, some years a little more.

 

[jebmke]

I actually used the "4% rule" to see how much I needed to save. I set proposed retirement spending at 4% and then calculate how much needs to be saved to make it happen (or you can just multiply spending by 25). Once retired, I didn't pay much attention to the 4% rule anymore. I took what I needed unless it was significantly greater than 4% in any given year.

I haven't gone the "adjust for inflation" route. Again, I just take what I need.

Same here. I know a lot of retirees. I don't know anyone who uses a mathematical withdrawal method. None.

 

[GalaxyBoy]

Just remember......you will withdraw 4% but you will not be spending 4%.

Taxes will take a big chunk of withdrawals from any 401k or Trad. IRA's.

I always thought taxes qualified as part of "spending."

 

[TimevsMoney]

thank you all for the very helpful feedback, links and extra homework to read and study. Fascinating stuff!

 

[audreyh1]

Same here. I know a lot of retirees. I don't know anyone who uses a mathematical withdrawal method. None.

There are a few here who do.