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4% plus inflation?
Old 05-01-2007, 09:50 AM   #1
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4% plus inflation?

I just finished reading the "adjusting withdrawls upward" thread and now Im confused about the very basics of the 4% rule.

Several people stated things like "4% plus inflation".

If I start with $1 Million and withdraw $40,000 th first year, what is my withdrawal the second year? Lets say the market went up and even after my $40,000 withdrawal is accounted for, my end of year balance is now $1,100,000

Is my 2nd year withdrawal?

1) Still $40,000
2) 4% of $1,100,000 or $44000
3) 4% plus inflation? If this is correct, how do we figure the exact amount
4) Some other number


I assume that option #2 is what people would call "adjusting upward" and is up to each person to decide if they want to adjust or not. My main question is this: how do you figure "4% plus inflation"?
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Re: 4% plus inflation?
Old 05-01-2007, 10:01 AM   #2
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Re: 4% plus inflation?

I would say it is number 3. As for the amount to add for inflation, I would suggest that you keep your own data and determine what your rate of inflation is and use that instead of some "official" number. The idea is to maintain your standard of living without running out of money.

I view the amount the rule say I can take as a maximum. That is, you could take up to that amount and still be within the probabilities established by your timeframe. But, there is no reason to spend money if you have no need to.

I have a long timeframe (I retired at 48) so I try to keep my withdrawls well below 4%.

Ray
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Re: 4% plus inflation?
Old 05-01-2007, 10:06 AM   #3
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Re: 4% plus inflation?

utrecht,

The answer to the basic 4% rule, is 3). The inflation number is usually the CPI reported by the goverment every month, year.

http://woodrow.mpls.frb.fed.us/Resea...c/hist1913.cfm
Last year CPI is 3.2%. So your new withdrawal amount would be $40,000 * 1.032 or $41,280.

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Re: 4% plus inflation?
Old 05-01-2007, 10:11 AM   #4
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Re: 4% plus inflation?

Quote:
Originally Posted by utrecht
I just finished reading the "adjusting withdrawls upward" thread and now Im confused about the very basics of the 4% rule.

Several people stated things like "4% plus inflation".

If I start with $1 Million and withdraw $40,000 th first year, what is my withdrawal the second year? Lets say the market went up and even after my $40,000 withdrawal is accounted for, my end of year balance is now $1,100,000

Is my 2nd year withdrawal?

1) Still $40,000
2) 4% of $1,100,000 or $44000
3) 4% plus inflation? If this is correct, how do we figure the exact amount
4) Some other number


I assume that option #2 is what people would call "adjusting upward" and is up to each person to decide if they want to adjust or not. My main question is this: how do you figure "4% plus inflation"?
3) is the answer, IMO.

How one calculates inflation REAL TIME, is a much bigger issue. My plan is to keep 3 years expenses in TIPs, which are indexed to inflation. I need to withdraw 1/3 of this value from the equity portion each year.
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Re: 4% plus inflation?
Old 05-01-2007, 12:04 PM   #5
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Re: 4% plus inflation?

Quote:
Originally Posted by utrecht
1) Still $40,000
2) 4% of $1,100,000 or $44000
3) 4% plus inflation? If this is correct, how do we figure the exact amount
4) Some other number
4. As much as you need, if its greater than #3 then you need to check your
spending habits because you spending is out pacing inflation.
TJ
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Re: 4% plus inflation?
Old 05-01-2007, 12:45 PM   #6
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Re: 4% plus inflation?

Quote:
Originally Posted by utrecht
I just finished reading the "adjusting withdrawls upward" thread and now Im confused about the very basics of the 4% rule.

Several people stated things like "4% plus inflation".

If I start with $1 Million and withdraw $40,000 th first year, what is my withdrawal the second year? Lets say the market went up and even after my $40,000 withdrawal is accounted for, my end of year balance is now $1,100,000

Is my 2nd year withdrawal?

1) Still $40,000
2) 4% of $1,100,000 or $44000
3) 4% plus inflation? If this is correct, how do we figure the exact amount
4) Some other number


I assume that option #2 is what people would call "adjusting upward" and is up to each person to decide if they want to adjust or not. My main question is this: how do you figure "4% plus inflation"?
Yes, #3 would be the standard model. #2 would be the pay out period reset model.

I would just point out that you should probably use the inflation number that corresponds to the inflation rate that you use in Firecalc. You are using Firecalc, aren't you?

Advanced Firecalc has three options for inflation: A fixed percentage, CPI, or PPI; CPI is the default. Basic Firecalc doesn't say exactly, but I bet it uses CPI.

In any case, the math is just as Sam describes it, just substitute in your chosen rate.

2Cor521
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Re: 4% plus inflation?
Old 05-01-2007, 02:18 PM   #7
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Re: 4% plus inflation?

Quote:
Originally Posted by teejayevans
4. As much as you need, if its greater than #3 then you need to check your
spending habits because you spending is out pacing inflation.
TJ
that really is the answer IMHO. Inflation has different effects on individuals. Take me - I've lived on essentially the same income for the last 10 years. I invest the rest of my income. Now, if I were retired I don't think I'd need to increase my withdrawal every year just to keep up with inflation! I'd probably only adjust as I felt the need. Of course, when I did adjust my withdrawals (probably every 7-10 years) , I'd make sure that I wasn't overspending relative to inflation.
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Re: 4% plus inflation?
Old 05-01-2007, 02:36 PM   #8
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Re: 4% plus inflation?

Quote:
Originally Posted by Alex
that really is the answer IMHO. Inflation has different effects on individuals. Take me - I've lived on essentially the same income for the last 10 years. I invest the rest of my income. Now, if I were retired I don't think I'd need to increase my withdrawal every year just to keep up with inflation! I'd probably only adjust as I felt the need. Of course, when I did adjust my withdrawals (probably every 7-10 years) , I'd make sure that I wasn't overspending relative to inflation.
*nods* our expenditures have pretty much stayed flat over the last 2 years (when we both had big raises and were able to loosen the belt a tad). The only line item where our spending has outpaced inflation (or gone up at all for that matter) has been gas.
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Re: 4% plus inflation?
Old 05-01-2007, 04:41 PM   #9
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Re: 4% plus inflation?

Well I have a very long time until I QUIT w$rking but heres my plan:

Withdraw no more than 3% a year (if I can make it on 3)

If inflation is 3% then adjust upward if it does not exceed 3%!
If the market drops a year then I can still only withdraw a max of 3%.

This seems like a good stategy to me because it will insure you never run out of money. I am trying to plan on a very long period of not working!
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Re: 4% plus inflation?
Old 05-01-2007, 05:00 PM   #10
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Re: 4% plus inflation?

Yes 3).

It does bring up the rationale for the 4% rule which is to provide a constant standard of living in retirement. Some may prefer to keep up with the Joneses. Since incomes usually rise 1% over inflation due to productivity, this would require something like no more than 3%. Not satisfied keeping up but want to grow richer in retirement? Try 2% and advance through society.
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Re: 4% plus inflation?
Old 05-02-2007, 04:31 AM   #11
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Re: 4% plus inflation?

I think the right answer is #2 or #3, and actually #4 isn't bad as long as you have a fallback plan.

#2 is adjusting upwards and while it definitely increases your risk of increasing or running out of money, it also decreases the risk that you will leave a fortune to your cat, or your worthless nephew, instead spending on yourself or your family, or worthy causes.

As a compromise if you do rerun FIREcalc to adjust for a good market, I would suggest maintaining your original planning horizon.
So if you retired at 50 and 40 year horizon for the wife, and 51 you now have 1.1 million. Assume you will still live 40 more years.
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Re: 4% plus inflation?
Old 05-02-2007, 01:21 PM   #12
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Re: 4% plus inflation?

Quote:
Originally Posted by utrecht
I just finished reading the "adjusting withdrawls upward" thread and now Im confused about the very basics of the 4% rule.

Several people stated things like "4% plus inflation".

If I start with $1 Million and withdraw $40,000 th first year, what is my withdrawal the second year? Lets say the market went up and even after my $40,000 withdrawal is accounted for, my end of year balance is now $1,100,000

Is my 2nd year withdrawal?

1) Still $40,000
2) 4% of $1,100,000 or $44000
3) 4% plus inflation? If this is correct, how do we figure the exact amount
4) Some other number


I assume that option #2 is what people would call "adjusting upward" and is up to each person to decide if they want to adjust or not. My main question is this: how do you figure "4% plus inflation"?
Because your post asked about the "basics of the 4% rule" the answer to your question is $40,000*(1+CPI change) so if the CPI change was 2.5% then the math would be:
$40,000*(1.025) = $41,000

Your Option #2, as you stated it is just a fixed percentage WD. The adjusting upward that has been discussed elsewhere on the board should be a rerun of FIRECalc with the new data a year later which would be a $1.1M portfolio and an adjusted lifespan. The 4% is just a rule of thumb which rarely matches exactly the results of FIRECalc.
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