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Alternative to the 4% rule
Old 06-29-2018, 07:30 AM   #1
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Alternative to the 4% rule

Seems logical, for those of us nearing 65. Takes into account the market ups and downs. Thoughts?

https://www.fool.com/investing/2018/...-from-you.aspx
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Old 06-29-2018, 07:41 AM   #2
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This is the withdrawal strategy recommended in the article

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However, the Center for Retirement Research recommends retirees of all ages use RMD tables to determine the percentage of their retirement account balance to withdraw each year
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Old 06-29-2018, 07:42 AM   #3
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Uh, what about us ER people. How much can I spend at age 45?
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Old 06-29-2018, 07:49 AM   #4
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Basically VPW, which is what I use. https://www.bogleheads.org/wiki/Vari...age_withdrawal

I like the simplicity over figuring out what inflation rate to add to 4% every year. I also like how it makes gentle reactions to the ups and downs of the market.
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Old 06-29-2018, 08:30 AM   #5
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I'm not a fan of RMD based rules, especially for ER. As mentioned in the article, too little spend in the go-go years and too much in the no-go years.

Note that VPW (which includes life expectancy) is quite a bit higher than a straight RMD and is more fitting (IMO) for ER.

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Uh, what about us ER people. How much can I spend at age 45?
2.58%. IRS provides an RMD table for all ages for use with inherited IRAs. It is Appendix B in https://www.irs.gov/publications/p590b. For 45 years old the life expectancy is 38.8 years.
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Old 06-29-2018, 08:37 AM   #6
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Originally Posted by RunningBum View Post
Basically VPW, which is what I use. https://www.bogleheads.org/wiki/Vari...age_withdrawal

I like the simplicity over figuring out what inflation rate to add to 4% every year. I also like how it makes gentle reactions to the ups and downs of the market.
Well, there you go. And I'm right back to 4%!
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Old 06-29-2018, 08:37 AM   #7
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We use a %remaining portfolio method, with still a fixed percent. But I will review the withdrawal % once DH reaches 70, and probably start increasing it. I’ve considered using the RMD tables yet holding at the 7% rate reached once at age 87.

My current withdrawal rate is too low, but I can’t motivate myself to increase it yet, probably because we are underspending our income.

When I reach 65, I need to take a hard look at this.
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Old 06-29-2018, 08:49 AM   #8
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I'd be really careful about using any RMD tables. The concept makes sense to me, but the RMD tables have the purpose of making you drain your tax deferred accounts so that the US Govt gets its tax revenue. This doesn't necessarily match making sure you have enough to pay for your expenses the rest of your life. I haven't compared them closely to see how well they apply.

And you can think you'll spend more while you're more active and traveling a lot, but go read the threads about managed care costs. If you don't care what kind of assisted living facility you'll live in if you're unable to take care of yourself, spend more now. If you do care, you might not want to front load your spending so much. My modification to the VPW tables at Bogleheads is more conservative, though I'm still spending as much as I care to. I started with 3%, increase it by .05% until I'm about 70, then increase by .10%, then .15% in my early 80s, and so on. I didn't take it out to when it would totally drain. I guess I feel like it's bad karma to predict my death. I'll just say it's over 100. I won't say by how much because some will scoff at it. I don't mind if I leave some behind. It's not set in stone, I can always adjust later.
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Old 06-29-2018, 08:53 AM   #9
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I put together a little spreadsheet at the start of the year (first year of ER so we'll see how it works out). It has columns for 3.5%, 4.0%, FIRECalc, McClung, VPW, 95% rule, and RMD. From these I picked a target for this year, which ended up being a conservative 4.00%. The SWR spread on the calculated ones was:

FIRECalc 4.35% (includes SS)
McClung 4.12% (includes valuation)
VPW 4.60%
RMD 3.38% (age 55)
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Old 06-29-2018, 09:17 AM   #10
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Originally Posted by USGrant1962 View Post
I put together a little spreadsheet at the start of the year (first year of ER so we'll see how it works out). It has columns for 3.5%, 4.0%, FIRECalc, McClung, VPW, 95% rule, and RMD. From these I picked a target for this year, which ended up being a conservative 4.00%. The SWR spread on the calculated ones was:

FIRECalc 4.35% (includes SS)
McClung 4.12% (includes valuation)
VPW 4.60%
RMD 3.38% (age 55)
Curious what your number was for the 95% rule, which we are considering strongly starting next year but with 3% vs. 4%.
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Old 06-29-2018, 09:19 AM   #11
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Curious what your number was for the 95% rule, which we are considering strongly starting next year but with 3% vs. 4%.
I just plugged in 4% for the 95% rule. I plan to track it from there using the rule.
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Old 06-29-2018, 09:21 AM   #12
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Originally Posted by USGrant1962 View Post
I put together a little spreadsheet at the start of the year (first year of ER so we'll see how it works out). It has columns for 3.5%, 4.0%, FIRECalc, McClung, VPW, 95% rule, and RMD. From these I picked a target for this year, which ended up being a conservative 4.00%. The SWR spread on the calculated ones was:

FIRECalc 4.35% (includes SS)
McClung 4.12% (includes valuation)
VPW 4.60%
RMD 3.38% (age 55)
Thatís a good idea!
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Old 06-29-2018, 09:29 AM   #13
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I just plugged in 4% for the 95% rule. I plan to track it from there using the rule.
Thanks. What are your conceptual thoughts on VPW vs. the 95% rule?
Even though the VPW gives a higher WR in % terms, I don't feel comfortable on the downside aspects of it in a 2008 scenario and feel I can live moreso with the max of 5% cuts even in multiple years.
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Old 06-29-2018, 09:51 AM   #14
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Originally Posted by Dtail View Post
Thanks. What are your conceptual thoughts on VPW vs. the 95% rule?
Even though the VPW gives a higher WR in % terms, I don't feel comfortable on the downside aspects of it in a 2008 scenario and feel I can live moreso with the max of 5% cuts even in multiple years.
I have not spent a ton of time with VPW, but generally agree with your view. I have a number of conservative assumptions already (neglect inheritance, neglect occasional consulting income, neglect DWs hobby job, 75% of SS) so a 2008 drop would suck, but shouldn't derail anything for me.

Also, all of these models except FIRECalc actually neglect SS so any of the results can be considered to be conservative. My current 4% becomes <3% when SS reinforcements arrive.
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Old 06-29-2018, 10:06 AM   #15
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I have not spent a ton of time with VPW, but generally agree with your view. I have a number of conservative assumptions already (neglect inheritance, neglect occasional consulting income, neglect DWs hobby job, 75% of SS) so a 2008 drop would suck, but shouldn't derail anything for me.

Also, all of these models except FIRECalc actually neglect SS so any of the results can be considered to be conservative. My current 4% becomes <3% when SS reinforcements arrive.
Thanks again.
My conservative version is to start at 3%, so conceptually a net 25% hit would just effectively put me at 4% while actual cuts would be below 3k at least the first year.
Just don't wish to cut back drastically on T&E in the years when I can really enjoy it.
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Old 06-29-2018, 10:37 AM   #16
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Thoughts?
Aaah, The Motley Fool. I had almost forgotten about them. Really enjoyed them in their early years, and I owe a fair amount to what I learned back when they were a fledgling site. More recently, I was very happy when I finally convinced them to cut me off their mailing list. Relationships change, and the gal I originally fell for changed, over the years, into a purveyor of hard-sells, laced with optimism, some bordering on fantasy. A few didn't sound too different from the "You too can make $8,000 a month on your laptop, working from home for just an hour a day!" claims seen in comments sections everywhere.

Oh, but I digress. I wonder what 117 year-old Nabi Tajima of Japan would make of the RMD of 15.87% at age 100? You see, I am planning on becoming the next world's oldest person, so a 15.87% annual withdrawal doesn't sound too appealing
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Old 06-29-2018, 11:50 AM   #17
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Thanks. What are your conceptual thoughts on VPW vs. the 95% rule?
Even though the VPW gives a higher WR in % terms, I don't feel comfortable on the downside aspects of it in a 2008 scenario and feel I can live moreso with the max of 5% cuts even in multiple years.
I could see going with a max 5% cut. I only use VPW as a target. If I have extraordinary expenses one year and am over budget, that's ok, as long as I've had some similarly under budget years before or after. And I do track actual total spending for the year vs. VPW target. In the case of following a down year, I might be over budget not due to major expenses, but rather an abnormally low starting balance. As long as my spending was previously under budget, or I can get it under budget after a recovery, I'll be fine. I kind of look at it as taking a loan from my portfolio. I can take a little more out of the portfolio for a year or two, but eventually I have to "pay it back" by going under budget later.

For those who actually withdraw their exact target amount and living on just that, a 95% strategy seems good, and will only get you in trouble if it's a prolonged downturn or really slow and small recovery. In that case, pure VPW would have served you better as it forced you to make bigger cuts more quickly. 4%/95% would probably force you to make some kind of adjustment for not cutting back enough too many years in a row. A straight 4%+inflation would be in more trouble because you've been increasing withdrawals, and might have to make a pretty drastic cuts (or find other ways to add to income) to make up for it, if you find you are in a rare failure scenario.
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Old 06-29-2018, 12:16 PM   #18
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I could see going with a max 5% cut. I only use VPW as a target. If I have extraordinary expenses one year and am over budget, that's ok, as long as I've had some similarly under budget years before or after. And I do track actual total spending for the year vs. VPW target. In the case of following a down year, I might be over budget not due to major expenses, but rather an abnormally low starting balance. As long as my spending was previously under budget, or I can get it under budget after a recovery, I'll be fine. I kind of look at it as taking a loan from my portfolio. I can take a little more out of the portfolio for a year or two, but eventually I have to "pay it back" by going under budget later.

For those who actually withdraw their exact target amount and living on just that, a 95% strategy seems good, and will only get you in trouble if it's a prolonged downturn or really slow and small recovery. In that case, pure VPW would have served you better as it forced you to make bigger cuts more quickly. 4%/95% would probably force you to make some kind of adjustment for not cutting back enough too many years in a row. A straight 4%+inflation would be in more trouble because you've been increasing withdrawals, and might have to make a pretty drastic cuts (or find other ways to add to income) to make up for it, if you find you are in a rare failure scenario.
My concept is to calculate the budget and develop the spending around that budget, since the 3% is already a good starting point for me. I am thinking that using 3%/95% vs. 4%/95% will allow me to absorb a longer downward sequence, plus provide some plan against sequence of returns and any ACA issues before 65 y.o.

As to the over/under issue, I am building my large expense cushion which will be partially funded with unused funds and other contributions, which will be kept separately. This is not a popular choice on this site, but I prefer to try to keep to a strict WR and fill in if necessary from that fund. Psychological I guess, so to "keep" to the 3%. Money is fungible, I know I know.
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Old 06-29-2018, 12:38 PM   #19
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I use VPW, SWR, Flexible Retirement Planner @ 95% and 100% and my spreadsheet that has all manner of whacky scenarios (SS cut, 40% drop in portfolio value @ retirement and whatever other doomsday scenario I can think of). They all spit out different numbers. But I do get a sense of best and worst case, which is nice because worst case is good enough. Just not lavish.

My plan right now is to pay myself the equivalent of what I should get from SS @ age 70 ($51k) and start that when I retire @ age 55. That's a 2.41% SWR. But the money only really needs to last until age 70, so that is ultra conservative.

So I have my COLA pension and COLA SS bridge to 70 ($95k in today's dollars). Then it's the COLA pension and real SS from 70+. That's my floor. This is what has freed me from paralysis by analysis. I have a floor.
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Old 06-29-2018, 12:53 PM   #20
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A lot of expenses, not all, go down as you get older. Vacations for one. Some go up, such as healthcare, but in general, I think expenses are way less for a 95 year old than a 55 year old.

That's why I think this is not a good plan. I like the 3.3% rule better.
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