Do you really stick to the 4%?

[windsurf]

The efficacy of 4% implies that everyone of a certain remaining actuarial number of years has a similar (performing) asset allocation. Where do I find the formula for the appropriate asset allocation at a given year on the continuum to maintain 4%?

 

[lazygood4nothinbum]

I thought the 4% was supposed to be based on the total net worth the first year you were retired, then that amount is adjusted up for inflation each year. Are y'all just taking 4% of whatever your net worth is at some point each year?

i was never clear if it was net worth or portfolio minus personal home as i've seen it argued both ways. regardless, from the little roller coaster ride (mostly down) i've experienced during the last two years, i'll be looking at 4% at least annually, adjusting on the way down as best i can and likely leaving it be on the way up. this is easier to do as a single person, not responsible for others. while i neither require nor get my kicks from excessive purchasing (my little convertible and some road trips make up my one big thrill these days), if i wind up with a large surplus later, i'll figure out how to spend it or life will become expensive enough to spend it for me. also, i'd rather "rough it" while i'm relatively younger to better assure more comforts in older age.

also, i'm flexible on what i include in that 4%. for now i consider my house because i'm planning to either downsize or sell-out and vagabond. if i downsize i would take the new-to-me lower cost home out of my 4% projection (and likely even get a place suitable for renting out a room or two). i'd rather not consider my pension nor social security as part of my 4% but temporarily i do because i'm stuck in south florida's market and it makes me feel better about spending more than i would if i could move to a less expensive location.

so at best that 4% swr, for me, is sort of like god is for others. you can't really prove its existance or importance. it can mean different things to different people. you can apply it in many ways and use it to suit your purposes. you can apply some presumptions to it and as such let it guide you to eternal retirement.

 

[Moemg]

I thought the 4% was supposed to be based on the total net worth the first year you were retired, then that amount is adjusted up for inflation each year.

So far I'm doing a straight 4% of my portfolio value so if the market drops so does my spending .I never thought of including the value of my house is anybody besides Lazy doing that ?

 

[kcowan]

We roll with the punches. Because we are value investors, we sometimes have a big capital gains bill, then for the next couple of years we pay nothing. Since downsizing we don't buy much stuff, and since retiring our clothes, car and meals budget are down substantially.

Our only concern is is we lose our health and have not budgetted for anything there, We have run as high as 5% and down as low as 3%.

To compensate for the next tough 10 years in the markets, we are going to spend half a year in Mexico starting next month. This will reduce our cash requirement by 30% and give us a 15% budget buffer. We have rented our northern place and that should improve the buffer. Since early last year we have reduced our equity position from 70% to 30% through profit-taking. This has increased our tax burden but saved us from serious loses.

During all these changes, we no longer have a baseline. So it will take a couple of years to establsh one. But most of the changes are in the direction of improvements. With any luck, we will be able to incorporate 2 extensive trips each year.

 

[haha]

So far I'm doing a straight 4% of my portfolio value so if the market drops so does my spending .I never thought of including the value of my house is anybody besides Lazy doing that ?

I hope not.

Ha

 

[Moemg]

I hope not.

Ha

Darn ,that would have given me one heck of a 4% allotment not sure what I'd do with all that extra money but I'd like to try !

 

[Gotadimple]

Darn ,that would have given me one heck of a 4% allotment not sure what I'd do with all that extra money but I'd like to try !

It's magic money! Can be used for anything you can dream up!

-- Rita

 

[albundyz]

i exceed 4%

In general, I think the 4% rule is a good one. However, every time I see the explanation for this percentage, I see assumptions by the authors that don’t apply to me.. For example, I really think that people who are 45 years old, do have (and should have) a signficantly different financial strategy from those who are 55 or 65 or 75. Simply put, in my opinion, the 4% rule does not apply to my situation.

This website is for people who retire early. Because of that, I would assume that most of the people are younger than 65. In my situation, my wife and I will not collect SS for 5 years or so. As a result, our withdrawal rates (right now) are significantly higher than 4%. However, 5 years from now we will have additional SS income and my wife will start to collect a monthly retirement check from her former company. When this happens, our withdrawal rate will drop to be slightly less than 4%. As a result, I can tolerate a withdrawal rate at 8.5% for the time being.

A withdrawal rate of 8.5% ? Perish the thought! This man is possessed by the devil!

Hey, it’s just that our situation is different from the norm. And I think many people in this forum may have reasons for not using the 4% withdrawal rate. FWIW, I've only been retired for one year, so my opinion should be valued less than others. Nevertheless, after one year I'm still comfortable with my calculations and we're staying within our planned budget.

 

[Moemg]

This website is for people who retire early. Because of that, I would assume that most of the people are younger than 65. In my situation, my wife and I will not collect SS for 5 years or so. As a result, our withdrawal rates (right now) are significantly higher than 4%. However, 5 years from now we will have additional SS income and my wife will start to collect a monthly retirement check from her former company. When this happens, our withdrawal rate will drop to be slightly less than 4%. As a result, I can tolerate a withdrawal rate at 8.5% for the time being.

.

I hope everything goes according to plan because if one of you die you are left with a diminished portfolio and half the amount in SS & pension .

 

[REWahoo]

Moemg, the withdrawal plan albundyz describes is similar to what I suspect many of us who retired a few years before collecting SS are using. The numbers vary by individual circumstance of course (I'm at a 6.5% prior to collecting SS), but FIRECalc tells us we can withdraw more up front since SS and pensions will reduce portfolio withdrawals to much smaller numbers once they kick in.

I hope everything goes according to plan because if one of you die you are left with a diminished portfolio and half the amount in SS & pension .

The portfolio will be the same amount whether one of them dies or not.

Yes, SS will be reduced and perhaps the survivor's pension as well. However, expenses will also be reduced. I have two examples in my family (my sister and my SIL) where the surviving spouse has more disposable income than they did when their husbands were still living.

 

[lazygood4nothinbum]

I hope not.

by that then i guess you've already set aside from your 4% generating pile an amount equal to what you plan to use to purchase your downtown seattle condo?

and by extension, if i am going to sell my house relatively soon, shouldn't i be able to consider that cash part of my 4% generating stash now?

although, as the market seems to say, a house certainly seems worthless today, but then, that just means it wouldn't cost anything to buy back in anyway.

if i decide to vagabond--which i am very strongly considering--should i keep aside enough to buy back in without utilizing 4% of that setaside over the next 15 years to life while i rent around the world? perhaps i could find someone else who might like to make use of it instead.

 

[Gotadimple]

and by extension, if i am going to sell my house relatively soon, shouldn't i be able to consider that cash part of my 4% generating stash now?

LG4NB,
I suppose you could if you are reasonably sure of the net amount you'll receive. However, if the sale isn't in the near-term, that means the investment in your home isn't liquid. I would think, that in that case, you'd want to exclude the equity value when determining your annual drawdown (4% or otherwise).

-- Rita

 

[Moemg]

Moemg, the withdrawal plan albundyz describes is similar to what I suspect many of us who retired a few years before collecting SS are using. The numbers vary by individual circumstance of course (I'm at a 6.5% prior to collecting SS), but FIRECalc tells us we can withdraw more up front since SS and pensions will reduce portfolio withdrawals to much smaller numbers once they kick in.

So I'm living on 4% while I could be at a higher percentage ? I'm returning to firecalc.

 

[cute fuzzy bunny]

Yep. Every time we have the 'social security' discussion, a lot of people say they're not going to incorporate SS or make a decision on when to take it until they're 62.

I always say that if you're over 50 and can pretty much count on receiving a major portion of your social security benefit, that by putting it into firecalc you may realize that you can retire earlier, with less money and/or spend more while you're in your 40's and 50's. In fact, I've said that 11 times, starting in 2004!

The introduction of ANY reliable income stream into a portfolio at ANY time during its run affects the spending THROUGHOUT the run. A lot of firecalc 'failures' happen in the middle or towards the end. Injecting money into that scenario at mid stream that allows the retiree to slow or halt portfolio withdrawals sort of solves those failures.

Of course, if you're 47 like I am, its a good idea to pretend its not there, at least for now. If things are the same when I'm 55 as they are now, I'd incorporate it and consider upping my spending.

 

[lazygood4nothinbum]

I suppose you could if you are reasonably sure of the net amount you'll receive. However, if the sale isn't in the near-term, that means the investment in your home isn't liquid. I would think, that in that case, you'd want to exclude the equity value when determining your annual drawdown (4% or otherwise).

thanx for the reminder but i think by now i understand illiquidity. happens i quit work right when i got super depressed which was right when i got inheritance and right when i thought i'd be selling out but happened that right then the market crashed. the tsunami of e.r.

at this point i'm not reasonably sure of anything. but since i'm stuck here in expensive hurricaneville without a job it makes me feel better to consider all assets including house, pension & social security values so that i can see i'm really only currently spending down about 3% of all my assets, instead of thinking, oh crap! the sky really is falling. once the sky has settled and the horizon is flat, i'll again remove housing (if i even own one by then) ss & pension from my fifth grade dropout ciphering of a swr.

attitudes are more important than facts, ya know. so stop trying to confuse me. it's not as if others haven't already tried.

 

[OAG]

I understand the 4% thing (4% day one increased by the inflation rate in the current year added to the 4% for the next year). So routine inflation (more or less 3% a year) would it not take you to a 8% rate about 24 years down the line? (3% X 24 = 72 which using the rule of 72 be a 100% increase over the starting %). I know it is just a yardstick but if one really kept to the 4% + Inflation rule).

 

[Canadian Grunt]

I thought the 4% was supposed to be based on the total net worth the first year you were retired, then that amount is adjusted up for inflation each year. Are y'all just taking 4% of whatever your net worth is at some point each year? I know that's one choice, as is the 95% of 4% option. But I guess I was assuming most people used option one, if they were doing a "4%" strategy.

I started at 3.5% of my NW my first year, and I'm adjusting up for inflation at 3% per year. In about 10 years (at age 62) we'll start our SS draw, assuming it's still available. Then when we reach 70.5 I'll repay the total and do the John Greaney SS annuity plan.

In 5 years or so I will readdress our situation, and may increase the draw to 4% if we're doing well. But even if we can't we should be fine with the original plan.

Just a thought Harley,


If you are worried about SS still being viable why would you repay your withdrawals and up the SS component of your ER? Won't this increase your exposure to SS cut backs should there be any or are you worried about means testing for SS? I think Greaney's plan is viable as long as the SS rules don't change. But you seem worried they will.

Grunt

 

[Gotadimple]

so stop trying to confuse me. it's not as if others haven't already tried.

OK, if you insist. BTW, what's the name of this group of folks who have tried (and failed) to confuse you? Maybe I'm qualified to join

Best wishes,
Rita

 

[harley]

Just a thought Harley,


If you are worried about SS still being viable why would you repay your withdrawals and up the SS component of your ER? Won't this increase your exposure to SS cut backs should there be any or are you worried about means testing for SS? I think Greaney's plan is viable as long as the SS rules don't change. But you seem worried they will.

Grunt

Not worried, just aware. I'm certainly concerned about means testing, and I just don't see how SS rules can remain the same as they are now. And I'm only 52 now, so that leaves a lot of time for things to change.

But as I said, I'm not worried. I've always made my retirement plans based on the assumption that SS won't be there at all, even though I know it will in some fashion. Just being ultra-conservative on something that's not under my personal control. So for now I'm planning based on the rules being what they are now. If they change, I'll adjust. Just like I have to do with taxes. The only reason I'm planning to do the Greaney method is to maximize my draw from the gov't. I'll have it if I die early, and if I live a long time I'll get a do-over.

Also, going back to my previous post, I apologize for misleading. When I said net worth, I meant minus my primary residence's worth. In my head I disregard the value of my home when doing my calculations.

 

[rs0460a]

1. I currently don't exceed it, but I will from age 62-70 while I delay SS and reduce my Traditional/Rollover IRA's in order to reduce my projected RMD's. My withdrawl rate at age 69 is currently at 8.6%, but then drops to 3.1% at age 70 (SS kicks in). It is not forecast to exceed the "magic 4%" till age 90 (guess I'll just have to cut back then ...)

2. Income tax is not required to be paid on a quarterly basis with Traditional/Rollover IRA withdrawls. You can compute your taxes in late November/early December and pay them at that time (let your tax $$ continue to earn interest during January-November ). Since it's not considered "earned income", quarterly taxes need not be made. However, be sure you get it in before Dec 31, or you will invoke a nice bill from the IRS! BTW, I have my taxes paid directly from my Vanguard/Fidelity accounts (depending on that year's withdrawl scheme). No need to send any checks! Fidelity/Vanguard handles it as a direct ETF payment to the governement.

3. As far as "long term expenses", I have them budgeted (using the previous 15+ year actual expenses from Quicken). These go into my projected monthly/annual budget. I then withdraw from (either) my Vanguard/ Fidelity MM accounts (which is funded with several years of forecast income to avoid problems as we are having today with the market).

Anyway, that's how I do it (in my situation).

- Ron

 

[Lsbcal]

I've run a lot of FIRECalc simulations that say we are probably OK (in the past from 1925 to now anyway). Withdrawal rates:

2004 7.3%
2005 4.2%
2006 5.1%
2007 6.3%
2008 5.3% (estimate)

current portfolio (inflation adjusted) value above starting value: +4%

Includes our kid's college expenses which will go to zero in 4yrs. Also will take SS in 6 yrs.

A few years ago a Vanguard planner said his retirement simulation showed our plan looked OK. Will be repeating this with Vanguard soon.

 

[lazygood4nothinbum]

OK, if you insist. BTW, what's the name of this group of folks who have tried (and failed) to confuse you? Maybe I'm qualified to join

no doubt some self-appointed illuminati. lucky for you, i don't believe they are currently recruiting.

 

[Gotadimple]

no doubt some self-appointed illuminati. lucky for you, i don't believe they are currently recruiting.

-- Rita

 

[haha]

by that then i guess you've already set aside from your 4% generating pile an amount equal to what you plan to use to purchase your downtown seattle condo?

I have RE to sell, my share of which should make a large dp. The monthly payment should then be similar to my rent, or just a little higher.

If it is meaningfully more expensive than this, I won't do it anyway.

Ha