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Does the 4% rule hold up?
Old 08-26-2010, 07:32 AM   #1
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Does the 4% rule hold up?

Interesting meditations on the "4% rule" from an economist at Vanguard:

Does the 4% rule hold up? | Vanguard Blog
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Old 08-26-2010, 07:44 AM   #2
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Answer: Yes, it does. (Or rather, it has so far.) Just don't try it with 100% CDs.
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Old 08-26-2010, 08:57 AM   #3
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4% is giving many salespeople ammunition... most here know it is "inefficient" (meaning there is money left at year 31), yet it is those inefficiencies we want, yet sales people prey on this.

That guy is selling something, just not sure what.
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Old 08-26-2010, 09:02 AM   #4
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This was one of the replies to the article:
Presumably, each portfolio would earn a rate of return. What if you were to immunize the risk with long-term bonds paying at least 4% a year. In this way, the principal remains in tack and the earnings provide the income. Perhaps having some stock investments will protect you from inflation risk, but at the cost of investment risk should the value of the portfolio decline, like in the past few weeks.

This poster stated exactly what my core plan is..at least for now. I'm 55 and have a million saved. $200,000 in tax deferred and $800,000 in taxable. I have 3 1/2 years to go before I am officially retired. At that time I estimate my liquid savings will be 1.3 to 1.4 million. Several years ago, I figured boosting my taxable portion might mean more to me in retirement than in the tax deferred vehicles...because I wasn't convinced my taxes would go down in retirement. I'll be debt free.
If one has accumulated enough to live off the interest and at least pay basic living expenses....and allowing for taxation..is there any reason to think the priniciple will not remain other than investment risk and inflation risk?
Does anyone know of a retirement calculator that runs a simulation if one wants to keep their principle in tact or ..invade it by only some percentage over 30 years.? I suppose a cash flow calculator is what I need to be looking at.
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Old 08-26-2010, 09:12 AM   #5
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Originally Posted by sheehs1 View Post
Does anyone know of a retirement calculator that runs a simulation if one wants to keep their principle in tact or ..invade it by only some percentage over 30 years.? I suppose a cash flow calculator is what I need to be looking at.
FIRECalc allows you to specify a minimum ending portfolio value in the "Investigate" tab.

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Old 08-26-2010, 09:17 AM   #6
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Does anyone know of a retirement calculator that runs a simulation if one wants to keep their principle in tact or ..invade it by only some percentage over 30 years.? I suppose a cash flow calculator is what I need to be looking at.
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Old 08-26-2010, 09:26 AM   #7
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Thanks Coach and Bikerdude.
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Old 08-26-2010, 09:52 AM   #8
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From the article,

Quote:
Bottom line, the 4% “rule of thumb” is just that—a rule of thumb. It’s based on an understandable, if not particularly complex set of assumptions about behavior and historical data on the markets. And as a baseline guide for setting individuals’ spending expectations at retirement, it’s in the ballpark, generating an initial spending recommendation that is arguably close to what comes out of a more complicated analysis.
That seems like a pretty fair conclusion to me. Assumptions are always a consideraton with models and can be problematic.

While 4% is a good rule for planning, and gives one a ballpark estimate when trying to determine that first year's withdrawal, I would imagine that many of us did not spend a full 4% in 2008-2009.

Some of us do not plan to ever spend a full 4% because we are not confident that the assumptions of this model will hold. But still, the 4% rule can be quite useful as a reference level even if we decide to withdraw less than that.
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Old 08-26-2010, 10:13 AM   #9
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Some of us do not plan to ever spend a full 4% because we are not confident that the assumptions of this model will hold. But still, the 4% rule can be quite useful as a reference level even if we decide to withdraw less than that.
I look at it as a useful "upper bound" for planning. In other words, if I need X per year in retirement income, I know I need at least 25X saved up. Alternatively, if I believe I'll have X saved up, I can run the numbers and see if the FIRE numbers still work if I assume no more than .04*X in income from my portfolio.

That's really all it is to me. I do think we have some recency bias in terms of not trusting the rule, but I tend to err on the side of being way conservative when it comes to financial assumptions and did even before the sky started falling 2-3 years ago.
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Old 08-26-2010, 11:34 AM   #10
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Have been running the ORP calculator bikerdude provide. Optimal Retirement Calculator and Retirement Decision Support System
Have had to jerry-rig a few things...such as the illiquid asset bucket.
Like the the fact that it tells you what you can spend each year.
Thanks again
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Old 08-26-2010, 12:05 PM   #11
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Originally Posted by W2R View Post
From the article,



That seems like a pretty fair conclusion to me. Assumptions are always a consideraton with models and can be problematic.

While 4% is a good rule for planning, and gives one a ballpark estimate when trying to determine that first year's withdrawal, I would imagine that many of us did not spend a full 4% in 2008-2009.

Some of us do not plan to ever spend a full 4% because we are not confident that the assumptions of this model will hold. But still, the 4% rule can be quite useful as a reference level even if we decide to withdraw less than that.
what she said

good post
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Old 08-26-2010, 12:19 PM   #12
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I would imagine that many of us did not spend a full 4% in 2008-2009.
No, I spent much, much more ...

The fallacy of the 4% rule is that infers that all income sources are available on day one of retirement.

For a lot of folks - especially those that are ER and retired many years before any pensions or SS are being taken, it's easy to spend much more than 4%.

As an example, I retired at age 59. I do not have a pension (e.g. defined benefit) but I "made" my own by taking a portion of my retirement portfolio and purchasing an SPIA.

Using FIDO's RIP program, which shows forecast withdrawal %, year by year till the end of your plan (in our case, a total plan of 41 years), it shows more than 4% from ages 59 to 70, when our final (and largest) income source comes; my SS.

At that time, our joint withdrawal rate drops to much less than 4% (just over 2%) and does not exceed the "magic 4%" till age 91. And that's with the increased portfolio withdrawls for 10 years - age 59 thru 69.

The reality is that we probably won't make it to the age of 91, and even if we do, we've planned on no reduction in expenses which we all know (except for medical expenses) is not reality as you age.

4% is a target for those that know little about retirement planning. It's a good target to begin planning, but not necessarily adhered to in reality for a lot of folks...
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Old 08-27-2010, 07:25 AM   #13
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Being an elastic waist, belt and suspenders type of gal, I use the 4% as what I would withdraw and assume it will eat the principal as well - i.e. that amount will last 25 years. As rescueme I have several phases to my retirement: the early phase in which I will be awaiting pension disbursement 1, the middle stage where one pension will be disbursing and the later stage where the second pension and SS (ha!) will be disbursing as well as possible required tax-deferred disbursements. What this means is the draw on my after-tax accounts will be greater in the early phase than in the middle and later stages. Theoretically, I would/could have a much higher withdrawal rate in the early phase and that would not affect me later on.

I'm still working now, albeit in a semi-retired fashion, but most of my earnings are going to an income producing investment which I hope will replace my earnings over time. Of course this is after I fully fund my tax-deferred accounts.
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