FIRE on 4%

[hnzw_rui]

The whole withdrawal rate discussion frustrates me because it ignores annuities like SS and pensions; a higher WR would work if you had SS and/or pension (presuming you cut your WR when you start getting those annuities, which only seems logical). Or, if you added the present value of your annuities to your current assets, then WR would be apples-to-apples (but then small changes in the inflation assumption can change the result).

If you retire super early (like 30s and 40s), a small pension in your 60s doesn't actually make much of a difference in the SWR (less than 20 bp). You also have a shortened working timeframe so that could be a lot of years with $0 SS earnings.

That said, most retirement calculators don't take into account human flexibility. I doubt most reasonable folk would continue increasing their withdrawals by CPI when their portfolio is getting hammered. One caveat is you'll need plenty of give in the budget.

 

[T-Minus]

I will be retiring next year at age 56. I have set my starting withdrawal rate at 3.5% and created four complete budget plans:

1. Up market - increase spending by 4%
2. Normal market - follow budget (starting point)
3. Down market - spending cut by 10%
4. Crash - minimum required to "live" (covered by AA+ or better fixed income instruments)

My wife and I have reviewed and agreed on the aforementioned budgets and have created our own Variable Percentage Withdrawal scheme, designed to increase our chances of success. Since we have been saving so aggressively in my run-up to retirement, our current living expenses fall somewhere in between the "Down" and "Crash" scenarios above - we are planning a nice bump in retirement spendable income as a reward for 35+ years of hard work.

Also, keep in mind that the original Trinity Study and subsequent updates (where the 4% SWR bogie came from) all ignore Social Security and other pension income. Fortunately, we have both on-deck, with pensions scheduled to start at age 65, and SS planned to delay until age 70.

 

[Senator]

I will be retiring next year at age 56. I have set my starting withdrawal rate at 3.5% and created four complete budget plans:

1. Up market - increase spending by 4%
2. Normal market - follow budget
3. Down market - spending cut by 10%
4. Crash - minimum required to "live"

My wife and I have reviewed and agreed on the aforementioned budgets. Since I have been saving so aggressively in my run-up to retirement, our current living expenses fall somewhere between the "Down" and "Crash" categories above - we are planning a nice bump in retirement spendable income as a reward for 35+ years of hard work.

Also, keep in mind that the original Trinity Study and subsequent updates (where the 4% SWR bogie came from) all ignore Social Security and other pension income. Fortunately, we have both on-deck, with pensions scheduled to start at age 65, and SS planned to delay until age 70.

Are we in a crash? Or a down market?

 

[Chuckanut]

Have you looked at one of the formulaic variable withdrawal systems?

They adjust upward for good markets and downward for poor markets, but do it somewhat gradually so you don't have huge cutbacks in one poor year or overspend in one good year. The idea is to maximize spending while preventing the worst case scenario - running out of money to early. I am doing a dry run of one of them to see how it compares to reality. Time will tell.

They have been discussed here:

http://www.early-retirement.org/for...drawal-calculator-ive-seen-to-date-68770.html

 

[pb4uski]

The whole withdrawal rate discussion frustrates me because it ignores annuities like SS and pensions; a higher WR would work if you had SS and/or pension (presuming you cut your WR when you start getting those annuities, which only seems logical). Or, if you added the present value of your annuities to your current assets, then WR would be apples-to-apples (but then small changes in the inflation assumption can change the result).

See post #12

 

[haha]

I'd like to hear about it. How is it working out for you? Are you concerned about investment returns going forward?

Thanks,
AdrianC

These anecdotes about how something is working and what ones's concerns are have absolutely nothing to do with how you or anyone else will do going forward.

I guess these testimonials can make some people feel good, but there is much better information out there. Our lives are a movie that no one has seen before.

Ha

 

[FreeBear]

I'll also come out of the closet with a +4% SWR, at least for now.

2015 (year 1 in FIRE, missed ACA subsidy cut), 5%
2016 4.5% target
...
2020 3.5% target (start of first early SS)

We'll also trying to slow personal inflation by not automatically assuming a CPI increase. We also try to continually cost-reduce our budget.

Honestly, I'd feel more comfortable under 4% given our 40 year plan, but I couldn't stand the corporate rat race any longer. We're also OK with worse case zero estate or Medicaid at the very end. We value the present more than the distant future at this point in life. Firecalc and other simulators give us a 90+% ish success rate over 40 years if we also account for us dying before running out of money (don't need to have money if we're both gone).

I also like Bernstein's take, from the ER FAQ:

"A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless."

The Retirement Calculator from Hell, Part III

Who knows for sure... Got to get back to living life!

 

[audreyh1]

Also, keep in mind that the original Trinity Study and subsequent updates (where the 4% SWR bogie came from) all ignore Social Security and other pension income. Fortunately, we have both on-deck, with pensions scheduled to start at age 65, and SS planned to delay until age 70.

They don't actually ignore pension and SS income. What they do ignore is the early retiree (earlier than ~65) with delayed pension and SS income - one who needs to draw on investments first, and then later has other funds come online. But Firecalc models these screens for early retirees.

But in the Trinity assumptions, the retiree is taking SS and pension income at the same time they retire and start needing income from their investments. These studies/papers are simply more geared to the "standard" retiree where 30 years is probably a conservative period to use.

And they are clear that you subtract your SS and pension income from your total expenses, and that the remaining expenses is what needs to be funded by annual withdrawals.

 

[bbbamI]

These anecdotes about how something is working and what ones's concerns are have absolutely nothing to do with how you or anyone else will do going forward.

I guess these testimonials can make some people feel good, but there is much better information out there. Our lives are a movie that no one has seen before.

Ha

Life’s like a movie, write your own ending
Keep believing, keep pretending
We’ve done just what we set out to do.
Thanks to the lovers, the dreamers, and you.

- Jim Henson

 

[Dd852]

I'm currently a fraction above 3%, 2.5 if I count fickle rental income (I do short term vacation lets, so in good times it is very good and in bad times it dries up!). I'm 3-1/2 years in. The first year had a very nice market gain, last year and this year so far of course have been nasty... But my total "pot" is still above the inflation adjusted amount I started with, which frankly is the number I look at most carefully.

(I'm 56 this year and DW is 61. No kids)

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[T-Minus]

Are we in a crash? Or a down market?

Hi Senator,

If I had retired last year, I would consider this a down market. I consider crash to be >35% loss in retirement assets from the date of retirement. That said, the numbers and withdrawal rates I quoted were current as of this AM (just re-ran all spreadsheets and tools).

 

[T-Minus]

They don't actually ignore pension and SS income. What they do ignore is the early retiree (earlier than ~65) with delayed pension and SS income - one who needs to draw on investments first, and then later has other funds come online. But Firecalc models these screens for early retirees.

But in the Trinity assumptions, the retiree is taking SS and pension income at the same time they retire and start needing income from their investments. These studies/papers are simply more geared to the "standard" retiree where 30 years is probably a conservative period to use.

And they are clear that you subtract your SS and pension income from your total expenses, and that the remaining expenses is what needs to be funded by annual withdrawals.

I think we're kind of saying the same thing. But, if you're retiring early (pre-Social Security and pre-pension), your starting withdrawal rate will be somewhat distorted. Here's one analysis - The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”

The trinity study assumes a retiree will:

- never earn any more money through part-time work or self-employment projects
- never collect a single dollar from social security or any other pension plan
- never adjust spending to account for economic reality like a huge recession
- never substitute goods to compensate for inflation or price fluctuation (vacation in a closer place one year during an oil price spike, or switch to almond milk in the event of a dairy milk embargo).
- never collect any inheritance from the passing of parents or other family members
- and never do what most old people tend to do according to studies – spend less as they age

I agree with your point about early retirement, which is why I've backed off my starting SWR to 3.5% but, given the most recent numbers provided by Pfau, feel that the combination of SS, Pension, 40-45% stock, variable withdrawal plans, and a "slowdown factor" as we age, each provide an additional measure of safety.

BTW - here's a link to the original Trinity Study: https://www.aaii.com/journal/articl...hoosing-a-withdrawal-rate-that-is-sustainable

...and here's a link to the 2009 update by Wade Pfau: Trinity Study Updates - Retirement Researcher

...upon further consideration, I think there's some sort of NPV calculation that can be applied to Social Security and Pensions, then combined with current net worth, to more accurately represent your true withdrawal rate, although I have not gone down that path yet. This might be especially useful to early retirees desiring a more accurate picture of their retirement assets.

 

[Nords]

Has anyone here retired early using an initial withdrawal rate of 4% or more?

Yep. We started with 4% and ramped up during a couple of travel years, especially with our daughter's college campus visits.

At the time we retired (2002) the market was much lower and 4% fit our projected expenses. As the market recovered, while our spending only went up a little, our net worth rose much faster.

Did you have any other income at retirement, such as a company or military pension, or a spouse still working? Did you build in extra safety margins in the budget?

My military pension and our savings were part of the plan. We also kept a couple of years of expenses in cash to be able to keep spending during a bear market.

I'd like to hear about it. How is it working out for you? Are you concerned about investment returns going forward?

The 4% rule has a failure rate, yes, but a military pension (or just about any single-premium immediate annuity) helps insure against portfolio failure. Social Security and variable spending plans also help minimize the failure rate.

The 4% SWR also essentially says that 16-19 times out of 20, you're going to end up with way more money than you need. So far that's been the case with us.

 

[audreyh1]

Are we in a crash? Or a down market?

A crash is something like down 30% in 3 or 4 months. Doesn't happen often, but we saw that in 2008!

 

[old woman]

My SIL has a financial adviser and told him she wanted her portfolio to give her a monthly check until she is 90, nothing left for older age or children. She isn't one to worry about money he told her how much she could have. She was telling me she had more than when she retired and lately has less than she had when she retired. She is 64 now retired 3 years. My brother said when he dies she will be low income, she has a pension and SS besides her retirement savings but if she runs out at 90 or before she could be hurting. They are spending my brother's savings on vacations but he has a pension and SS too so they are living pretty rich for now. I couldn't do it, I need my money to last even if I live to 115.

 

[petershk]

Also bear in mind people with 4%+ that it didn't work out for are likely self selecting out of an ER forum

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[AdrianC]

These anecdotes about how something is working and what ones's concerns are have absolutely nothing to do with how you or anyone else will do going forward.

I guess these testimonials can make some people feel good, but there is much better information out there. Our lives are a movie that no one has seen before.

Ha

Sure. I posted the question out of interest. I posted the same question on the Money Moustache forum, where the consensus is very much for the 4% rule, and it was surprising (to me) how few there were who had FIRE'd on 4% or more.

As I wrote up thread, I’m thinking I need to be a little more prudent, with three young kids. A 3% WR is more than our current expenses.

 

[AdrianC]

Also bear in mind people with 4%+ that it didn't work out for are likely self selecting out of an ER forum

There is that!

 

[nun]

Sure. I posted the question out of interest. I posted the same question on the Money Moustache forum, where the consensus is very much for the 4% rule, and it was surprising (to me) how few there were who had FIRE'd on 4% or more.

As I wrote up thread, I’m thinking I need to be a little more prudent, with three young kids. A 3% WR is more than our current expenses.

The folks who are aching to ER probably look at their expenses and as soon as their portfolio is 25x their income they retire. Those that fail and have to go back to work might not post on ER forums leaving only the successful 4% people.

Personally, I waited until 52 and ERed with a paid off home and rental apartment. I took 20% of my portfolio and bought into a pension/annuity that with the rental income meets my income needs. SS will be gravy. My portfolio is left to compound to fund large expenses and to leave to my nieces and a couple of charities.

 

[Teacher Terry]

As to the poster that mentioned Sil was spending to travel now I think that is a good plan. If she is low income at 90 she can live in senior housing for cheap, etc. Many people don't live that long and I certainly would not be delaying traveling while they can just in case they live to be 100. As people age they lose their desire to travel or to spend a lot of $ on stuff. I wouldn't spend every penny either which didn't sound like what they were doing.

 

[AdrianC]

The folks who are aching to ER probably look at their expenses and as soon as their portfolio is 25x their income they retire. Those that fail and have to go back to work might not post on ER forums leaving only the successful 4% people.

Yep. There's a lot of posters on the ER forums in their 30s and early 40s targeting about $700K, and who will FIRE as soon as they get there. There aren't many who say they actually did it on such small amounts.

 

[nun]

Yep. There's a lot of posters on the ER forums in their 30s and early 40s targeting about $700K, and who will FIRE as soon as they get there. There aren't many who say they actually did it on such small amounts.

$700k at 4% is $28k/year. With SS and a frugal lifestyle I suppose that might be ok . But 4% also might be a bit optimistic given the projections of the returns if the stock and bond markets.

 

[photoguy]

My WR is way under 4%, but I'd be more willing to pull out that much if (1) I was willing to return to work and (2) I could easily find another position that paid comparably to my jobs before fire.

I suspect that many of the younger retirees willing to take a go at 4% do consider returning to work a viable plan b.


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[NW-Bound]

Are you thinking you will still be around after the age of 95? If so, you must have longevity genes in your family. I would think most people retiring any time between 60 and 65 will be looking down from the heavens well in advance of 30 years. 4% wr should actually leave a balance for heirs.

Yes. I am one who does not think I will live to see my 80th birthday, let alone 90. And I also fear that I will not be looking down from heaven, but looking up from h*ll.

But in any case, while I am still alive I like to see a nice number at the bottom of Quicken screen if I can help it. It's not to leave to the kids, as I hope leaving them the homes will be good enough for them. It's for my comfort, as having money gives me a warm and fuzzy feeling that spending it on anything cannot match.

 

[papadad111]

Thanks, all.

I think I have a good appreciation of what the 4% rule is and what it isn't. It is reasonable to target 25x expenses as your Financial Independence goal. Reach 25x with some margin of safety and most folks can start to think about giving up the day job, with caveats, eyes open to risks, etc.

It is not reasonable to then take out an inflation-adjusted 4% each year with no regard to investment performance and spending levels.

Audreyh1 sums up my thinking:



In addition to that, the current investment environment is very much less than ideal.

I’m thinking of FIREing this year, at age 50. I don’t have long-life genes but my younger wife does, plus we have three kids, two still in elementary school. Our money needs to last 50+ years. We will get SS down the road. Wife will get a small pension. That’s all. I’ve been self employed for 16 years, wife has been a stay at home mom for 8.

I’m thinking I need to be a little more prudent. A 3% WR is doable.

In 2016, is the 4% rule good advice to be giving to wannabe early retirees? Especially very early retirees, folks in their 30s and 40s? There may be some disappointment in a few years, I fear.

Many discussions on these items you highlight.

My conclusion is an early early retiree, defined by me as someone 20 years from SS or more, meaning early to mid 40s of age, needs to be in the 2.5-3.0 percent withdraw rate to be safe. In fact the best position would be to be 100 percent equities and just living on dividend yield which for broad market is approximately 2.5%. The hope then is that the equity market rises to cover ravages of inflation ( holding long term bonds won't) with a little help 20+ years out when cola'd social security kicks in for a little added reinforcement.

For a 40 or 50 year horizon, the crystal ball is quite blurry and its best to be very flexible with spending scenarios including the "no really" and the "living large" budgets especially during the first two decades of FIRE.

Then offset this with occasional splurges during "up years" for living life to its fullest while younger. Healthier and able to do so.