FIRE on 4%

[AdrianC]

Lots of people talk about it, but does anyone really do it?

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

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?

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

Thanks,
AdrianC

 

[REWahoo]

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

Yes to the more. See this post: http://www.early-retirement.org/forums/f28/firecalc-vs-rew-64705-5.html#post1664252

Did you have any other income at retirement, such as a company or military pension, or a spouse still working?

None.

Did you build in extra safety margins in the budget?

Not really - although we budgeted for what we thought we'd actually spend knowing we could cut back to a bare-bones, essentials only budget if forced by the fickle financial gods to do so.

How is it working out for you? Are you concerned about investment returns going forward?

All is going well, and of course I'm concerned about investment returns going forward. If you have money in the markets you'd have to be comatose not to have at least some concern. But I sure don't let it keep me up at night.

 

[HadEnuff]

How old are you? How long you will need to live on your investments is a large determinant of what is a safe WR, to the degree that we can agree that anything is safe right now.

 

[2017ish]

Lots of people talk about it, but does anyone really do it?

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

...

Note that the "4%" SWR rule envisions a robotic withdrawal of an initial 4% of portfolio, adjusted upward each year by inflation rate, with no attention whatsoever paid to portfolio value. I think it is a very good planning tool in the accumulation phase, but have difficulty seeing anyone taking such an approach in real life during the withdrawal phase. (I could be wrong, but I don't recall seeing anyone on this board or bogleheads state that they took such a static approach for any significant time in retirement.)

We haven't retired yet, but barring disastrous returns, our variable withdrawals will cause us to exceed 4% of initial portfolio for a number of years, especially for the 13 years before (fingers crossed) social security, when our only spending source is our portfolio. Hopefully, our returns will be enough to spend as high of percentage as REWahoo (if we choose). If not, our safety margin is that most of our spending will be discretionary and quite capable of being slashed.

For retirement planning, otoh, I wanted us to be living a very good life if we relied on a 3% SWR.

 

[Looking4Ward]

Note that the "4%" SWR rule envisions a robotic withdrawal of an initial 4% of portfolio, adjusted upward each year by inflation rate, with no attention whatsoever paid to portfolio value. I think it is a very good planning tool in the accumulation phase, but have difficulty seeing anyone taking such an approach in real life during the withdrawal phase. (I could be wrong, but I don't recall seeing anyone on this board or bogleheads state that they took such a static approach for any significant time in retirement.)

We haven't retired yet, but barring disastrous returns, our variable withdrawals will cause us to exceed 4% of initial portfolio for a number of years, especially for the 13 years before (fingers crossed) social security, when our only spending source is our portfolio. Hopefully, our returns will be enough to spend as high of percentage as REWahoo (if we choose). If not, our safety margin is that most of our spending will be discretionary and quite capable of being slashed.

For retirement planning, otoh, I wanted us to be living a very good life if we relied on a 3% SWR.

I was about to compose a response when I realized the above is exactly what I would have said.

 

[ripper1]

You would think a 3% WR for 30 years would be safe for most of us. If it gets above that I will adjust to 3% of portfolio value and no inflation adjustment.

 

[Dcharles]

I went with 5 percent withdrawal till SS and made a decision not to sweat it or worry about it. Guess what.......we're all on the same boat! What is the worst thing that can happen Maybe drive a school bus PT?


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[rodi]

You would think a 3% WR for 30 years would be safe for most of us. If it gets above that I will adjust to 3% of portfolio value and no inflation adjustment.

Since this is an EARLY retirement forum - 30 years might not be the appropriate length of time. It would suck to have the money run out on the 31st year.

That said - the studies showed that 4% WR worked for 95% of the historical market returns for 30 years. So it's a good benchmark.

Many folks who are retiring in their 40's or 50's choose a 3% WR since their horizon is longer than 30 years.

Firecalc shows that 3% works 100% of the time for a 40 year retirement - with the lowest portfolio balance being 568k (out of a starting 1M).

Firecalc shows that 3.5% works 97% of the time for a 40 year retirement with 3 of 105 cycles failing.

As for my plan - I'm planning on a sub-4% - but if need be, if the 529's aren't enough for the kids college, I'll be willing to up it a bit temporarily. I'm pre SS, but DH is collecing... our WR last year was under 4%.

As has been mentioned here often - you need to be agile and react to the market... If it's booming, perhaps loosen the purse strings... if it's a bear market, perhaps tighten the purse strings....

 

[Looking4Ward]

....Firecalc shows that 3% works 100% of the time for a 40 year retirement - with the lowest portfolio balance being 568k (out of a starting 1M).

Firecalc shows that 3.5% works 97% of the time for a 40 year retirement with 3 of 105 cycles failing....

In regards to Firecalc, I have to admit that I cheat a bit on my calculations. I set the analysis period to begin in 1940, removing the consequences of the Great Depression.

My thought process is that if I ever had to endure such severe economic conditions I'd most certainly make drastic reductions in my spending.

 

[hnzw_rui]

In regards to Firecalc, I have to admit that I cheat a bit on my calculations. I set the analysis period to begin in 1940, removing the consequences of the Great Depression.

My thought process is that if I ever had to endure such severe economic conditions I'd most certainly make drastic reductions in my spending.

Interestingly enough, based on inflation-adjusted spending and portfolio values, the Great Depression actually fares better compared to the 1970s stagflation.

 

[Mulligan]

I went with 5 percent withdrawal till SS and made a decision not to sweat it or worry about it. Guess what.......we're all on the same boat! What is the worst thing that can happen Maybe drive a school bus PT?


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Ugh, I surrendered my bus operator license and I was the Boss. Stick with the door greater stuff... Now if you really like adventure, be a substitute driver and have the 3rd-4th graders sit by you to get you around on your route.. Anyone younger is clueless, and anyone older you cant trust.


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[pb4uski]

Lots of people talk about it, but does anyone really do it?

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

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?

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

Thanks,
AdrianC

Yes, our current WR since retiring at age 56 at the end of 2011 has exceeded 4%. We do not have any pension, spouse still working, etc. We could always tighten our belts a bit if necessary.

Thanks to the investment gods, things are working out great. We have maintained our pre-retirement standard of living (arguably increased it since we joined the local country club after we retired, and we travel more), demolished our one-car garage and built a two-car garage with attic loft that is DW's sewing space, and out portfolio is still even after the recent red ink about 10% higher than when we retired.

I should mention that SS at our FRA will cover about 57% of our annual spending and I have a small non-COLA pension that will cover about 23% so while our WR is currently more than 4% it will plummet once we kick off these income streams in about 5-10 years. Also, if investment performance is particularly poor we can opt to start SS early if we want.

I don't view our initial WR as being particularly relevant, but our ultimate WR once these income streams are going is relevant.

One way to assess your ultimate WR is to reduce your nestegg for spending between ER and when you start SS and pensions and then divide that remainder by your annual gap (spending less SS less pension). Ours is less than 2% even though our intital WR is more than 4%.

For example, let's say you retire at 60 with $1 million and spend $50k a year and expect $40k a year in SS at age 70. Your adjusted nestegg would be $500k ($1 million less 10 years at $50k a year) and your ultimate WR would be 2% ($50k spending - $40k SS)/$500k.

 

[mathjak107]

Interestingly enough, based on inflation-adjusted spending and portfolio values, the Great Depression actually fares better compared to the 1970s stagflation.

The 1965/1966 group was worse then the 1929 group

 

[audreyh1]

Lots of people talk about it, but does anyone really do it?

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

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?

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

Thanks,
AdrianC

4% was for 30 years which assumes someone retires NOT early at age 65. When I retired early I hoped to live a lot longer than that, so I didn't dare take out as much as 4%.

 

[NanoSour]

I went with 5 percent withdrawal till SS and made a decision not to sweat it or worry about it. Guess what.......we're all on the same boat! What is the worst thing that can happen Maybe drive a school bus PT?


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I'm in that same boat with you.

Here is my WR for each of my first 4 years of ER:

2013) 5.27%
2014) 5.05%
2015) 4.93%
2016) 4.94%

So far so good.

 

[hnzw_rui]

4% was for 30 years which assumes someone retires NOT early at age 65. When I retired early I hoped to live a lot longer than that, so I didn't dare take out as much as 4%.

In fairness, that 4% "rule" increases withdrawals based on CPI indiscriminately and with starting year of 1966, actually has up to an 8% WR after just a few years (I think I read this in a Kitces article). I don't think this applies to a % of portfolio method. Even a 5% WR wouldn't deplete your portfolio. It'll just make withdrawals smaller and smaller if the market doesn't play nice.

 

[bobandsherry]

Just 1week into retirement at 54, my plan is for 4-5% initially, consider inflation in subsequent years. I plan to draw from social security at 66 and adjust WR down as offset to social security benefit. Or that's the plan...

 

[golfnut]

4% was for 30 years which assumes someone retires NOT early at age 65. When I retired early I hoped to live a lot longer than that, so I didn't dare take out as much as 4%.

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.

 

[Terryjm51]

Thanks for posting retirees .....
When I start drawing I will post my withdraw rates Thinking between 4 to 5.5 until. SS begins


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[audreyh1]

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.

I have to plan as if I may still be around until 95.

30 years for someone retiring at 65 is simply prudent planning.

Yes it's conservative. It's all conservative.

 

[audreyh1]

In fairness, that 4% "rule" increases withdrawals based on CPI indiscriminately and with starting year of 1966, actually has up to an 8% WR after just a few years (I think I read this in a Kitces article). I don't think this applies to a % of portfolio method. Even a 5% WR wouldn't deplete your portfolio. It'll just make withdrawals smaller and smaller if the market doesn't play nice.

I was answering for the initial % of portfolio increased with inflation each year method. 4% is not a safe withdrawal rate for a possibly >30 year retirement. Someone retiring at 55 should probably assume 40 years.

 

[hnzw_rui]

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.

Problem is it's hard for individuals to pool risk. Sure, people without pensions can buy an SPIA but then you run the risk of inflation. The inflation-adjusted SPIAs cost way too much (for joint life 55/51 with 2% COLA, ~3.4% cash flow rate).

Can't easily predict which end of the spectrum you fall on. Both my grandfathers died fairly young (although both racked up huge medical bills near EOL). Meanwhile, one grandmother lived up to 89 yo (died 6 days short of her 90th bday) despite diabetes, hypertension and being wheelchair bound for a couple of decades. One grandmother just celebrated her 92nd birthday but does suffer from dementia and requires round the clock care (my aunt is paying for private caregivers). She has diabetes, too.

I was answering for the initial % of portfolio increased with inflation each year method. 4% is not a safe withdrawal rate for a possibly >30 year retirement. Someone retiring at 55 should probably assume 40 years.

Ah, in that case, yep, 4% initial WR is a bit iffy if planning for a long retirement. I plan on retiring at 55 so I'm using 45 years in FIRECalc and ******** which I think is sufficiently conservative. I doubt I'll live up to 100. At 4%, I get a success rate of ~80%, at 3.5% it's ~95% and at 3%, that seems to be conservative enough for a perpetuity.

 

[AdrianC]

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:

4% was for 30 years which assumes someone retires NOT early at age 65. When I retired early I hoped to live a lot longer than that, so I didn't dare take out as much as 4%.

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.

 

[HadEnuff]

I guess the reason I didn't retire "early" was because I was too conservative to trust the calculators, and too worried about what unseen extremes of market return, inflation, interest rates, and personal health might be seen over a 4 or 5 decade span. As it is, retiring at age 62, which I don't consider early, (despite what the Social Security Administration says) still leaves me doing a lot of guessing.
DW and I are not big spenders. No pensions. Just a nest egg that I figure we could live on with a 3% WR, even if we were to lose 35% of it to market corrections in the early years. Since it is only 60% invested in stock funds, that would represent an even bigger stock market correction.
I got a big kick out of reading the page of acronyms, when I got to FYF, because that is me in a nutshell.
Hoping to start out at 2%, and when this market turns around, have enough eggs left in the basket to go to 4% eventually, if needed or desired.

 

[sengsational]

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).