i kinda understand the 4% swr-start at 4% increasing by inflation rate thereafter- but, if for instance your earned 7 and took 7, would ya not end up with the original principal amount? understanding that the orig amount would be worth less due to inflation, but, wouldn't you still have it?
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i kinda understand the 4% swr-start at 4% increasing by inflation rate thereafter- but, if for instance your earned 7 and took 7,* would ya not end up with the original principal amount?* understanding that the orig amount would be worth less due to inflation, but, wouldn't you still have it?
That may be true but it's not necessarily meaningful. Although the original principal has to support a higher withdrawal of a greater number of inflation-ravaged dollars, the portfolio also has to survive one year less. The trick is to ensure that the portfolio lasts at least as long as you do.
FIRECalc looks at how often a portfolio survives. If you demand that it have some leftover at the end, then that much less is available for FIRECalc to use during "bad" times, which tends to reduce a portfolio's survival rate. FIRECalc ignores the year-to-year principal amount (as long as it's higher than zero!) since the portfolio will grow in value during good years and decline in value during bad ones.
The "initial 4%" method may consume the portfolio's value over its lifespan. Or it might not, but FIRECalc doesn't care as long as there's something left to work with.
Other methods have been proposed that may or may not support a timely or successful ER. For example you could accumulate a huge pile of dividend-paying principal, live off the dividends without touching the principal, and hope that all those dividend-paying investments keep up with inflation. (The amount you need for this withdrawal method may discourage most investors from considering it.)
Or, as Cut-Throat has pointed out, you could withdraw no more than 50% of your principal each year. If you follow that method you'll never deplete the principal. Of course the amount of your annual withdrawals will quickly drop into single digits, but technically your portfolio will survive.
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Re: how long will it last
If you take out the growth on the portfolio every year, then even if the portfolio never went down, your portfolio value would remain constant.* But the portfolio will do down some years, so you take nothing out. And in the subsequent years, you still take nothing, until the portfolio builds back to its starting point and then grows enough to allow another withdrawal.
The discussions and research that wind up with a 4% conclusion leave enough in your portfolio in the good years to allow for withdrawals in the bad years, and also enough more to grow so that your withdrawals could increase to keep up with inflation.
While inflation is just an annoyance when looking year by year, the cumulative effects are enormous. Just for example, someone who retired quite early in 1960 would be spending about $50,000 today to buy the same goods and services that $8,000 would have bought in 1960.* Had they adopted a strategy that didn't keep up with inflation, they would be trying to survive today on that $8,000 a year.
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Re: how long will it last
And you'd be saying "Hello and welcome to walmart!".
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
what if- assuming an average return of 7%, you took withrew 7% only in the years the portfolio returned 7% or more and, withdrew nothing in the years the return was less than 7%. how much would the portfolio balance be in twenty years? and what would it be worth?
what if- assuming an average return of 7%, you took withrew 7% only in the* years the portfolio returned 7% or more and, withdrew nothing in the years the return was less than 7%.* *how much would the portfolio balance be in twenty years? and what would it be* worth?
okay, i'll bite; what's the answer?
follow-on question: what does one eat during those <7% years?
is rental income considered air or fries?* what about pension and ssi?
Rental income is return on your principle unless your tenant moves out. Pensions and SS are a nice floor for your withdraws. Unless you have a COLA pension, inflation will kill your pension.
When I got out of college in 1973, I figured if I could ever save $200,000 I wouldn't know what to do with all of the money I'd get in just interest. It was well over my starting salary. Now I'm trying to decide if I can get by on anything less that $2,000,000. Inflation is the darkside of compound interest. If you don't plan for it you will see how well you can live on SS. Unfortunately, that's what most people will do.
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