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Need clarification on the 4% rule
Old 01-21-2011, 07:36 AM   #1
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Need clarification on the 4% rule

Does this mean 4% net withdrawal (after taxes),... or 4% gross??
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Old 01-21-2011, 07:40 AM   #2
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4% gross, and its really more of a rule of thumb.
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Old 01-21-2011, 07:50 AM   #3
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rdjrn, this thread may help: Explain the 4% withdrawal rate
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Old 01-21-2011, 07:52 AM   #4
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That being the case, I've got about $530,000 in a 401K, plus another $450,000 in lump sum pension. Thinking of retireing in about 13 months at age 55 and with 31 years at the same megacorp. I get about $15,000 per year (tax free) from VA disability and will start getting about $9,000 per year USAR retirement at age 60. Plan to start taking SS at age 62 ($18,000/year). Does it look feasible for me to withdraw a net $65,000 per year? FireCalc says I'm ok, and so does my financial advisor at the bank. Final question,... what will my tax rate (%) be in retirement?
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Old 01-21-2011, 07:53 AM   #5
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The best way to road test your retirement taxes is to buy a copy of turbotax and prepare a dummy return with your expected numbers. It will not be exact to the penny, but you will have a good idea of where you stand.
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Old 01-21-2011, 08:08 AM   #6
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I misspoke. I don't plan to "withdraw" $65,000, but I need/want a total of $65,000 (net) using 4% withdrawal + VA pension + USAR pension (60) + SS (62).
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Old 01-21-2011, 08:30 AM   #7
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At 55 you'll need to generate $41k a year from you nest egg ($24k pensions) which will drop to $23k when SS starts. You have $980k and 4% of that is...........$39.2k. So you might be spending a little principal up to age 62, but you should be fine.

However, you might want to just trim your spending a bit and one suggestion I have is getting rid of the financial advisor if they are charging you for this advise. Next question should be how are you going to generate that 4%.
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Old 01-21-2011, 08:33 AM   #8
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I misspoke. I don't plan to "withdraw" $65,000, but I need/want a total of $65,000 (net) using 4% withdrawal + VA pension + USAR pension (60) + SS (62).
If $65K fully supports your needs you seem to be there. Do you have wiggle room if things get hairy? Do you have health care covered? It would seem that the first few years are critical. You will be drawing down a larger percentage of your portfolio as you want for the USAR pension and then SS. A major downturn during that period would be the worst case scenario. If you have flexibility to cut back or work part time you would be in great shape.
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Old 01-21-2011, 08:33 AM   #9
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... $65,000 (net) ...
You keep hinting that Taxes are not an expense (cost) item. Why is that?

It's like saying $65,000 (after Groceries).
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Old 01-21-2011, 08:49 AM   #10
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Health care is covered. At 55 I can keep my company plan in retirement at same cost. Tricare will kick in at age 60, plus the wife works at a medical clinic and has access to good health insurance.

$65,000 does allow for wiggle room since it's a little more than I bring home now, plus we should have the mortgage paid off in 2-3 years.
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Old 01-21-2011, 09:04 AM   #11
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Health care is covered. At 55 I can keep my company plan in retirement at same cost. Tricare will kick in at age 60, plus the wife works at a medical clinic and has access to good health insurance.

$65,000 does allow for wiggle room since it's a little more than I bring home now, plus we should have the mortgage paid off in 2-3 years.
Yes, just think of taxes like any other expense when planning for retirement. The nice part is that early in retirement if you rely on post-tax dollars to meet expenses, you won't usually have a lot of taxes to pay.

FIRECalc is your friend in such matters.
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Old 01-21-2011, 09:11 AM   #12
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I used 70K take home with FIRECalc and the results were still good. That's considerably more than I'll need to live comfortably (in the south).
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Old 01-21-2011, 09:54 AM   #13
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I used 70K take home with FIRECalc and the results were still good. That's considerably more than I'll need to live comfortably (in the south).
If by "take home" you mean "after taxes", that is not the correct number to use with FIRECalc. It doesn't know anything about your tax situation.
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Old 01-21-2011, 12:23 PM   #14
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When you say "results were still good" does that mean 100% success or 90% success? Just curious.


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I used 70K take home with FIRECalc and the results were still good.
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Old 01-21-2011, 12:40 PM   #15
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96.3% as I recall.
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Old 01-21-2011, 12:49 PM   #16
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The best way to road test your retirement taxes is to buy a copy of turbotax and prepare a dummy return with your expected numbers. It will not be exact to the penny, but you will have a good idea of where you stand.
This is what I did about 18 months before I RE'd and it worked well. Preparing a tax return with only your pension, dividends and some capital gains etc will give you an estimate of your taxes which you will add to your $65k of expected expenses. This is the figure you then use in FIRECALC.
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Old 01-21-2011, 01:44 PM   #17
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The 96% seems reasonable however it really depends on your expense/spend estimate. Was your number conservative with fair wiggle room? or tight where the least bump can hurt?

For me, it might be a mental issue, as I don't feel FI or serious RE situation even with 100% success from FIRECalc.


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96.3% as I recall.
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Old 01-21-2011, 01:56 PM   #18
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I've considered working a couple more years and retiring at 57 just to enhance my safety factor (more nest egg, less years to spend it).
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Old 01-21-2011, 02:02 PM   #19
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For me, it might be a mental issue, as I don't feel FI or serious RE situation even with 100% success from FIRECalc.
So what will be your trigger to retire? Death?
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Old 01-21-2011, 02:12 PM   #20
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So what will be your trigger to retire? Death?

Like he said: his issue is "mental."
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