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Questions about the 4% rule
Old 12-13-2010, 04:20 PM   #1
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Questions about the 4% rule

Sometimes it doesn't make sense as stated.

If one has $1,000,000 and withdraws 4% over the course of a year but earns 4% over the course of the same year, wouldn't there still be $1,000,000 in the kitty?

Our plan has been to accumulate enough to cover our expenses from interest alone. Probably too high a portion of the retirement assets are in muni's (all insured!), but overall our pre-retirement rate of return has been better than 4% and actually a little over 5% for the last couple of years.

So why wouldn't someone with $1,000,000 earning 4% and withdrawing 4% always have $1,000,000? If things are laddered and inflation occurs so you need more than 4%, wouldn't the earnings go up to?

So why does 4% only last for 25 or 30 years?

I'm trying to get a handle on all this before I join you!
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Old 12-13-2010, 04:22 PM   #2
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Perhaps this thread will help address your question: Explain the 4% withdrawal rate
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Old 12-13-2010, 04:38 PM   #3
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The short answer is ... because some years you lose a lot when your investments tank.
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Old 12-13-2010, 04:46 PM   #4
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Quote:
Originally Posted by 67walkon View Post
Sometimes it doesn't make sense as stated.

If one has $1,000,000 and withdraws 4% over the course of a year but earns 4% over the course of the same year, wouldn't there still be $1,000,000 in the kitty?

Our plan has been to accumulate enough to cover our expenses from interest alone. Probably too high a portion of the retirement assets are in muni's (all insured!), but overall our pre-retirement rate of return has been better than 4% and actually a little over 5% for the last couple of years.

So why wouldn't someone with $1,000,000 earning 4% and withdrawing 4% always have $1,000,000? If things are laddered and inflation occurs so you need more than 4%, wouldn't the earnings go up to?

So why does 4% only last for 25 or 30 years?

I'm trying to get a handle on all this before I join you!
The 4% rule is an average which is what you will probably have left over to live off of assuming perhaps historic return and inflation. Some years you will earn more and some less, but the 4% assumption provides a high likelihood of not running out of money based on past performance.

Does that help?
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Old 12-14-2010, 09:53 AM   #5
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Quote:
Originally Posted by 67walkon View Post
Sometimes it doesn't make sense as stated.

If one has $1,000,000 and withdraws 4% over the course of a year but earns 4% over the course of the same year, wouldn't there still be $1,000,000 in the kitty?

Our plan has been to accumulate enough to cover our expenses from interest alone. Probably too high a portion of the retirement assets are in muni's (all insured!), but overall our pre-retirement rate of return has been better than 4% and actually a little over 5% for the last couple of years.

So why wouldn't someone with $1,000,000 earning 4% and withdrawing 4% always have $1,000,000? If things are laddered and inflation occurs so you need more than 4%, wouldn't the earnings go up to?

So why does 4% only last for 25 or 30 years?

I'm trying to get a handle on all this before I join you!
The 4% in the "standard" SWR analysis is inflation adjusted. So maybe your $1m of fixed assets earn $40k, and you withdraw $40k, in the first year. But if inflation is 3%, you need to withdraw $41,200 the next year, then $42,400 etc.

It's hard to find any fixed assets that earn inflation + 4%, hence people start looking at equities, which have varying returns, leading them to pick more conservative withdrawal rates to allow for the bad years, leading them to back-test various withdrawal rates against past performance, etc.
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Old 12-14-2010, 12:48 PM   #6
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Thanks. I guess it is a guideline more than anything else.

It also doesn't take into consideration other types of investments or assets. When I've tried to do my calculations, I've been conservative. We have a commercial property that generates good rental income with a tenant that has been there for many years; unfortunately, that tenant is a car dealeship. When trying to run retirement numbers, I have assumed we would sell that property in about 5 years for 50% of what it is assessed at right now; those numbers work and would be better if the values go up, or we sell it for close to what it is worth now or if we can keep renting it out forever. I can't imagine it would sell for less than 50% of assessed value, but you never know.

so how do other assets figure into the 4% rule?
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