Vanguard looks at the 4% rule, 20 years later

[explanade]

The 4% spending rule, 20 years later | Vanguard Blog


Conclusions:

Here’s how I suggest retirees approach the 4% spending rule of thumb. First, maintain the perspective that this type of analysis should only be used as a modeling tool to help gauge portfolio durability simulations, assuming you maintain a balanced and diversified portfolio Second, portfolio management costs will be a “drag” on your spending, so it’s important to minimize investment costs and follow a tax-efficient portfolio spending approach. Third, embrace a dynamic spending strategy that considers market performance and allows for flexibility on an annual basis. Certainly, these three principles are general in nature, but they can give future retirees a nice tailwind as they head into retirement.

 

[Options]

Thanks for posting. And here I thought 3% was the new 4%, with some diehards hanging at 2%.

 

[Live And Learn]

Thank you for posting this !

With a 0.0 expense ratio and a 50/50 allocation they say at 3.5% WR will survive with 85% success over 40 years. With a .25% expense ratio that would be 3.25%. My 3% may not be as conservative as I thought but it should still be good enough.

 

[Quantum Sufficit]

Thank you for posting this !

With a 0.0 expense ratio and a 50/50 allocation they say at 3.5% WR will survive with 85% success over 40 years. With a .25% expense ratio that would be 3.25%. My 3% may not be as conservative as I thought but it should still be good enough.

Live and learn,

Looks like you and I will be joining the class of 2015 at the same time! But I have you beat at 2.83% swr

 

[BBQ-Nut]

Arrr.....

 

[mathjak107]

the problem with this 4% rule stuff is it assumes all retirees need a raise every year by the rate of inflation . real world spending says other wise.

the more descretionary spending one has in the budget the less inflation will likely effect them.

why? because when everything is not a need ,spending tends to be smile shaped .

we spend more early on doing ,buying and traveling . but by mid 70's we are doing less and by early 80's spending falls off a cliff. spending ramps up again mid 80's as healthcare ,charilty and gifting picks up.

that drop in spending seems to more than offset the inflation in the stuff that continues to be bought and much less inflation adjusting is needed.

one may actually need 20% less than the calculators figure with their annual adjustments.

that leaves room for more conservative investing or higher expenses and still do just fine.

 

[steelyman]

I don't use a "withdrawal rate" approach, rather an "income replacement" one. I took 85% of my final gross salary, adjust that annually for 3% inflation, and work backwards from that from income sources. It's fixed, but I know what I'm going to "get" each year.

 

[Jack_Pine]

the problem with this 4% rule stuff is it assumes all retirees need a raise every year by the rate of inflation . real world spending says other wise.

the more descretionary spending one has in the budget the less inflation will likely effect them.

why? because when everything is not a need ,spending tends to be smile shaped .

we spend more early on doing ,buying and traveling . but by mid 70's we are doing less and by early 80's spending falls off a cliff. spending ramps up again mid 80's as healthcare ,charilty and gifting picks up.

that drop in spending seems to more than offset the inflation in the stuff that continues to be bought and much less inflation adjusting is needed.

one may actually need 20% less than the calculators figure with their annual adjustments.

that leaves room for more conservative investing or higher expenses and still do just fine.

My thoughts exactly. Especially the part about not needing a raise to keep with inflation. We lived with out a raise for 5 years straight and adjusted just fine.

 

[photoguy]

And here I thought 3% was the new 4%

It still is at least in my mind.

One thing to note about the article is that to get to 4% they triple the failure rate in comparison to the original Trinity study. I.e. Vanguard is using 15% instead of 5%.

 

[BBQ-Nut]

I just use the 4% 'guideline' as a check.


I estimate our expenses in multiple phases for when pensions are available, when SS is taken between my spouse and myself, when the kids are gone, when the house is paid for, when RMDs hit.


Then I estimate how much is needed to draw from various pools (after tax, tax deferred, and tax free) to meet expenses after other income streams.


I compute our WR in each of these phases as a check only. I do not use the SWR to see what we can withdraw and 'back in' to our expenses(which include taxes).


In the later phases, when I expect we are both 80+ and we may need assisted living, then expenses are much higher and our WR is >4%, yet it still meets what I estimate when 'end game' is.

 

[audreyh1]

I use a % remaining portfolio withdrawal method. If my portfolio doesn't keep up with inflation, neither does my income.

If it runs ahead of inflation - PARTAY!

 

[rodi]

These hard fast rules: 4%, 3%, whatever don't take into account real life issues... Like a higher withdrawal rate prior to taking SS and/or pension, then dropping when those income sources come online.

For early retirees - I would assume *most* have some delayed income stream (SS).

I'm at 3.5% after rent and DH's SS... but that will drop when I start my small pension at 55. It will drop again when I start SS. And our spending will drop when the kids grow up, go through college, and get launched on their journey of life.

That's what spreadsheets and calculators are for (Firecalc, QLP, etc).

 

[W2R]

I use a % remaining portfolio withdrawal method. If my portfolio doesn't keep up with inflation, neither does my income.

If it runs ahead of inflation - PARTAY!

So, it's been a fun few years lately, huh?


For me, 4% (and then 3%) were a good starting point when I was first starting to think about retirement. As time passed I learned more and began to realize that I would not want to stick with either one in both booming and crashing market conditions. When working, one gets SO used to having a predictable paycheck every week. In retirement, that just isn't as big a deal because the necessary expenses are much lower for me. No rent, no car payments, no work expenses, and so on.

 

[Alan]

These hard fast rules: 4%, 3%, whatever don't take into account real life issues... Like a higher withdrawal rate prior to taking SS and/or pension, then dropping when those income sources come online.

For early retirees - I would assume *most* have some delayed income stream (SS).

I'm at 3.5% after rent and DH's SS... but that will drop when I start my small pension at 55. It will drop again when I start SS. And our spending will drop when the kids grow up, go through college, and get launched on their journey of life.

That's what spreadsheets and calculators are for (Firecalc, QLP, etc).

+1

Between the 2 of us we still have 4 income streams to come online over the next 10 years.

 

[teejayevans]

I use it as a guideline, especially since my spending isn't constant.


Sent from my iPad using Early Retirement Forum

 

[foxfirev5]

Having had the worklife experience of 20-30% swings in income I see no need for a specific SWR% rule.

 

[Live And Learn]

Definitely using it as a guideline, but the "rule" is one of the tools in the toolbox in making the final ER decision.

The reality is that I plan to do a bottoms up budget each year, taking COLA adjustments only where needed.

My 3% also excludes SS, so that's another "buffer".

I like having all these tools / calculators giving me consistent "it's a go" indicators in this decision. ER is a one - way ticket (at least in my case).

 

[athena53]

I don't use a "withdrawal rate" approach, rather an "income replacement".

I do something similar. I like the regularity of a "paycheck" so I move money out of the brokerage account $20K at a time and then move it into the spending money on a monthly basis. (I've got the world's most complicated checking account spreadsheet.) I don't intend to increase it for inflation next year. It will come out to a 2.5% withdrawal rate; I'm 61 and will wait for spousal SS till age 67, my own at 70, and a pension at 65 ($12,000/year). Withdrawal rates should decrease when those kick in.

 

[RetireBy90]

2 points,:


1) I likewise am using 4% only as a check to verify we have sufficient that 4% will fill the gap between other income and spending. Once we start SS (66 and 70) I don't plan to take any from IRA to cover expenses. Perhaps some to cover other expenses like travel or a new liver


2) Completely different tac here, I wonder if anyone has done any research like the author, with a model of say 4% but if market goes down, draw goes down by say 1/2 of the market drop. I expect that if I could expect $1,000 every month, say from SS then for some reason that drops to $800 this year, my spending would also drop. I would think this is more realistic than to assume spending will never change from the time you FIRE. As noted in other replies, some plan to increase and decrease as needs and income change, so shouldn't your projection of needed draw?

 

[CoolChange]

I use a % remaining portfolio withdrawal method. If my portfolio doesn't keep up with inflation, neither does my income.

If it runs ahead of inflation - PARTAY!

This is what I am planning as well. Based on what I have read here, this seems to be quite outside the norm even though it seems quite sensible to me.

So, I have a couple of questions for you since you are having a very successful retirement. I have also included a bit about my thinking in case you have additional comments.

• What % of your portfolio do you use to plan your annual spending?
  • I can support my current lifestyle with 1.5% of my current portfolio, assuming subsidized health care and accruals for major expenses (like a new car) every 7-10 years.
  • With some trivial belt tightening (less travel, eating out, etc.), I should easily be able to get this number under 1.2%.
  • For fun, I did what I consider an absolutely extravagant budget with no health care subsidy, lots of travel, etc. This came to be about 3% of my current total stash.
• What do you do with the extra cash not spent in a given year? Same question for the accrual buckets (roof, car, etc.).
  • Set it aside in CD's for bad years?
  • Plow it back into the total portfolio?
  • Other?

I apologize if you have answered these questions already; I did search this site briefly without finding your commentary on these.

 

[BBQ-Nut]

2 points,:


1) I likewise am using 4% only as a check to verify we have sufficient that 4% will fill the gap between other income and spending. Once we start SS (66 and 70) I don't plan to take any from IRA to cover expenses. Perhaps some to cover other expenses like travel or a new liver

Well, don't be surprised that you will be *required* to take distributions from your IRA (assuming it is a tIRA and not a ROTH) at age 70.

In our scenario, even when doing 'top off' Roth conversions up to 70, we still get whammed by RMD, I just hope the DW and I are still up and about to take whirl wind world cruises and skydiving lessons with all the 'extra' money cuz of RMDs at 70!

 

[RetiredAndFree]

I do something similar. I like the regularity of a "paycheck" so I move money out of the brokerage account $20K at a time and then move it into the spending money on a monthly basis. (I've got the world's most complicated checking account spreadsheet.) I don't intend to increase it for inflation next year. It will come out to a 2.5% withdrawal rate; I'm 61 and will wait for spousal SS till age 67, my own at 70, and a pension at 65 ($12,000/year). Withdrawal rates should decrease when those kick in.

athena, am curious what your thoughts are on just staying with a 2.5% withdrawal rate when SS arrives, and instead kicking up the spend?

We likewise have been at between 2.4% and 2.5% since ER'ing, but are thinking there's no reason not to continue doing same even after pensions, SS and Medicare arrive, since all indicators are that we can continue to do so with a 100% success rate probability, and still leave a sizable estate at end of life.

 

[RetireBy90]

Well, don't be surprised that you will be *required* to take distributions from your IRA (assuming it is a tIRA and not a ROTH) at age 70.

In our scenario, even when doing 'top off' Roth conversions up to 70, we still get whammed by RMD, I just hope the DW and I are still up and about to take whirl wind world cruises and skydiving lessons with all the 'extra' money cuz of RMDs at 70!

I understand that, but my plan is to start pulling from the IRA as soon as we retire, even if it is just to put it into another account. This would pull some from the account before RMD kicks in, giving me a lower average income by adding 10 years to the number of years. I've given up on trying to find a tax efficient method, we have about $60K of pension, great to have, but it will keep us in a higher marginal tax bracket in retirement. Add to that 85% of SS and then the RMD and we will be funding Govt phones for years to come.


Just remember George HW Bush did the sky diving well into RMD territory, if he can so can I and so can you!!!

 

[pb4uski]

I do something similar. I like the regularity of a "paycheck" so I move money out of the brokerage account $20K at a time and then move it into the spending money on a monthly basis. (I've got the world's most complicated checking account spreadsheet.) I don't intend to increase it for inflation next year. It will come out to a 2.5% withdrawal rate; I'm 61 and will wait for spousal SS till age 67, my own at 70, and a pension at 65 ($12,000/year). Withdrawal rates should decrease when those kick in.

Similar here but I do it monthly. When I rebalance annually I bring my cash in a 0.9% interest online savings account back up to 6% of our total nestegg. The 6% should be sufficient to fund 2-3 years of living expenses once combined with dividends from taxable investments that we take in cash.

I have a monthly "paycheck" that is a transfer from that online savings account to our local checking account which I use to pay our bills. Occasionally if we have special expenditures (for example, we bought a boat last summer, our property taxes for the year are due in November, etc) I make a special transfer from online savings to checking. So I can tell our withdrawals for the year by just adding up the transfers out of the online savings account.

We have been retired for 3 years now and I haven't yet felt the need to give us a "raise" by increasing our monthly transfer from online savings to checking.

 

[Hermit]

I understand that, but my plan is to start pulling from the IRA as soon as we retire, even if it is just to put it into another account. This would pull some from the account before RMD kicks in, giving me a lower average income by adding 10 years to the number of years. I've given up on trying to find a tax efficient method, we have about $60K of pension, great to have, but it will keep us in a higher marginal tax bracket in retirement. Add to that 85% of SS and then the RMD and we will be funding Govt phones for years to come.


Just remember George HW Bush did the sky diving well into RMD territory, if he can so can I and so can you!!!

I am in the same boat. I like to think of it as funding subsidized health care for all the nice retired millionaires on this board.