Vanguard looks at the 4% rule, 20 years later

[RetireBy90]

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.

Hermit - no kidding. Don't even get to write it off as a charity

Not trying to get political here: I know some make more from investments than I do, but because I work for a check it is taxed differently? If we had a national sales tax and did away with income tax that may be an option, but then all that ROTH we been shoving in would be taxed again. Another option would be to treat all income as income. Carried interest - Cap Gains - Dividends - SS income - all of them treated the same would bring down the effective rate for me

 

[pb4uski]

Hermit - no kidding. Don't even get to write it off as a charity

Not trying to get political here: I know some make more from investments than I do, but because I work for a check it is taxed differently? If we had a national sales tax and did away with income tax that may be an option, but then all that ROTH we been shoving in would be taxed again. Another option would be to treat all income as income. Carried interest - Cap Gains - Dividends - SS income - all of them treated the same would bring down the effective rate for me

Perhaps it would be good for you but it would be unfair to many.

Your wages are arguable a wash from a tax perspective in that while you pay tax on your wage income, your employer gets a tax deduction for what they pay you for wages and pay less taxes than they otherwise would (unless your employer is governmental or not-for-profit or similar entity that doesn't pay taxes). In fact, if you work for a corporation, then incremental tax benefit your employer receives on the wages it pays you (which would typically be 35%) is often more than what the employee pays in taxes on that income.

The corporate income that is the basis for the dividends that I receive has already been taxed once at the corporate level and it is taxed again at my level albeit at lower preferential rates. The corporate income that isn't distributed to me in the form of dividends is retained by the company and increases the company's value and is part of the capital gain when I sell my ownership interests, so part of that gain has already bee taxed as well. Similarly, my contributions to SS were not deductible so to the extent that the SS benefits that I receive are a return of previous contributions then that has already been taxed once as well.

A national sales tax would be very unfair to savers in that they have already paid taxes on the income they generated to build their savings so they shouldn't have to pay taxes on that same principal again when they spend it.

 

[Sunset]

There are many aspects of income tax that are unfair.
The Carried interest is an unfair advantage to all the hedge fund managers, should be counted as income.

 

[pb4uski]

+1 on carried interest. One of the more outrageous inequities in the code - widely recognized as such yet Congress lacks the courage to do anything about it.

 

[nuke_diver]

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?

I can't say that I've modelled things like you suggest specificially but using Flexible retirement planner I've done something similar, drop the market by 50% drop spending to what I assume is a minimum...and see how the money works out. I've run those kinds of scenarios to try and see if we could for example handle a say 60% drop in the market followed by a number of years of effectively no growth. At some point in time anything will fail of course but it makes me feel good to know that my spending and savings are in line with surviving all but a doomsday situation. And also that if I'm in serious trouble probably almost everyone else is too ...

 

[Fermion]

We are going to go with 3.5% to 4% (variable) at age 46 and if it fails....well, there is always money in the banana stand.

I am actually *ok* with it failing if we both get a good 20 years or so of retirement. No kids or anyone to worry about so we can always Thelma and Louise it.

Life has so many other unknowns (accidents, murder, cancer) that it seems a bit silly to worry a great deal about failure rates past 85% success.

 

[mathjak107]

i happen to like bob clyatts dynamic method alot. as a ballpark we will run at least the first few years with that method.

 

[Huston55]

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

Well, let's hope that is a 'sufficient quantity.'

 

[Huston55]

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?

The Guyton-Klinger WD method does something similar (10% WD reduction for a 20% PF reduction), as do some other VWD methods (like Clyatt).

You can find threads on them here and at BH.

 

[RetireBy90]

The Guyton-Klinger WD method does something similar (10% WD reduction for a 20% PF reduction), as do some other VWD methods (like Clyatt).

You can find threads on them here and at BH.

checked onepfa.org, seems the link has been moved by a rework of the site
Here is what I get for a dynamic withdrawal rate:

Mabye I need to stick to the 4% rule

 

[mickeyd]

The "4% rule" is not a rule. It should be referred to as the 4% guide, just as the "age in bonds" is really a guide , not a rule.

But, of course, most of us already are aware of this.

 

[Major Tom]

We are going to go with 3.5% to 4% (variable) at age 46 and if it fails....well, there is always money in the banana stand.

I am actually *ok* with it failing if we both get a good 20 years or so of retirement. No kids or anyone to worry about so we can always Thelma and Louise it.

Life has so many other unknowns (accidents, murder, cancer) that it seems a bit silly to worry a great deal about failure rates past 85% success.

20 years would take you to age 66. What would you do if your portfolio failed at age 66?

 

[unclemick]

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!

No surprise here - after 21 years of ER at age 71 me and the IRS are just the best of new found pals.

Now - I suspect in my being a 'cheap SOB' in early years of ER anticipating 'the shoe to drop any time' and wanting to be ready 'just in case' I was not alone. It might be like the OMY syndrome and very common.

Hindsight says I kinda enjoyed getting down with my bad frugal and varying withdrawals. Knock on wood - health has held up so I have no regrets on not spending earlier on hiking, skiing, travel, etc., etc.

heh heh heh - so all in all 2-6% plus variable withdrawal range and some Mr Market dipsy doodles 1993 -2014 I'm happy and my new found pals at the IRS are ecstatic.

 

[clifp]

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


Conclusions:

I must compliment Vanguard on presenting a good balanced article on the limitations and caveats on the 4% rule... I especially like this comment "In reality, very few retirees actually stick with such a strict policy".

I have yet to meet an actual retiree IRL or a forum who faithful follows the 4%, and I think that is a good thing.

 

[David1961]

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!

I'm curious what you do if your portfolio goes down by 10% in a year. Do you reduce spending by 10% the next year?

 

[audreyh1]

I'm curious what you do if your portfolio goes down by 10% in a year. Do you reduce spending by 10% the next year?

My income, i.e. the amount I can withdraw, would drop by 10%. Yes to that part.

My spending is a different animal. At present my retirement income exceeds my expenses by a wide margin, so if income only dropped 10%, I might not have to cut my spending at all.

 

[Major Tom]

I have yet to meet an actual retiree IRL or a forum who faithful follows the 4%, and I think that is a good thing.

If there is such an individual i.e. one who began the withdrawal phase with a fixed percentage of the starting value of the portfolio, and sticks to it, with adjustments only for inflation, over the course of 20, 30 or more years, then I hope that he/she will post here. I'm sure we will all have questions to ask!

 

[ejman]

No surprise here - after 21 years of ER at age 71 me and the IRS are just the best of new found pals.

Now - I suspect in my being a 'cheap SOB' in early years of ER anticipating 'the shoe to drop any time' and wanting to be ready 'just in case' I was not alone. It might be like the OMY syndrome and very common.

Hindsight says I kinda enjoyed getting down with my bad frugal and varying withdrawals. Knock on wood - health has held up so I have no regrets on not spending earlier on hiking, skiing, travel, etc., etc.

heh heh heh - so all in all 2-6% plus variable withdrawal range and some Mr Market dipsy doodles 1993 -2014 I'm happy and my new found pals at the IRS are ecstatic.

Isn't it wonderful to think that you and the 'guvmint' are on the same side on this one? After all, if your IRA portfolio shrinks 50% then your "pals" share shrinks even further. Yeah its nice when we can all pull together.

 

[audreyh1]

Isn't it wonderful to think that you and the 'guvmint' are on the same side on this one? After all, if your IRA portfolio shrinks 50% then your "pals" share shrinks even further. Yeah its nice when we can all pull together.

Agree - unclemick's post is just hilarious! Especially his newfound camaraderie with the IRS!

 

[ERD50]

If there is such an individual i.e. one who began the withdrawal phase with a fixed percentage of the starting value of the portfolio, and sticks to it, with adjustments only for inflation, over the course of 20, 30 or more years, then I hope that he/she will post here. I'm sure we will all have questions to ask!

I don't understand why this would be considered a rare occurrence. Even at a full 4%, adjusted for inflation every year, we know that 95% of times they would have survived just fine. And many of those rides would not have been scary at all.

Take 1982 for example - their portfolio increased in real dollars, never took even a minor dip from the starting point, just up and up, even with the 4% withdrawals! It was double in just 7 years. Would they be worried?

edit/add: just ran a simulation, and you could retire in 1982 with greater than an 8% inflation adjuste WR, and never see your portfolio buying power dip below the start point! Sweet!

-ERD50

 

[clifp]

I don't understand why this would be considered a rare occurrence. Even at a full 4%, adjusted for inflation every year, we know that 95% of times they would have survived just fine. And many of those rides would not have been scary at all.

Take 1982 for example - their portfolio increased in real dollars, never took even a minor dip from the starting point, just up and up, even with the 4% withdrawals! It was double in just 7 years. Would they be worried?

edit/add: just ran a simulation, and you could retire in 1982 with greater than an 8% inflation adjuste WR, and never see your portfolio buying power dip below the start point! Sweet!

-ERD50

The question isn't survival at all, I and I suspect Major Tom believe the numbers. It is just a matter of mechanics of being retired and implementing the 4% rule.

First, I suspect once people are actually retired the most important number for figuring out how much to spend is the value of the current portfolio not what it was 5 or 10 years ago when they retired.

Second people spending is function of needs and events more than inflation. Even if somebody was actually basing their spending solely on their initial portfolio value, they adjust spending on things beside the government inflation value. I seriously want to meet an actual retiree who in Jan 2009, said last year I withdrew $43,420, in 2008 inflation was 3.8% so this year I'll withdraw $45,070

I would think that person either had huge balls or hadn't been paying attention the last few months.

 

[ERD50]

The question isn't survival at all, I and I suspect Major Tom believe the numbers. It is just a matter of mechanics of being retired and implementing the 4% rule.

First, I suspect once people are actually retired the most important number for figuring out how much to spend is the value of the current portfolio not what it was 5 or 10 years ago when they retired.

Second people spending is function of needs and events more than inflation. Even if somebody was actually basing their spending solely on their initial portfolio value, they adjust spending on things beside the government inflation value. I seriously want to meet an actual retiree who in Jan 2009, said last year I withdrew $43,420, in 2008 inflation was 3.8% so this year I'll withdraw $45,070

I would think that person either had huge balls or hadn't been paying attention the last few months.

Well, my personal rate of inflation hasn't been much. But I did not cut anything from the budget in the downturn. My charts showed this was a historic downturn, I was well aware of it.

But that's not the point. Downturns like that is what leads to 3-4% WR, just in case. But on average (try a 50% success rate), that has not been what retirees face. But we need to be conservative - just in case.

-ERD50

 

[Fermion]

20 years would take you to age 66. What would you do if your portfolio failed at age 66?

I guess we would do what 80% of the USA is going to do...rely on SS and complain about the government.

 

[clifp]

Well, my personal rate of inflation hasn't been much. But I did not cut anything from the budget in the downturn. My charts showed this was a historic downturn, I was well aware of it.

But that's not the point. Downturns like that is what leads to 3-4% WR, just in case. But on average (try a 50% success rate), that has not been what retirees face. But we need to be conservative - just in case.

-ERD50

But did you increase your spending by 3.8% like the Trinity study would have you do.

The point that Vanguard guy, myself, and I think Major Tom are making that real retirees don't behave in the same robotic method as the hypothetical retiree in the Trinity studies do.

I suspect that for careful planners like we have on the forum, the actual failure meaning people run out of money by systematic overspending before they die is even smaller than FIRECalc would predict.

 

[Major Tom]

The question isn't survival at all, I and I suspect Major Tom believe the numbers.

I do believe the numbers or, to be more accurate, I have a pretty good understanding of what they mean. I was merely wondering - and this is by no means an original thought - how many people would begin a 30, 35 or 40 year withdrawal period with a particular WR, and stick to that exact same WR, with annual adjustments for inflation, for their entire retirement? There may be several different reasons for retirees pulling out different amounts. For instance, quite a lot of people seem comfortable with a WR that gives, say, a 95% chance of success, or the highest WR that will still just give a 100% chance of success. I am not taking issue with those decisions, as everyone has different risk tolerances and intended strategies but let's, for instance, take a retiree who feels comfortable with a WR that Firecalc gives a 95% chance of success. If he/she is unlucky enough to have a poor sequence of returns early on in retirement, then we know that at least historically, he/she can continue following the strategy and won't run out of money. There is, however, a difference between rationally knowing something, and having the emotional make-up to follow-through. I wouldn't mind betting that, after a poor sequence of returns, many folk would reduce their spending a little until the market recovered somewhat.

Likewise, what if our retiree were lucky enough to experience a good sequence of returns (or even an "average" one)? If, after 10 or 15 years, you were to find yourself with considerably more money than you were planning/hoping for, after adjusting for inflation? Perhaps a few would stick to the same WR but I'm betting that at least a few would either increase their withdrawals for a few years, or perhaps reset their strategy, and begin another 30 or 40 year withdrawal period. I bet a few folk here reset every few years - c'mon - own up

All I'm saying is that when at least 30 years have passed since the Trinity study and similar studies that were based on it were carried out, how many retirees will have experienced an entire retirement with the exact same WR (with adjustments for inflation) throughout the entire period? I can tell you that if I hit paydirt and end up one of those particularly lucky high-flying trajectories in Firecalc, I won't still be living on the same amount (inflation adjusted) as when I started!

PS - I wrote this reply a few hours ago, but it has been sitting on my computer in review mode and un-posted until now because I ended up napping with 2 cats on top of me and couldn't move