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Vanguard looks at the 4% rule, 20 years later
Old 12-04-2014, 03:12 PM   #1
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Vanguard looks at the 4% rule, 20 years later

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


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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.
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Old 12-04-2014, 03:21 PM   #2
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Thanks for posting. And here I thought 3% was the new 4%, with some diehards hanging at 2%.
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Old 12-04-2014, 03:26 PM   #3
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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.
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Old 12-04-2014, 03:48 PM   #4
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Originally Posted by Live And Learn View Post
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
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Old 12-04-2014, 04:02 PM   #5
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Arrr.....
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Old 12-04-2014, 05:18 PM   #6
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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.
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Old 12-04-2014, 05:26 PM   #7
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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.
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Old 12-04-2014, 05:45 PM   #8
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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.
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Old 12-04-2014, 06:10 PM   #9
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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%.
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Old 12-04-2014, 06:35 PM   #10
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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.
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Old 12-04-2014, 07:37 PM   #11
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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!
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Old 12-04-2014, 09:21 PM   #12
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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).
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Old 12-04-2014, 09:56 PM   #13
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Originally Posted by audreyh1 View Post
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.
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Old 12-04-2014, 10:12 PM   #14
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Quote:
Originally Posted by rodi View Post
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.
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Old 12-05-2014, 06:58 AM   #15
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I use it as a guideline, especially since my spending isn't constant.


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Old 12-05-2014, 08:04 AM   #16
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Having had the worklife experience of 20-30% swings in income I see no need for a specific SWR% rule.
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Old 12-05-2014, 08:06 AM   #17
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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).
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Old 12-05-2014, 08:11 AM   #18
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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.
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Old 12-05-2014, 09:14 AM   #19
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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?
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Old 12-05-2014, 09:23 AM   #20
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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.
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