The 4% rule;which is it?

[Gunny]

I bet I have read a hundred articles and blog posts regarding Bengen's 4% SWR research and the Trinity Study. I've read that the two were based on historical returns of a hypothetical 50/50 portfolio, a 60/40, and a 75/25 portfolio. Which is it? I've also read that 4% is too conservative. I've read it is not conservative enough in relation to today's bond yields and high equity valuations. Which is it? Its enough to drive a person batty trying to figure it out. I have a very, very low SWR as I have a great pension, but I don't want to leave a small fortune on the table when I die at exactly 92.5 years old either. Just trying to figure it out. What say you?

 

[walkinwood]

Dig into the assumptions made. What was the asset allocation, what constituted failure, what percentage was acceptable, what was the time frame? What is the exact methodology?

Then pick.

We're using a volatile investments to come up with a predictable income stream. There are no "natural" rules, just guesses based in some way or the other on the history of the investments.

I think we all went nuts over it at some time or the other, but then decided that ER was more appealing than endless analysis.

Pick an asset allocation, pick a duration, pick a methodology, give yourself some headroom, pay attention and be flexible with your spending.

 

[W2R]

Here's an article in the Bogleheads wiki that discusses asset allocation with relation to the Trinity Study:

https://www.bogleheads.org/wiki/Trinity_study_update

Among other things, it points this out:

First, regarding the Trinity study itself, the fact that 75% stocks increased the probability of success for 4% inflation-adjusted withdrawals is not a strong reason to choose this allocation. The difference between 100% success for 75/25 and 96% for 50/50 is just that in two years (1965 and 1966) the maximum withdrawal rate fell slightly below 4% with 50/50, but stayed slightly above 4% with 75/25. It is not that big of deal when considering your overall return requirements and tolerance for risk.

Personally I am a bit too conservative with my withdrawal strategies to get anywhere near 4% anyway. That's just me. I don't mind leaving money on the table at all, as long as I have had the most wonderful life and retirement imaginable. So far, so good. Any excess at death is no longer my problem.

 

[GravitySucks]

Knowing the exact end date should help you work back.
I think the 4 percent is way to conservative...until those extremely rare cases when it's not. (I always read 4.5% and Bengen reaffirmed that in his AMA on Reddit.)
I used 4.5% for the last four years. I plan on bumping this up now that I'm in my 5th year as I'm assuming SS kicks in a living income at 70.
Also, looking at relatives in the mid 80s and I see how little they want and how little hey spend. I need to enjoy some of this money now while I'm able.

 

[Gunny]

Here's an article in the Bogleheads wiki that discusses asset allocation with relation to the Trinity Study:

https://www.bogleheads.org/wiki/Trinity_study_update

Among other things, it points this out:

Personally I am a bit too conservative with my withdrawal strategies to get anywhere near 4% anyway. That's just me. I don't mind leaving money on the table at all, as long as I have had the most wonderful life and retirement imaginable. So far, so good. Any excess at death is no longer my problem.

Great job hitting the nail right on the head.

 

[Dtail]

Knowing the exact end date should help you work back.
I think the 4 percent is way to conservative...until those extremely rare cases when it's not. (I always read 4.5% and Bengen reaffirmed that in his AMA on Reddit.)
I used 4.5% for the last four years. I plan on bumping this up now that I'm in my 5th year as I'm assuming SS kicks in a living income at 70.
Also, looking at relatives in the mid 80s and I see how little they want and how little hey spend. I need to enjoy some of this money now while I'm able.

This is one way to go and totally agree with your concept. My parents are in their mid to late 80's and their spending has dropped as my father's health is slowly deteriorating.

This is my first full retirement year and using 2.5% WR.
Another concept is I will most likely move to 3% remaining portfolio next year, but in a very bad market year will try hard to limit cutting expenses and effectively have the WR for that year go to ~4%.

Lots of different ways to slice the pie.

 

[gayl]

This is one way to go and totally agree with your concept. My parents are in their mid to late 80's and their spending has dropped as my father's health is slowly deteriorating.

This is my first full retirement year and using 2.5% WR.
Another concept is I will most likely move to 3% remaining portfolio next year, but in a very bad market year will try hard to limit cutting expenses and effectively have the WR for that year go to ~4%.

Lots of different ways to slice the pie.

Baby stepping into this. 2nd year of retirement, 1st yr not saving. Who is it who says "blow that dough?"

 

[OldShooter]

... There are no "natural" rules, just guesses. ...

+1 (emphasis added)

 

[dvalley]

...
Any excess at death is no longer my problem.

Just leave me your info and I'll be glad to take on that problem

 

[W2R]

Just leave me your info and I'll be glad to take on that problem

What, and deprive my heirs of the "fun" of battling to the death over it for years? No way. Well, this is assuming the government doesn't take it all somehow, which I understand they are pretty good at doing.

 

[mrWinter]

... but I don't want to leave a small fortune on the table when I die at exactly 92.5 years old either.

I'd posit that if what you are talking about is a 'constant' inflation adjusted SWR as used in the trinity study, any number low enough to keep you solvent in >95% of historical scenarios will also be so low that in maybe 50-75% of historical scenarios you will be leaving a fortune on the table when you die. Setting the number low enough to weather the worst historical situations means that if anything better than the worst happens, you number is lower than needed, likely much so.

If you are adjusting the SWR throughout your retirement based on portfolio performance, that's a different story, but I don't think that is what most people are talking about when they are talking about the 4% rule, nor was it what was use in the trinity study.

 

[MoneyIsMyHobby]

I bet I have read a hundred articles and blog posts regarding Bengen's 4% SWR research and the Trinity Study. I've read that the two were based on historical returns of a hypothetical 50/50 portfolio, a 60/40, and a 75/25 portfolio. Which is it? I've also read that 4% is too conservative. I've read it is not conservative enough in relation to today's bond yields and high equity valuations. Which is it? Its enough to drive a person batty trying to figure it out. I have a very, very low SWR as I have a great pension, but I don't want to leave a small fortune on the table when I die at exactly 92.5 years old either. Just trying to figure it out. What say you?

I don't have your answer, but I do believe the 4% and 25x rules are meant for a 'normal retirement age'. If I decide to FIRE, I plan to be well below 4%, probably 3%. Depending on what happens in the first few years, I may increase my spending over time. I also agree with the idea of spending more while you're young enough to enjoy it... so that is conflicting! I love playing with various spending and saving scenarios in Personal Capital.

MIMH

 

[Cut-Throat]

I bet I have read a hundred articles and blog posts regarding Bengen's 4% SWR research and the Trinity Study. I've read that the two were based on historical returns of a hypothetical 50/50 portfolio, a 60/40, and a 75/25 portfolio. Which is it? I've also read that 4% is too conservative. I've read it is not conservative enough in relation to today's bond yields and high equity valuations. Which is it? Its enough to drive a person batty trying to figure it out. I have a very, very low SWR as I have a great pension, but I don't want to leave a small fortune on the table when I die at exactly 92.5 years old either. Just trying to figure it out. What say you?

You sound like a perfect candidate for VPW (Which is safer than 4%, 3%, 2% Withdrawal Rates) --- Probably the most efficient Withdrawal System going. Check out VPW (Variable Percent Withdrawal)

 

[dvalley]

What, and deprive my heirs of the "fun" of battling to the death over it for years? No way. Well, this is assuming the government doesn't take it all somehow, which I understand they are pretty good at doing.

Good point! But did I mention that I'm frequently available for adoption too?

OK back to the subject at hand...

 

[Offgrid Organic Farmer]

In my opinion, if I were to withdraw funds at any rate faster then portfolio growth that would be a mistake.

 

[Cut-Throat]

In my opinion, if I were to withdraw funds at any rate faster then portfolio growth that would be a mistake.

The OP said:

but I don't want to leave a small fortune on the table when I die at exactly 92.5 years old either.

Your plan would not work for that and probably would have you Starving to death in a Stock Market Downturn of 15-20 years.

 

[MoneyIsMyHobby]

In my opinion, if I were to withdraw funds at any rate faster then portfolio growth that would be a mistake.

This seems like sound logic to me, particularly when retiring at 42 Farmer!

 

[Offgrid Organic Farmer]

My portfolio is growing, we live below our means.

My holdings are within a couple LLCs, so when I die it should slide over to my children without much fanfare.

I do not see any likelihood of starving if the Stock Market takes a nose dive for 20 years.

 

[OldShooter]

... My holdings are within a couple LLCs, so when I die it should slide over to my children without much fanfare. ...

I have not heard of this before. Do you still get the asset basis step-up on death for the holdings?

 

[Cut-Throat]

My portfolio is growing, we live below our means.

My holdings are within a couple LLCs, so when I die it should slide over to my children without much fanfare.

I do not see any likelihood of starving if the Stock Market takes a nose dive for 20 years.

Well, this is all fine and Dandy, but it does not address the Original Question of this thread.

 

[Offgrid Organic Farmer]

I have not heard of this before. Do you still get the asset basis step-up on death for the holdings?

My wife and I started a couple LLCs. We each own 49% and our sons each hold 1% ownership of each LLC. If we die the LLCs pass over to our sons.

One LLC holds the deed and bank accounts to our farm.

The other LLC owns 2 commercial buildings occupied by a church, 2 businesses, and eleven residential tenants.

 

[OldShooter]

My wife and I started a couple LLCs. We each own 49% and our sons each hold 1% ownership of each LLC. If we die the LLCs pass over to our sons.

One LLC holds the deed and bank accounts to our farm.

The other LLC owns 2 commercial buildings occupied by a church, 2 businesses, and eleven residential tenants.

Yes, I think I understand the idea. Let me try to explain my question:

When one inherits property from an estate, the inheritor's tax basis on the property is its value on the date of death. For example if you held your farm personally and bequeathed it to your sons, there would never be any tax paid on the gain between your basis and the farm's value on your date of death. If you have held the farm for a long time, this could be a huge benefit. Did your tax advisor tell you that this basis step-up still applies if the farm is held in an LLC and the LLC is transferred as you expect?

The same question applies on the other LLC. Will your sons get the basis step-up on the commercial and residential property?

 

[exnavynuke]

1. I bet I have read a hundred articles and blog posts regarding Bengen's 4% SWR research and the Trinity Study. I've read that the two were based on historical returns of a hypothetical 50/50 portfolio, a 60/40, and a 75/25 portfolio. Which is it?

2. I've also read that 4% is too conservative. I've read it is not conservative enough in relation to today's bond yields and high equity valuations. Which is it?

Its enough to drive a person batty trying to figure it out. I have a very, very low SWR as I have a great pension, but I don't want to leave a small fortune on the table when I die at exactly 92.5 years old either. Just trying to figure it out.

3. What say you?

1. The studies tested multiple withdrawal rates, and there was very little overall difference between the 50-75% equity portfolios. As such, I say use whatever makes you most comfortable.

2. A 4% SWR is neither conservative nor aggressive, it's simply a guide using historical numbers. Those historical numbers could be just like what we see moving forward or very different from what comes to pass and no one can tell which will actually happen. As such, you can decide what level of risk you're willing to take. A 4% SWR has minimal risk if things go as well or better than history. It has high risk if things go much worse than history. So, again, I say use whatever makes you most comfortable.

3. I plan on using a 4% SWR and "resetting" it annually until I'm in my 60's, while monitoring for indications it might be excessive. By that I mean I'll assume each year is "year one" and go with 4% from that point, adjusting my "number" up or down depending on how the markets have been doing. A series of very bad returns in the early years would likely mean that would adjust down to a point I might not be comfortable with, so I'd re-evaluate my plan (see if I could reduce expenses or if I should look for some other income sources; i.e. get a job, at least for some of the time) if that were to happen.

 

[Dtail]

1. The studies tested multiple withdrawal rates, and there was very little overall difference between the 50-75% equity portfolios. As such, I say use whatever makes you most comfortable.

2. A 4% SWR is neither conservative nor aggressive, it's simply a guide using historical numbers. Those historical numbers could be just like what we see moving forward or very different from what comes to pass and no one can tell which will actually happen. As such, you can decide what level of risk you're willing to take. A 4% SWR has minimal risk if things go as well or better than history. It has high risk if things go much worse than history. So, again, I say use whatever makes you most comfortable.

3. I plan on using a 4% SWR and "resetting" it annually until I'm in my 60's, while monitoring for indications it might be excessive. By that I mean I'll assume each year is "year one" and go with 4% from that point, adjusting my "number" up or down depending on how the markets have been doing. A series of very bad returns in the early years would likely mean that would adjust down to a point I might not be comfortable with, so I'd re-evaluate my plan (see if I could reduce expenses or if I should look for some other income sources; i.e. get a job, at least for some of the time) if that were to happen.

exnavynuke
On point #3, are you familiar with Clyatt's 4/95 WR strategy?
If so, would you consider using it in down years?
I am strongly considering for next year and always open to ideas on the concept.

 

[Offgrid Organic Farmer]

Yes, I think I understand the idea. Let me try to explain my question:

When one inherits property from an estate, the inheritor's tax basis on the property is its value on the date of death. For example if you held your farm personally and bequeathed it to your sons, there would never be any tax paid on the gain between your basis and the farm's value on your date of death. If you have held the farm for a long time, this could be a huge benefit. Did your tax advisor tell you that this basis step-up still applies if the farm is held in an LLC and the LLC is transferred as you expect?

The same question applies on the other LLC. Will your sons get the basis step-up on the commercial and residential property?

They would have the option of having either property re-assessed if they wanted to do so.

We recently went through an inheritance, where my wife was the executor and the sole heir. The probate court contested the will, and it dragged out for 18 months. Nobody else, ever stepped up to say that they were heirs. It still all went to my wife. But we had to pay for the lawyer fees. We wanted to make our estate to go smoother.