4% rule

[Shinge1233]

Hi, we know 4% rule to use for 401k investment after retire. But is it the 4% assumption too conservative ? Because we assume the monthly withdraw will never touch the principal. However, we may only need the money for 30 to 40 years. Why does the principal keep forever ? Is it overestimate the money ?

 

[SecondCor521]

Briefly, it's because you have to account for fluctuations in the principal.

If you have $1M and you withdraw $40K a year, and then the next year the $1M drops to $500K, then your $40K withdrawal represents an 8% withdrawal rate. Importantly, when you take that 8% out and spend it, that is money that can't compound and grow and recover.

Also, the original studies that established the 4% rule assumed that you spend down the principal over that 30 year time period. They did not assume that the withdrawals would never touch the principal - quite the opposite in fact; in many instances principal was dipped into or spent down.

See http://www.firecalc.com or google the Trinity Study for more information.

 

[RunningBum]

Hi, we know 4% rule to use for 401k investment after retire. But is it the 4% assumption too conservative ? Because we assume the monthly withdraw will never touch the principal. However, we may only need the money for 30 to 40 years. Why does the principal keep forever ? Is it overestimate the money ?

I'm confused, you said in another thread that your pension covers all of your expenses. Now you are asking about the 4% rule on 401K withdrawals? Why?

And what are you investing in that gives you a 4% distribution that doesn't require you to touch the principal?

 

[W2R]

I think it's important to underestimate what you can spend in retirement, a little, and set that extra money aside for bigger purchases. The attached graph of my annual spending during the first 11 years of retirement, as a function of my portfolio total, shows why that makes sense to me. The year with higher spending was that year when I bought my Dream Home in cash. My other spending that year was consistent with what I spent other years. Before retirement I was thinking about 3.5% sounded about right to me. Didn't work out like that but that's fine.

Anyway, some people say you no longer need to think about saving once you reach retirement. My opinion is that you do! So it's nice to have a little wiggle room so that you can save some money for big purchases like a house, boat, plane, RV, or whatever you dream of. I probably have too much but a percent or so of wiggle room is what I would suggest.

 

[Shinge1233]

I'm confused, you said in another thread that your pension covers all of your expenses. Now you are asking about the 4% rule on 401K withdrawals? Why?

And what are you investing in that gives you a 4% distribution that doesn't require you to touch the principal?

Yes, because I do have $450000 , 457k fund ( as same like 401k ) beside my pension, I assume to withdraw $1500 per month based on 4 % rule . I thought if it is too conservative to withdraw $1500 every month.

 

[Out-to-Lunch]

Few people would say that a 4% withdrawal rate is too conservative. We all HOPE that it will turn out to be too conservative, but few people think that it is ex ante.

 

[Dtail]

Yes, because I do have $450000 , 457k fund ( as same like 401k ) beside my pension, I assume to withdraw $1500 per month based on 4 % rule . I thought if it is too conservative to withdraw $1500 every month.

So if your pension does cover all your expenses, then why take out any monies from your 457 account?

 

[Shinge1233]

So if your pension does cover all your expenses, then why take out any monies from your 457 account?

Yes in my case, it is not necessary to use my 457 k for basic expenses but 457k fund is for vacation or emergency use. Just make sure the fund is adequate.

 

[Dtail]

Yes in my case, it is not necessary to use my 457 k for basic expenses but 457k fund is for vacation or emergency use. Just make sure the fund is adequate.

Okay. The concept of the 4% rule is conservative in nature, but many folks on this site use a WR of less than 4%.
It sounds like you are fine overall.

 

[Huston55]

Yes in my case, it is not necessary to use my 457 k for basic expenses but 457k fund is for vacation or emergency use. Just make sure the fund is adequate.

I suggest you review this thread for possible methods to manage your [-]play[/-] vacation/emergency money.

How can I model this? Right now, all my expenses are in my model and I have 100% Ps. The model says I can spend $25k / year on BTD from 55-70 (I have other inputs for after 70, so let's focus on 55-70). Great. But, If remove the BTD from the model, I can pull out a chunk of money and still maintain 100% Ps on the base model. To illustrate:

$2M portfolio = 100% Ps with $25k / year BTD
$1.5M portfolio = 100% Ps with no BTD

Ok, so now I have $500k to play with and I want to spend it all between 55-70. I will use a variable percent withdrawal (VPW) for this. The VPW worksheet show that I can start with $40k. Then you withdraw the percentage the worksheet says each year. If the portfolio tanks, you withdraw the prescribed % but the dollar amount is less and vice versa. Basically, I want to spend as much as possible as early as possible without risking my base portfolio.

I think I can just model this in my spreadsheet and not have to create a separate account at Fidelity. Makes life simpler.

Does all this make sense? Is it a good idea?

 

[mickeyd]

It's really the "4% guess" not the 4% rule. Use it as a guide if you have no other way to distribute your stash.

 

[GenXguy]

Hi, we know 4% rule to use for 401k investment after retire. But is it the 4% assumption too conservative ? Because we assume the monthly withdraw will never touch the principal. However, we may only need the money for 30 to 40 years. Why does the principal keep forever ? Is it overestimate the money ?

It was changed to the 4.5% rule a long time ago. Now maybe the 5% rule. See:

https://www.early-retirement.org/forums/f28/bengen-says-4-5-is-the-new-4-a-107530.html#post2548572

 

[CRLLS]

Hi, we know 4% rule to use for 401k investment after retire. But is it the 4% assumption too conservative ? Because we assume the monthly withdraw will never touch the principal. However, we may only need the money for 30 to 40 years. Why does the principal keep forever ? Is it overestimate the money ?

Which 4% rule are you talking about? There are many variations to that. The original "Trinity Study" started the 4% idea and did include spending down the principle over the 30 year "assumed" lifetime. most here, from past posts, think somewhere between 3% to 3.5% is closer to what they are using for longer periods of life expectancy. Then there is the "retire, and retire again" people. There are a lot of different ways to use a "4% rule".

 

[pb4uski]

The reason why it is 4%... and so much lower than what one would expect the average annual return for a 60/40 portfolio, is because it is the withdrawl rate that could weather really bad historical variations in returns without running out of money. More often than not, those who adhere to the 4% rule will die rich, and only 5% or so will actually run out of money.

 

[Shinge1233]

Okay. The concept of the 4% rule is conservative in nature, but many folks on this site use a WR of less than 4%.
It sounds like you are fine overall.

Thanks for your response. What is WR mean ?

 

[Out-to-Lunch]

Thanks for your response. What is WR mean ?

WR = "withdrawal rate"

 

[REWahoo]

Shinge1233, you might find this link helpful:

* Acronyms and Slang Frequently Used on the Forum *

 

[Koolau]

Hi, we know 4% rule to use for 401k investment after retire. But is it the 4% assumption too conservative ? Because we assume the monthly withdraw will never touch the principal. However, we may only need the money for 30 to 40 years. Why does the principal keep forever ? Is it overestimate the money ?

As others have indicated, you still have much research to do. I think it will make a lot more sense when you internalize the concept. Before then, you can easily be confused and mislead. DO keep in mind that this concept is not fool proof. It's a theory with lots of research and long-term financial evidence over the better part of a century. BUT, nothing says something can't change. IF the future is different than what the concept was developed from, results could be less favorable.

Also, full disclosure, though most of us pretty much accept the 4% rule (or the concept where the 4% rule comes from) MOST of us would change our withdrawal rate in the face of a major market down turn. SO YMMV.

 

[Shinge1233]

WR = "withdrawal rate"

Thanks