Alternative to the 4% rule

[esterhazy]

if one doesn't have any needs for the extra monies in that particular year, why spend it?

Because money is ALWAYS spent. There's no such thing as "not spending money". The only question is whether it gets spent today or in the future. Whether it gets spent today in a way that you can enjoy the spending (whatever that may mean for you; it does NOT mean "buy more stuff") or whether it gets spent by your heirs when you are dead.

(What follows is 60% a devil's advocate position....stick with me to the end.)

When you take into account things like the time value of money and the joy of seeing it spent while alive as opposed to the much more nebulous "my estate will inherit it and distribute it to my appointed heirs"....it should be clear that, even if you don't personally subscribe it, the idea of "distribute money now instead of later" is a position people can argue credibly.

Keep in mind that for all of us, except in the most dire historical circumstances of all time, we will die with more money than we have today.

To take a simple example: imagine giving $10,000 a year to your children (to help fund a Roth or 529 or just pay down a mortgage faster or whatever; you know your children, I don't) when you are in your 50s (and they are in their 30s) instead of them getting $500,000 as a lump sum when they are 70 (and you passed away in your 90s).

If you do a simple "time value of money" calculation using a discount rate of 3% then it is better to spend/give/burn up $10,000 a year for 30 years than to leave your estate $196,000.

When people say "if I don't have any extra needs why spend it" they usually really mean something "I'd rather save it until I'm nearly dead JUST IN CASE something comes up". And I get that. I do. I'm not a spreadsheet automaton. I have the same fears & paranoias & whatnot as other people. But that's where a good systematic plan comes in. It helps us defeat our behavioural biases.

If my systematic plan says I can spend $80,000 this year and I'm actually only spending $50,000 (including all the wild bucket list vacations I want) then....sure, like you I'm probably not going to spend that $30,000 "just because" some spreadsheet told me to. But I'd have a serious hard look in the mirror and ask myself what exactly I'm saving that money for? If I don't need it today what am I saving it for tomorrow for? Early retirees should recognise this as just another form of "I don't need the money to support my lifestyle, then why am I still working?" question that we all ask ourselves at some point.

So, sure, I probably wouldn't spend all $30,000. But I'd probably meet the spreadsheet halfway and give my brother $15,000 to pay down his mortgage faster or pay for my niece's college tuition for one semester or donate to my nephew's basketball team or donate to the local temple that teaches literacy to orphans.

 

[Dtail]

Because money is ALWAYS spent. There's no such thing as "not spending money". The only question is whether it gets spent today or in the future. Whether it gets spent today in a way that you can enjoy the spending (whatever that may mean for you; it does NOT mean "buy more stuff") or whether it gets spent by your heirs when you are dead.

(What follows is 60% a devil's advocate position....stick with me to the end.)

When you take into account things like the time value of money and the joy of seeing it spent while alive as opposed to the much more nebulous "my estate will inherit it and distribute it to my appointed heirs"....it should be clear that, even if you don't personally subscribe it, the idea of "distribute money now instead of later" is a position people can argue credibly.

Keep in mind that for all of us, except in the most dire historical circumstances of all time, we will die with more money than we have today.

To take a simple example: imagine giving $10,000 a year to your children (to help fund a Roth or 529 or just pay down a mortgage faster or whatever; you know your children, I don't) when you are in your 50s (and they are in their 30s) instead of them getting $500,000 as a lump sum when they are 70 (and you passed away in your 90s).

If you do a simple "time value of money" calculation using a discount rate of 3% then it is better to spend/give/burn up $10,000 a year for 30 years than to leave your estate $196,000.

When people say "if I don't have any extra needs why spend it" they usually really mean something "I'd rather save it until I'm nearly dead JUST IN CASE something comes up". And I get that. I do. I'm not a spreadsheet automaton. I have the same fears & paranoias & whatnot as other people. But that's where a good systematic plan comes in. It helps us defeat our behavioural biases.

If my systematic plan says I can spend $80,000 this year and I'm actually only spending $50,000 (including all the wild bucket list vacations I want) then....sure, like you I'm probably not going to spend that $30,000 "just because" some spreadsheet told me to. But I'd have a serious hard look in the mirror and ask myself what exactly I'm saving that money for? If I don't need it today what am I saving it for tomorrow for? Early retirees should recognise this as just another form of "I'm I don't need the money to support my lifestyle, then why am I still working?" question that we all ask ourselves at some point.

So, sure, I probably wouldn't spend all $30,000. But I'd probably meet the spreadsheet halfway and give my brother $15,000 to pay down his mortgage faster or pay for my niece's college tuition for one semester or donate to my nephew's basketball team or donate to the local temple that teaches literacy to orphans.

I understand your stance.
For me personally, it is not the end of life with no money worries, but more so filling in the actual spend shortfalls in a severe bear market and new car purchase as another example.

 

[audreyh1]

As my short-term funds accumulate due to the current roaring bull market, I often ask myself what I’m going to spend that money on. I have lots of answers. I haven’t gotten around to several of them yet and some may occur in the future anyway. I don’t feel urgency. We keep ramping up spending, but don’t feel the need to push hard.

We already do a lot of gifting. I prefer to ramp that gradually, just like my target budget.

We’ve been meaning to buy a new car for over two years now, LOL! Somehow we get too busy. It might happen this year.

I’m still in my 50s. As we age, if funds keep accumulating we’ll get more aggressive. But we also may need to supplement our income at some point during the next 10 years due to a severe bear market knocking down the portfolio.

If my systematic plan says I can spend $80,000 this year and I'm actually only spending $50,000 (including all the wild bucket list vacations I want) then....sure, like you I'm probably not going to spend that $30,000 "just because" some spreadsheet told me to. But I'd have a serious hard look in the mirror and ask myself what exactly I'm saving that money for? If I don't need it today what am I saving it for tomorrow for? Early retirees should recognise this as just another form of "I don't need the money to support my lifestyle, then why am I still working?" question that we all ask ourselves at some point.

Huh? I don’t get the analogy, but I also wonder why does it matter? Different people have different goals with their spending and their spending timelines.

 

[esterhazy]

I understand your stance.
For me personally, it is not the end of life with no money worries, but more so filling in the actual spend shortfalls in a severe bear market and new car purchase as another example.

For "filling actual spend shortfalls in a severe bear market"....that's what I meant when I originally said "test it and see if it actually makes a difference".

When I did my own testing I found that it rarely helped any significant amount. After all, the only times severe bear markets usually hurt is when they happen early in retirement when you haven't had any time to build up this buffer to any significant amount. Maybe it has $20,000 or $30,000 in there. But that's small consolation when your spending shortfall is $15,000 a year for 10 years.

Anyway, everyone should do their own testing and come up with their own conclusions. But I personally came away thinking there wasn't much benefit in trying to sock away money for super worst case scenarios. Virtually all decent withdrawal strategies already handle worst case scenarios for anything the US has ever seen. If it gets worse than that, a "rainy day" fun won't be enough because we're not talking about rainy days...we're talking about Noah-style floods

For "new car purchase"....well, I include those in my spending plan already. But I guess you really mean any kind of irregular ultra-big purchase. Maybe you decide to take your entire extended family on a cruise to Antarctica and it is going to be $120,000 or whatever. So you "save" some money from 2019 and 2020 so you have enough in 2021. Sure, I totally understand that. Makes complete sense to me, too.

 

[Dtail]

For "filling actual spend shortfalls in a severe bear market"....that's what I meant when I originally said "test it and see if it actually makes a difference".

When I did my own testing I found that it rarely helped any significant amount. After all, the only times severe bear markets usually hurt is when they happen early in retirement when you haven't had any time to build up this buffer to any significant amount. Maybe it has $20,000 or $30,000 in there. But that's small consolation when your spending shortfall is $15,000 a year for 10 years.

Anyway, everyone should do their own testing and come up with their own conclusions. But I personally came away thinking there wasn't much benefit in trying to sock away money for super worst case scenarios. Virtually all decent withdrawal strategies already handle worst case scenarios for anything the US has ever seen. If it gets worse than that, a "rainy day" fun won't be enough because we're not talking about rainy days...we're talking about Noah-style floods

For "new car purchase"....well, I include those in my spending plan already. But I guess you really mean any kind of irregular ultra-big purchase. Maybe you decide to take your entire extended family on a cruise to Antarctica and it is going to be $120,000 or whatever. So you "save" some money from 2019 and 2020 so you have enough in 2021. Sure, I totally understand that. Makes complete sense to me, too.

See bolded by me.
I agree wrt early in retirement scenario viability. This is why I am using this concept in addition to the 95% Clyatt WR rules, which will also counter the effects of the bear market.

 

[audreyh1]

Anyway, everyone should do their own testing and come up with their own conclusions. But I personally came away thinking there wasn't much benefit in trying to sock away money for super worst case scenarios. Virtually all decent withdrawal strategies already handle worst case scenarios for anything the US has ever seen. If it gets worse than that, a "rainy day" fun won't be enough because we're not talking about rainy days...we're talking about Noah-style floods.

Sure, and my particular withdrawal method could theoretically result in a 60% drop in real income before recovering. So I’ve come up with strategies to deal with it that match my way of life.

Each of us has a philosophy of stewardship in terms of how we use our overall assets to the benefit of ourselves, loved ones and other people around us, the charities we support, and our heirs. I’m sure they vary widely.

 

[big-papa]

Perhaps semantics. Wouldn't it be similar to one feeling they aren't going to receive SS payments and thus are not including it in their "Firecalc" calculations, or most folks not including inheritance possibilities.
Thus they wish to calculate the survival % of just a set subset of their overall monies and anything other NW assets are outside this realm.

Always a choice to treat everything but my portfolio as a bonus. For many of us, to do otherwise means we have to work longer. So I choose to use the present value of everything I know that's coming. I can choose to give SS a haircut and do just in case. But I'm not going to ignore it. All things investing will require some degree of faith and that's where I've placed mine. YMMV

 

[Nature Lover]

Sure, and my particular withdrawal method could theoretically result in a 60% drop in real income before recovering. So I’ve come up with strategies to deal with it that match my way of life.

Each of us has a philosophy of stewardship in terms of how we use our overall assets to the benefit of ourselves, loved ones and other people around us, the charities we support, and our heirs. I’m sure they vary widely.

So true! The math doesn't drive us...we decide for ourselves what works best for our way of life, and plan accordingly. The mental accounting, determining what is or isn't appropriate in spending early vs. later, whether to gift or hold for a legacy, our investment knowledge and individual risk tolerance, and our financial position vs. our own "typical expenses"....these are all things that vary widely. And those of you with a spouse and/or children have to seek a stewardship approach that generally works for everyone. To know thyself is sometimes the hardest part of all this.

I wanted to jump in at some point to thank the participants of this thread, as I've found it quite informative and thought provoking. I love talking about the math, and while compared to most, I'm knowledgeable; but some here know much more than I do, and I appreciate being able to read their views and rationale.

NL