Interesting article on 4% rule

[audreyh1]

Also the 4% rule may not account for SS if you retire early.

Example us, retired at age ~45. Now at age ~49.

SS even with zeros in the earnings from age 45 to 62 is still a decent amount per month then, something like $2700 a month in today's dollars combined, which is quite a large portion of what we spend per month now.

So in 13 years our SWR could drop from 3.5% down to 2%, or we could increase our spending.

Since I was retiring early, I ignored SS. It might add some safety, but I wanted to feel financially secure without.

 

[FREE866]

Interesting article and thank you for all the comments. Just so I can completely grasp this:
One has $1,000,000 at retirement and takes out $40,000 in year one. Even if in year 2 the account is worth $600,000 he/she takes out $40,000 + inflation rate? so even though in year 2 he will be taking out ~6.6% thats still fine?

 

[audreyh1]

Interesting article and thank you for all the comments. Just so I can completely grasp this:
One has $1,000,000 at retirement and takes out $40,000 in year one. Even if in year 2 the account is worth $600,000 he/she takes out $40,000 + inflation rate? so even though in year 2 he will be taking out ~6.6% thats still fine?

Yes, according to the studies you have a 95% chance of not running out of money within 30 years based on US market history.

 

[FREE866]

Yes, according to the studies you have a 95% chance of not running out of money within 30 years based on US market history.

Got it. My numbers are a tad better than that, but that % won't be what I'm withdrawing for 30 years. I hope to get SS at 70 which is 17 years away.

 

[targatom2019]

cool, I only need 2% WD to cover my yearly expenses... I guess I have room to "Blow That Dough"

 

[Lewis Clark]

... For next year we are throwing caution to the wind and will pull 2.6%. Blow that dough!

If you run amok like this, based on past history, your portfolio is likely to last .... forever. : )

 

[GenXguy]

cool, I only need 2% WD to cover my yearly expenses... I guess I have room to "Blow That Dough"

Similar here. Without scaling down from my current home, and adding on health care costs for retirement, I can cover my required expenses, including sinking funds for long term expenses, with a 1.5% WR for all those required expenses, but I don't want to retire on that thin of a budget, so my plan it to spend about 2% WR on discretionary spending alone to enjoy retirement, bringing my WR rate to 3.5% combined. And after 10 years, SS will cover my required expenses, so I'll be back down to about 2% WR.

So, I won't be pushing near the 30 year 4.0% or 4.5% rule.

 

[audreyh1]

cool, I only need 2% WD to cover my yearly expenses... I guess I have room to "Blow That Dough"

Yes you do! That’s a value of the models - they can help you see if you are being perhaps too conservative in your retirement spending. It all depends on one’s goals, of course.

 

[GravitySucks]

Bengen on Bengen

He is an update from Bengen on his SAFEMAX work. A few years old now, but looks like the 2000 retiries are doing ok.
One very interesting point I take is only 5 times in quarterly data did 5% fail. "You've got to ask yourself a question: 'do I feel lucky?' "

https://www.fa-mag.com/news/is-4-5---still-safe-27153.html

 

[watchman3135]

Regarding the 4% SWR and 72t, like many here, I was planning ER at 55 however was laid of from my IT job of 18 years at the end of June this year at age 53 1/2 with a near six month severance and unemployment.
So I've decided to retire now. becase like many, my funds are in tax sheltered 403b (rolled over to IRA) and traditional IRA, I plan on using SEPP 72t to avoid the 10% penalty however as anyone who is familiar with the rules, once to set an annual withdrawal rate, you must pull that exact same amount each and every year for 5 years minimum or age 59.5. With that in mind, you cannot adjust up or down based on market fluctuations or inflation. The best that you can and are allowed to do is to use a multiplier rate up the Federal mid term rate when you start. I have $1.2m total and plan to separate about $500k form my IRA, move to the Vanguard balanced index which is 60/40 and initiate SEPP 72t on that amount. That plus another fixed\stocks of $450k will get me where I need. 72t Calculator, https://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx I selected my age of 54 which i'll be January 2020 and used a lower 1.3% reasonable interest rate and amortized method to achieve close to a 4% SWR. Given my start age, I will need to do this for 6-7 years to meet the rules. I'm still trying to decide if I need to move the reasonable interest rate up or down to account for market downturns or inflation. I should also note the one bit of flexibility one has it to switch to the lower RMD method which is a option in serious long market downturns.
A 4% SWR shows a high probability of success but being locked in with 72t has me thinking of even going lower to something like 3% -3.5% SWR. I know it's just the initial worry and after I get my feet wet i'll be fine but wonder if other have gone through this similar scenario.

 

[SecondCor521]

Regarding the 4% SWR and 72t, like many here, I was planning ER at 55 however was laid of from my IT job of 18 years at the end of June this year at age 53 1/2 with a near six month severance and unemployment.
So I've decided to retire now. becase like many, my funds are in tax sheltered 403b (rolled over to IRA) and traditional IRA, I plan on using SEPP 72t to avoid the 10% penalty however as anyone who is familiar with the rules, once to set an annual withdrawal rate, you must pull that exact same amount each and every year for 5 years minimum or age 59.5. With that in mind, you cannot adjust up or down based on market fluctuations or inflation. The best that you can and are allowed to do is to use a multiplier rate up the Federal mid term rate when you start. I have $1.2m total and plan to separate about $500k form my IRA, move to the Vanguard balanced index which is 60/40 and initiate SEPP 72t on that amount. That plus another fixed\stocks of $450k will get me where I need. 72t Calculator, https://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx I selected my age of 54 which i'll be come January 2020 and used a lower 1.3% reasonable interest rate and amortized method to achieve close to a 4% SWR. Given my start age, I will need to do this for 6-7 years to meet the rules. I'm still trying to decide if I need to move reasonable interest rate up or down to account for market down turns or inflation. I should also note the one bit of flexibility one has it to switch to the lower RMD method which is a option in serious long market downturns.
A 4% SWR shows a high probability of success but being locked in with 72t has me thinking of even going lower to something like 3% -3.5% SWR. I know it's just the initial worry and after I get my feet wet i'll be fine but wonder if other have gone through this similar scenario.

It sounds like you've done your research. Certainly you know that the interest rate used must be no greater than 120% of the mid-term AFR in either of the two months prior to initiation of the SEPP. 120% of the mid-term AFR for this month is 2.03% per https://www.irs.gov/pub/irs-drop/rr-19-26.pdf, so you can fiddle with the interest rate if you want.

Using the calculator you mentioned, an interest rate of 1.3%, age 54, and the uniform life table, it looks like the amortization method throws off about 3% and the annuitization method throws off about 4%. Which table were you using for life expectancy, and which method were you planning on using?

I haven't done an SEPP personally because it doesn't fit my situation currently. But I considered using it before finding out about the Roth conversion ladder so I'm fairly familiar with it in principle.

I am not certain, but I think if you started the SEPP at age 54 in January 2020, you could make annual withdrawals in January 2020, 2021, 2022, 2023, 2024, and January 2025. Then when you hit 59.5 in summer 2025 do whatever you want. So it would be six years of SEPP withdrawals, not seven.

People worry about the calculation but I think it is pretty straightforward. Try several online calculators and make sure you're confident in the result. It would be nice if the calculators all agreed.

 

[watchman3135]

It sounds like you've done your research. Certainly you know that the interest rate used must be no greater than 120% of the mid-term AFR in either of the two months prior to initiation of the SEPP. 120% of the mid-term AFR for this month is 2.03% per https://www.irs.gov/pub/irs-drop/rr-19-26.pdf, so you can fiddle with the interest rate if you want.

Using the calculator you mentioned, an interest rate of 1.3%, age 54, and the uniform life table, it looks like the amortization method throws off about 3% and the annuitization method throws off about 4%. Which table were you using for life expectancy, and which method were you planning on using?

I haven't done an SEPP personally because it doesn't fit my situation currently. But I considered using it before finding out about the Roth conversion ladder so I'm fairly familiar with it in principle.

I am not certain, but I think if you started the SEPP at age 54 in January 2020, you could make annual withdrawals in January 2020, 2021, 2022, 2023, 2024, and January 2025. Then when you hit 59.5 in summer 2025 do whatever you want. So it would be six years of SEPP withdrawals, not seven.

People worry about the calculation but I think it is pretty straightforward. Try several online calculators and make sure you're confident in the result. It would be nice if the calculators all agreed.

Good point and I've have ran the calculations as you mentioned from several sites as I was also curios of the consistency and they all seem to be spot on.

Even though I'm married, I am using single life expectancy on the $500k at age 54 (I'll be 54 December 25th). At 1.3% I get $19,963 Amortized Over Life Expectancy so close enough if I elect to use a 4% SWR.
I was just a bit fuzzy about the 6 vs 7 years so thanks for letting me know. Being locked in a SEPP 72t for the least amount of time sounds more appealing.

The Roth conversion did look more appealing and I currently have $30k in a S&P 500 Roth however the 5 year wait period throws me off on the mechanics of this vs. 72t.

 

[SecondCor521]

Good point and I've have ran the calculations as you mentioned from several sites as I was also curios of the consistency and they all seem to be spot on.

Even though I'm married, I am using single life expectancy on the $500k at age 54 (I'll be 54 December 25th). At 1.3% I get $19,963 Amortized Over Life Expectancy so close enough if I elect to use a 4% SWR.
I was just a bit fuzzy about the 6 vs 7 years so thanks for letting me know. Being locked in a SEPP 72t for the least amount of time sounds more appealing.

The Roth conversion did look more appealing and I currently have $30k in a S&P 500 Roth however the 5 year wait period throws me off on the mechanics of this vs. 72t.

Looks like you're using the tables correctly. Since you can use any interest rate you want, you could even use 1.301% or whatever to get it to an even $20K per year. It's all approximate anyways, as your $500K will vary in value over the next 6 years. My understanding of both those methods though is that you take out $19,963 (or whatever) each year.

As you noted originally, you're locked in for five years or until age 59.5, whichever is longer. Since you're just turning 54 now, I'm pretty sure what I wrote in my previous post is correct. You should, of course, doublecheck yourself.

I found out about the Roth ladder a few years before I retired at age 46. Being that young, I decided it was better if I didn't have to commit to a SEPP for ~14 years. I also was able to save up the 5 years of expenses to prime the pump, so to speak. Turns out with a side gig that unexpectedly showed up plus a small inheritance, I'll be OK (I'm 50 now). I still do Roth conversions just to help with my probable tax torpedo issue.

 

[teejayevans]

Regarding the 4% SWR and 72t, like many here, I was planning ER at 55 however was laid of from my IT job of 18 years at the end of June this year at age 53 1/2 with a near six month severance and unemployment.
So I've decided to retire now. becase like many, my funds are in tax sheltered 403b (rolled over to IRA) and traditional IRA, I plan on using SEPP 72t to avoid the 10% penalty however as anyone who is familiar with the rules, once to set an annual withdrawal rate, you must pull that exact same amount each and every year for 5 years minimum or age 59.5. With that in mind, you cannot adjust up or down based on market fluctuations or inflation. The best that you can and are allowed to do is to use a multiplier rate up the Federal mid term rate when you start. I have $1.2m total and plan to separate about $500k form my IRA, move to the Vanguard balanced index which is 60/40 and initiate SEPP 72t on that amount. That plus another fixed\stocks of $450k will get me where I need. 72t Calculator, https://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx I selected my age of 54 which i'll be January 2020 and used a lower 1.3% reasonable interest rate and amortized method to achieve close to a 4% SWR. Given my start age, I will need to do this for 6-7 years to meet the rules. I'm still trying to decide if I need to move the reasonable interest rate up or down to account for market downturns or inflation. I should also note the one bit of flexibility one has it to switch to the lower RMD method which is a option in serious long market downturns.
A 4% SWR shows a high probability of success but being locked in with 72t has me thinking of even going lower to something like 3% -3.5% SWR. I know it's just the initial worry and after I get my feet wet i'll be fine but wonder if other have gone through this similar scenario.

You also can start another 72t on remaining balance if you feel that you need more. Personally I would take as much as you can, you can see other threads how people are trying to lessen their RMDs and tax hit with RMDs and SS. You can always bank the excess 72t into a taxable account.

 

[pb4uski]

You also can start another 72t on remaining balance if you feel that you need more. Personally I would take as much as you can, you can see other threads how people are trying to lessen their RMDs and tax hit with RMDs and SS. You can always bank the excess 72t into a taxable account.

+1 if you are currently in a much lower tax bracket than you will be later on once SS and any pensions start, this would be an ideal time to do either roth conversions or maximize 72t withdrawals and bank any excess of withdrawals over spending in taxable account investments. Depending on your taxable income, some taxable account income like qualified dividends and long-term capital gains can be tax-free.... but the important point is to reduce tax-deferred balances and achieve more tax diversification before RMDs begin at 70 1/2.

 

[watchman3135]

You also can start another 72t on remaining balance if you feel that you need more. Personally I would take as much as you can, you can see other threads how people are trying to lessen their RMDs and tax hit with RMDs and SS. You can always bank the excess 72t into a taxable account.

As someone who has spent over a decade researching early retirement, I have seen many recommend taking the maximum amount allowable however I struggle with it as I have been preprogrammed to take no more than 4% from any one account to avoid depleting it to soon.

 

[pb4uski]

^^^ You seem to be confusing withdrawals with spending.

If you're taking 72t then presumably you are in a lower income tax bracket than you will be in later once pensions or SS start.... taking maximum 72t's is likely to be tax effective since you are in a low tax bracket... and just because you withdraw it doesn't mean that you have to spend it. You can invest the excess of the withdrwawal over what you need for spending in preferenced investments in a taxable account.

IMO it would be foolish not to take advantage of years of low tax rates.

 

[watchman3135]

^^^ You seem to be confusing withdrawals with spending.

If you're taking 72t then presumably you are in a lower income tax bracket than you will be in later once pensions or SS start.... taking maximum 72t's is likely to be tax effective since you are in a low tax bracket... and just because you withdraw it doesn't mean that you have to spend it. You can invest the excess of the withdrwawal over what you need for spending in preferenced investments in a taxable account.

IMO it would be foolish not to take advantage of years of low tax rates.

That is a good point related to the required 70 1/2 RMD I will consider come my first withdrawal this January. My understanding of the tax laws is even though I am not working and cannot make traditional or roth contributions due to no "earned income", my wife is and can invest on my behalf however I will need to check on how strict it is regarding the money trail. Otherwise, If it presents a possible issue, I would just reinvest whatever I don't use in a tax efficient non IRA mutual fund at Vanguard.

 

[Sunset]

That is a good point related to the required 70 1/2 RMD I will consider come my first withdrawal this January. My understanding of the tax laws is even though I am not working and cannot make traditional or roth contributions due to no "earned income", my wife is and can invest on my behalf however I will need to check on how strict it is regarding the money trail. Otherwise, If it presents a possible issue, I would just reinvest whatever I don't use in a tax efficient non IRA mutual fund at Vanguard.

You might want to check as the SECURE act was passed, so you might not need to take RMD until age 72 (depends upon your age).

There is no money trail, if your wife earns enough income, then she can contribute to her 401K and her IRA/Roth and give you the cash to contribute to your IRA/Roth. We never had any issue always filed married, so everything is blended in the return.

 

[watchman3135]

You might want to check as the SECURE act was passed, so you might not need to take RMD until age 72 (depends upon your age).

There is no money trail, if your wife earns enough income, then she can contribute to her 401K and her IRA/Roth and give you the cash to contribute to your IRA/Roth. We never had any issue always filed married, so everything is blended in the return.

Yes, 72 it is for me. Good to know about money trail. I was wondering if the yearly contribution (providing there is money left over) had the come from her account to meet the provisions however you answered my question. Thanks.

 

[Gunny]

I considered a SEPP, but decided against it because of the five year, age 62 lock. But I do have a pension which I decided to suplelment with part time do consulting. Then at 62 I'll consider what my SWR will be on the balance of my portfolio. Probably won't go as high as 4%.

 

[pb4uski]

...Good to know about money trail. I was wondering if the yearly contribution (providing there is money left over) had the come from her account to meet the provisions however you answered my question. Thanks.

No, the money can come from anywhere. What allows you to contribute is that fact that you are married and that between the two of you that you have earned income that is at least equal to your contribution.

So if her earned income is at least $13,000 then you can each contribute the max of $6,500 (assuming you are both over 50).

OTOH, if her earned income was only $12,000, you could only contribute $12,000 between the two of you and no more than $6,500 each.

 

[teejayevans]

I considered a SEPP, but decided against it because of the five year, age 62 lock. But I do have a pension which I decided to suplelment with part time do consulting. Then at 62 I'll consider what my SWR will be on the balance of my portfolio. Probably won't go as high as 4%.

What is 5 year 62 lock? Searching came up with nada.

 

[HI Bill]

What is 5 year 62 lock? Searching came up with nada.

I think he just meant you have to take SEPPS for at least 5 years, or until 59.5, whichever is later; so if you start at 57, you'd have to continue until 62.

 

[Gunny]

Yes, that's what I was saying. Thanks for clearing that up.