Do you really stick to the 4%?

[Florida]

To those who are ER'd and living off their investments, pensions, SS or other non earned income.
You've done the math and figured out how much you can spend each year per the 4% rule.

Do you exceed it?

Do you budget your income tax due within it? quartley payments.

Do you set aside a replacement fund for expenses that may come about every few years such as autos, furniture, unexpected medical or dental bills, etc.?

 

[Leonidas]

No
Yes - have to mail one in just a few days.
Yes - but it's mostly a rough, in-the-ballpark figure.

 

[CyclingInvestor]

I am 50, retired 2 years. I do not use the 4% rule, but I considered it a useful guideline when planning for retirement. I live off the dividends of my IRAs (accessed via 72(t)), plus a smaller after tax slush fund (mostly stock). I do no explicit budgeting nor do I set up any specific replacement funds - I just pay the bills as they arrive. I exceeded 4% overall my first 2 years due to surprise medical and car replacement issues and alot of travel, but do not feel stressed at all. Dividends have been increasing considerably faster than inflation (100% individual stock portfolio), so I see no problems ahead.

 

[lazygood4nothinbum]

due to losing close to 30% of net worth since retirement two years ago, i'm currently a little above 4% of liquid & nonliquid assets but comfortably below 4% of that plus pension & social security. my budget includes plenty of padding which could be used towards the unexpected. i'm used to budgeting dental because of perio work. i retired with a new car and the idea of traveling without a car into the near future. buying another one in my 60s shouldn't be a problem because by then i'll also have social security & pension. buying a new car every few years doesn't even play into my thinking. that's called a lease and should be so budgeted, just like taxes should be budgeted.

if i start another career the question is moot.

once markets turn, i could easily & comfortably downsize within just a few hours' drive from here to reach 4% of liquid assets alone without counting pension or ss.

if i sell out all nonliquid and vagabond, i'll be below 4% of liquid assets and far below that plus pension & ss.

i like the 4% rule. while it doesn't rule me, i find it, from what i've read, to be a comforting guide.

 

[friar1610]

To those who are ER'd and living off their investments, pensions, SS or other non earned income.
You've done the math and figured out how much you can spend each year per the 4% rule.

Do you exceed it?

No. I've actually been very fortunate that the way things have worked out (pension and, about a year ago, adding SS), I haven't had to take anywhere near the 4%.

Do you budget your income tax due within it? quartley payments.

I've adjusted the Federal and State income tax taken out of my pension such that it covers other sources of income on which I'll be taxed (interest, dividends, etc.) I also have Federal income tax taken out of my SS. (SS will not take out State income tax, so I've increased the State amount taken out of my pension accordingly.) I like this arrangement because I don't have to worry about quarterly payments. Each year when I do my income tax, I tweak the amounts so I get them as close to a wash as I can make them (not always knowing exactly what the total income will be for the next year.)

Do you set aside a replacement fund for expenses that may come about every few years such as autos, furniture, unexpected medical or dental bills, etc.?

I did during the first year or two of retirement but have since stopped. Since I'm not taking anywhere near 4% of the portfolio, I figure there's really no unanticipated expense I can't handle. Fortunately, my medical expenses are well taken care of with catastrophic caps and all that.

Lest any of the above sound smug, be aware that I'm generally a LBYM kind of person who doesn't throw money around but who has a fairly comfortable retirement.

 

[Moemg]

I do not go above 4% and usually end up below it . My budget has a lot of padding so it covers my unexpected expenses and my income tax is included in it .

 

[cute fuzzy bunny]

Nope. I figured a reasonable budget along with toys and play spending money and tuned the dividend production of our income bucket to meet or slightly exceed that spending demand. That its less than 4% of our total is comforting.

My budget is drawn up to include EVERYTHING, including present value of all expected costs and a detailed run-down of miscellaneous expenses. Everything from toothpaste to lawn mower maintenance to car tires, painting, furniture and appliances, roof replacements, replacement vehicles, etc.

My miscellaneous 'stuff' came up to about 2k a year. Present value of everything I'll ever have to do forever comes to a very stiff 10k a year...rather concerning if you're figuring a year to year budget without any thought to long term expenses and you're barely getting by @4%.

By the way, those costs are presuming that I do everything I'm capable of doing myself up to around the age of 65 and paying someone to do the stuff thats too difficult for me and everything from 65 on. I dont think I'll be cleaning the gutters out 30' up when I'm 70.

So if you're going to have to pay someone to do everything for you, that 10k a year might be pretty light. If you buy everything used off of craigslist, rent, dont own a car, and wear the very best that goodwill offers, you might get by with far less than 10k.

 

[VaCollector]

I had never heard of the 4% rule until venturing here....thankfully just before making my decision to slow down....not even
my FA had mentioned it

Once I had that info and ran my numbers in firecalc, I was comforted and knew that I could "save myself" from the rigors of the wo*k force....

But I have to admit that while the 4% rule made a lot of sense and was instrumental in my decision to slow down, I have yet to draw from my retirement funds....currently living off rents collected and my Feb-April part time work preparing taxes.

So my answer is NO - I don't exceed it, I don't set aside for future purchases and NO, my taxes don't come out of it.....as I have not drawn from those funds....YET!

 

[CuppaJoe]

I'm not detail-minded. Here on day 6 I seem to be doing ok. My last unexpected bonus could cover the rest of 2008 expenses. Or, I could figure 4% of my portfolio divided by the four remaining months of 2008--doing very very well, thank you! My RE portfolio came in better than expected. Thanks to this forum's advice, I took note of the starting amount and will be able to start answering your questions after a while. I do plan to stick to the 4% method, starting now.

 

[unclemick]

Hmmm - hell no - layed off 1993 - I'm not even sure when I ER'd in my own mind. I do remember thinking 6-8% wasn't out of the question in 1993. Had a retirement booklet with look up tables from Vanguard.

Severance pay(16 wks for 24 yrs service), then unemployment, 1 yr jobshopping, sold and ate the duplex(profit plus principle), the SO worked one year longer than I did, small non cola pension at +6 yrs , plus I had dividend DRIP stocks in taxible.

0 - 8+% over the years and I'm probably wrong even there. I do much better on yearly expenses in dollars - not %.

12k to 89k(new house post Katrina) more or less everything 1993 to 2007.

But finding this forum/and Bernstein's Efficient Frontier - 4% is ok handgrenade wise - if you use a really big handgrenade.

heh heh heh - . older, fatter and not as frugal as the 90's. .

 

[Dawg52]

heh heh heh - . older, fatter and not as frugal as the 90's. .

This is my plan as I grow older. Now, pretty much a 'cheap old bastard'. As I have mentioned in other threads, I can not travel much due to the fact I need to stay close by to look after my Mom and Aunt, both in their 90's. So my circumstances has a lot to do with my very low w/d rate, roughly 2.5%.

Funny how things work out for the best sometimes. Stock market has lowered my net worth, so not a bad time for my forced COB lifestyle.

 

[socca]

My laddered bond portfolio pays me a nice monthly 'salary', which I treat exactly as if I were still employed. Currently my 'salary' far exceeds my expenses, so I'm still growing my asset base, but at a much lower rate than when I was slaving away for the war-mongers/war-profiteers in the vast American industrial-military complex. I hope to create some new income streams down the road, which will just be icing on the cake. I would be very alarmed if I were drawing down principal at my relatively young age of 45 - my great-grandmother lived to be 104.

To me, the 4% 'rule' appears to be meaningless - there is too much potential variation in personal investment styles and living circumstances (current and future) to make such a rule useful as anything but an extremely crude guideline.

 

[audreyh1]

You bet the taxes come out of that 4%. Taxes come out FIRST each year, then whatever is left over is mine to spend. So far, I have not spent all of the remainder so some of it gets reinvested.

I keep 2 to 3 years of living expenses available in a short term cash account. This is enough to cover large ticket items as needs arrive.

Audrey

 

[Rambler]

Not ERd yet, but don't plan on going anywhere near 4%...I'm targeting 3-3.3%, and won't leave the workforce until I'm in that range. Then, I won't use more than that, ever, including taxes and accruals/provisions for the big ticket stuff....well, maybe I'll inch it up to 4% after age 65 (mid 40s now). As it stands though, I have created a generous budget, including taxes and accruals for the big tickets, so may not even reach 3% in the early years. Looking for FIRE within a year or two...lots of variables at the moment, and still creating the dividend/interest cash-flow machine.

R

 

[dm]

I'm shooting for 4% and I pay taxes out of that. This is my first year and it looks like I will spend closer to 5%. I need to take another look at our budget. We really never held ourself to a budget, I just keep track of what we spend. We had our kitchen floor tiled and bought a new HDTV. And we are spending more on gas than I had thought.

The wife is still teaching a night class at the local college, she is grinding away for 4 hours a week. I general don't include this money into my plans, but it offsets the extra spending. But I think that see will be giving this up in a year or so. I hopefully will have a better handle on our expenses by then.

 

[rickier55]

I retired 3 years ago with a Cola's pension that covered 90% of annual expenses. I use my retirement portfolio to cover the rest. The draw on my portfolio started at around 2.6%. The percnetage fluctuates with the market. I've also increased the initial amount each year so far by each years Cola (though I've been arguing with myself about this increase this year). Coincidentally, as of first of Sept it's right at 2.6% again.

I arrived at my original draw by estimating my annual expenses (all expenses - including taxes & allotments for major purchases and repairs), then subtracting out pension. My draw down was based on funding the remainder. My expense estimate was based on several years of tracking expenses, and I wanted to basicly maintain the same style of living as before retirement.

Rick

 

[september]

large variation depending on when/how denominator is measured

It's always bothered me when people talk about 4% (and some make distinctions such as "i'd stick with 3.5% instead of 4%", etc., or ...etc. etc....carrying out decimal places as if they're significant). Although I think the original literature defined the WD rate using a denominator that is the "beginning of the year balance" or maybe "last day of the year x-1", I doubt everyone uses that definition....and most people don't define it. But you obviously get very different WD rates depending on how you define that denominator (i.e., what point in the year you measure it). I "withdraw" money every month for living expenses, and I use a mid-year average as the denominator. And in a years like 2007 and 2008, with these swings in portfolio value, you obviously get different results. I thought about posting this only because i just recently went back and retrospectively (roughly) estimated my WD rates over the past few years, as part of a project of developing annual expense reports for myself. Anyway, it seems that for someone who withdraws and spends money each month, it makes sense to use the yearly average of the portfolio value, or maybe just the mid-year value. But, if the "literature" always defines it as first day of the year value, and if eveyone does it that way, then perhaps that makes the most sense, for consistency.

 

[Moemg]

I write down what my 4% amount is on Jan.1 . Every month I calculate how much of the 4% allotment I've used so I know if I need to cut back or spend freely .

 

[Rambler]

I write down what my 4% amount is on Jan.1 . Every month I calculate how much of the 4% allotment I've used so I know if I need to cut back or spend freely .

That is essentially my plan, but with the lower rate I gave, until somewhere between age 62-67. At that point, I may begin to ratchet the rate up a notch at a time to max at 4%, depending on how the markets have treated me, and how well I tolerated the ups and downs in the 14-18 years between the time I FIRE and that age. Yes, this means that I may have to reduce my expenses 15-20% in certain years, but I believe my targeted budget to be pretty generous. If a 15-20% cutback is too steep, I could cut back spending levels by 5-10% and still be under 4%.

R

 

[mschiap]

I write down what my 4% amount is on Jan.1 . Every month I calculate how much of the 4% allotment I've used so I know if I need to cut back or spend freely .

I do something similar: calculate the amount for the year, divide by 12, and move that much cash monthly into our "transaction" account. Then you can easily "track" against your monthly budgeted expense.

 

[W2R]

I do something similar: calculate the amount for the year, divide by 12, and move that much cash monthly into our "transaction" account. Then you can easily "track" against your monthly budgeted expense.

Then do you pay your taxes out of what's left over in your "transaction" account, or are they separate? I am not retired quite yet but was thinking of adjusting my spending by subtracting an estimate of my taxes from my withdrawals and putting that aside.

 

[mschiap]

Income Tax comes out of the "leftover" in my "transaction" account.

Property Tax is kept out of the "transaction" account; it is set aside before I calculate the monthly amount.

 

[W2R]

Income Tax comes out of the "leftover" in my "transaction" account.

Property Tax is kept out of the "transaction" account; it is set aside before I calculate the monthly amount.

Sounds reasonable - - Thanks.

 

[haha]

I have never done any of these things. I just go along spending what I need to spend to feel reasonably happy. Most months I have more cash income than I spend. Since this 4% business is tested on a fairly narrow set of investments and assumptions, and these are not even close to how I invest, I feel that is is almost useless for me.

I think once you get to a certain portfolio size, stocks invesments are a business like any other. Pay attention, try to avoid big mistakes, do some high potential pay-off things, watch your overhead and you should be fine.

I am trying to get a better handle on tax expense.

Ha

 

[harley]

I thought the 4% was supposed to be based on the total net worth the first year you were retired, then that amount is adjusted up for inflation each year. Are y'all just taking 4% of whatever your net worth is at some point each year? I know that's one choice, as is the 95% of 4% option. But I guess I was assuming most people used option one, if they were doing a "4%" strategy.

I started at 3.5% of my NW my first year, and I'm adjusting up for inflation at 3% per year. In about 10 years (at age 62) we'll start our SS draw, assuming it's still available. Then when we reach 70.5 I'll repay the total and do the John Greaney SS annuity plan.

In 5 years or so I will readdress our situation, and may increase the draw to 4% if we're doing well. But even if we can't we should be fine with the original plan.