FIRE on 4%

[audreyh1]

Quote:

Originally Posted by hnzw_rui In fairness, that 4% "rule" increases withdrawals based on CPI indiscriminately and with starting year of 1966, actually has up to an 8% WR after just a few years (I think I read this in a Kitces article). I don't think this applies to a % of portfolio method. Even a 5% WR wouldn't deplete your portfolio. It'll just make withdrawals smaller and smaller if the market doesn't play nice.

I was answering for the initial % of portfolio increased with inflation each year method. 4% is not a safe withdrawal rate for a possibly >30 year retirement. Someone retiring at 55 should probably assume 40 years.

[hnzw_rui]

Quote:

Originally Posted by golfnut Are you thinking you will still be around after the age of 95? If so, you must have longevity genes in your family. I would think most people retiring any time between 60 and 65 will be looking down from the heavens well in advance of 30 years. 4% wr should actually leave a balance for heirs.

Problem is it's hard for individuals to pool risk. Sure, people without pensions can buy an SPIA but then you run the risk of inflation. The inflation-adjusted SPIAs cost way too much (for joint life 55/51 with 2% COLA, ~3.4% cash flow rate).

Can't easily predict which end of the spectrum you fall on. Both my grandfathers died fairly young (although both racked up huge medical bills near EOL). Meanwhile, one grandmother lived up to 89 yo (died 6 days short of her 90th bday) despite diabetes, hypertension and being wheelchair bound for a couple of decades. One grandmother just celebrated her 92nd birthday but does suffer from dementia and requires round the clock care (my aunt is paying for private caregivers). She has diabetes, too.

Quote:

Originally Posted by audreyh1 I was answering for the initial % of portfolio increased with inflation each year method. 4% is not a safe withdrawal rate for a possibly >30 year retirement. Someone retiring at 55 should probably assume 40 years.

Ah, in that case, yep, 4% initial WR is a bit iffy if planning for a long retirement. I plan on retiring at 55 so I'm using 45 years in FIRECalc and ******** which I think is sufficiently conservative. I doubt I'll live up to 100. At 4%, I get a success rate of ~80%, at 3.5% it's ~95% and at 3%, that seems to be conservative enough for a perpetuity.

[AdrianC]

Thanks, all.

I think I have a good appreciation of what the 4% rule is and what it isn't. It is reasonable to target 25x expenses as your Financial Independence goal. Reach 25x with some margin of safety and most folks can start to think about giving up the day job, with caveats, eyes open to risks, etc.

It is not reasonable to then take out an inflation-adjusted 4% each year with no regard to investment performance and spending levels.

Audreyh1 sums up my thinking:

Quote:

Originally Posted by audreyh1 4% was for 30 years which assumes someone retires NOT early at age 65. When I retired early I hoped to live a lot longer than that, so I didn't dare take out as much as 4%.

In addition to that, the current investment environment is very much less than ideal.

I’m thinking of FIREing this year, at age 50. I don’t have long-life genes but my younger wife does, plus we have three kids, two still in elementary school. Our money needs to last 50+ years. We will get SS down the road. Wife will get a small pension. That’s all. I’ve been self employed for 16 years, wife has been a stay at home mom for 8.

I’m thinking I need to be a little more prudent. A 3% WR is doable.

In 2016, is the 4% rule good advice to be giving to wannabe early retirees? Especially very early retirees, folks in their 30s and 40s? There may be some disappointment in a few years, I fear.

[HadEnuff]

I guess the reason I didn't retire "early" was because I was too conservative to trust the calculators, and too worried about what unseen extremes of market return, inflation, interest rates, and personal health might be seen over a 4 or 5 decade span. As it is, retiring at age 62, which I don't consider early, (despite what the Social Security Administration says) still leaves me doing a lot of guessing.
DW and I are not big spenders. No pensions. Just a nest egg that I figure we could live on with a 3% WR, even if we were to lose 35% of it to market corrections in the early years. Since it is only 60% invested in stock funds, that would represent an even bigger stock market correction.
I got a big kick out of reading the page of acronyms, when I got to FYF, because that is me in a nutshell.
Hoping to start out at 2%, and when this market turns around, have enough eggs left in the basket to go to 4% eventually, if needed or desired.

[sengsational]

The whole withdrawal rate discussion frustrates me because it ignores annuities like SS and pensions; a higher WR would work if you had SS and/or pension (presuming you cut your WR when you start getting those annuities, which only seems logical). Or, if you added the present value of your annuities to your current assets, then WR would be apples-to-apples (but then small changes in the inflation assumption can change the result).

[hnzw_rui]

Quote:

Originally Posted by sengsational The whole withdrawal rate discussion frustrates me because it ignores annuities like SS and pensions; a higher WR would work if you had SS and/or pension (presuming you cut your WR when you start getting those annuities, which only seems logical). Or, if you added the present value of your annuities to your current assets, then WR would be apples-to-apples (but then small changes in the inflation assumption can change the result).

If you retire super early (like 30s and 40s), a small pension in your 60s doesn't actually make much of a difference in the SWR (less than 20 bp). You also have a shortened working timeframe so that could be a lot of years with $0 SS earnings.

That said, most retirement calculators don't take into account human flexibility. I doubt most reasonable folk would continue increasing their withdrawals by CPI when their portfolio is getting hammered. One caveat is you'll need plenty of give in the budget.

[T-Minus]

I will be retiring next year at age 56. I have set my starting withdrawal rate at 3.5% and created four complete budget plans:

1. Up market - increase spending by 4%
2. Normal market - follow budget (starting point)
3. Down market - spending cut by 10%
4. Crash - minimum required to "live" (covered by AA+ or better fixed income instruments)

My wife and I have reviewed and agreed on the aforementioned budgets and have created our own Variable Percentage Withdrawal scheme, designed to increase our chances of success. Since we have been saving so aggressively in my run-up to retirement, our current living expenses fall somewhere in between the "Down" and "Crash" scenarios above - we are planning a nice bump in retirement spendable income as a reward for 35+ years of hard work.

Also, keep in mind that the original Trinity Study and subsequent updates (where the 4% SWR bogie came from) all ignore Social Security and other pension income. Fortunately, we have both on-deck, with pensions scheduled to start at age 65, and SS planned to delay until age 70.

[Senator]

Quote:

Originally Posted by T-Minus I will be retiring next year at age 56. I have set my starting withdrawal rate at 3.5% and created four complete budget plans: Up market - increase spending by 4% Normal market - follow budget Down market - spending cut by 10% Crash - minimum required to "live" My wife and I have reviewed and agreed on the aforementioned budgets. Since I have been saving so aggressively in my run-up to retirement, our current living expenses fall somewhere between the "Down" and "Crash" categories above - we are planning a nice bump in retirement spendable income as a reward for 35+ years of hard work. Also, keep in mind that the original Trinity Study and subsequent updates (where the 4% SWR bogie came from) all ignore Social Security and other pension income. Fortunately, we have both on-deck, with pensions scheduled to start at age 65, and SS planned to delay until age 70.

Are we in a crash? Or a down market?

[Chuckanut]

Have you looked at one of the formulaic variable withdrawal systems?

They adjust upward for good markets and downward for poor markets, but do it somewhat gradually so you don't have huge cutbacks in one poor year or overspend in one good year. The idea is to maximize spending while preventing the worst case scenario - running out of money to early. I am doing a dry run of one of them to see how it compares to reality. Time will tell.

They have been discussed here:

http://www.early-retirement.org/foru...ate-68770.html

[pb4uski]

Quote:

Originally Posted by sengsational The whole withdrawal rate discussion frustrates me because it ignores annuities like SS and pensions; a higher WR would work if you had SS and/or pension (presuming you cut your WR when you start getting those annuities, which only seems logical). Or, if you added the present value of your annuities to your current assets, then WR would be apples-to-apples (but then small changes in the inflation assumption can change the result).

See post #12

[haha]

Quote:

Originally Posted by AdrianC I'd like to hear about it. How is it working out for you? Are you concerned about investment returns going forward? Thanks, AdrianC

These anecdotes about how something is working and what ones's concerns are have absolutely nothing to do with how you or anyone else will do going forward.

I guess these testimonials can make some people feel good, but there is much better information out there. Our lives are a movie that no one has seen before.

Ha

[FreeBear]

I'll also come out of the closet with a +4% SWR, at least for now.

2015 (year 1 in FIRE, missed ACA subsidy cut), 5%
2016 4.5% target
...
2020 3.5% target (start of first early SS)

We'll also trying to slow personal inflation by not automatically assuming a CPI increase. We also try to continually cost-reduce our budget.

Honestly, I'd feel more comfortable under 4% given our 40 year plan, but I couldn't stand the corporate rat race any longer. We're also OK with worse case zero estate or Medicaid at the very end. We value the present more than the distant future at this point in life. Firecalc and other simulators give us a 90+% ish success rate over 40 years if we also account for us dying before running out of money (don't need to have money if we're both gone).

I also like Bernstein's take, from the ER FAQ:

"A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless."

The Retirement Calculator from Hell, Part III

Who knows for sure... Got to get back to living life!

[audreyh1]

Quote:

Originally Posted by T-Minus Also, keep in mind that the original Trinity Study and subsequent updates (where the 4% SWR bogie came from) all ignore Social Security and other pension income. Fortunately, we have both on-deck, with pensions scheduled to start at age 65, and SS planned to delay until age 70.

They don't actually ignore pension and SS income. What they do ignore is the early retiree (earlier than ~65) with delayed pension and SS income - one who needs to draw on investments first, and then later has other funds come online. But Firecalc models these screens for early retirees.

But in the Trinity assumptions, the retiree is taking SS and pension income at the same time they retire and start needing income from their investments. These studies/papers are simply more geared to the "standard" retiree where 30 years is probably a conservative period to use.

And they are clear that you subtract your SS and pension income from your total expenses, and that the remaining expenses is what needs to be funded by annual withdrawals.

[bbbamI]

Quote:

Originally Posted by haha These anecdotes about how something is working and what ones's concerns are have absolutely nothing to do with how you or anyone else will do going forward. I guess these testimonials can make some people feel good, but there is much better information out there. Our lives are a movie that no one has seen before. Ha

Life’s like a movie, write your own ending
Keep believing, keep pretending
We’ve done just what we set out to do.
Thanks to the lovers, the dreamers, and you.

- Jim Henson

[Dd852]

I'm currently a fraction above 3%, 2.5 if I count fickle rental income (I do short term vacation lets, so in good times it is very good and in bad times it dries up!). I'm 3-1/2 years in. The first year had a very nice market gain, last year and this year so far of course have been nasty... But my total "pot" is still above the inflation adjusted amount I started with, which frankly is the number I look at most carefully.

(I'm 56 this year and DW is 61. No kids)

Sent from my iPad using Early Retirement Forum

[T-Minus]

Quote:

Originally Posted by Senator Are we in a crash? Or a down market?

Hi Senator,

If I had retired last year, I would consider this a down market. I consider crash to be >35% loss in retirement assets from the date of retirement. That said, the numbers and withdrawal rates I quoted were current as of this AM (just re-ran all spreadsheets and tools).

[T-Minus]

Quote:

Originally Posted by audreyh1 They don't actually ignore pension and SS income. What they do ignore is the early retiree (earlier than ~65) with delayed pension and SS income - one who needs to draw on investments first, and then later has other funds come online. But Firecalc models these screens for early retirees. But in the Trinity assumptions, the retiree is taking SS and pension income at the same time they retire and start needing income from their investments. These studies/papers are simply more geared to the "standard" retiree where 30 years is probably a conservative period to use. And they are clear that you subtract your SS and pension income from your total expenses, and that the remaining expenses is what needs to be funded by annual withdrawals.

I think we're kind of saying the same thing. But, if you're retiring early (pre-Social Security and pre-pension), your starting withdrawal rate will be somewhat distorted. Here's one analysis - The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”

Quote:

The trinity study assumes a retiree will: - never earn any more money through part-time work or self-employment projects - never collect a single dollar from social security or any other pension plan - never adjust spending to account for economic reality like a huge recession - never substitute goods to compensate for inflation or price fluctuation (vacation in a closer place one year during an oil price spike, or switch to almond milk in the event of a dairy milk embargo). - never collect any inheritance from the passing of parents or other family members - and never do what most old people tend to do according to studies – spend less as they age

I agree with your point about early retirement, which is why I've backed off my starting SWR to 3.5% but, given the most recent numbers provided by Pfau, feel that the combination of SS, Pension, 40-45% stock, variable withdrawal plans, and a "slowdown factor" as we age, each provide an additional measure of safety.

BTW - here's a link to the original Trinity Study: https://www.aaii.com/journal/article...is-sustainable

...and here's a link to the 2009 update by Wade Pfau: Trinity Study Updates - Retirement Researcher

...upon further consideration, I think there's some sort of NPV calculation that can be applied to Social Security and Pensions, then combined with current net worth, to more accurately represent your true withdrawal rate, although I have not gone down that path yet. This might be especially useful to early retirees desiring a more accurate picture of their retirement assets.

[Nords]

Quote:

Originally Posted by AdrianC Has anyone here retired early using an initial withdrawal rate of 4% or more?

Yep. We started with 4% and ramped up during a couple of travel years, especially with our daughter's college campus visits.

At the time we retired (2002) the market was much lower and 4% fit our projected expenses. As the market recovered, while our spending only went up a little, our net worth rose much faster.

Quote:

Originally Posted by AdrianC Did you have any other income at retirement, such as a company or military pension, or a spouse still working? Did you build in extra safety margins in the budget?

My military pension and our savings were part of the plan. We also kept a couple of years of expenses in cash to be able to keep spending during a bear market.

Quote:

Originally Posted by AdrianC I'd like to hear about it. How is it working out for you? Are you concerned about investment returns going forward?

The 4% rule has a failure rate, yes, but a military pension (or just about any single-premium immediate annuity) helps insure against portfolio failure. Social Security and variable spending plans also help minimize the failure rate.

The 4% SWR also essentially says that 16-19 times out of 20, you're going to end up with way more money than you need. So far that's been the case with us.

[audreyh1]

Quote:

Originally Posted by Senator Are we in a crash? Or a down market?

A crash is something like down 30% in 3 or 4 months. Doesn't happen often, but we saw that in 2008!

[old woman]

My SIL has a financial adviser and told him she wanted her portfolio to give her a monthly check until she is 90, nothing left for older age or children. She isn't one to worry about money he told her how much she could have. She was telling me she had more than when she retired and lately has less than she had when she retired. She is 64 now retired 3 years. My brother said when he dies she will be low income, she has a pension and SS besides her retirement savings but if she runs out at 90 or before she could be hurting. They are spending my brother's savings on vacations but he has a pension and SS too so they are living pretty rich for now. I couldn't do it, I need my money to last even if I live to 115.