FIRE on 4%

[Bir48die]

My goal has always been to retire at 60 and drop dead at 85 (inside joke). For those glorious 25 years I have projected to stay under 4% even during the bridging until FRA at 66.2 and claim for SS. Once I hit that my WR will plummet to 1.5% while I watch my portfolio grow. Then DW can chase the men who are still alive and kicking and be their golden goose

 

[YVRRocketSurgery]

Lots of people talk about it, but does anyone really do it?

Has anyone here retired early using an initial withdrawal rate of 4% or more?
<snip>

You've actually kind of inspired me to run some calculations over the next decade.

We're somewhat FI but looking to hit certain numbers before we RE for various reasons: a safety factor, afford to be a bit more splurgy, etc. I have, as I'm sure many others do, an enormous spreadsheet tracking various financials year over year. It's be interesting to run and track various scenarios around if I had retired in year 20xx how would have our accumulated nest egg fared against our investment selections and spend requirements.

<snip>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.

I'm scared as heck about running out of money so for me, the 4% rule is more of guideline to use for default assumptions. Ie. Do you take the 4% rule literally and take out 4%+I every year or do you use it for baseline calculations to compare to your yearly spend but have flexibility to adjust down your discretionary spend in poor market years?

 

[AdrianC]

Thanks everybody.

I hope that anyone using the 4% rule for early retirement realizes that there is a definite possibility it will not work going forward. Past results do not guarantee future performance and all that. Your plan has to include a margin of spending flexibility and the ability to go back to some sort of paid work if needed.

My plan is a variable withdrawal rate ranging from 2.5% (base expenses) to 4% (charity, vacations, big ticket items, etc). The lower rate when in capital preservation mode in down markets. The higher rate when we're feeling flush. I'm also continuing to work part time, for this year at least.

 

[pb4uski]

Lots of people talk about it, but does anyone really do it?

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

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?

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

Thanks,
AdrianC

Thanks everybody.

I hope that anyone using the 4% rule for early retirement realizes that there is a definite possibility it will not work going forward. Past results do not guarantee future performance and all that. Your plan has to include a margin of spending flexibility and the ability to go back to some sort of paid work if needed.

My plan is a variable withdrawal rate ranging from 2.5% (base expenses) to 4% (charity, vacations, big ticket items, etc). The lower rate when in capital preservation mode in down markets. The higher rate when we're feeling flush. I'm also continuing to work part time, for this year at least.

You're kidding us, right? In your OP (and your first post) you ask if any people are using 4% and how it is going and then 5 posts you later admonish us that it might not work and lecture people as to what their plan should include.

Seems pretty arrogant to me. I guess you learned a lot in 6 posts. What makes you think you are such an expert that you can lecture us?

 

[nun]

You're kidding us, right? In your OP (and your first post) you ask if any people are using 4% and how it is going and then 5 posts you later admonish us that it might not work and lecture people as to what their plan should include.

Seems pretty arrogant to me. I guess you learned a lot in 6 posts. What makes you think you are such an expert that you can lecture us?

There is plenty of wisdom outside of early-retirement.org and number of posts does not necessarily equate with naivety. There is a 4% dogma, but some retirees might not feel comfortable with that given their ideas about future returns or feelings about risk. The OP's plan seems sensible and the reasons for it are given. However, I'm not as pessimistic at the success probability of a 4% WR and future returns and I would not retire without knowing that I never needed to work again. Having said that this year I plan to spend 3.6% of my invested portfolio, but to have that come from rent and a pension....so 0% withdrawal from the portfolio.

 

[HadEnuff]

At 62, I'm pretty comfortable with it. If I were trying to retire at 40, or even 50, I don't think I would be.
Even at 62 I'll be watching things pretty closely, especially these first few years.

 

[Dcharles]

As an optimist, I chose 5% the past two years and we'll stick with that and not adjust it for inflation. In other words, I chose to start a WD rare of 5 percent from 60 years old when I retired and see how things go when I hit 70 and begin SS. That was 2 years ago and we look forward to a bump in income at 65 when I can reduce our monthly medical costs of $1,065 to whatever Medicaid might be three years from now. I am a little nervous about the down turn in the market, but I am not changing course yet and reducing our Withdrawal rate. I'm sticking to 5% in our particular situation. Each retiree needs to work up their own plan to meet their needs and expectations and then roll the dice. Who knows what the future will bring?


Sent from my iPad using Early Retirement Forum

 

[pb4uski]

There is plenty of wisdom outside of early-retirement.org and number of posts does not necessarily equate with naivety. There is a 4% dogma, but some retirees might not feel comfortable with that given their ideas about future returns or feelings about risk. ....

I concede that number of posts doesn't equate with expertise, and if the post #53 had said something along the lines of "I am concerned that the 4% rule might not work going forward and ..." then I would not have objected in the least. It wasn't the message that was objectionable but more the lecturing tone.

 

[Chuckanut]

I hope that anyone using the 4% rule for early retirement realizes that there is a definite possibility it will not work going forward. Past results do not guarantee future performance and all that. Your plan has to include a margin of spending flexibility and the ability to go back to some sort of paid work if needed.

My understanding is that the 4% rule was suggested for those retiring at a 'normal' retirement age - about 65. However, many 'experts' use it out of context and forget this important caveat.

 

[NW-Bound]

My understanding is that the 4% rule was suggested for those retiring at a 'normal' retirement age - about 65. However, many 'experts' use it out of context and forget this important caveat.

I think posters here who use 4%WR or even higher are closer to the SS or pension eligibility age than the younger crowd at some other forums. They expect to drop their WR when other incomes kick in, thus maintaining the same living condition. Or in a decade or so, they may have travel or desire for toys out of their system, and submit themselves to the Bernicke's observation.

Their "event horizon" may also be closer than it appears, though they do not want to think about it.

 

[pb4uski]

My understanding is that the 4% rule was suggested for those retiring at a 'normal' retirement age - about 65. ....

Good point. If you do a Firecalc run of 4% using a 50/50 portfolio over 30 years and all other default assumptions the success rate is 95.8%. Change that 30 years to 40 years and the success rate changes to 73.3%. To get back to 94.8% over 40 years you need to reduce the WR to ~3.5%.

 

[AdrianC]

You're kidding us, right? In your OP (and your first post) you ask if any people are using 4% and how it is going and then 5 posts you later admonish us that it might not work and lecture people as to what their plan should include.

Seems pretty arrogant to me. I guess you learned a lot in 6 posts. What makes you think you are such an expert that you can lecture us?

I apologize that my post came across as arrogant. That wasn't my intent.

My intent was not to admonish, just giving my opinion of how I'm approaching the 4% rule after this thread and lots of other reading. I learned by reading, not so much by writing posts.

Not many people on this thread said they retired early on 4% or more (you were one of the few). I think the reason is many prospective early retirees came to the same conclusion I did - the 4% rule may have worked in the past for a 30 year retirement, but it's applicability to a 50 year retirement going forward is in serious doubt. Many posters in this thread have expressed the same doubts.

I wish you all the best and thanks again everyone for your input.

 

[jkern]

But in any case, while I am still alive I like to see a nice number at the bottom of Quicken screen if I can help it. It's not to leave to the kids, as I hope leaving them the homes will be good enough for them. It's for my comfort, as having money gives me a warm and fuzzy feeling that spending it on anything cannot match.

I agree completely that having money as security yields more happiness than just spending it because you can.

To me the 4% rule comes into play when all income streams come online. I plan on starting SS at 62 and that's when I'll evaluate my initial withdrawal rate. Of course I've made some projections, but I won't know what my portfolio value will be until then.

The 4% is a guideline and here's my view on it:

4% Too high, not comfortable at all
3.5% Maximum amount, still worried
3% Comfortable, just ok
2.5% Very comfortable, no problems
2% Absolutely golden

 

[nun]

I apologize that my post came across as arrogant. That wasn't my intent.

My intent was not to admonish, just giving my opinion of how I'm approaching the 4% rule after this thread and lots of other reading. I learned by reading, not so much by writing posts.

Not many people on this thread said they retired early on 4% or more (you were one of the few). I think the reason is many prospective early retirees came to the same conclusion I did - the 4% rule may have worked in the past for a 30 year retirement, but it's applicability to a 50 year retirement going forward is in serious doubt. Many posters in this thread have expressed the same doubts.

I wish you all the best and thanks again everyone for your input.

The 4% rule is usually defined over 30 years....if you go to 50 years you need to do new calculations.....and the SWR drops to 3%

The 4% SWR rule is a gross simplification derived from Monte Carlo testing of random sets of market returns for various asset allocations over different withdrawal times. To boil it down to a simple rule of thumb a 50/50 bond/equity portfolio might be defined, then a withdrawal term is defined, say 30 years (assuming someone retires at 65 and lives longer than expected), success is defined as having a greater than 95% chance of having money left after 30 years and inflation is estimated at maybe 3% and.....voila.....a 4% WR fits in with all those assumptions. If any of those are wrong or change then the SWR will change too, which is why some people will monitor the WR and adjust it if necessary. There are lots of papers and research about all the options and possible scenarios, but you can use an online tool called FIREcalc to run the simulations for various combinations of parameters. If you push the length of retirement form 30 to 40 or 50 years you'll see the SWR, or the probability of success, decrease

 

[pb4uski]

I apologize that my post came across as arrogant. That wasn't my intent.

My intent was not to admonish, just giving my opinion of how I'm approaching the 4% rule after this thread and lots of other reading. I learned by reading, not so much by writing posts.

Not many people on this thread said they retired early on 4% or more (you were one of the few). I think the reason is many prospective early retirees came to the same conclusion I did - the 4% rule may have worked in the past for a 30 year retirement, but it's applicability to a 50 year retirement going forward is in serious doubt. Many posters in this thread have expressed the same doubts.

I wish you all the best and thanks again everyone for your input.

Apology accepted... I didn't think that was your intent but I guess I was in a sour mood when I read it.

And to be clear, while we have early retired and our WR is currently more than 4%, once my pension and our SS are online our WR will be much lower than 4% which is why I was comfortable retiring early. For situations like ours I think it most prudent to look at the ultimate WR rate which can be estimated by reducing the withdrawals numerator by SS and pensions and reducing the resources denominator by the amount of funds needed to carry you from ER to the point that SS and pensions start. What you are in effect doing is segregating the money you need to carry you from ER to SS from the total and then calculating your WR at the time you start SS.

So for example, if one retired at 60 had $1 million and needed $60k a year to live on and expected to receive $36k a year in SS at 66 while your initial WR would be 6% the ultimate WR would be 3.75% [($60 needed-$36 SS)/($1,000 at retirement-($60 needed*6 years)].

If anything the 3.75% would be conservative since it assumes zero real growth of the portfolio during the 6 years from 60 to 66. If you assume 2% annual real growth it reduces the WR to about 3.3% ($24/$640*(1+2%)^6)

 

[Andy2]

I have to plan as if I may still be around until 95.

30 years for someone retiring at 65 is simply prudent planning.

Yes it's conservative. It's all conservative.

Absolutely agree - you might fall off the perch at 70 and leave a fortune to the kids, but it would be unfortunate to expend all your savings by a certain age and outlive that age.

 

[ripper1]

I agree completely that having money as security yields more happiness than just spending it because you can.

To me the 4% rule comes into play when all income streams come online. I plan on starting SS at 62 and that's when I'll evaluate my initial withdrawal rate. Of course I've made some projections, but I won't know what my portfolio value will be until then.

The 4% is a guideline and here's my view on it:

4% Too high, not comfortable at all
3.5% Maximum amount, still worried
3% Comfortable, just ok
2.5% Very comfortable, no problems
2% Absolutely golden

I like your guideline. Just wondering are you also considering an inflation adjustment with those figures?

 

[pb4uski]

I don't think you need to consider an inflation adjustment in the ratio... but rather in the numerator and denominator used in computing the ratio. IOW both numerator and denominator should be based on a certain date.

I agree with kjkern's guideline for a 62 or 65 year old, but for a 80 year old it would be way too conservative and for a 40 year old it would be way too liberal.

 

[Nords]

Not many people on this thread said they retired early on 4% or more (you were one of the few). I think the reason is many prospective early retirees came to the same conclusion I did - the 4% rule may have worked in the past for a 30 year retirement, but it's applicability to a 50 year retirement going forward is in serious doubt. Many posters in this thread have expressed the same doubts.

Well, I think the reason is that your logic and your conclusion are flawed. The reason is that many early retirees are tired of rehashing this perpetual topic and didn't bother to respond.

Luckily if you're not comfortable with the 4% SWR then you're the only one who has to work longer to pad your nest egg until you can sleep comfortably at night. Behavioral finance is at least as important as the math.

But I've been retired for nearly 14 years on the 4% SWR, including two awe-inspiring recessions, and I think that counts as "so far so good" for sequence of returns risk.

Let's rehash the assumptions that the Trinity trio made to simplify their computer simulations:
- 1% expense ratio on investments
- No Social Security
- No flexible spending
- Conservative asset allocation

So if you go by the 4% SWR, right away you're assuming that you throw away 100 basis points every year. In my case, with my expense ratio of about 24 basis points, I have an extra 0.76% on my side.

I don't know about you, but I expect Social Security to be available when I turn 70 years old in 15(!??!) years. That's about $12K/year for me and another $12K for my spouse. That's at least a quarter of our spending unless we're really blowing it out for travel.

Which brings me to the next point: we don't rigidly spend 4% + CPI every year. I don't think anybody does, and we can all cut back during a recession. There's another margin to let a portfolio recover from a bear market.

Which brings me to my final point: you'll never get a 100% success ratio, and statistics indicates that anything over 80% is ludicrous. Instead of maximizing your success ratio eliminate your failure rate by annuitizing a portion of your portfolio to provide a minimal standard of living. Maybe that annuity is SS, or maybe it's another type of deferred annuity, or maybe you buy a SPIA. But once you have that minimum longevity insurance covered, then you can invest in a much higher asset allocation of around 80/20 stocks/cash.

By the time I'm 70 I'll have lived through 29 of the 30 years. I'll let you know how it goes while I reset the calendar for a second 30-year retirement. I'm guessing it'll work out too.

 

[HadEnuff]

Apology accepted... I didn't think that was your intent but I guess I was in a sour mood when I read it.

And to be clear, while we have early retired and our WR is currently more than 4%, once my pension and our SS are online our WR will be much lower than 4% which is why I was comfortable retiring early. For situations like ours I think it most prudent to look at the ultimate WR rate which can be estimated by reducing the withdrawals numerator by SS and pensions and reducing the resources denominator by the amount of funds needed to carry you from ER to the point that SS and pensions start. What you are in effect doing is segregating the money you need to carry you from ER to SS from the total and then calculating your WR at the time you start SS.

So for example, if one retired at 60 had $1 million and needed $60k a year to live on and expected to receive $36k a year in SS at 66 while your initial WR would be 6% the ultimate WR would be 3.75% [($60 needed-$36 SS)/($1,000 at retirement-($60 needed*6 years)].

If anything the 3.75% would be conservative since it assumes zero real growth of the portfolio during the 6 years from 60 to 66. If you assume 2% annual real growth it reduces the WR to about 3.3% ($24/$640*(1+2%)^6)

Great points!
One of the things that I'm slowly grasping is that while I am just starting out in retirement now, (I'm 62, DW is 58), every few years things are going to change for the better. in 3 years I get Medicare, in 4 years DW gets SS, in 7 years DW gets Medicare, in 10 years a 10K/ year mortgage gets paid off... each one of those milestones takes a good chunk off of what I need to withdraw.

I have also come to the conclusion that the 10K/ year mortgage at 2.75% interest could also be largely viewed as "asset relocation", taking money from my 60-40 IRA portfolio and putting it into a real estate holding, on a lake house that if I live long enough, I will likely sell.
To me, the fly in the ointment, if there is one, is the historically low interest rates that force us into perhaps more volatility than I'd like in order to try to reach a % return that will make the 4% WR a "gimme"...

 

[Focus]

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.

Trinity Study Updates - Retirement Researcher

At first, I thought, "Are we talking about the same Pfau?" I've always found his conclusions pessimistic and not exactly encouraging. But yes indeed, there is a light at the end of the post you linked to:

6. On the other hand, there is some good news. Retirees who diversify their portfolios with international assets and TIPS many very well find an edge to keep the 4% rule alive.
7. UPDATE – MORE GOOD NEWS: I am hearing more and more that actual retirees do not necessarily need to adjust their spending for inflation each year, and that actual retirees may voluntarily reduce their spending as they get older. For both of these cases, a higher initial withdrawal rate can be supported. The combination of these factors may mean that the no-inflation adjustments case (which is shown in Table 1 of the updated Trinity study) may be more representative of what actual retirees will experience. I hadn’t realized this. The traditional 4% rule only applies when taking annual inflation adjustments. I have not done research about how my other concerns listed above impact withdrawal rates for the no-inflation adjustments case, but I hope to do this later.

 

[audreyh1]

Let's rehash the assumptions that the Trinity trio made to simplify their computer simulations:
- 1% expense ratio on investments
- No Social Security
- No flexible spending
- Conservative asset allocation

So if you go by the 4% SWR, right away you're assuming that you throw away 100 basis points every year. In my case, with my expense ratio of about 24 basis points, I have an extra 0.76% on my side.

I didn't know that the Trinity Study assumed a 1% expense ratio or other cost on investments?

I was pretty sure that they assumed no investment expenses/expense ratios but just used historical index data. Obviously not quite real world. OK - you made me go back and scan it (link at bottom).

The Standard & Poor’s 500 index was used to represent stocks, and long-term, high-grade corporate bonds were used to represent bonds.

The study did not adjust for taxes or transaction costs. An investor’s own experience would differ depending on how much of his assets were in tax-deferred accounts, and the extent to which transaction costs could be held to a minimum using low-cost index funds.

And that it was a much later Pfau model that assumed 1% expense ratio among other factors that resulted in a much lower SWR.

The Trinity study doesn't discuss social security simply because they were trying to answer the question "how much money they [the retiree] should plan to withdraw annually from their investment portfolio". Obviously this would be in addition to any other income sources available to the retiree such as pension or social security.

They modeled the entire range of portfolio allocations, so it didn't apply to a "conservative" asset allocation. They modeled 0% stocks to 100% stocks in 25% stock increments. And their results showed that 75% stocks was optimal, although 50% stocks was close. Certainly these are not conservative allocations.

Link to the Trinity Study paper http://www.aaii.com/journal/article...inable?utm_source=sitesearch&utm_medium=click

 

[pb4uski]

+1 If that is the case, given the downward trend in ERs since the study was completed that probably makes 4% now 4.75% (my aggregate ER is 0.14% so I think 0.25% should be easily attainable for most people).

 

[audreyh1]

+1 If that is the case, given the downward trend in ERs since the study was completed that probably makes 4% now 4.75% (my aggregate ER is 0.14% so I think 0.25% should be easily attainable for most people).

See my post above yours.

 

[Markola]

. But I've been retired for nearly 14 years on the 4% SWR, including two awe-inspiring recessions, and I think that counts as "so far so good" for sequence of returns risk.
.

Thanks for this whole informed, real-world comment, Nords, which I've read a couple of times. Of course you didn't know in 2002 what the economy would do going forward, but you got an extra springboard effect in hindsight because the sequence of returns helped you. I hope I'd have the guts to FIRE in a period when there is at least residual "blood on the streets" and some upside possibly left in the stock market, versus when I hit my number and all looks rosy. Who knows, because life is never certain, including one's j*b, so behavioral finance and steady adaptation to life over math, indeed.