Michael Kitces on the 4% rule

[mathjak107]

here is an interesting interview with michael kitces. michael is one of the most famous researchers today in the field of retirement planning and his words move an entire industry.

he talks about how the 4% rule is not a complete retirement strategy but only sets a safe floor to begin. it assumes you are retiring right on the eve of the worst of times to date.

of course folks hating to spend money for financial advice want a magic number to take with them for life so they do not need an advisor and there is the problem since there is no magic answer.

these studies and the numbers that come out of them are only for establishing a safe floor for starting out. things have to be reviewed and personalized criteria looked at and figured in as time goes on.

it was never intended to be a "here is your spending level , have a nice life"

Michael Kitces on Safe Withdrawal Rates - YouTube

 

[Dog]

Interesting, thanks for sharing. I'm not retired yet, but within the next 10 months. DH and I were pretty good at the "accumalation phase", now I'm reading and trying to learn all I can about the "spend down phase".

 

[W2R]

Interesting video. He points out that 4% SWR should not be considered as a "set and forget" withdrawal level, depending on many changing factors such as market conditions.

Many of us who retired in the midst of the 2008-2009 recession find that now we have a considerably larger nestegg than we did at retirement. So if we pretend we are retiring today, instead of back then, the withdrawal amount for a given SWR would be larger than what we may have computed based on a 2008-2009 retirement.

Being of a cautious nature, I compute my WR several different ways and make sure it is OK with me using any of them.

 

[Options]

Google the topic on the BH site. That horse has been beat to death. If the horse had 9 lives, it would be on its 19th. Original authors of the 4% rule never stated it was a hard and fast rule. In fact, they later advised maintaining financial flexibility in retirement, with the 4% rule used as a starting point.

 

[REWahoo]

"Round and round she goes, where she stops nobody knows"

The Kitces Report: Resolving the Paradox – Is the Safe Withdrawal RateSometimes Too Safe?

 

[W2R]

Google the topic on the BH site. That horse has been beat to death. If the horse had 9 lives, it would be on its 19th. Original authors of the 4% rule never stated it was a hard and fast rule. In fact, they later advised maintaining financial flexibility in retirement, with the 4% rule used as a starting point.

Absolutely, and I suppose that is why so many of our members do not actually follow it at all. I would be willing to bet that Mathjak, for example, is more inclined to withdraw more than 4% right now based on what I recall from previous posts of his. Of course, I could be wrong and wouldn't want to speak for him.

When I first started following online retirement discussions, before the trinity study, a WR of 6%-8% seemed more often used than 4%. Times sure change, don't they! But we still have a variety of WRs in use here.

 

[mathjak107]

i will first start withdrawing in july. i will go with bob clyatts method until i get my feet wet and see how things go.

i think i will combine michael and pfau's rising glide path method along with bobs method of withdrawing initially.

right now i am about 37% equites in my retirement model and i will increase by 1% a year once i get rolling.

my origonal plan included a nice income we had from a real estate llc we are partners in . but the sale of the lease rights we were holding in a very high profile sale last month ended that income for us.

our partner bernard spitzer the real estate mogal decided to sell and he was the senior partner.

although i got a nice chunk of change from the sale now i will have a hard time even coming close to that income.

i thought i would be able to get by with only 2% withdrawals or so but now it looks like i will be pulling 2x that easy.

 

[W2R]

Sorry about the sale, Mathjak. I suppose that the silver lining is that now you have more complete control over that part of your planned retirement income.

Because it is outrageously easy, in retirement I find that I like computing my allowed (maximum) withdrawal amount based on percentage of my portfolio's value on January 1st of the year.

I have a lot of "fluff" in my spending, so it wouldn't be hard for me to cut back in the event of another market crash. (To prove this to myself I also do the above computation but assuming my portfolio is at its 3/9/2009 low.)

Also I always compute my allowed (maximum) withdrawal amount according to other methods, including the Trinity method, just to see how I am doing according to those methods. My kind of fun.

 

[mathjak107]

i love seeing those results in calculators like fideliy's . the monthly allowance is so big. quite frankly i wouldn't be comfortable even using their poor market performance numbers as they are higher than i am comfortable spending..

 

[explanade]

If you're in early retirement and you can't withdraw from certain retirement accounts because you haven't hit the age yet, would you withdraw a set percentage from your total assets, including those retirement accounts you can't touch yet?

Or would you just apply the withdrawal rates against the assets that you can access?

 

[mathjak107]

everything counts as one, where you take it from is not that critical.

 

[Alan]

If you're in early retirement and you can't withdraw from certain retirement accounts because you haven't hit the age yet, would you withdraw a set percentage from your total assets, including those retirement accounts you can't touch yet?

Or would you just apply the withdrawal rates against the assets that you can access?

Speaking for myself I always calculate the actual WR and my personal max (4%) against all my retirement savings including the IRA accounts that I can't access without penalty. (In 5 months time those accounts will become accessible)

 

[nun]

Speaking for myself I always calculate the actual WR and my personal max (4%) against all my retirement savings including the IRA accounts that I can't access without penalty. (In 5 months time those accounts will become accessible)

+1

4% is not a floor for me it's a ceiling.

I take income from investments that have done well (or stable value and cash in bad times) and that also has the effect of doing some rebalancing. I carefully track expenses and account balances so that I can see that I am not exceeding my spending prediction or depleting my accounts too quickly.

My attitude is that I want to take as little as I can......NOT as much as I can. The starting point for me is not investing, it's frugality and my goal is to keep my income requirements within what's provided by my fixed income sources like SS, rental and pensions etc. I'll ride my bike rather than drive my car and bake muffins rather than buy them. Doing stuff like that saves money and has added benefits in satisfaction and enjoyment.

 

[Midpack]

+1

4% is not a floor for me it's a ceiling.

I take income from investments that have done well (or stable value and cash in bad times) and that also has the effect of doing some rebalancing. I carefully track expenses and account balances so that I can see that I am not exceeding my spending prediction or depleting my accounts too quickly.

I definitely wouldn't attempt to sway anyone, but in the context of the Trinity Study et al, 4% was a historical floor by definition, not a ceiling. There was a 95% probability you could withdraw more than 4% inflation adjusted for 30 years. SWR is a good planning tool (during the accumulation years mostly), but it's not a spending methodology for the distribution years as others have noted.

 

[nun]

I definitely wouldn't attempt to sway anyone, but in the context of the Trinity Study et al, 4% was a historical floor by definition, not a ceiling. There was a 95% probability you could withdraw more than 4% inflation adjusted for 30 years. SWR is a good planning tool (during the accumulation years mostly), but it's not a spending methodology for the distribution years as others have noted.

Agreed.....but I don't use the Trinity Study definition in my planning. As a consequence I am not planning to spend down my retirement savings. In all phases of retirement I still hope to be accumulating given 3% inflation and a 4% return.

 

[seraphim]

I take out what I need to live the lifestyle I enjoy, but would limit my lifestyle if necessary to avoid going over 3% - a lot more than I currently draw. What I don't spend my son can invest for HIS ER.

But, as noted, this topic's been beaten to death. Numerous threads easily searched.

 

[Midpack]

I take out what I need to live the lifestyle I enjoy, but would limit my lifestyle if necessary to avoid going over 3% - a lot more than I currently draw. What I don't spend my son can invest for HIS ER.

But, as noted, this topic's been beaten to death. Numerous threads easily searched.

3% of what? Initial withdrawal plus inflation thereafter? Remaining portfolio (in which case SWR is irrelevant)? Other?

 

[truenorth418]

The starting point for me is not investing, it's frugality and my goal is to keep my income requirements within what's provided by my fixed income sources like SS, rental and pensions etc. I'll ride my bike rather than drive my car and bake muffins rather than buy them. Doing stuff like that saves money and has added benefits in satisfaction and enjoyment.

+1

Hopefully I have many years left, and I am in the early years of my early retirement, so I am being frugal and careful, although not depriving myself of things that are important to me. My spending basically corresponds with what I make from dividends and interest, in all less than 2.5% of my investable assets. I'm fine with that for now, and I will probably dial that up as I get closer to SS and pension coming on line.

But, as noted, this topic's been beaten to death. Numerous threads easily searched.

Agreed, but this is one of my favorite ER topics and I never tire of reading about how others are doing it.

 

[Ready]

Entering a $1M portfolio into Firecalc, 60/40 AA, 30 year time period, I show that to achieve 100% success I need to limit SWR to 3.67%. I can adjust the number upward slightly by changing from CPI to PPI, or changing from Long Interest Rate to each of the other fixed options, but no combination achieves a 4% SWR.

If I run a $40K withdrawal, I show success rate of 95.6% with 5 cycles failing.

If the original Trinity study suggested that no 30 year time period failed with a 4% inflation adjusted SWR, why does Firecalc come up with 5 failures?

 

[Midpack]

Entering a $1M portfolio into Firecalc, 60/40 AA, 30 year time period, I show that to achieve 100% success I need to limit SWR to 3.67%. I can adjust the number upward slightly by changing from CPI to PPI, or changing from Long Interest Rate to each of the other fixed options, but no combination achieves a 4% SWR.

If I run a $40K withdrawal, I show success rate of 95.6% with 5 cycles failing.

If the original Trinity study suggested that no 30 year time period failed with a 4% inflation adjusted SWR, why does Firecalc come up with 5 failures?

It doesn't and never did...

A safe withdrawal rate is defined as the quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure; failure being defined as a 95% probability of depletion to zero at any time within the specified period.]

 

[Ready]

It doesn't and never did...

Interesting...did not know that. So it appears that from a historical perspective, the WR that achieved 100% success is closer to 3.67%. Perhaps a bit higher or lower depending on AA, but based on 60/40 AA and all other default values in Firecalc, that appears to be the historically 100% safe figure, at least for a 30 year time period.

 

[seraphim]

"3% of what? Initial withdrawal plus inflation thereafter? Remaining portfolio (in which case SWR is irrelevant)? Other?"

Sorry - should have explained. Percentages based on portfolio amount's beginning value at retirement. It's my intent for the value of the portfolio to increase over time (30 years?), rather than decrease. That implies no COLAs, but it also permits for future flexibility in WD. If I don't need it, don't withdraw it. I've set a dollar amount cap based on 3% of the portfolio's initial value, to protect myself from love of spending. At that point, it's a life style change. By that point, I expect to be less active anyway.

But that's based on my personal financial situation and lifestyle. Were I to use the strategy of initial percentage plus annual COLAs, I wouldn't exceed 3% for my initial withdrawal. As Midpack pointed out, 4% can historically fail, 3.5% would show %100, but 3% predisposes for a Gergen of unprecedented complications never before encountered lol.

I don't believe in a 'safe' withdrawal rate - although I understand the theory (and uncertainty) behind the term. I'm highly conservative, financially.

 

[mathjak107]

while 4% can fail 92% of the timer it leaves more than you started with since anything above worst case is an upside surprise.

 

[audreyh1]

If you're in early retirement and you can't withdraw from certain retirement accounts because you haven't hit the age yet, would you withdraw a set percentage from your total assets, including those retirement accounts you can't touch yet?

Or would you just apply the withdrawal rates against the assets that you can access?

Theoretically, it all counts as one and you draw all from the part you can at first.

But DH and I haven't counted our IRAs in our withdrawal calcs yet. They are only 10% of our retirement portfolio. Since we are still far away from having to draw them, I have kind of set them aside as padding - earmarking them as future LTC funds, or whatever.

If you can retire on a subset of your assets, it just means your true withdrawal rate is lower. But that's a personal choice.

 

[nun]

If you're in early retirement and you can't withdraw from certain retirement accounts because you haven't hit the age yet, would you withdraw a set percentage from your total assets, including those retirement accounts you can't touch yet?

Or would you just apply the withdrawal rates against the assets that you can access?

I just began ER at 52.5 so I only have easy access to my taxable investments and my 457 plan. I am spending those down and have them invested conservatively so a market down turn won't wipe them out before I reach 59.5. Right now my withdrawal of total investments is 2%, but as a percentage of taxable and 457 it is 8%.