Morningstar declares 4% safe once again

[mathjak107]

That's probably most people outside of these retirement forums.

let me say i believe that to be true here , but there are other forums i have been on where not only are most clueless but they argue based on what they they think without wanting to learn

 

[marko]

So just wait until 2030 and the withdrawal rate will be up to 6.5%

That'll be good since I've been >6% each year for 20 years.

 

[mathjak107]

at this stage of retirement , going on 9 years , we are down to a pretty low draw rate since the portfolio grew so much over the years .

with 9 years of life less , we can probley take another 80-100k a year if we wanted to but we are already drawing 6 figures out a year .

its a nice problem to have …so the portfolio is compounding even more then if we had the full draw coming out .

we use 95/5 as a draw method so our goal posts are based on each years balance so they keep growing

 

[LateToFIRE]

That'll be good since I've been >6% each year for 20 years.

Inspiring! Hmmm, maybe I will buy that new car after all.

 

[mathjak107]

since there is a 90% chance of ending with more than you started with it’s important to take raises using the conventional method of withdrawal.

One suggested method has you checking every three years if the balance is 50% above where you started when you retired.

if it is take a 10% raise plus inflation adjusting .

wash and repeat in another three years.

 

[Gumby]

Why would you "take a raise" if you're not spending the money now? Why not leave it invested so it can compound? I currently don't need the money in my portfolio to do everything I want to do. If I do want to do or have something more and need money for it, I'll take some from the portfolio. But I'm not planning to spend money just because I can.

 

[mathjak107]

Why would you "take a raise" if you're not spending the money now? Why not leave it invested so it can compound? I currently don't need the money in my portfolio to do everything I want to do. If I do want to do or have something more and need money for it, I'll take some from the portfolio. But I'm not planning to spend money just because I can.

well dying with to much money unspent and not enjoyed or shared while you are alive isn’t good either for many ..

so a system of taking raises can be helpful for those who do want to safely draw more but don’t know how is safe to increase

 

[LateToFIRE]

Why would you "take a raise" if you're not spending the money now? Why not leave it invested so it can compound? I currently don't need the money in my portfolio to do everything I want to do. If I do want to do or have something more and need money for it, I'll take some from the portfolio. But I'm not planning to spend money just because I can.

Hey, speak for yourself. Personally speaking, I'd be gettin a bigger yacht!

 

[Gumby]

Hey, speak for yourself. Personally speaking, I'd be gettin a bigger yacht!

Having a yacht, or any boat, would be a major pain in the butt.

 

[mathjak107]

i rather spend it on women. ha ha

 

[Fermion]

Having a yacht, or any boat, would be a major pain in the butt.

It is more of a pain in the wallet.

 

[MichaelB]

I’m missing the logic here. If we plan for a 4% withdrawal rate, and that level of expense represents our target budget level on retirement, why is a “raise” compelling? If the portfolio has performed better than planned the 4% we are withdrawing is already gives us more cash more than we planned for, so we have surplus cash. We still don’t know what the future holds so why would we increase the withdrawal %?

well dying with to much money unspent and not enjoyed or shared while you are alive isn’t good either for many ..

so a system of taking raises can be helpful for those who do want to safely draw more but don’t know how is safe to increase

since there is a 90% chance of ending with more than you started with it’s important to take raises using the conventional method of withdrawal.

One suggested method has you checking every three years if the balance is 50% above where you started when you retired.

if it is take a 10% raise plus inflation adjusting .

wash and repeat in another three years.

 

[Sojourner]

well dying with to much money unspent and not enjoyed or shared while you are alive isn’t good either for many ..

It's good for me, because my DW is significantly younger than I am, and her financially security once I'm gone is of utmost importance to me.

Regarding the 4% benchmark that Morningstar is espousing once again, I have rarely seen that in FIRECalc when I've plugged in my numbers over the years. It's almost always more in the 3.4% to 3.7% range for me. I am still a full decade from traditional retirement age, though, which I suppose does make a big difference with calculations like this. I'll happily stick with 3.4% for now, which (I feel fortunate to say) easily covers our household spending.

 

[SecondCor521]

I’m missing the logic here. If we plan for a 4% withdrawal rate, and that level of expense represents our target budget level on retirement, why is a “raise” compelling? If the portfolio has performed better than planned the 4% we are withdrawing is already gives us more cash more than we planned for, so we have surplus cash. We still don’t know what the future holds so why would we increase the withdrawal %?

Sometimes the utility of spending more now (even if marginal) is worth more than leaving unspent dollars at death. And this calculus can change back and forth over time.

This can be particularly true for some whose target budget at the beginning of FIRE was somewhat constrained either by choice or by circumstance.

Imagine someone who is aiming for full FIRE at 55 and is on target for a $100K a year budget. But then they get injured and become medically retired against their will at age 50 and their FIRE stash only supports $80K. It's manageable, but they have to cut out some aspirational travel. They'd go back to work but ageism is alive and well even though technically illegal.

They stay invested, and ten years later the stash has gone up, even on an inflation adjusted basis. They're finally able to raise their budget from $80K to the originally desired $100K and are happier.

Another scenario would be a person who is just in a really bad job situation and decides that it's worth it to cut back on the budget in order to get out of the bad job situation. So they quit. After a few years of scrimping, maybe they have some regrets and want to spend more, but they've been out of the job market for a while and either can't or don't want to go back. Eventually their portfolio rebounds and they can stop scrimping as much.

I'm sure some of us managed to FIRE when we wanted with a plentiful budget. But lots do not.

 

[Sojourner]

A 90% probability of having money left after 30 years is still a little low for my taste. Plus, there are most likely some runs that leave you with surplus funds, which still dip rather frighteningly low. My WR represents ~2.6% of my current portfolio, and that's still a bit higher than I'd like.

At a 2.6% WR, your probability of safely and easily outliving your nest egg is not only higher than 90%, it's probably > 99.9%. And here I am thinking my 3.4% WR target might be overly conservative!

 

[mathjak107]

I’m missing the logic here. If we plan for a 4% withdrawal rate, and that level of expense represents our target budget level on retirement, why is a “raise” compelling? If the portfolio has performed better than planned the 4% we are withdrawing is already gives us more cash more than we planned for, so we have surplus cash. We still don’t know what the future holds so why would we increase the withdrawal %?

why ? because 4% is a conservative starting point based on the remote chance we are the poster child for a worst case outcome .

inflation adjusting only keeps the same WORST CASE spending power .

on the other hand over 90% of all 30 year outcomes end with more then we started , 67% end with 2x what we started with , and 50% of the time end with 3x what we started with . in fact it’s the same odds of ending with 6x what you started as being the worst case outcome .

so most of us want to be rewarded by not being restrained to the same worst case budget .

remember , other withdrawal methods allow a bigger budget automatically…

using 95/5 we are so far a head of where we would be using the conventional swr method .

whether we spend it is up to us but we know our capabilities for spending .

it’s almost like saying if you started a life on the income of your first job , why not just inflation adjust that and never spend more even though we are earning far more.

some may do that , but many of us do want to spend more , if not on us , then our kids and grandkids.

but there isn’t a lot of info on just how much more is safe or how to go about implementing a safe glidebpath upward

 

[HI Bill]

My portfolio is down something like 9% since December, 2021

How diversified are your investments, and what's your AA? My portfolio's currently up 8.7% from December 2021, and I've been taking 5-6% annual withdrawals.

 

[Major Tom]

At a 2.6% WR, your probability of safely and easily outliving your nest egg is not only higher than 90%, it's probably > 99.9%. And here I am thinking my 3.4% WR target might be overly conservative!

With recent market activity, my WR now stands at 2.32% of the current balance. The point I was trying to make though, is not that I care what my portfolio balance will be upon my death. I'm not at all concerned about running out of money either. My main objective is to avoid the balance dipping to a low that upsets my sleep at night before it recovers. We've had the most glorious bull run since the big dip of 2008/2009. We might be in for another one for a few more years but, at some point, we'll most likely revert to the mean. I know that I can survive those more moribund years, if they happen, but I'd like to survive them in style, with ease and grace, and without an upset stomach!

Just attempting to explain my perspective, and I don't have the slightest problem with your 3.4% WR. Each to his own, different strokes, etc etc. We all have different long-term outlooks and varying tolerances for volatility/risk.

 

[FREE866]

That'll be good since I've been >6% each year for 20 years.

Can you clarify this?


every year for 20 years you've been withdrawing 6% of your portfolio?

 

[mathjak107]

the draw rate really depends on how long the retirement may have left

at this stage we already passed thru 8 years of retirement…so using firecalc if we enter 22 years instead now our allowable draw for a 90% success rate is 60-70k a year more then it was for 30 years.

not only based on less years but also portfolio growth

 

[MichaelB]

Sometimes the utility of spending more now (even if marginal) is worth more than leaving unspent dollars at death. And this calculus can change back and forth over time.

This can be particularly true for some whose target budget at the beginning of FIRE was somewhat constrained either by choice or by circumstance.

Imagine someone who is aiming for full FIRE at 55 and is on target for a $100K a year budget. But then they get injured and become medically retired against their will at age 50 and their FIRE stash only supports $80K. It's manageable, but they have to cut out some aspirational travel. They'd go back to work but ageism is alive and well even though technically illegal.

They stay invested, and ten years later the stash has gone up, even on an inflation adjusted basis. They're finally able to raise their budget from $80K to the originally desired $100K and are happier.

Another scenario would be a person who is just in a really bad job situation and decides that it's worth it to cut back on the budget in order to get out of the bad job situation. So they quit. After a few years of scrimping, maybe they have some regrets and want to spend more, but they've been out of the job market for a while and either can't or don't want to go back. Eventually their portfolio rebounds and they can stop scrimping as much.

I'm sure some of us managed to FIRE when we wanted with a plentiful budget. But lots do not.

Thanks for the examples. I agree there are many situations and circumstances where someone would want to increase the withdrawal. If one retires with the desired level of budget, spending and portfolio, however, I think the case to increase the WR is not so clear.

 

[mathjak107]

Thanks for the examples. I agree there are many situations and circumstances where someone would want to increase the withdrawal. If one retires with the desired level of budget, spending and portfolio, however, I think the case to increase the WR is not so clear.

but i bet if someone was to give you an extra 50k a year with the stipulation that you had to spend it and enjoy it. you certainly would and could .

if it was a yearly thing you would start to expect it and actually incorporate it iin your lifestyle

 

[MichaelB]

why ? because 4% is a conservative starting point based on the remote chance we are the poster child for a worst case outcome .

inflation adjusting only keeps the same WORST CASE spending power .

on the other hand over 90% of all 30 year outcomes end with more then we started , 67% end with 2x what we started with , and 50% of the time end with 3x what we started with . in fact it’s the same odds of ending with 6x what you started as being the worst case outcome .

so most of us want to be rewarded by not being restrained to the same worst case budget .

remember , other withdrawal methods allow a bigger budget automatically…

using 95/5 we are so far a head of where we would be using the conventional swr method .

whether we spend it is up to us but we know our capabilities for spending .

it’s almost like saying if you started a life on the income of your first job , why not just inflation adjust that and never spend more even though we are earning far more.

some may do that , but many of us do want to spend more , if not on us , then our kids and grandkids.

but there isn’t a lot of info on just how much more is safe or how to go about implementing a safe glidebpath upward

If one retires with a target budget and 4% withdrawal rate it cannot be considered a “worst case budget”. Just the opposite, it’s the desired budget. If the portfolio has performed well, just taking the same % withdrawal already provides more inflation adjusted money for the budget. There is no need to increase the withdrawal %.

If someone retires with a budget below their preferred level, looking to increase it is legitimate, and if that is what you are arguing, fine.

It’s not like living with one’s first salary, because the retirement budget reflects one desired level or spending. That’s the difference.

 

[mathjak107]

there are two schools of thought here as far as the budget .

most people have a lifestyle based on a pay check or two pay checks in place already as that is what their lifestyle is based on .

when they retire and those pay checks stop , it doesn’t matter what those pay checks used to be .

they see what they have to work with and then stress test there savings in say firecalc which is based around worst case outcomes and then they back in to a lifestyle that fits .

if they can stay where they are, great .

maybe they have to cut back on things they enjoyed or did .

some like my dad had to relocate 1000 miles away to make what he had work .

so many times the lifestyle that is based on worst case outcomes which we call a safe withdrawal rate , gives them a life that has plenty of room for improvement and upgrade.

others may have enough when they retire to cover what things were or are not investing to support themselves , for them it’s fun money or they are investing for legacy money

 

[Gumby]

It was a sine qua non of our retirement decision that our financial standard of living after retirement had to be the same as or better than it was before retirement. And it has been; we spend the same amount of money on (mostly) the same stuff.