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Questioning the 4% plan in retirement
Old 01-11-2022, 03:47 PM   #1
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Questioning the 4% plan in retirement

Hello. I basically understand that the 4% plan ,in a nutshell, is basically spending 4% of your assets each year, adjusting for inflation. So, for example in my case, I have $2 million net ,all in liquid assets. (recently sold my small business) and I'm 54, divorced and own nobody anything, no debt and and have 4 monthly payments left on my townhouse worth 600K currently, which is included in my net worth. So, roughly have $80K a yr spending using the 4% plan. I could live on that in Florida, where I reside without problems. BUT always wanted to buy a boat and live on it 6 months a yr . The boat would cost roughly $400K, I know not cheap considering a depreciating asset, and cost 3k a month in upkeep. That would be everything besides fuel and food/ drink. So my question is, using the 4 % rule , though I would surely be breaking is , isn't there another "plan" , like a spend down plan and enjoy the assets slowly? Honestly I rather not "take my assets with me into the next life and enjoy my next 25 yrs. Yes , I know, the unknown is health and those costs related. Though presently, never a health problem yet. Eat well and run 20-25 miles a week currently. Any thoughts? Let me have it! Thank you.. P.S. - Could always consult part time for $25/hr, no problem, though rather not
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Old 01-11-2022, 03:54 PM   #2
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In your case, you should take the $400k off the top of your assets (so, 1.6) and then add the maintenance $36k into your budget. If you can still do that at 4% of what's left, with the increased expense, ok.

But there's a lot more to the 4% rule than you mention. It expects a 30 year retirement - if you plan to live longer than that you should be more conservative. It also depends on a healthy AA, and a keen understanding of your actual expenses, including the big ones that come up, and things like healthcare, and taxes. And your exercise and diet, and health before about 55, aren't all that good of predicting your health expenses for the next 20-40 years. Plenty of athletic healthy people here replacing knees and hips, or dealing with other ailments they never used to have to think about.

Most here would not retire on a 4% plan unless at least 60+. And even then, 3.5% is better, or even lower.

It's not about leaving behind money, it's about not running out and being broke at 80 and being a burden. You want to be able to weather a recession (when your NW is dropping and there are no sweet $25 part time jobs...)
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Old 01-11-2022, 04:17 PM   #3
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Thanks for the reply. I sold a fitness/nutrition small business and yes ,will be switching to half run/half swim soon for self preservation ) Regarding the 400K boat, I could always sell it for a loss of course , but we are talking a 20 to 25% max in a down market or in a 5 yr time period. So tough to say, remove it entirely from my net, but I know what you mean. Regarding the $25/hr consulting gigs, as much as I would want, though prefer not to. Spent 30 yr in health/ fitness , writing articles on the side for my former business website and magazines. Regarding the dangers of going broke, I could always move later to Mexico, Panama , Costa Rica without problem , as I speak Spanish and am 1/2 Panamanian , (Though I rather not) So, would anyone know of some type of spend down of assets plan/calculation? Very new to this site, but enjoying it! Thanks
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Old 01-11-2022, 04:21 PM   #4
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A little confused.
You state that you have 2m in net worth all in liquid assets, but then you say that the townhouse worth 600k is included in your net worth.
So if you bought a boat, would you sell the townhouse and find some other residence for 6 months a year?
If not, then isn't your true liquid assets 1m after the boat purchase?
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Old 01-11-2022, 04:46 PM   #5
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A little confused.
You state that you have 2m in net worth all in liquid assets, but then you say that the townhouse worth 600k is included in your net worth.
So if you bought a boat, would you sell the townhouse and find some other residence for 6 months a year?
If not, then isn't your true liquid assets 1m after the boat purchase?
Oh! I missed that - the 4% rule does not work off your total NW, but your invested NW. It does not include your residence.
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Questioning the 4% plan in retirement
Old 01-11-2022, 04:55 PM   #6
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Questioning the 4% plan in retirement

4% rule assumes spend down in 30 years. So for you at 54, you should go with 3.5% of your “invested” assets. I know that’s not the answer you are looking for but there is no shortcut to FIRE. Consider delaying your retirement if you truly want that boat Or keep the townhouse and have a modest retirement. Age old trade off: Time or Money! I would pick time. There is no free lunch.
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Old 01-11-2022, 04:58 PM   #7
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Sorry for the confusion. Well, the boat would be a liveaboard for 6 months to start. Spending time cruising in the Bahamas and/or Caribbean. Those expenses cruising would be around 4k a month. I could rent my furnished townhouse for roughly the same during those 6 cruising months (Nov to April) as its in a touristy part of South Florida. Or eventually just sell the townhouse in a year, if fulltime boat living works out. Won't know the full picture, until I pull the trigger on the boat and get out there. So renting the townhouse out for the 1st 6 months, i would be open to that, but selling? I would wait a year, and evaluate the situation. Thanks
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Old 01-11-2022, 05:04 PM   #8
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@Aerides ..Ok.. Did not know a debt free house is not including in the 4% rule . But what if I can rent it for $3.5k -4k per month? I suppose that 40k then would count towards off setting expenses..Thanks
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Old 01-11-2022, 05:06 PM   #9
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@Aerides ..Ok.. Did not know a debt free house is not including in the 4% rule . But what if I can rent it for $3.5k -4k per month? I suppose that 40k then would count towards off setting expenses..Thanks

Correct. If you count the rent as expenses then you can count condo price as part of your nest egg.
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Old 01-11-2022, 05:07 PM   #10
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Or working part time consulting and / or selling the townhouse?
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Old 01-11-2022, 05:10 PM   #11
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4% is an average. Due to income my first year will be 1% and then 5 years between 5-6% until SS starts and then it will be 2.1% at age 67.

or I can take SS at age 62 and my withdrawal rate will start at 3.2%

due to the increased income with SS at 67, my breakeven point is age 85

My point is the 4% rule should be considered with other factors as applicable like step up or step down in incomes. My evaluation shows money lasting as long as I live and past 110 years of age were my plot stops

so if you want to buy a boat and your rate is 20% this year, you need to look at the run down of your finances based on expected income. I think that was what you are asking about
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Old 01-11-2022, 05:11 PM   #12
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Thanks all for the great advice. Is there some sort of FIRE or " spending down of assets "calculation ? Just signed up to this site 2 days ago ..
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Questioning the 4% plan in retirement
Old 01-11-2022, 05:12 PM   #13
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Questioning the 4% plan in retirement

Quote:
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Or working part time consulting and / or selling the townhouse?

If you are OK working part time and renting then you can start cruising now! It will actually allow you to refine what you really want to do. I took pay cut to buy more time, still technically not retired but I can care less about the definition. I have more time to enjoy life now. But I would still caution you to control your “total” expenses to about 3.5% of the inverted assets. SORR is real.
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Old 01-11-2022, 05:13 PM   #14
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Thanks all for the great advice. Is there some sort of FIRE or " spending down of assets "calculation ? Just signed up to this site 2 days ago ..

Check out firecalc.com.
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Old 01-11-2022, 05:16 PM   #15
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I basically understand that the 4% plan ,in a nutshell, is basically spending 4% of your assets each year, adjusting for inflation.
I believe it is 4% of the beginning balance of liquid assets ($1.4M), then adjust for inflation each year thereafter. Not 4% every year. That is a common misperception/misinterpretation.

Others, please correct me if I am wrong.

And, I'd aim for 3.5% as others have mentioned as you will be at this (retirement) for a while more than 30 years....which is a good thing
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Old 01-11-2022, 05:53 PM   #16
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So if your net worth is $2m and that includes your $600k townhouse, then your real liquid assets that generate interest and dividends are $1.4m? Is that right?

4% of $1.4m would only be $56k a year from your $1.4m retirement portfolio and that would be not spending $400k on a boat. If you spent $400k of your $1.4m on a boat then the remaining portfolio would only safely provide $40k a year. On top of that you would need to factor in any rental income, any other earnings from part-time work and your expenses.

How much do you have coming in Social Security? Have you tried using FIRECalc? You can input your portfolio and your Social Security and use the Investigate tab to calculate how much you can safely spend.

For a 40 year retirement like yours the 4% for a 30 year retirement becomes 3.65% for a 40 year retirement (both have a 95% success rate, just like the "4% rule"). BTW, the withdrawals would increase for inflation each year so if the first year withdrawal was $50k then the next year would be ~$51.5k, etc.

Finally, how much of the $1.4m is accessible without penalty? Is any of it tied up in tax-deferred accounts that have a 10% penalty if withdrawn before you turn 59-1/2?
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Old 01-11-2022, 06:05 PM   #17
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Originally Posted by pb4uski View Post
So if your net worth is $2m and that includes your $600k townhouse, then your real liquid assets that generate interest and dividends are $1.4m? Is that right?

4% of $1.4m would only be $56k a year from your $1.4m retirement portfolio and that would be not spending $400k on a boat. If you spent $400k of your $1.4m on a boat then the remaining portfolio would only safely provide $40k a year. On top of that you would need to factor in any rental income, any other earnings from part-time work and your expenses.

How much do you have coming in Social Security? Have you tried using FIRECalc? You can input your portfolio and your Social Security and use the Investigate tab to calculate how much you can safely spend.

For a 40 year retirement like yours the 4% for a 30 year retirement becomes 3.65% for a 40 year retirement (both have a 95% success rate, just like the "4% rule"). BTW, the withdrawals would increase for inflation each year so if the first year withdrawal was $50k then the next year would be ~$51.5k, etc.

Finally, how much of the $1.4m is accessible without penalty? Is any of it tied up in tax-deferred accounts that have a 10% penalty if withdrawn before you turn 59-1/2?
How do you pay for gas? 400k boat takes a lot of fuel.
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Old 01-11-2022, 09:49 PM   #18
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Originally Posted by pb4uski View Post
So if your net worth is $2m and that includes your $600k townhouse, then your real liquid assets that generate interest and dividends are $1.4m? Is that right?

4% of $1.4m would only be $56k a year from your $1.4m retirement portfolio and that would be not spending $400k on a boat. If you spent $400k of your $1.4m on a boat then the remaining portfolio would only safely provide $40k a year. On top of that you would need to factor in any rental income, any other earnings from part-time work and your expenses.

How much do you have coming in Social Security? Have you tried using FIRECalc? You can input your portfolio and your Social Security and use the Investigate tab to calculate how much you can safely spend.

For a 40 year retirement like yours the 4% for a 30 year retirement becomes 3.65% for a 40 year retirement (both have a 95% success rate, just like the "4% rule"). BTW, the withdrawals would increase for inflation each year so if the first year withdrawal was $50k then the next year would be ~$51.5k, etc.

Finally, how much of the $1.4m is accessible without penalty? Is any of it tied up in tax-deferred accounts that have a 10% penalty if withdrawn before you turn 59-1/2?
I understand the townhouse is not included in the 4% but it would generate 35k to 38K after taxes a year rented
Nothing is in tax deferred accounts. Stocks, cash and index funds
Actually the boat 42 to 45ft I like, could be bought used for 300K not 400K, would be very economical. It would be a trawler with 120hp 4 cyl diesel engines using 3 to 4 gallons an hour combined. Slow 8 knots. So if I stayed in the Bahamas for 6 months anchored out mostly between various Islands, monthly diesel costs to be around $500. Boat maintenance is the bigger expense, depending on how much one can do. (oil, filter, belt changes, general water maker and generator maintenance) A couple can live on this type of boat for $3k a month nicely. (food, diesel, internet, wash machine, air cond ,though not needed 6 months a yr in the Islands ,anchoring out, insurance and NO property tax) If fishing, diving, exploring, and nice boating community people are your thing, its a great lifestyle with most comforts of home. But that's for another forums!
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Old 01-11-2022, 11:52 PM   #19
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OP, given your NW, if you want to keep the townhouse and buy a boat, that would be 1M going to those two. You have 1M left which can generate $40K per year. Add net rental income (if any) to that, and that could be your budget. Let's say your budget is $40K + $30K (net rental) = 70K. This amount needs to cover all expenses including HI. Do not skip Health Insurance. Keep in mind the $30K rental could be less depending on the particular year maintenance expenses and zero income months between tenants. It will depend on how much risk you are willing to take. On the positive side, you will have SS later (this will provide relief), the 4% rule is based on the worst market performance in the past 100 years or so (so if you are lucky, you will have more spending power than 4%, but you may have less if the future is worse than the worst past - no one knows). Also, you have the townhouse and the boat to sell if you run out of $ 30 years from now.
On the negative side, the market has been high, so it is not inconceivable that stock can have some steep drops (but this should be baked into the equation by the 4% rule as described above). If you are at peace with you backup plan to move to some lower cost countries later if necessary, then you are good to go. Just make sure your expenses are well understood. Good luck.
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Old 01-12-2022, 04:54 AM   #20
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Let’s assume the annual boat costs and rental income offset. Can you live off $40k per year?
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