The 4% Rule is now the 5% Rule

[CaptTom]

Yes, I fear inflation more than anything, because it compounds and never corrects.

But this article also implies that my pension is suddenly worth less. One of the things I learned on this forum was to think of my non-COLA pension as if it were part of my portfolio.

Using some easy numbers as an example, the theory goes like this:

Say you have $1M in your portfolio. At 4% a year, that's $40K. So if you have a $40K pension, you have the equivalent of a $1M portfolio.

But if you change that number to 5%, your $40K pension is only equal to having an $800,000 portfolio.

So, that $40K pension is now worth $200,000 (20%) less than it was when the rate was 4%.

It's pretty funny what you can do with figures sometimes

 

[MRG]

Geeze I could have....

Oh well. We've been living on 3% and planned on staying there till 65, maybe ramp up a little until SS at 70. Maybe we could spend a little more.

 

[explanade]

4% or 5%?

My trailing 12-month expenses run 1.7% of portfolio. The WR is even lower, because my wife has drawn her SS.

So the goal is to leave money for the kids?

 

[Ready]

I enjoyed reading the article as it was nice to see an article that projects a positive future rather than a doom and gloom scenario. I still wonder how sequence of returns risk plays in here if you are just getting ready to retire. The market has been going up for more than a decade. If we have a major downturn I would think that a 5% starting number would be aggressive. Then again, 4% was always the worst case scenario, with 7% being the average safe withdrawal rate over the entire period being analyzed.

We are currently spending well below 4%. Logically I know that we can easily afford to spend more, but emotionally I’m still stuck being frugal. It’s a very challenging habit to break.

 

[NW-Bound]

Lucky heirs!

Could that be a problem?

I talked to my wife recently, and said when we will be able to travel again, we will fly business class. To my surprise, my frugal wife agreed.

Well, that may bring my expenses from 1.7% (1.67% to be exact) to something a bit higher. Still less than 2%. I guess that depends on how much international travel we will make, but I don't see doing more than one long trek a year.

And I will be claiming SS before I know it.

Where did the time go? One day, you were worrying about SORR, the next day you don't care to spend the money that has accumulated.

 

[corn18]

I enjoyed reading the article as it was nice to see an article that projects a positive future rather than a doom and gloom scenario. I still wonder how sequence of returns risk plays in here if you are just getting ready to retire. The market has been going up for more than a decade. If we have a major downturn I would think that a 5% starting number would be aggressive. Then again, 4% was always the worst case scenario, with 7% being the average safe withdrawal rate over the entire period being analyzed.

We are currently spending well below 4%. Logically I know that we can easily afford to spend more, but emotionally I’m still stuck being frugal. It’s a very challenging habit to break.

The market has been going up fo a century. And the past decade has had it's share of corrections and near bear/bear markets. Lest our memories forget:

 

[cyber888]

Read that. I was thinking 3.5% when I retire .. but yeah, life may be short, so 4% works.

 

[aja8888]

Inflation is permanently etched into my brain. Some times I will never forget:

In 1980, I was a Plant Manager running one of ARCO's business units back East. That year, I handed out annual raises to my managers that were between 17% - 20% of their base salaries. That did not include performance bonuses.

In 1981, I was promoted to a corporate job in California and signed on to a 18% mortgage on a house that was smaller than the one on our 3 acre parcel back east and cost twice (plus) as much! But fortunately ARCO had a generous relocation policy and we made out OK.

Big numbers!

 

[NW-Bound]

So the goal is to leave money for the kids?

No, the kids are self-sufficient at this point. They do not need my money. If they get it, they can go straight into ER.

No goal. We just have not found anything worthwhile to spend money on.

 

[street]

No, the kids are self-sufficient at this point. They do not need my money. If they get it, they can go straight into ER.

No goal. We just have not found anything worthwhile to spend money on.

I would say we are in the same boat. 4% is a lot of money to spend when there really isn't any needs. A person never knows what unexpected events can come about thou. Money could go fast and be little left for heirs.

If I was to start spending 4 to 5% I would spend it on land for the heirs.

 

[Focus]

To be exact, Bergen is suggesting "no more than 5%."

 

[Onward]

I was pretty young in the 70's, but the main thing I remember is that everybody was nuts about antiques and collectibles. Everyone was trying to convince me to "invest" in fancy Avon bottles.

I'm sure that was a function of inflation. They were hard assets.

 

[RobLJ]

We're withdrawing 5% (gasp!) for the next 3 years until I hit Social Security full withdrawal age. Then it goes to 3.5%. Then four years later when DW hits SS full withdrawal it goes to.... less than 2.5%.
So I'm fine with withdrawing 5% for a short period, which is set by the 12% tax rate.

I assume the portfolio can go down in the next 3 years and the withdrawal rate will then go up, but barring a 40-50 percent collapse in the market (given our allocation), it shouldn't change much. The more likely "problem" is how to spend the money, including SS, at a 4% rate.

Our actual spending will be about 4% or less (not 5.5% we spent this year only after installing solar and trading in the Forester to buy a Chevy Bolt); barring significant health costs of course. The excess/unspent goes into a brokerage account where I will do some tax loss gathering as I place unspent funds into a variety of ETFs or closed end funds and stocks. It has doubled the last 3 years and could get quite large. I could do the Roth from IRA, but it seems more trouble than what it is worth; I might change my mind next year about that, though. I'm not interesting in withdrawing past the 12% tax area, even if it could make sense if the portfolios hold up the next 5 years.

[/B]

I would say we are in the same boat. 4% is a lot of money to spend when there really isn't any needs. A person never knows what unexpected events can come about thou. Money could go fast and be little left for heirs.

If I was to start spending 4 to 5% I would spend it on land for the heirs.

 

[NW-Bound]

[/B]

I would say we are in the same boat. 4% is a lot of money to spend when there really isn't any needs. A person never knows what unexpected events can come about thou. Money could go fast and be little left for heirs.

If I was to start spending 4 to 5% I would spend it on land for the heirs.

I no longer worry about running out of money, mainly due to access to SS if I want it, and also seeing how our spending goes down while the market lifts up our stash. Even if the market drops by 1/2, we would still be below 4% WR. And I am not worrying about not having enough left for the kids. They can fend for themselves.

It's really that we have no desire for anything more. I already have 2 homes, and even one home would be enough to keep busy maintaining. People like to blow money on cars, but I have been indifferent to cars since my late 30s. No boats or planes either. They just bring more work. And I don't want more work.

The only leisure thing left is travel, which has been curtailed due to Covid. And I cannot be a perpetual traveler either; it would be tiring.

I still enjoy making money off the market though. It's now much more a pastime than a necessity. It's like playing chess with a faceless opponent.

 

[Out-to-Lunch]

Yes, I fear inflation more than anything, because it compounds and never corrects.

But this article also implies that my pension is suddenly worth less. One of the things I learned on this forum was to think of my non-COLA pension as if it were part of my portfolio.

Using some easy numbers as an example, the theory goes like this:

Say you have $1M in your portfolio. At 4% a year, that's $40K. So if you have a $40K pension, you have the equivalent of a $1M portfolio.

But if you change that number to 5%, your $40K pension is only equal to having an $800,000 portfolio.

So, that $40K pension is now worth $200,000 (20%) less than it was when the rate was 4%.

It's pretty funny what you can do with figures sometimes

The larger point that you are making that the imputed value of your pension depends on the WR is taken and acknowledged.

However, you should perhaps realize that NO ONE values your non-COLA pension at 25x the annual payout. Because of inflation. A pension with COLA would be valued the way you are thinking, but not a non-COLA.

 

[teejayevans]

I calculated Present Value of my SS benefits and use that to calculate withdrawal rate, which I try to keep under 4%, but occasionally life changes requires more $. To me it’s not a rule, it’s a guideline.

 

[WyomingLife]

This is a great thread; that MarketWatch article is very well written. Thank you all very much.

Carrying the argument a bit further, I guess it means some deflation isn’t so scary for retirees either. I stumbled upon this: https://retirementaction.com/2012/03/02/deflation-impact-on-retirees/

We are still gunning for a SWR well south of 4%, but I will sleep better tonight having read this thread.

Looks like the Baby boomers (of which I am one, though barely) could fair reasonably well yet again.

 

[WyomingLife]

Lucky heirs!

I’m bald so mine were unlucky, sadly

 

[Badger]

I still have not tapped my retirement stash and it keeps growing. We are 75 yo and seem to get along fine with pensions and SS paying the way. I probably need a long vacation.

+1
We are both frugal out of habit for so many years and enjoyed more of the simple pleasures. With "Needs" taken care of and very few "Wants" the only things really important to us is taking vacations that include bicycling, hiking, or some other type of active pursuit that we are still able to enjoy. The pandemic has brought that to a screeching halt but if/when things improve enough to where we feel safe to continue then we will be making up for lost time as long as we can. Other than that we give the maximum gift to each of the grown children to make their lives a little easier and make donations to a few places that could use some financial help. The retirement stash still grows.


Cheers!

 

[FLSUnFIRE]

About 45% of my spending is on the following: Health Insurance, Health OOP, Property Taxes, Homeowners Insurance (FL), and utilities. They are all pretty fixed and relatively cheap so not much room for me to mitigate increases. Property tax growth is somewhat capped by Homestead in FL but the others I expect to increase much faster than any "low inflation" estimate. I expect that within a couple years, they will account for a much greater proportion of my expenses -especially as the largest is healthcare/insurance and I've consistently been getting older at a steady rate (although, I expect to "age" a bit slower once I FIRE myself).

 

[Perryinva]

4% has always been the guideline or rule of thumb, for planning, but not a strict requirement. Our SWR will be what ever it needs to be. I don’t consider it a larger SWR due to larger withdrawals while delaying filing for SS. I keep the total amount required that would equal my planned SS in HY (? Not so high, now) accounts, and withdraw as needed and ignore it as part of my portfolio. It is no different than ignoring our pensions and SS as portfolio equivalents, but rather as the cost of annuities. That those amounts they currently generate exceed our normal expenses was always the plan. Like others here, we do not pinch pennies or indulge in the frugality involved during w*rking years, building the nest egg, & just let our natural tendency to not waste money on “stuff” we don’t need, be part of everyday. But if we want something, ( take out vs cooking at home, business or first class travel, cars, whatever) so far, it has all been covered with next to no portfolio withdrawals. At 63 & 68, we cannot see the logic to deny ourselves what we can easily afford with the money we saved and invested now that we are there. Keeping a constantly growing larger balance than we could use is not a priority. I abhor waste, so we cannot see not using coupons or fuel points or whatever fairly effortless bonus programs are out there even though it is a flyspeck on total costs. $5 is still $5, even if it gradually buys less.

We filled up 2 cars yesterday as a single purchase on Septembers fuel points to claim a $14 savings instead of $7. 2 cars needed gas so why not make the small effort to go at the same time and space them so I could easily swap the nozzles from one car to the next when the first was filled. To me, it is no different than consolidating trips to save fuel and time, or planning to avoid said trips during rush hours (which are minimal in our locale).

But food coupons, travel points etc, using local library resources, doing most all my own home & auto repairs, shopping at Target or Marshalls, etc are about the most effort we put in to being “frugal”. I’ll pay someone to do what I don’t want to or can’t do, which will be more & more as we age, I’m sure. But in the meantime, we don’t shop for clothes at thrifts, or own super economy small cars or live in a 1200sqft house and set thermostats where we don’t want, to rein in expenses. We buy organic when it makes sense ( better produce) but not if the differential is 100% or makes little sense. Organic bananas? Really? But we have our social commitments (like delicious $5/dozen local free range brown eggs vs tasteless commercial $1.50/doz chicken factory white eggs) that are damn the cost, as whatever it is, is better for everyone (except the wallet) all around, so it sort of evens out.

 

[donheff]

Could that be a problem?

I talked to my wife recently, and said when we will be able to travel again, we will fly business class. To my surprise, my frugal wife agreed.

Well, that may bring my expenses from 1.7% (1.67% to be exact) to something a bit higher. Still less than 2%. I guess that depends on how much international travel we will make, but I don't see doing more than one long trek a year.

+1 In this hunkered down pandemic year, it looks like we will withdraw about 1%. We are looking forward to flying business class for international bike trips if we can ever get back to that.

 

[corn18]

I'm planning on 6.2% WR from 55-70. Once SS kicks in, it goes down to 1.6%.

 

[explanade]

No, the kids are self-sufficient at this point. They do not need my money. If they get it, they can go straight into ER.

No goal. We just have not found anything worthwhile to spend money on.

Lot of fancy electrical cars coming out in the next couple of years.

 

[NW-Bound]

Lot of fancy electrical cars coming out in the next couple of years.

I will have to say that Tesla Cybertruck is something I have an interest in.

Call it ugly if you will, but I am a brute who cares more about utility and function than form. And I like the tough body panels a lot.


PS. Still does not move the WR that much with a truck, but at least it's something I can use.