The 4% Rule is now the 5% Rule

[Happyras]

+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.

Hell, we just booked British First class to Barcelona next Sept. Flying First Class to Houston the end of this month to see friends for dinner. We will likely never need to withdraw from our retirement accounts, and feel very fortunate....

My DW started riding horses/showing again its our main source of spending now. Lots of folks willing to take your money in that sport. Being stuck at home created a lot of depression for her. Our portfolio provides a great assurance we will be OK, but a greater risk for us is not inflation, it is the potential loss of the TCJA, taxing our installment gains we built for retirement.

 

[FANOFJESUS]

American funds talks about 5% on page 5
https://www.spahnfinancial.com/files/21788/ICA_Guide_2019.pdf

 

[Koolau]

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.

I've always struggled with this concept of figuring NPV of pension and/or SS. Thought Experiment: Consider you at age 62, taking SS or Pension for first time. Is not the NPV HIGHER than when you are, say, 82? IOW at age 62 you have the time between when you begin to the time when you die. At age 62, you have 20 more years to collect than when you are 82. SO, the NPV at 82 must be smaller, right?

Using the NPV to allow you to put more into equities is probably valid (treating SS or Pension as something like "bonds.") But in real terms, your SS or Pension (or purchased annuity for that matter) MUST be worth less every month because you will receive ONE LESS payment for every month you collect. What do you think since YMMV?

 

[SecondCor521]

I've always struggled with this concept of figuring NPV of pension and/or SS. Thought Experiment: Consider you at age 62, taking SS or Pension for first time. Is not the NPV HIGHER than when you are, say, 82? IOW at age 62 you have the time between when you begin to the time when you die. At age 62, you have 20 more years to collect than when you are 82. SO, the NPV at 82 must be smaller, right?

Using the NPV to allow you to put more into equities is probably valid (treating SS or Pension as something like "bonds.") But in real terms, your SS or Pension (or purchased annuity for that matter) MUST be worth less every month because you will receive ONE LESS payment for every month you collect. What do you think since YMMV?

I calculate my NPV on my Social Security based on collecting from age 70 to age 85. Since I'm 51, my SS NPV goes up every month between now and 70 because that time series of payments is getting closer and is thus discounted less. It then drops from 70 to 85 because of the fewer months to collect before I die situation that you mention.

I don't use SS to adjust my AA, although I probably could and perhaps should. My SS NPV is currently about 6 times what I have in bonds (but I have a very small bond allocation).

 

[HI Bill]

I've always struggled with this concept of figuring NPV of pension and/or SS.

+1.

Adding the NPV of something you may not start receiving for 20+ years doesn't adequately factor in the SORR for your non-SS assets. Let's say FIRECALC's first failure point (not including SS) is 17 years after your RE. If that's before SS kicks in, you have now run out of $, and are not yet eligible for SS. Using SS's NPV is not valid, IMHO. It also ignores the risk that SS recipients may not receive the full value of what's currently estimated.

Using FIRECALC as intended, and effectively reducing your investment withdrawals when you start takin SS accounts for the added income, and includes the SORR on the correct portion of your "assets".

 

[YVRRocketSurgery]

What I've wondered was...
The 4% rule was to account for maximum withdrawals to account for worst case scenarios
The worst case scenarios seem to be a combo of early poor market returns and high inflation with the worst series in the 60's/70's with double digit inflation and bear market.
The Fed and Bank of Canada introduced inflation targeting in the 90's with a 2% goal. Nowadays, they're going to relax the policy to allow inflation to float higher a bit if to support higher employment. However, I can't see them allowing it to get close to double digits.
So if half the variable (inflation) is kept under reasonable control, how does it impact a SWR? I know this would not be a perfect analysis but I'd like to see historical simulations run with a maximum inflation rate of say 6% (and with a 60:40 ratio).

 

[Dtail]

+1.

Adding the NPV of something you may not start receiving for 20+ years doesn't adequately factor in the SORR for your non-SS assets. Let's say FIRECALC's first failure point (not including SS) is 17 years after your RE. If that's before SS kicks in, you have now run out of $, and are not yet eligible for SS. Using SS's NPV is not valid, IMHO. It also ignores the risk that SS recipients may not receive the full value of what's currently estimated.

Using FIRECALC as intended, and effectively reducing your investment withdrawals when you start takin SS accounts for the added income, and includes the SORR on the correct portion of your "assets".

I look at it this way too.

 

[explanade]

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.

Seem the Hummer EV they showed?

Also Rivian coming, as well as a slew of EVs around or over $100k.

 

[MRG]

Seem the Hummer EV they showed?

Also Rivian coming, as well as a slew of EVs around or over $100k.

Indeed, some might have subsidies . A person could buy one of each taking care of some extra dough to blow.

 

[RobLJ]

If you're interested in a quasi luxury trip, 3 years ago we biked down the Mosel River Valley with Zephyr Adventures and 4 years ago in Puglia with the same company. Highly recommended; the food/wine and accommodations are usually great.

We've used a much cheaper company without a guide (and more 2-3 star accommodations without a dinner meal) for the hikes up the West Highland Way in Scotland and the Kerry Way in Ireland. Cheaper and not as high end, but also a fine experience. They pick up your luggage and take it to the next bed and breakfast.

+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.

 

[bada bing]

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

Very close to my plan. Spend ~6% or a bit more for 8 years until age 70. At age 70 my SS and deferred pension will be $75K/yr, which would be a substantial but tolerable cut. That's if there is nothing left of the portfolio. One thing that makes sense to me, but doesn't seem often considered here with respect to spending rules: typical spending is not linear as you age. The is so much data that shows typical spending falls as people age, quite independent of their means. A flat 4% across retirement unnecessarily shortchanges early retirement years. JMO

 

[teejayevans]

I calculate my NPV on my Social Security based on collecting from age 70 to age 85. Since I'm 51, my SS NPV goes up every month between now and 70 because that time series of payments is getting closer and is thus discounted less. It then drops from 70 to 85 because of the fewer months to collect before I die situation that you mention.

I do this, and I am close enough to 70 I am not worried about running out of money before I reach 70 or that there will be no SS. I would not do this if I was <50.
I don’t want to run out of money but I don’t want to die a millionaire either. Spending more of my assets earlier in retirement and waiting till 70 to take SS allows me to accomplish this.

 

[Out-to-Lunch]

I've always struggled with this concept of figuring NPV of pension and/or SS. Thought Experiment: Consider you at age 62, taking SS or Pension for first time. Is not the NPV HIGHER than when you are, say, 82? IOW at age 62 you have the time between when you begin to the time when you die. At age 62, you have 20 more years to collect than when you are 82. SO, the NPV at 82 must be smaller, right?

Using the NPV to allow you to put more into equities is probably valid (treating SS or Pension as something like "bonds.") But in real terms, your SS or Pension (or purchased annuity for that matter) MUST be worth less every month because you will receive ONE LESS payment for every month you collect. What do you think since YMMV?

Yes, the NPV will decrease over time. Just like the 401(k) that you have been spending out of from age 62 to 82.

But the notion of the 4% rule is to set a rough spending level based on your assets at the point of retirement. At retirement, the NPV of your SS provides part of that knowledge.

(Caveat: I don't do it that way, using NPV. I just try to estimate income needed beyond SS and other guaranteed sources, and calculate my withdrawal rate based on this additional spending and my investable assets.)

 

[Rambler]

From ‘13-‘17, we probably averaged a tad less than 3%...’18 and ‘19 included a big move, some things for the new house, and helping/gifting a down payment on a home for one of the kids, and we probably hit 4%. This year, with Covid, we tightened things up in March when the markets were slammed, and didnt loosen back up as they recovered. I’m thinking we may end up around 1.8-2% this year. Next year will likely be pretty similar. We’ve run out of things to buy, don’t intend to do crowded touristy things for another good while, and will use the RV for almost all travel until things get better. Pretty much all our travel will be to see the grand kids. I turn 59 next week, so I’m glad it looks safe to use more than I am using, but also quite pleased that we don’t have to use that much to be happy. All of that said, whether Bengen says 4% or 5% doesnt really matter that much to me. What matters is that I remain flexible enough, and cognizant enough, to adjust to what the market is doing to the value of my assets.

 

[Closet_Gamer]

Interesting insights from a smart person.

Its written, however, at a time when the market is quite high (some would say irrationally) and inflation is quite low (at least as calculated and published.)

While I wrote elsewhere that my crystal ball forecasted mild overall inflation, in my heart I'm a mean-reversion person. There are other schools of thought that forecast low annual asset returns for years.

I also think conservatism remains the smart approach on these topics.

I'm still in accumulation mode, so my planning goal of a 3-3.25% SWR isn't changing.

 

[dixonge]

Read the actual paper here.
https://www.fa-mag.com/news/choosing-the-highest-safe-withdrawal-rate-at-retirement-58132.html

As always, Bengen's paper is well reasoned and presented with all the caveats clearly spelled out.

Thanks for posting the article.

And thanks for posting the paper!


An interesting quote:

Retirees facing more favorable market circumstances, on the other hand, have been able to successfully withdraw up to 13% of their portfolios

That's certainly not a number you hear often! I wonder during what timeframe a SWR of 13% worked?


[EDIT: now that I've read the article, the answer is - really low CAPE/Shiller combined with deflation]

 

[Dtail]

And thanks for posting the paper!


An interesting quote:



That's certainly not a number you hear often! I wonder during what timeframe a SWR of 13% worked?


[EDIT: now that I've read the article, the answer is - really low CAPE/Shiller combined with deflation]

IIRC, roughly around 1982 was one of the best years for retirement with (in hindsight) an SWR of over 10%.

 

[latexman]

Seem the Hummer EV they showed?

Did you notice the narrator was Lebron James?

IIRC, there was a huge brouhaha, when he graduated from High School, and "his Mom" gave him a brand new Hummer H2 with a "loan" based on Lebron's future earnings. That's when they still lived in the Cleveland projects. But, not for very much longer.

Lebron must have gotten great satisfaction out of doing that commercial.

 

[Markola]

“His calculations, incidentally, are all based on a conservative retirement portfolio where you keep 30% of your money in the S&P 500 SPX, +0.34%, 20% in U.S. small-caps such as the S&P 600 SML, +0.51%, and 50% in intermediate U.S. Treasury bonds TMUBMUSD07Y, 0.603%.”

It’s a rather large fly in the ointment that other common asset classes are not included, of course. Like the 4% Rule, the new 5% Rule is not so much a rule as a YMMV.

 

[latexman]

It’s a rather large fly in the ointment that other common asset classes are not included, of course. Like the 4% Rule, the new 5% Rule is not so much a rule as a YMMV.

It's a "rule of thumb", i.e. a broadly accurate guide or principle, based on experience or practice rather than theory. It is empirical.

As with all rules of thumb, they must be applied correctly to be useful; that's where YMMV.

 

[corn18]

I’ve heard stories from folks before the internet existed that 10% was a good ROT. Conservative folks lived off dividends. How the heck did anyone retire before firecalc?

 

[gauss]

I’ve heard stories from folks before the internet existed that 10% was a good ROT. Conservative folks lived off dividends. How the heck did anyone retire before firecalc?

Defined Benefit pensions?

 

[Dtail]

I’ve heard stories from folks before the internet existed that 10% was a good ROT. Conservative folks lived off dividends. How the heck did anyone retire before firecalc?

The Fidelity guy, Peter Lynch IIRC recommended a 7% WR since Stocks less inflation was around 7%. The concept of SORR was missed.

 

[Dtail]

Very close to my plan. Spend ~6% or a bit more for 8 years until age 70. At age 70 my SS and deferred pension will be $75K/yr, which would be a substantial but tolerable cut. That's if there is nothing left of the portfolio. One thing that makes sense to me, but doesn't seem often considered here with respect to spending rules: typical spending is not linear as you age. The is so much data that shows typical spending falls as people age, quite independent of their means. A flat 4% across retirement unnecessarily shortchanges early retirement years. JMO

And thus there is a Bernicke retirement option in Firecalc which addresses this concept.

 

[Koolau]

Apparently, Bill Bengen, creator of the 4% safe withdrawal rule, now believes that it should be 5% based on low inflation expectations.

https://www.marketwatch.com/story/the-inventor-of-the-4-rule-just-changed-it-11603380557?mod=home-page

Just refocusing for a moment on the 'new and improved' 5% rule: Looking back, the only time we ever withdrew 4% or a little more was back when we were in perpetual rehab mode (getting last mainland place ready to sell - new roof, new carpet and paint, radon remediation, landscaping and curb appeal etc.). Then there were two rehabs in Paradise (Kitchen and 2 baths each - very expensive.) AND this was before either of us started SS or MC!

Now, looking forward, Port has increased significantly AND the 30 year time frame is arguably only 15 years (actually, I'm NOW ending my time line at age 100 so that's 26 years, heh, heh.) I can't even think how I would SPEND 5%! I suppose I could buy new cars, fly 1st class, DO some vacations (after Covid), give the kids even more money, double our charities, etc. I know, I know, what a great problem to have. But seriously, I'm finding myself in a quandary as to how to proceed. We've never been about leaving a ton to the kids (we think it might ruin them - so charities will get most of it.) DW and I need a kitchen-table moment I guess though YMMV.