The 4% Rule is now the 5% Rule

[USGrant1962]

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?

Well, FIRECalc is for early retirement - the RE part. Most retired (and still do) in their 60s with SS, pension/401(k)/IRA, and some taxable savings. Nothing new here.

 

[NW-Bound]

Uh Oh!

If the market keeps on dropping like it does today, it will not be long for the 4%WR to become 5%.

 

[Koolau]

Uh Oh!

If the market keeps on dropping like it does today, it will not be long for the 4%WR to become 5%.

Voilà! Problem solved!

Well, maybe it's just the volatility one might expect what with a raging pandemic, national elections and this (bloody) 2020 - but YMMV.

 

[sengsational]

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!

I don't count home improvements (i.e. things that are expected to increase the selling price through something that would show on the appraisal). The idea is that you are investing in an appreciating asset, not out-the-door spending that's gone-gone. One could argue that you might (probably) will get less back than you spend, but since I usually do the sweat equity version, I call it even.

 

[ERD50]

I don't count home improvements (i.e. things that are expected to increase the selling price through something that would show on the appraisal). The idea is that you are investing in an appreciating asset, not out-the-door spending that's gone-gone. One could argue that you might (probably) will get less back than you spend, but since I usually do the sweat equity version, I call it even.

I agree - the money isn't really 'spent' if it went into the house and increased it's value (at least the amount increased). Of course, you still need the cash flow. But it's kinda like a Roth contribution - that money wasn't 'spent', it was a transfer. It's still on your balance sheet.

An expensive dinner, or any purchase that depreciates to near zero, is money spent. It's gone from your balance sheet.


-ERD50

 

[tb001]

I'm retiring soon, and Once my income stream stops in January 2021 I'll have 11 years where I use purely savings withdrawals to live on, but after that, for the next 30 years (taking me to 97 years old) I'll have pension and SSN paying at least half of our expenses. Am I wrong in estimating I'd be OK to spend about 6% of our savings, not including any present value estimates of SSN/Pension, each year in these first 11 years? Especially considering our two sons will (hopefully) be on their own in a matter of 3-5 years. I would think a lot of early retirees would be in this boat, do most take that into consideration when calculating the 4% rule and its variances in their early years of retirement?

I would put it in firecalc and test it. We will theoretically have a higher withdrawal rate our first few years. I think ours was a little over 5% IIRC. Over an extended time period it averages to about 3.5%. But because of the higher initial withdrawal our potential success rate is decreased.

(I say theoretically because DH is consulting PT. So far he’s brought in enough income to keep our withdrawal rate well below that.)

 

[38Chevy454]

I'm retiring soon, and Once my income stream stops in January 2021 I'll have 11 years where I use purely savings withdrawals to live on, but after that, for the next 30 years (taking me to 97 years old) I'll have pension and SSN paying at least half of our expenses. Am I wrong in estimating I'd be OK to spend about 6% of our savings, not including any present value estimates of SSN/Pension, each year in these first 11 years? Especially considering our two sons will (hopefully) be on their own in a matter of 3-5 years. I would think a lot of early retirees would be in this boat, do most take that into consideration when calculating the 4% rule and its variances in their early years of retirement?

It is quite common for new retirees to spend a lot more in the first few years. Items such as deferred house projects/upgrades, bigger and longer traveling, and buying new things like recreational vehicles or vacation homes. All of these can blow the withdrawal rate higher than 4% or 5% of course. How you treat them with respect to your budget is your choice. My personal method is to not view large withdrawals for one-time big purchases as part of the withdrawal rate. It certainly drops the total savings amount, which does affect that withdrawal rate in the sense it causes a higher revised withdrawal rate due to a lower divisor number.


Another big reason for a change in withdrawal rate is when SS or pensions kick in. As you have stated, after the 11 years your SS will result in a big change in withdrawal rate. Same with the effect when a pension kicks in. It's the old three legged stool concept: you need X amount of income each month/year, and it has to come from 3 sources. Those sources are: 1 = your savings, 2 = SS, and 3 = pension. When and how much each of those are tapped is dependent on your situation.


So, short answer to your question is you are probably safe to have 6% withdrawal in the early stages of your retirement. Just watch the numbers and be ready to adjust as needed if your savings is going down too fast.

 

[youbet]

I don't remember too much about the lingering effect of inflation in the 70's. I do remember 12-15% mortgages and car loans. It didn't stop us from having kids or buying our first new car and our first home.

The ongoing effects aren't really something to "remember." That's because they're non-events. Generally, once the general price level increases, it never retracts. That is, there is no deflation. So if you run into a sequence of events which includes high inflation early in retirement, your expenses increase (if you hold to the same standard of living) for perpetuity never returning to where they were

Market performance, OTOH, generally recovers. If you find a way to weather a down market, it seems it always eventually returns to its ongoing upward trend and eventual new highs.

 

[WyomingLife]

It is quite common for new retirees to spend a lot more in the first few years. Items such as deferred house projects/upgrades, bigger and longer traveling, and buying new things like recreational vehicles or vacation homes. All of these can blow the withdrawal rate higher than 4% or 5% of course. How you treat them with respect to your budget is your choice. My personal method is to not view large withdrawals for one-time big purchases as part of the withdrawal rate. It certainly drops the total savings amount, which does affect that withdrawal rate in the sense it causes a higher revised withdrawal rate due to a lower divisor number.


Another big reason for a change in withdrawal rate is when SS or pensions kick in. As you have stated, after the 11 years your SS will result in a big change in withdrawal rate. Same with the effect when a pension kicks in. It's the old three legged stool concept: you need X amount of income each month/year, and it has to come from 3 sources. Those sources are: 1 = your savings, 2 = SS, and 3 = pension. When and how much each of those are tapped is dependent on your situation.


So, short answer to your question is you are probably safe to have 6% withdrawal in the early stages of your retirement. Just watch the numbers and be ready to adjust as needed if your savings is going down too fast.

I'm still w*rking, so discount everything that follows, as I'm merely speculating as to what DW and I are apt to do when that magic day arrives and I hand in my papers at the office.

As background, DW is essentially a miser. She truly dislikes spending money. And that is even when decent salary is coming in the door. It is one of the many reasons why I love her, and a big reason why we are where we are today financially speaking.

So I anticipate that in the early years of retirement, we will be rubbing pennies together, eating rice and popcorn, and being even more hyper frugal than we already are. I anticipate not using my credit card (maybe even ever again), nor going to the ATM machine without first having a thoughtful conversation with DW.

Why? We would want to make sure everything was going to be ok, that our egg was going to last. We would want to see what happened to our NW over a 12-month period in the absence of salary-based retirement contributions. That seems like a prudent thing to do.

And one thing I definitely know is this: If I went to DW shortly after I was retired and said: "Honey, I'm going to purchase a $100,000 RV but don't worry about it because I'm not going to count it against our withdrawal rate," it very well might be a marriage-ending event. Or at least I would spend the next couple of days in the hospital for surgery to extract the spatula from my head.

 

[corn18]

We made all of our giant purchases this year before I retire next year. 2 new cars, move to new house (and new furniture), electric bikes, new camper. Spent about $175k plus the mortgage. If the stuff hits the fan, I can keep working vs. retiring. Helps manage SORR.

 

[pb4uski]

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

We were similar... ~4% until SS starts and then sub-1%.

 

[NW-Bound]

I don't remember too much about the lingering effect of inflation in the 70's. I do remember 12-15% mortgages and car loans. It didn't stop us from having kids or buying our first new car and our first home.

What I do remember that really made a mark on me, was what one of the respected engineers did during that time. After seeing his profit sharing fall to pieces, he quit his job in order to "protect" his investment from falling any further. At that time, the only way to get the profit sharing was to quit. A year or two later, I heard he was stocking shelves in a grocery store. I learned not to take any drastic actions. That has been etched in my memory more than the inflation rates of the time.

The ongoing effects aren't really something to "remember." That's because they're non-events. Generally, once the general price level increases, it never retracts. That is, there is no deflation. So if you run into a sequence of events which includes high inflation early in retirement, your expenses increase (if you hold to the same standard of living) for perpetuity never returning to where they were

Market performance, OTOH, generally recovers. If you find a way to weather a down market, it seems it always eventually returns to its ongoing upward trend and eventual new highs.

The mortgage on my 1st home in 1980 had a rate of 14%. It hurt like crazy, but when Volcker, then Fed chairman raised interest rate further to slay inflation and the mortgage rate went to a peak of 18.63% in 1981, I thought I was so lucky to lock in that 14% rate.

When inflation finally subsided and the mortgage rate went down, I refinanced a couple of times before selling to move to another part of town in 1986. I sold the house for 1.5x of what I paid. That's inflation for you.

As Youbet said, prices once they went up never did go back down like the interest rate. Wages, on the other hand, did go up to match inflation somewhat. Workers tend to do OK. The only people hurting BIG TIME are people on fixed income, such as non-COLA'ed pensions.

Braumeister already told us the story about his grandfather, who saw his pension purchasing power shrinking to 23% of its original value, during the course of his 30-year retirement.

 

[GaryInCO]

I'm 64. Still w*rking, sorta. I've been self-employed most of my life, and due to limitations of my work (finding enough of it), I was never able to work full-time. Fortunately it paid a full-time income anyway. So I've been basically semi-retired with a nice "pension" for decades. I enjoy the work, I enjoy the income, and I got nothin' better to do, so I plan to keep working for the foreseeable future. So I won't be dipping into savings any time soon.

For various stupid reasons I have always sucked at investing. I got tired of watching the money in my account disappear, so I quit it -- basically haven't been in the stock market in many years. (I figured it out in the last year or three, but I think the market is much too overextended to jump in now.) Instead my ex-DW and I bought rental properties and paid down mortgages. Now, especially with a recent inheritance from my mother, I have 3 paid-for rentals, plus a rental "apartment" in the basement of my (large) house. I have about a $2100 mortgage payment on my house, but over $6k/month (gross) income from my rentals, so that's my "pension." It should COLA pretty well, as rents go up with inflation, and northern Colorado real estate has done real well appreciation-wise. So I'm in good shape.

My wife left me 10 years ago, and I don't enjoy traveling by myself. I finally started traveling again with some group trips to Tuscany and Bordeaux in the last few years, but for now travel is on hold. I still like my car and will probably keep it for another 2 yrs or so, at which point it will be over 20 years old and it'll be time for an electric car.

Last year I was diagnosed with prostate cancer and lymphoma. The PC should be treated & "fixed," but the lymphoma is dicier. I still feel fine. My dad died of the exact same cancer, but treatments have improved. So I don't think I have a great chance of lasting another 20 years.

So I have a comfortable income, with SS coming up sometime (probably at 66, given uncertain life expectancy), and nothing much to spend it on. I dumped $100k into my house in the last few years so that's taken care of for a while.

My two sons are in their mid-20's, and I don't expect them to have as cushy a life as I did. They don't know it but I hope to leave them upwards of $1M each. I think they're level-headed enough to not let it ruin them.

So my plan for now is to hunker down through COVID (lymphoma places me at severe risk), travel a lot more when it's safe (work travel got me half a million United miles, if United is still in business by then...), buy a car in a year or two, plan to help my sons with their first down payment, etc. WR doesn't really apply to me because I'll be living off "dividends" (rental income). I can sell off a rental if I really need cash.

 

[LastBoomer]

5% withdrawal already advised by Wes Moss

Wes Moss’ “You Can Retire Sooner than You Think” book already advocates a 5% withdrawal. The way he states it is, for every $240K you have invested you can withdraw $1,000 /month (his “$1000 Bucks a month rule”). He also advocates multiple sources income, including SS, part-time work, so he is basically saying don’t have just one source of income. Good book (IMO), with good advice, much of it non-financial (treat yourself to steak once in a while!)

 

[pb4uski]

^^^ are his $1,000/month withdrawals adjusted for inflation?

$1,000 in September 2000 would have the buying power of $667 in September 2020.

With the 4% rule withdrawals are increased for inflation, so someone withdrawing $1,000 in September 2000 would be withdrawing $1,500 in September 2020.

 

[DrRoy]

I have a modest pension but no SS yet. My first year of RE I WD 1.6% and that let me match my previous year's spending. As the market has been good since then (3.5 years ago) I have been increasing the draw for some home remodeling and more travel. I am taking 3% for next year, the most ever, but even with a new project I do not see that we will spend it all so we will add to the cash cushion.

 

[Nightingale9]

Here is a cogent rebuttal to the Bengen article:
https://earlyretirementnow.com/

 

[PointBreeze]

I'm 64. Still w*rking, sorta. I've been self-employed most of my life, and due to limitations of my work (finding enough of it), I was never able to work full-time. Fortunately it paid a full-time income anyway. So I've been basically semi-retired with a nice "pension" for decades. I enjoy the work, I enjoy the income, and I got nothin' better to do, so I plan to keep working for the foreseeable future. So I won't be dipping into savings any time soon.

For various stupid reasons I have always sucked at investing. I got tired of watching the money in my account disappear, so I quit it -- basically haven't been in the stock market in many years. (I figured it out in the last year or three, but I think the market is much too overextended to jump in now.) Instead my ex-DW and I bought rental properties and paid down mortgages. Now, especially with a recent inheritance from my mother, I have 3 paid-for rentals, plus a rental "apartment" in the basement of my (large) house. I have about a $2100 mortgage payment on my house, but over $6k/month (gross) income from my rentals, so that's my "pension." It should COLA pretty well, as rents go up with inflation, and northern Colorado real estate has done real well appreciation-wise. So I'm in good shape.

My wife left me 10 years ago, and I don't enjoy traveling by myself. I finally started traveling again with some group trips to Tuscany and Bordeaux in the last few years, but for now travel is on hold. I still like my car and will probably keep it for another 2 yrs or so, at which point it will be over 20 years old and it'll be time for an electric car.

Last year I was diagnosed with prostate cancer and lymphoma. The PC should be treated & "fixed," but the lymphoma is dicier. I still feel fine. My dad died of the exact same cancer, but treatments have improved. So I don't think I have a great chance of lasting another 20 years.

So I have a comfortable income, with SS coming up sometime (probably at 66, given uncertain life expectancy), and nothing much to spend it on. I dumped $100k into my house in the last few years so that's taken care of for a while.

My two sons are in their mid-20's, and I don't expect them to have as cushy a life as I did. They don't know it but I hope to leave them upwards of $1M each. I think they're level-headed enough to not let it ruin them.

So my plan for now is to hunker down through COVID (lymphoma places me at severe risk), travel a lot more when it's safe (work travel got me half a million United miles, if United is still in business by then...), buy a car in a year or two, plan to help my sons with their first down payment, etc. WR doesn't really apply to me because I'll be living off "dividends" (rental income). I can sell off a rental if I really need cash.

Gary,

I wish you good luck with the lymphoma. Both my Dad and his brother got non-Hodgkin’s lymphoma about 20 years ago, and both of them kicked it (one was stage 2 and one was stage 4). New treatments had just come out and worked for them. I’m sure treatments are even better now

 

[GravitySucks]

Reading the Bengen paper - he's not readjusting SAFEMAX as he did in 2006, he's simply saying due to low expected inflation he's confident October 2010 is not as bad a time to retire as October 1968, even though CAPE 10 is high.
I also do not think we are at the worst of times even though it is certainly a 'unique' period.

 

[walkinwood]

Here is a cogent rebuttal to the Bengen article:
https://earlyretirementnow.com/

That is an impressive post! Thanks for sharing.

Someone with more knowledge of statistics may be able to poke holes in it, but a lot of what he says made sense to me.

Luckily, I don't need a 5% SWR

 

[Koolau]

That is an impressive post! Thanks for sharing.

Someone with more knowledge of statistics may be able to poke holes in it, but a lot of what he says made sense to me.

Luckily, I don't need a 5% SWR

Yes, as mentioned in my last post, after 15 years FIREd, I see the discussion as more academic than tailored to my situation. I'm still very interested as it's one of the concepts that got me here. At least so far, I consider myself one of the 'success stories' of FIRE and want to pass on what I can to the young whippersnappers here.:cool smiley: In any case, I've NEVER gone out and withdrawn 4% (adjusted for inflation) just because it's "the rule."

I've stated before that I always used the 4% rule (or now, maybe or maybe not the 5% rule) as a planning tool. If 4% is what I can spend, then how much of a 'stash' do I need to turn 4% into what I'm spending - or anticipating spending in first year. I sort of overdid it (plus there was that OMY X 7 thing after FI ).

So since my 30 year time-line is now 15 (or maybe 26 years), I'll save some of it and NOT read the 2nd article too closely. YMMV

 

[Live Large]

Earl? Is that you...

Here is a cogent rebuttal to the Bengen article:
https://earlyretirementnow.com/

+1

Thanks, as this was revealing there certainly are variables but I think I will also stick with Bengen’s tried and true original 4% RW. The Security Act raised age of RMD to age 72. There is another Bill that has an age factor up to April 1 year turning 75?

We’d stretch savings a while, an option unless inflation runs high over 5% - start RW cover.

Like some that have other sources of retirement income, I’ve yet to withdraw monies continue to grow. But like I’ve read in a post here, not trying to leave million in cash behind. DW is still working full salary so benefit source of income there. But once travel is safe again we intend to spend more early after she retires~ call it lump sum expenses. At least that’s our script we’re sticking to. Then later 4% rule.

Earl Nightingale- The Strangest Secret in the World