The Four Percent Rule

[Lsbcal]

Believe it or not, I can actually follow ERD50's and Audrey's treatment of their portfolios. Seems to me very fine points of differences. I'm not feeling misled at all.

 

[Lsbcal]

On the thread about portfolio return YTD, there are posters who say "this account of mine has wonderful return of so and so". Well, owning individual stocks, I can always point to some stocks where I double my money, while neglecting the ones where I lost my shirt.
...

Is that why you are just shown in silhouette?

 

[NW-Bound]

What's wrong with a silhouette?

Anyway, I do not have problems with how people manage their money. It really depends on what one's definition of a portfolio is.

Mine happens to include every bit of cash. Well, not the loose coins in the ashtray of my car, or the few dollar bills in my wallet, but everything else is on that Quicken screen. Quicken also immediately subtracts out any charges that I make with my credit cards, my HD and Lowe's cards, and it reminds me that I am that much poorer. I like it.

Every so often, people ask about net worth on this forum, and I am among the people who do not count the value of their home(s). No, it's not on Quicken.

I guess I could guesstimate RE values and add it to the Quicken screen to feel better, but I just don't. True, it's in my networth, but it is illiquid and I do not expect to spend it any time soon, so why bother? Maybe Audrey thinks of her secret pile of "off-portfolio" cash the same way.

PS. I've got some gold coins. They are not on Quicken either.

 

[Corporateburnout]

I have that big pile of cash, and it is included in Quicken. Even the cash in my checking account is included (used to be in the mid 5 figures). And my total return always includes the effect of the meager yield of all that cash.

How do you get a Quicken return report to include your cash accounts? I have not been able to get Quicken to include my cash accounts in the performance report so I have to add them manually.

 

[NW-Bound]

I lied and told it that these are "investing" accounts instead of "banking" accounts.

I thought that fooled it, but maybe not.

PS. They all add up in the left-hand panel under "Net Worth", but not all appear in the right-hand panel under "Portfolio".

PPS. For the record, I use the "Net Worth" number, then adjust for expenses when computing return. So, the return number that I compute by hand includes the effect of the last dollar of idle cash, however minimal that is.

The big cash items like I-bonds and Stable Value Fund, plus the cash sprinkled throughout all accounts are tallied up by Quicken in its AA report. They all show up in the right-hand panel under "Portfolio".

 

[Totoro]

But let's all remember that the 4% "rule" is a guideline, not set as an actual fact.

+1

 

[pb4uski]

How do you get a Quicken return report to include your cash accounts? I have not been able to get Quicken to include my cash accounts in the performance report so I have to add them manually.

In Account Details make the account an Investment account rather than a Spending account.

The problem is that if you withdraw from that account then for some reason you'll get some screwy results. For example, my cash allocation is in a Discover Bank online savings account that is included in my Investments and earns 0.95% and my monthly "paycheck" is a transfer from that account to my local credit union that I use to pay my bills. If I run a YTD Investment Performance report in Quicken for just that account it says the return is -31%, but i know the return is really 0.95%.

As all result I just exclude that account when I run an Investment Performance report and it is usually pretty close since my cash allocation is small.

 

[redduck]

...I'm just conservative for my personal comfort. It's my version of belts and suspenders...

I'm not sure that "belts and suspenders" works for everyone.

 

[audreyh1]

First, I didn't say (and my example showed this), that all accounts are subject to the same AA. I showed that one should sum all their investible assets, and the look at the total AA in order to see the big picture.

As far as it not being stated - I think it is such a basic concept that it is accepted by default. Look at this from firecalc.com:




It doesn't say anything about a segment of your finances, to see how that segment would do. Your net worth is your whole nut.



OK, for simplicity, you could pull out a known amount for a known upcoming expense, like college education - and then take a look at the portfolio going forward without either the funds or the expense. That's no different from entering it as cash, and entering the expense later, but that's more entries in firecalc.

But that's different from an ongoing strategy of pulling excess based on market returns, taking it out of the equation, and then spending that accumulation on various things in various years, and trying to discuss this in terms of the standard inflation adjusted withdrawals and 'portfolio survival'. Again, not that there's anything wrong with that approach, but as far as making comparisons to how firecalc works, and all those terms, well, it just isn't a part of how it works.

For example, you could have pulled an excess for many years and set it aside, but never got excited about any big purchase, so it just sits there. Then let's say the market melts down and your 'compartmentalized portfolio' fails, but then you 'refill' from your off-the-books stash.

Did your portfolio (the whole nut) actually fail? I'd say no, but I think you would say yes. This is why I say it is confusing. A big picture view has no such uncertainty in terms.

-ERD50

Many of the studies work the other way - they ask how do much you want to withdraw (including taxes you will have to pay) and then tell you how large of a retirement portfolio you need to support that annual income given a 30 year retirement based on the Trinity rules or whatever.

I see no benefit in looking at the AA of my total net worth - that is not something I am trying to manage or have a target for. I only need to look at the AA of the portfolio that I have invested for my retirement income. That's the only part that I withdraw from annually and rebalance to a given AA that was selected based on portfolio survival criteria. I don't need to project the long-term performance and survival of the remainder of my assets.

I'm not using inflation adjusted withdrawals or discussing that scenario. I'm using % remaining portfolio. Neither am I changing my withdrawals based on some perceived market excess in the portfolio as the % withdrawal rate is the same year after year as the portfolio grows and shrinks. My income varies from year to year based on the size of the portfolio each year on Dec 31. I choose to manage the variability in income versus my spending by allowing unspent funds to accumulate, and doing so outside of my AA rebalanced retirement portfolio as I choose not to expose those unspent funds to market forces. Recalculating some AA taking into account these unspent funds provides me no benefit.

 

[kcowan]

What about funds set aside for children's college? What about funds set aside of other things but not retirement such as saving for a new car or house down payment...

I treat the college fund as part of my portfolio, but the withdrawals are booked as future liabilities, same as car purchases.

It depends if you are talking about the success/failure of that particular pool of money. But that is not the same as the success/failure of the retiree, who depends on his/her entire portfolio...

After being retired for 6 years, I received an inheritance. I added it to my investable assets and recalculated my WR. Then we lowered our need for withdrawals by living in a low cost place for 5+ months a year.

Mine happens to include every bit of cash. Well, not the loose coins in the ashtray of my car, or the few dollar bills in my wallet, but everything else is on that Quicken screen. Quicken also immediately subtracts out any charges that I make with my credit cards, my HD and Lowe's cards, and it reminds me that I am that much poorer. I like it.

Every so often, people ask about net worth on this forum, and I am among the people who do not count the value of their home(s). No, it's not on Quicken...

Again net worth is a totally different animal that investable assets. Yes we could turn real estate into an investable asset but until we do, it is a lifestyle expense.

 

[NW-Bound]

...Again net worth is a totally different animal that investable assets. Yes we could turn real estate into an investable asset but until we do, it is a lifestyle expense.

RE is definitely not investable asset, unless it is for rental. It's just a money pit. However, it is definitely "spendable" asset in dire situations. I keep that in the back of my mind, but do not have it in Quicken or any spreadsheet.

 

[pb4uski]

FWIW, my retirement assets include all financial assets other than a few local bank accounts that I use to pay my bills... online bank account that is my cash allocation, all tIRAs, Roths, HSAs, taxable accounts, CSV of life insurance (that I view as a bond equivalent). The local bank accounts float around usually in the $5-$40k range depending on what we are spending but I don't consider it part of my retirement assets.

My retirement funds also exclude my homes, cars, etc.

 

[audreyh1]

The problem with returning unspent funds to the retirement portfolio, is that none of the models work that way. They assume once your withdrawal is withdrawn, that's it - it's never returned.

If you do return unspent funds - your actual withdraw rate for a that year was lower than you calculated when you made your initial decision. Now you don't have a fixed withdrawal amount or rate anymore - it's jumping up and down depending on whether you spent all your income or not. The model goes out the window.

 

[RetireAge50]

The problem with returning unspent funds to the retirement portfolio, is that none of the models work that way. They assume once your withdrawal is withdrawn, that's it - it's never returned.

If you do return unspent funds - your actual withdraw rate for a that year was lower than you calculated when you made your initial decision. Now you don't have a fixed withdrawal amount or rate anymore - it's jumping up and down depending on whether you spent all your income or not. The model goes out the window.

I think it is cool how you do it and you have explained it well in this and other threads. I like it when people share their withdrawal strategies. I'm surprised when people get all crazy about definitions of words and such.

For me I'm piling everything together and using a RMD approach starting at age 50. I have a stable value fund where I will keep all the cash.

 

[redduck]

...
The model goes out the window.

You say it like it's a bad thing. But, maybe we should take a closer look.

 

[RobbieB]

I could care less if "the model goes out the window", I only care about how much dough I have and how fast I'm spending it.

These calculators are good for giving you a warm fuzzy before you retire but after?

You are on your own, the die is cast. No model is ever going to put more dough in your account or cut your spending, improve the market, lower inflation or keep you out of the hospital.

 

[audreyh1]

I could care less if "the model goes out the window", I only care about how much dough I have and how fast I'm spending it.

These calculators are good for giving you a warm fuzzy before you retire but after?

You are on your own, the die is cast. No model is ever going to put more dough in your account or cut your spending, improve the market, lower inflation or keep you out of the hospital.

The models can still help you decide whether to cut your spending and/or lower your withdrawal rate, or increase them. Or what the effects might be if you change your asset allocation. Or if you decide to pull a chunk of money out for a one-time large purchase, how the resulting projected income might change.

As long as you haven't retired with too little money, and/or have 100% fixed expenses locked in, you can course correct even during retirement.

You can also reevaluate your situation after a good market run, or after a poor one.

 

[NW-Bound]

You are on your own, the die is cast. No model is ever going to put more dough in your account or cut your spending, improve the market, lower inflation or keep you out of the hospital.

No model is going to cut the spending. You have to do that yourself, sometimes because there's no alternative.

 

[growing_older]

At year end I subtract the unspent amount from the total portfolio on my spreadsheet and add it to the "mad money cell (which I have just adjusted up or down based on the past year's performance).

I like this description very much. If I have a spending rate that is comfortable, I am strongly inclined to maintain a lifestyle I have become accustomed to. If I see I have more portfolio than I really need, I can of course add expenses a bit at a time, but I would much prefer to know that some "mad money" is available for a big purchase from time to time (maybe a once in a lifetime trip, for example). I don't want to change my regular month-in-month-out expenses. But I want to stay within the plan for safe expenses even with occasional big purchases. This method gives me a very intuitive way to do that.

 

[Backdraft57]

Just like to say great thread! Thanks to all the wisdom shared here. I have only been at retirement for six months and so far just living off pension and my vacation and sick leave payouts. Next year will be different and I will need to start withdrawal from 457 account. I have learned a lot from you all so thanks for all you have shared here.

Sent from my SM-G935V using Early Retirement Forum mobile app

 

[RobLJ]

I also enjoyed the thread. Basically, I'm planning to run on a 5-5.5% withdrawal rate until SS, reduced to 3.5-4% after SS kicks in.
I'm still working 1/3 time and DW is working and plans to work for another 4-6 years (to vest fully in the 401k in her new job), so we added 7% to the portfolio in 2016, barring an "event." No withdrawals yet.
Both amounts have about 30%-35% of slack (vacations, etc.) built in, so like pb4uski I probably won't be spending it all, but stashing some in cash, either for splurges or a rainy day.
I also plan to recalculate when we actually do start withdrawing, which could be next year, if I'm not renewed at part-time.
FireCalc gave me the confidence to go ahead, go part-time the July before last, move to Reno, and buy the dream house (and tell DW she could quit now, in 2 years or whenever she wants).

 

[marko]

No model is ever going to put more dough in your account or cut your spending, improve the market, lower inflation or keep you out of the hospital.

The speedometer on that cycle of yours is not going to tell you to speed up or slow down but it's a good thing to know how fast you're going.

 

[Totoro]

The speedometer on that cycle of yours is not going to tell you to speed up or slow down but it's a good thing to know how fast you're going.

Nice analogy.

Also works with downhill / uphill or wind speed. It doesn't tell you the inclination or wind speed, but if you're going 40mph it's safe to say it's not just you who's doing the paddling