The Ratcheting Safe Withdrawal Rate – A More Dominant Version Of The 4% Rule?

[Midpack]

I couldn't find a newer one, but this chart starts in 1985 - which covers 30 years to 2015. These have been posted here before, but it's been a while since I've seen one. Another way to see how safe 4% has been over past history, back to 1871 which includes World Wars, the Great Depression and numerous other wars, recessions and other market corrections. You could have withdrawn more, a lot more in some cases, than 4% for many 30 year periods. Just FWIW.

https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/

 

[bobandsherry]

Historically the broad market, e.g. S&P 500, has done much better than 4% over the long term, 10 to 30 years. It seems a case of 4%>5%, and then 3%>4%. From source listed below:

During the best 30-year period (1932-1961), the S&P 500 delivered*10.1%*annual returns.

During the worst 30-year period (1965-1994), the S&P 500 delivered*4.3%*annual returns.

The median annual returns for 30-year periods since 1928 has been*7.1%.

So 4% feels about right and is probably set based that the worst period was 4.3%.

Source: https://fourpillarfreedom.com/heres-how-the-sp-500-has-performed-since-1928

 

[Dtail]

IIRC, the mean WR% one could take out is 6.5%, but the worst 5 years or so to retire bring the WR% down to a more conservative 4%.

 

[flyingaway]

If you think you can withdraw more than 4% each year, do you have some easy ways to spend the extra money?
The 4% calculation is based on your spending amount. Another way to get around is to adjust your spending amount, i.e., the numerator used to calculate to percentage.

 

[Exchme]

In Kitces article, the point was that a 50% increase in assets would allow you a permanent 10% increase in withdrawals. Since that "ratchet" up to higher spending would never need to be reduced, he called it dominant vs the traditional 4% rule. In contrast, traditional variable withdrawal methods could leave you withdrawing less, sometimes a lot less, if markets go down.

I took it as a "think piece" to make people consider their withdrawal strategy and why they shouldn't greatly increase spending if markets go up without understanding that unless they are careful, they are putting themselves in front of the SORR bus again.

 

[RetiredAt49]

The 4% rule confuses me somewhat…. I have $1.8 million in a taxable brokerage account, $200k in savings, $600k in IRA’s, home worth $500k, cabin worth $500k, and investment rental properties worth $1.5 million (which we plan to liquidate over the next few years).

Thus, is the 4% guidance based on just my taxable brokerage account? Everything combined, other?

If my brokerage account is sitting at $2 million next year do I pull 4% of $2 million or $1.8 million next year?

BTW - I’m 49 so can’t touch IRA’s for awhile.

 

[Sunset]

The 4% rule confuses me somewhat…. I have $1.8 million in a taxable brokerage account, $200k in savings, $600k in IRA’s, home worth $500k, cabin worth $500k, and investment rental properties worth $1.5 million (which we plan to liquidate over the next few years).

Thus, is the 4% guidance based on just my taxable brokerage account? Everything combined, other?

If my brokerage account is sitting at $2 million next year do I pull 4% of $2 million or $1.8 million next year?

BTW - I’m 49 so can’t touch IRA’s for awhile.

The 4% "rule" was based on folks retired at 65 and living for up to 30 years.

Being retired at 49, I think you would want a lower number to ensure it lasts the extra 16 yrs.

Maybe 3% or 3.3% (all done without using actual math )

I'd calculated 3% of: $1.8 million in a taxable brokerage account, $200k in savings, $600k in IRA’s, and investment rental properties worth $1.5 million
Which is 3% of $4.1 Million ($123K) , I never count the house and did leave out the cabin as maybe you have a house and cabin rather than a bigger house.

But of course how does this $123K compare to your spending ?

At 3.3% it would be $135K

 

[teejayevans]

Don’t count anything you don’t plan on selling.
I would sell the real estate now given how hot the market is.

 

[Dtail]

In Kitces article, the point was that a 50% increase in assets would allow you a permanent 10% increase in withdrawals. Since that "ratchet" up to higher spending would never need to be reduced, he called it dominant vs the traditional 4% rule. In contrast, traditional variable withdrawal methods could leave you withdrawing less, sometimes a lot less, if markets go down.

I took it as a "think piece" to make people consider their withdrawal strategy and why they shouldn't greatly increase spending if markets go up without understanding that unless they are careful, they are putting themselves in front of the SORR bus again.

If one uses a variable withdrawal rate, the percentage of discretionary spending comes into play more highly, so some necessary potential cuts can be wants instead of needs.

 

[donheff]

The 4% rule confuses me somewhat…. I have $1.8 million in a taxable brokerage account, $200k in savings, $600k in IRA’s, home worth $500k, cabin worth $500k, and investment rental properties worth $1.5 million (which we plan to liquidate over the next few years).

Thus, is the 4% guidance based on just my taxable brokerage account? Everything combined, other?

If my brokerage account is sitting at $2 million next year do I pull 4% of $2 million or $1.8 million next year?

BTW - I’m 49 so can’t touch IRA’s for awhile.

Bubba, you probably want to read up on this to get a fuller understanding. But the simple answer is that you start retirement by setting an initial SWR fixed dollar amount based on all of your liquid assets (IRAs, taxable accounts, not house and cabin). You would probably want to toss in the rental property values for estimates since you plan to liquidate them. So, if everything adds up to $4M your initial dollar amount if you go with 4% would be $160K. In the following year you would adjust that $160K upward by the social security COLA, and so on in the following years.

Now, having done this myself for more that 15 years I have come to realize that it is (for me) a theoretical exercise. I am spending way below that theoretical initial SWR amount based on 4% or even 3%. But starting out it is a useful tool. And, if your actual spending rate is at or near the initial pull, setting a tight SWR limit could be important to protect yourself from a bad sequence of returns. As you get further down the road you can evaluate how best to adjust.

 

[Dash man]

The 4% rule confuses me somewhat…. I have $1.8 million in a taxable brokerage account, $200k in savings, $600k in IRA’s, home worth $500k, cabin worth $500k, and investment rental properties worth $1.5 million (which we plan to liquidate over the next few years).

Thus, is the 4% guidance based on just my taxable brokerage account? Everything combined, other?

If my brokerage account is sitting at $2 million next year do I pull 4% of $2 million or $1.8 million next year?

BTW - I’m 49 so can’t touch IRA’s for awhile.

I would only include your investment properties after tax/sales costs value. You’re likely to have a significant capital gains and depreciation recapture tax.

 

[SecondCor521]

BTW - I’m 49 so can’t touch IRA’s for awhile.

This is a common misconception.

There are at least three or four different ways to access IRAs earlier than 59.5:

1. SEPP / 72(t)
2. Roth conversion ladder
3. Rule of 55 (for IRAs would require rolling into one's 401(k) I guess)
4. Just pay the 10% penalty

As for the original topic on this thread, I generally like Kitces' stuff but I like the Payout Period Reset model here better:

https://retireearlyhomepage.com/popr.html

It ratchets up sooner and is easier to keep track of.

That being said, I'm 52 and at a 1% WR so it's really just theoretical for me also.

 

[Koolau]

For the newer folks, let me be the first to remind that most retirees never actually "execute" the 4% rule (or the SWR calculated by FIRECalc.) We don't "slavishly" calculate 4% (plus appropriate inflation) to withdraw from our nest egg. Rather, we keep our early spending to around 4% or less (in the yearly rear view mirror.)

So IOW most of us plan our FIRE by asking the question "How much income do I need to generate to meet my proposed FIRE spending?" Then, using the 4% rule or the results of FIRECalc or similar tools, we work toward a nest egg that will supply our needs within the bounds set around 4% WDR or whatever.

But once we achieve the required nest egg, we FIRE, then relax a bit and take what we need, keeping in mind the general limits of the 4% rule. I've gone over 4% a few times - especially when doing rehabs on my property. I've viewed these as a partial investment, so the 4% can be stretched a bit. Time has confirmed the investment aspect as I've sold 2 properties which I rehabbed and recouped most of the rehab costs.

My point is to use the 4% rule (or whatever) to prepare for FIRE. Once FIRE is achieved, use 4% (plus inflation, etc.) as a guideline not a "bright" line. And always be ready to cut back if your gut tells you to. Most of us did cut back a bit during the unpleasantness of 2008, etc. Your gut will probably guide you well in uncharted waters.

Or, more succinctly, measure with a micrometer and cut with an ax though YMMV.

 

[audreyh1]

I expect that we are under withdrawing. Don’t know what to do about it yet, but there is something to be said for building a later nest egg for funding long term care and/or family medical emergencies/care needs.

 

[brett]

For the newer folks, let me be the first to remind that most retirees never actually "execute" the 4% rule (or the SWR calculated by FIRECalc.) We don't "slavishly" calculate 4% (plus appropriate inflation) to withdraw from our nest egg. Rather, we keep our early spending to around 4% or less (in the yearly rear view mirror.)

So IOW most of us plan our FIRE by asking the question "How much income do I need to generate to meet my proposed FIRE spending?" Then, using the 4% rule or the results of FIRECalc or similar tools, we work toward a nest egg that will supply our needs within the bounds set around 4% WDR or whatever.

But once we achieve the required nest egg, we FIRE, then relax a bit and take what we need, keeping in mind the general limits of the 4% rule. I've gone over 4% a few times - especially when doing rehabs on my property. I've viewed these as a partial investment, so the 4% can be stretched a bit. Time has confirmed the investment aspect as I've sold 2 properties which I rehabbed and recouped most of the rehab costs.

My point is to use the 4% rule (or whatever) to prepare for FIRE. Once FIRE is achieved, use 4% (plus inflation, etc.) as a guideline not a "bright" line. And always be ready to cut back if your gut tells you to. Most of us did cut back a bit during the unpleasantness of 2008, etc. Your gut will probably guide you well in uncharted waters.

Or, more succinctly, measure with a micrometer and cut with an ax though YMMV.

Exactly. In ten years of retirement we have never even bothered to calculate our withdrawal rate. Never even thought about it. There are other deciding factors for us on how much we withdraw.

I have never paid any attention to the supposed 4 percent rule. I just determined out spend and compared same to our income and to our resources. Prior to, and on an after tax total annual annual spend. That is as far as our budgeting goes. Whether it be on a trip to SE Asia, a can of peas, or a new roof.

 

[pb4uski]

The 4% rule confuses me somewhat…. I have $1.8 million in a taxable brokerage account, $200k in savings, $600k in IRA’s, home worth $500k, cabin worth $500k, and investment rental properties worth $1.5 million (which we plan to liquidate over the next few years).

Thus, is the 4% guidance based on just my taxable brokerage account? Everything combined, other?

If my brokerage account is sitting at $2 million next year do I pull 4% of $2 million or $1.8 million next year?

BTW - I’m 49 so can’t touch IRA’s for awhile.

4% was based on a study that was only financial assets (stocks and bonds). But as a practical matter it can include other assets that are either income producing (like your investment properties) and others that you plan to sell (like cabin?). IOW, any assets that you plan to convert to cash over your retirement. In our case, I exclude our VT home and our FL condo, both of which we have no plans to sell... the benefit to our retirement of those two assets are places to live and only pay property taxes, insurance, HOA fees and utilities rather than pay rent.

So in your case, assuming thaou plan to keep the cabin and the house, your base would be $4.1 million.

However, as others have posted, 4% was based on a 60/40 AA, 30 year time horizon and a 95% level of success. For longer time horizons, the 4% would need to be lower. If you put into FIRECalc $1m portfolio, 30 years, 60% equities and solve for safe spending at 95% success you'll get 4.06%... the 4% rule. But if you change that 30 years to 46 years (65+30-49) then the safe withdrawal rate changes to 3.49%.

So applying the 4% rule to your situation would result in safe withdrawals of ~$143k... and adding in SS would increase it a bit more.

Also, the 4% rule was based on the percentage applied to the retirement date portfolio balance and then subsequently, withdrawals would be increased for inflation... but not x% of the beginning of year portfolio balance each year.

There is a school of thought that one can safely "ratchet" withdrawals... each year use the higher of 4% of the portfolio at the beginning of the year or the previous year's withdrawals adjusted for inflation. For example say in the first year of retirement you withdraw $143k but your portfolio increases over the year to $4.5m. If it is safe for someone retiring with $4.5m to withdraw $157k ($4.5m * 3.49%) then it should be equally safe for you to withdraw $157k that year rather than limit yourself to $143k plus inflation.

 

[audreyh1]

We’ve been running a strict 3% of end of year portfolio value each year. This % remaining portfolio method, as it is named in Firecalc, obviously tracks with portfolio value. We haven’t tried ratcheting up and keeping it there, but due to the long bull market our income has increased substantially.

We are now 62 and 66. We haven’t increased the % because it’s already above what we usually spend. But I also know from my modeling that we certainly could and still be sustainable.

 

[Perryinva]

I echo what Koolau says. It’s a great tool for planning, and is more important for those that depend entirely or nearly on it for income. But depending on what percentage of your income comes from the portfolio, people with lots of rental income, pensions, annuities etc, are less likely to “follow the rule” when retired. Many are forced to do so, if it is mostly in pretax IRAs, via RMDs eventually, where as those with 100% Roth and no RMDs calculate it differently. Naturally, income from $120k via 4% from a Roth is not the same as $120k via 4% from a tIRA The rule does not ever claim to be a tool for living income, but merely a historic probability withdrawal vehicle from a sustainable 30year portfolio, to aid income.

Personally, it is net spendable funds that I care about, so tax arbitrage via Roth conversion is my current tact. I haven’t “enabled” the 4% rule yet, between Roth conversions and delayed SS filing.

Since I have the majority of my retirement funds in my Fidelity accounts, it is easy to estimate the percentage based on withdrawals. I simply subtract the amount I expect to withdraw as a SS substitute (approx $150k, taxable at this time ) from the total, and see what percentage above that amount I have drawn. At this time any income needed in addition to pensions and DW SS, that are less than my yet to be filed SS, means I have not touched my “real” savings yet, which, thanks to C19, I haven’t even gotten close to, to date. My conservative portfolio grew 10%, plus the funds amount I have withdrawn, as one would expect with the markets returns these last years.

I read Kitces paper many times before retiring and liked the idea a lot. For my circumstances, I have no desire at all to leave a large inheritance, so increased withdrawal rate based on success & growth appeals to me, though in our circumstances, our natural tendencies curb wanton spending and like many here we are forced to BTD (but not for excessive toys, etc) if we want to use that 4%, and even more so, if we ratchet. IIRC, approx 50% increase in size from the start means to ratchet up, and I will likely be there by the time we can BTD on travel like we planned.

If we assume 2% inflation, then 4% becomes 6% over 20 years. Yet a lot of Firecalc threads still show net growth at a 6% withdrawal. It has been noted that there is irony in that you can really BTD when you are too old to enjoy it.

 

[Markola]

I used to be focused on obtaining enough resources to generate enough income from a 4% Rule to let me retire. However, “life happens”, such as:

- DW ‘s bucket overflowed and she left her career earlier than planned.
- After experimenting with zero paid work for a year, we both decided we like the concept of semi-retirement indefinitely, her through a PT j*b and me through enjoyable consulting gigs.
- Max SS coming online for both at age 70, we think.
- About 9 more years of insurance to be funded before Medicare helps.
- Yada, yada, making the future unpredictable.

Anyway, Vanguard Personal Advisory Services inputs all of the above and more and our best guesses at wants and needs in the future, and taxes, into their Monte Carlo software and gives us spending category numbers that we aim for. Then we discuss and adjust course with our assigned CFP twice per year based on the precise plan meeting reality, some positive, some negative. Another aspect is that, if/when the SHTF in the markets, we will only be asked to cut the daily spending category 2.5% year over year. If the markets boom, we are asked not to increase daily spending more than 5% year over year.

This service allowed us to semi-retire 5 years earlier than my hard-stop-at-59 plan based on the 4% Rule. Our check ins with our assigned CFP keep DW and me harmoniously on the same page, meeting our individual and collective goals, and we think our plan is flexible enough to meet the uncertainties of the future. All for thirty basis points. YMMV but it definitely works for us.

 

[marko]

For the newer folks, let me be the first to remind that most retirees never actually "execute" the 4% rule (or the SWR calculated by FIRECalc.) We don't "slavishly" calculate 4% (plus appropriate inflation) to withdraw from our nest egg. Rather, we keep our early spending to around 4% or less (in the yearly rear view mirror.)

So IOW most of us plan our FIRE by asking the question "How much income do I need to generate to meet my proposed FIRE spending?" Then, using the 4% rule or the results of FIRECalc or similar tools, we work toward a nest egg that will supply our needs within the bounds set around 4% WDR or whatever.

But once we achieve the required nest egg, we FIRE, then relax a bit and take what we need, keeping in mind the general limits of the 4% rule. I've gone over 4% a few times - especially when doing rehabs on my property. I've viewed these as a partial investment, so the 4% can be stretched a bit. Time has confirmed the investment aspect as I've sold 2 properties which I rehabbed and recouped most of the rehab costs.

My point is to use the 4% rule (or whatever) to prepare for FIRE. Once FIRE is achieved, use 4% (plus inflation, etc.) as a guideline not a "bright" line. And always be ready to cut back if your gut tells you to. Most of us did cut back a bit during the unpleasantness of 2008, etc. Your gut will probably guide you well in uncharted waters.

Or, more succinctly, measure with a micrometer and cut with an ax though YMMV.

+100 One of the more succinct explanations of how to consider the 4% 'rule' for the new comers! Like FireCalc, folks should use these tools as guides and not gospel!

 

[Sojourner]

But once we achieve the required nest egg, we FIRE, then relax a bit and take what we need, keeping in mind the general limits of the 4% rule.

+1

In my 8-ish years of ER and semi-ER, I have never bothered to calculate what my actual WR was for any year. It's on my to-do list to actually go through this exercise one day soon, just to see how much I withdrew/spent in 2019, 2020, and last year. I'm certain my annual spending has been (substantially) less than 4% each year, and I strongly suspect it will continue to be so. From my perspective, for my situation, the 4% rule is essentially irrelevant. I'm much more interested in what FIRECalc tells me my SWR is: roughly 3.4% the last time I ran it.

 

[Midpack]

In my 8-ish years of ER and semi-ER, I have never bothered to calculate what my actual WR was for any year. It's on my to-do list to actually go through this exercise one day soon, just to see how much I withdrew/spent in 2019, 2020, and last year. I'm certain my annual spending has been (substantially) less than 4% each year, and I strongly suspect it will continue to be so. From my perspective, for my situation, the 4% rule is essentially irrelevant. I'm much more interested in what FIRECalc tells me my SWR is: roughly 3.4% the last time I ran it.

+1. FIRECALC is supposed to provide some historical guidance for accumulation, before one pulls the trigger (irreversible for many). SWR was never intended to be a withdrawal methodology, all the authors noted that from the start, and have reiterated since. But some people still don't grasp that, no matter how many posts appear here and elsewhere...

 

[brett]

I believe that there are some who really get carried away by these percentages. Everyone's financial situation is different-short and long term.

There is no substitute for a bit of common sense, a finger in the air to estimate what the following year will look like, and a quick annual review of where one stands from an income, an investment, a spending, and a debt perspective. If I can do this in all of ten or fifteen minutes, anyone can.

Not to mention a good dose of reality and actually dealing with the numbers that one is facing rather than sitting back, doing nothing, or letting life happen instead of being proactive.

You do not have to be a finance major to figure out that if the value of your investments have dropped by 40 percent then chances are so will your investment income. And the reverse.

We do not bother with these percentages. The bottom right hand numbers tell the story about income, investments, debt, spending, etc.

We do not keep spreadsheets to keep track of every can of peas that we buy either. So far this common sense approach has worked better for us than all the formula and spreadsheet busywork.

 

[Koolau]

<SNIP, SNIP, SNIP>

It has been noted that there is irony in that you can really BTD when you are too old to enjoy it.

Another irony that creeps up on you is actual age. When I retired at 58, living 30 more years to 88 seemed like a good, reasonable plan. Now that I'm 75, 105 doesn't seem reasonable (though I do know a lady who just turned 106!). Now that my "current" plan "ends" at the arbitrary number of 99, my SWR goes yet HIGHER - at the same time my portfolio has been outdoing any expectations I ever had for it. What's is an old codger like me to do? I know, I'll ask RobbieB

First world problems are the best problems though YMMV.

 

[Midpack]

Another irony that creeps up on you is actual age. When I retired at 58, living 30 more years to 88 seemed like a good, reasonable plan. Now that I'm 75, 105 doesn't seem reasonable (though I do know a lady who just turned 106!). Now that my "current" plan "ends" at the arbitrary number of 99, my SWR goes yet HIGHER - at the same time my portfolio has been outdoing any expectations I ever had for it. What's is an old codger like me to do? I know, I'll ask RobbieB

First world problems are the best problems though YMMV.

I assume we’ll have several market corrections, maybe severe, over our many retirement years to bring us all down to earth again, after the incredible run up since 2009. A conservative WR now might look pretty smart during those bad years to come?