I understand the 4% concept. My wife, a long retired banker, understands it to. But how does it work for you guys?
Assume Mr. and Mrs. Thrifty retire when Mr Thrifty hits 62. Assume they have $2,000,000 million in savings/401's, etc. Assume the Thrifties have their money invested in some municipal bonds, dividend paying stocks and some corporate bonds, yielding an over all cash flow of $90,000 a year, or 4.5% total return. The Thrifties have saved up enough cash to have $90,000 put away.
In year 1, under the 4% SWD method, would they spend $80,000, or 4% of the nest egg? Or would they be able, should they choose to do so, take the $80,000 plus the $90,000 cash flow?
During year 1, the value of the next egg could go up or could go down. More than likely it would go down. But it could go up. So at the start of year 2, do the Thrifties then pull down 4% of the then value, plus what is left of the $90,000 cash flow since some assets were sold?
OR, do the Thrifties just take the 4%, or $80,000 in year 1 and let the $90,000 cash flow just go into the kitty? If that's how it works, year 2 would result in the Thrifties taking out $83600, because they would also take 4% of the $90,000 cash flow they left in there.
Seems to me that if the second option is the right way to do the 4%SWR, you will never run out of money unless you consistently have returns of less than 4%.
So how does it work?
Assume Mr. and Mrs. Thrifty retire when Mr Thrifty hits 62. Assume they have $2,000,000 million in savings/401's, etc. Assume the Thrifties have their money invested in some municipal bonds, dividend paying stocks and some corporate bonds, yielding an over all cash flow of $90,000 a year, or 4.5% total return. The Thrifties have saved up enough cash to have $90,000 put away.
In year 1, under the 4% SWD method, would they spend $80,000, or 4% of the nest egg? Or would they be able, should they choose to do so, take the $80,000 plus the $90,000 cash flow?
During year 1, the value of the next egg could go up or could go down. More than likely it would go down. But it could go up. So at the start of year 2, do the Thrifties then pull down 4% of the then value, plus what is left of the $90,000 cash flow since some assets were sold?
OR, do the Thrifties just take the 4%, or $80,000 in year 1 and let the $90,000 cash flow just go into the kitty? If that's how it works, year 2 would result in the Thrifties taking out $83600, because they would also take 4% of the $90,000 cash flow they left in there.
Seems to me that if the second option is the right way to do the 4%SWR, you will never run out of money unless you consistently have returns of less than 4%.
So how does it work?