above the 4% rule

[Dtail]

I think everyone has a slightly different interpretation of how to implement the rule and that's OK. Reading the recent Bengen interview I am reminded that
after I take that initial 4% I can ignore the %age in future years and focus on the dollars instead. Comments here are inconsistent because we often fall back into speaking of an annual %age. Let's say I take 40k initially on 1M nest egg and the portfolio drops 10% and inflation is 5%. My portfolio is $960k after withdrawal 1 and drops to 864k after 1 yr. I can take $42k in yr 2 which might feel like 4.8% but it is still consistent with the 4% SWR guideline.

This is true, but very few people especially on this site follow the 4% guidance as an actual withdrawal methodology. It is certainly a great reference point to see if one might be ready to retire from a financial perspective. It is also used by some as a % of remaining portfolio concept.

 

[big-papa]

Has anyone made a deliberate effort to spend more than the 4% rule? Or use 4% and retired early so you are trying to burn down principal? Or made a plan to spend all principal and only have a house left? i was just modeling that and wondering what happens if you want to spend say 6%? Can you spend it all down?

I've made a very deliberate effort to NEVER follow the 4% rule or any other fixed percentage SWR method where choosing the wrong starting percentage might either
1) results in a catastrophic premature depletion of my portfolio or
2) makes me so fearful of depleting my portfolio that I choose a ridiculously low starting percentage, resulting in a loss of joy in my remaining time on earth.

Because the future is unknown and is under no obligation to be contained within past results, there is no way to know ahead of time whether your starting percentage results in #1 , #2 or is a Goldilocks choice.

When I started retirement, I used an amortization method to calculate my withdrawals. You won't prematurely deplete your portfolio, but the tradeoff for that benefit is that withdrawals will vary. As a general class of withdrawal methods where one is withdrawing from a portfolio of risky assets, this remains my favorite. However, in my case, it was pretty obvious that I had miscalculated (underestimated by a lot) our basic spending needs vs. what amortization could provide. After a year of that, we each purchased 30 year TIPS ladders, I purchased an additional 6 year TIPS ladder which acts as a bridge to SS, and the remainder of our everyday spending comes from my wife's SS benefits and dividends thrown off by the stock fund in our taxable account which will of course vary.

The remainder is in stock that can be used for any lumpy expense (whether discretionary or not), including dealing with contingencies that might come along, such as SS Benefits cuts. I actually do use an amortization calculation on our stock holdings, but primarily to act as a budgetary guide for what we might be able to spend above and beyond spending for our basic expenses in any given year. So far, we've barely scratched what we could withdraw. And of course if some large non-discretionary expense comes along that blows that budget, then we'll do what we have to do.

Cheers.

 

[RobLJ]

From 2018-2024, we withdrew from 5-7%. Now, with the growth of the portfolio and my drawing SS at FRA, our withdrawal this year was 3.5%. I have told DW twice over the last 5 years that we can significantly increase spending. This will become even more true in 3 years when she reaches SS FRA; we plan to give to sons/grandkids and increase charitable gifts.

 

[GenXguy]

Has anyone made a deliberate effort to spend more than the 4% rule? Or use 4% and retired early so you are trying to burn down principal? Or made a plan to spend all principal and only have a house left? i was just modeling that and wondering what happens if you want to spend say 6%? Can you spend it all down?

I spend LESS than the 4% rule because the 4% rule was calculated on the government figures for CPI, which is always on the low side vs. what I see in reality, and inflation for seniors is expected to be even higher than that, especially with health care and other high cost expenses.

 

[Koolau]

I spend LESS than the 4% rule because the 4% rule was calculated on the government figures for CPI, which is always on the low side vs. what I see in reality, and inflation for seniors is expected to be even higher than that, especially with health care and other high cost expenses.

Not defending the CPI numbers but the 4% rule is based on calculated theoretical portfolio results based on a series of 30 year periods of time. They're calculated as if they were actual portfolios and did they survive and how did they fare? The CPI or whatever actual inflation is baked in the cake as I understand it.

Every study I've seen since the original w*rk in the early '90s has suggested that the 4% rule is very conservative. I've seen suggestions that even 6% wouldn't be taking a very large chance but YMMV.

Full disclosure: Of late, I too spend less than 4% most years though my early years were as much as 7%.

 

[FREE866]

Not defending the CPI numbers but the 4% rule is based on calculated theoretical portfolio results based on a series of 30 year periods of time. They're calculated as if they were actual portfolios and did they survive and how did they fare? The CPI or whatever actual inflation is baked in the cake as I understand it.

Every study I've seen since the original w*rk in the early '90s has suggested that the 4% rule is very conservative. I've seen suggestions that even 6% wouldn't be taking a very large chance but YMMV.

Full disclosure: Of late, I too spend less than 4% most years though my early years were as much as 7%.

good points. I read that the odds of you running out of money with the 4% rule are equal to the odds of you having 5 x more money than you started with.Amazing!

 

[Koolau]

good points. I read that the odds of you running out of money with the 4% rule are equal to the odds of you having 5 x more money than you started with.Amazing!

Yeah, I think the 4% rule (and then learning about the guts of it here) are what convinced me that I could actually become Financially Independent at an early age. I still think the original w*rk was brilliant and it should be taught in High School.

 

[RetiredHappy]

I had never paid attention to 4% rule or whatever when we retired. I used a bucket strategy, setting aside $1M to be spent in the first 7 years before the various income streams started. Looking back we were spending 7 to 10% for many years. Right now we are down to about 2.5% withdrawal.

Our friends pulled money based on their need. They started with $48K a year but it went up to $72K a year after a few years. Yes, they are running out of money. In 5 years' time, they will sell their home and buy a less expensive home, and pull out another $700K to live on again.

 

[Gumby]

The 4% "rule" is simply a way to calculate how much portfolio you need to amass prior to pulling the plug. After you do retire, you'll probably adjust course as necessary. Trim when the portfolio is falling more than is comfortable. Loosen the purse strings when it's rising. At any point in time, you can use the "retire again and again" strategy to reset your spending level.

 

[engineernerd]

As jazz4cash says, the 4% rule does not mean you take out 4% of your remaining portfolio each year, it means you take 4% in your retirement year, then you can take the same spending power out each year thereafter no matter what percent of your then-current portfolio it is.

If you do end up as unlucky as the worst historical retirement that didn't go negative in FIRECalc, you would EXPECT to be taking higher percentages as the years go by. Approximately 100% in your very last year, as a matter of fact!

Here's a link to the Bill Bengen paper, in case you're curious: https://kyestates.com/wp-content/uploads/2015/02/Bengen1.pdf

 

[HI Bill]

Yes, I use Bogleheads’ Variable Percentage Withdrawal method. 4.3% first 2 years, now up to 6.2%. Trying to maximize spending in earlier, healthier years when we can travel and dive more. Have spent $1.4M in the first 5 years and assets are about the same as the starting point if you adjust for inflation. That said, I wouldn't plan on a fixed max budget based on VPW. Even that has 'floors' that reduce your withdrawal rate if your portfolio encounters a specific level of loss (labeled "Required Flexibility". The 4% rule and even VPW account for the SORR (sequence of returns risk).

 

[GenXguy]

Not defending the CPI numbers but the 4% rule is based on calculated theoretical portfolio results based on a series of 30 year periods of time. They're calculated as if they were actual portfolios and did they survive and how did they fare? The CPI or whatever actual inflation is baked in the cake as I understand it.

It's baked into the cake because it is what was used.

The 4% rule relies on historical data where CPI-U data is the literal variable used to adjust purchasing power in the backtested models

 

[Dtail]

I spend LESS than the 4% rule because the 4% rule was calculated on the government figures for CPI, which is always on the low side vs. what I see in reality, and inflation for seniors is expected to be even higher than that, especially with health care and other high cost expenses.

Let me throw out this scenario.
If one is using the 4% guidance for actual withdrawals, then wouldn't they actually be withdrawing a lower number than the reality number you mention each year. Since each year is inflation adjusted, then the govt inflation increase would be a lesser number than reality and thus the withdrawal would be more conservative actually than real life.
Just a theoretical thought, as I don't know anyone who uses the 4% guidance as an actual inflation adjusted withdrawal methodology.

 

[pb4uski]

... Every study I've seen since the original w*rk in the early '90s has suggested that the 4% rule is very conservative. I've seen suggestions that even 6% wouldn't be taking a very large chance but YMMV. ..

A lot depends on how well funded you are. If you have more than your annual spend divided by 4% or 25x spend, then obviously you can safely spend more than 4%... you are just withdrawing some of those "excess" funds.

Also, there is the notion of retiring "again" if your potfolio increases. If $40k of withdrawals from a $1m portfolio for 30 years starting at age 65 is ok, then it seems to me that if your portfolio increases to $1.1m then you can increase withdrawals to $44k (or even more given that you now have 29 years left).

Of course, it is all academic because very few actually follow the 4% rule closely, but it is a nice asset adequacy benchmark to have.

 

[old medic]

Our nest egg is just that, so far have just added to it. But 4% would be enough to BARELY get by.

 

[Koolau]

A lot depends on how well funded you are. If you have more than your annual spend divided by 4% or 25x spend, then obviously you can safely spend more than 4%... you are just withdrawing some of those "excess" funds.

Also, there is the notion of retiring "again" if your potfolio increases. If $40k of withdrawals from a $1m portfolio for 30 years starting at age 65 is ok, then it seems to me that if your portfolio increases to $1.1m then you can increase withdrawals to $44k (or even more given that you now have 29 years left).

Of course, it is all academic because very few actually follow the 4% rule closely, but it is a nice asset adequacy benchmark to have.

I'm talking about a full-funded nest egg - not over-funded. More recent studies I've seen on the 4% rule usually suggest that even a conservative spend is more like an initial 4.7% for 30 years. Don't have a citation but I've seen several citations right here on the Forum where we've talked about a higher initial spend rate.

My opinion is that a fair amount of the "over-funding" we've seen here on the Forum for many years is due to the amazing run we've had since the recovery from the Great Recession. I wasn't particularly over-funded when I began the FIRE journey. In fact some of my initial WD rates were up to 7%.

 

[ShokWaveRider]

I had never paid attention to 4% rule or whatever when we retired. I used a bucket strategy, setting aside $1M to be spent in the first 7 years before the various income streams started. Looking back we were spending 7 to 10% for many years. Right now we are down to about 2.5% withdrawal.

Our friends pulled money based on their need. They started with $48K a year but it went up to $72K a year after a few years. Yes, they are running out of money. In 5 years' time, they will sell their home and buy a less expensive home, and pull out another $700K to live on again.

Then they did not manage their money very well did they? We have never had rules and always pull from our stash as needed with no specific numbers. We now have 4 x what we started with AND we have not been in the stock market since 2010.

 

[disneysteve]

I’ve been retired for just over 2 years now. In each of those 2 years we spent what we wanted to spend and neither year hit 4%. Not only that but also our portfolio grew in each year thanks to the bull market despite our spending. So no, we haven’t exceeded 4% yet. DW is getting SS now which helps some but I won’t collect until at least 67 which is 5 more years. At that point I imagine exceeding 4% will be even less likely.

 

[latexman]

Also, there is the notion of retiring "again" if your potfolio increases. If $40k of withdrawals from a $1m portfolio for 30 years starting at age 65 is ok, then it seems to me that if your portfolio increases to $1.1m then you can increase withdrawals to $44k (or even more given that you now have 29 years left).

I've heard that, and I personally like the sounds of that, but the sequence of returns (risk) for the 30 year periods were back tested (baked) into the initial 4%, then adjusted for inflation in later years, of Bengen's methodology. It seems to me that if one back tested this retiring "again" methodology on the worst 30 year sequence, I believe it started in 1966, it might fail, where under Bengen's methodology, it did not fail. I do see where reducing the sequence to 29 years after the retiring "again" helps.

Can one retire "again" once and get away with it? Twice? Thrice? We are mixing methods and this is getting unclear to me. I doubt folks stick strictly to a method anyway once they develop their stride.

One thing is obvious to me, if one uses this retire "again" method every year, they would need to decrease their withdrawal accordingly if their portfolio decreases for a chance at a 30 year success. It morphs into a variable withdrawal method. I wonder, is it one of the recommended variable withdrawal methods?

This is getting quite messy academically. I think I'll quit while I'm . . . ahead?

 

[Gumby]

I've heard that, and I personally like the sounds of that, but the sequence of returns (risk) for the 30 year periods were back tested (baked) into the initial 4%, then adjusted for inflation in later years, of Bengen's methodology. It seems to me that if one back tested this retiring "again" methodology on the worst 30 year sequence, I believe it started in 1966, it might fail, where under Bengen's methodology, it did not fail. I do see where reducing the sequence to 29 years after the retiring "again" helps.

Can one retire "again" once and get away with it? Twice? Thrice? We are mixing methods and this is getting unclear to me. I doubt folks stick strictly to a method anyway once they develop their stride.

One thing is obvious to me, if one uses this retire "again" method every year, they would need to decrease their withdrawal accordingly if their portfolio decreases for a chance at a 30 year success. It morphs into a variable withdrawal method. I wonder, is it one of the recommended variable withdrawal methods?

This is getting quite messy academically. I think I'll quit while I'm . . . ahead?

After much discussion and debate, ERD50 has convinced me that you can lift spending after an up market year under the "retire again" model, and not decrease spending in a down market year, and yet still not have increased your risk over what it was initially.

Here's the thread When do you determine your withdrawal amount after retiring?

 

[Dtail]

I'm talking about a full-funded nest egg - not over-funded. More recent studies I've seen on the 4% rule usually suggest that even a conservative spend is more like an initial 4.7% for 30 years. Don't have a citation but I've seen several citations right here on the Forum where we've talked about a higher initial spend rate.

My opinion is that a fair amount of the "over-funding" we've seen here on the Forum for many years is due to the amazing run we've had since the recovery from the Great Recession. I wasn't particularly over-funded when I began the FIRE journey. In fact some of my initial WD rates were up to 7%.

The 4.7% WR is from Bengen's new book with updated research.

 

[audreyh1]

I've heard that, and I personally like the sounds of that, but the sequence of returns (risk) for the 30 year periods were back tested (baked) into the initial 4%, then adjusted for inflation in later years, of Bengen's methodology. It seems to me that if one back tested this retiring "again" methodology on the worst 30 year sequence, I believe it started in 1966, it might fail, where under Bengen's methodology, it did not fail. I do see where reducing the sequence to 29 years after the retiring "again" helps.

Can one retire "again" once and get away with it? Twice? Thrice? We are mixing methods and this is getting unclear to me. I doubt folks stick strictly to a method anyway once they develop their stride.

One thing is obvious to me, if one uses this retire "again" method every year, they would need to decrease their withdrawal accordingly if their portfolio decreases for a chance at a 30 year success. It morphs into a variable withdrawal method. I wonder, is it one of the recommended variable withdrawal methods?

This is getting quite messy academically. I think I'll quit while I'm . . . ahead?

FIREcalc models the %remaining portfolio method where you ignore inflation (no adjustment) and base next withdrawal on Dec 31 portfolio value each year. Yes, you have to deal with lower withdrawal amounts after bad market years, but this puts less stress on the portfolio after bad years, and lets you immediately take advantage of portfolio growth spurts after good years. If you have a high percentage of discretionary spending/flexibility this should not be an issue, simply expect it. Overall this is a very different approach than the traditional 4% (inflation adjusted) method which ignores portfolio performance. The traditional method was developed assuming an annual income need that was fixed and needed to grow with inflation, mimicking a salary.

 

[audreyh1]

The 4.7% WR is from Bengen's new book with updated research.

Which requires a very specific allocation and screams back testing to me IMO. As opposed to the range of allocations tested and more general asset classes of the prior studies.

 

[Dtail]

I've heard that, and I personally like the sounds of that, but the sequence of returns (risk) for the 30 year periods were back tested (baked) into the initial 4%, then adjusted for inflation in later years, of Bengen's methodology. It seems to me that if one back tested this retiring "again" methodology on the worst 30 year sequence, I believe it started in 1966, it might fail, where under Bengen's methodology, it did not fail. I do see where reducing the sequence to 29 years after the retiring "again" helps.

Can one retire "again" once and get away with it? Twice? Thrice? We are mixing methods and this is getting unclear to me. I doubt folks stick strictly to a method anyway once they develop their stride.

One thing is obvious to me, if one uses this retire "again" method every year, they would need to decrease their withdrawal accordingly if their portfolio decreases for a chance at a 30 year success. It morphs into a variable withdrawal method. I wonder, is it one of the recommended variable withdrawal methods?

This is getting quite messy academically. I think I'll quit while I'm . . . ahead?

The retire again and again methodology is actually one of the choices one can choose in Firecalc. It is named "% of remaining portfolio" methodology.
It is indeed a different methodology than the original 4% Bengen research. IIRC, this methodology has also been backtested and does work out for the worst sequential periods.
In general, since the markets go up over time, it allows one to take advantage of the theoretically increasing portfolio. However, one still would need to withdraw much less in large down years.
Bob Clyatt's 95/5 methodology addressed the above issue, but that is a whole another conversation.

 

[Dtail]

Which requires a very specific allocation and screams back testing to me IMO. As opposed to the range of allocations tested and more general asset classes of the prior studies.

Agree, plus according to Karsten (BIG ERN), Bengen is allowing the higher WR mainly to the alpha results of the Small Cap (Value?) from past years which has effectively been arbitraged away.