Fallacy of the 4% Rule

[Flieger]

I'm not sure about the 4% rule for "early" retirement gauge? It's based on a 30 year retirement and at 60, that goes to 90. I guess it depends on what you call early retirement.

I "retired" (with some help) just before turning 62, certainly not early. I also have less than (maybe) most on this site. At this point, I am not really following a particular "rule (4%, VPW, etc) but am constantly watching to see what is happening, and planning based on increased funds from outside of my stash later which will allow me to adjust downward.

I sure hope one day to help both of my DD's out and allow them some cushion, but barring that I helped them to grow, become educated and self sufficient, so if I am not able to, I still feel I did my part.

Flieger

 

[silvor]

I sure hope one day to help both of my DD's out and allow them some cushion, but barring that I helped them to grow, become educated and self sufficient, so if I am not able to, I still feel I did my part.

Well said! I’m going to steal that from you!

 

[Perryinva]

IF you think about it, 4% is just 1/25th, so over 30 years you are just hoping to make up 5 years in growth to get to your thirty years. I believe you can achieve that with less than a 2% annual growth on average.

I know the market doesn't grow consistently and there are SORR and such, but 4% is a WORST CASE SCENARIO.

I just asked Chat GPT to see what 1million would be today if I retired 30 years ago to the day in 1995, assuming actual SP500 returns and using 4% withdraws with actual CPI increases, and I would have 968,000 after 30 years of withdraws.

For me 4% is just a general thought exercise, and now Bengen says 4.7 up to 5.

Check this out >>> Is the 4% Rule Obsolete? - TheWeFIRE

You realize that the 4% was of the original amount, and then that amount increases annually each year to match inflation, regardless of the performance of the initial amount, so it ends up quite a bit more after even 20 years, and an even higher percentage if the initial amount takes a nosedive due to negative returns, which is why approx 5% fail. A much higher percentage only leaves such a small amount after 30 years that even 31 years is a failure, etc

There are some that use 4% of whatever the annual balance is, so lean withdrawals when the investments hit a bear market. Most of the millionaires next door types use (need) far less than 4% as their SS and pensions cover the vast majority. The 4% Rule was NEVER what you HAD to live on, but was instead what you COULD withdraw and still have money left over after 30 years. You could simply use the rule to donate an amount for 30 years because you need nothing else to live on, etc.

If you retired at 55, and used and spent the 4% rule amount every year along with whatever income you had, you would be taking some risk to only have your income left to survive with past age 85. Pretty scary if you bit that age and could see another 10 years. We are dealing with an indirect relative that is now 96, and in a nursing home on Medicaid, ad an example of what we don’t want to happen to us because we ran out of funds. No one in her family EVER made it past 85, no longevity in the family at all, and she had a host of health issues, but she is still alive.

Just saying it’s a big difference how you view and handle using the 4% rule to live on vs using it to perpetuate a legacy for heirs because it is not needed to live on.

 

[Dtail]

I would suppose that there are very few folks on this site who use the 4% guidance to actually make withdrawals. As for myself, I will most likely use the Cylatt 95/5 rule which is modeled in Firecalc and is a cousin of the % of remaining/current balance methodology. Since I am already 65 y.o., using 30 years gets me to 95 which is fine for now.

 

[steelpony10]

I prefer to look at retirement as U shaped.

Age 65-75 is the left side the go-go years where spending is as you were used to but extras are added that you didn’t do before like trips, paying off mortgages etc. Spending more then usual the first 10 years.

Age 75-85 are the slow go years, the bottom of the U. Your energy level wains here and if you check the SS actural life table a huge chunk of like aged retirees pass.

Age 85 on are the no go years, the right side. You may be alone now. You may need help with everyday tasks etc. You may enter independent living. Assisted living and LTC may lie ahead. Expenses could be the highest here because you may pay for everything.

So I guess my point is you can throw out rules, allocations and diversification. If you make It here or a couple does money could be flying out the door.

Based on past personal experience with parents and in-laws I set up a dedicated growth section on reinvestment that’s years old as soon as I could. It has let us spend freely as we entered the bottom of the U but reasonably with the rest of our retirement funds as the set aside keeps growing as backup.

 

[ncbill]

Given how many variable withdrawal approaches there are including this popular Bogleheads spreadsheet

IMHO no one should be worrying about a fixed withdrawal rate.

Despite the ridiculous amount of '4% rule' threads.

 

[ShokWaveRider]

The "withdraw when we need/want it" approach is working for us, and has done for the last 20 years since we ER'd.

 

[audreyh1]

I would suppose that there are very few folks on this site who use the 4% guidance to actually make withdrawals. As for myself, I will most likely use the Cylatt 95/5 rule which is modeled in Firecalc and is a cousin of the % of remaining/current balance methodology. Since I am already 65 y.o., using 30 years gets me to 95 which is fine for now.

So Dtail, you’ve been retired for a while, right? Are you not withdrawing now?

 

[Koolau]

I would suppose that there are very few folks on this site who use the 4% guidance to actually make withdrawals. As for myself, I will most likely use the Cylatt 95/5 rule which is modeled in Firecalc and is a cousin of the % of remaining/current balance methodology. Since I am already 65 y.o., using 30 years gets me to 95 which is fine for now.

Right. I only used the "4% rule" to determine if I had enough to retire. I did calculate % spending in retirement but only as a check on whether I might be over spending.

For several years, I just moved the 30 year time frame out each year for planning purposes. But now, I just say that my plan expires at age 99.

 

[RobLJ]

We are closer to 5%. And when we start taking SS in 5 years, it will be half that.

Annually, our portfolio has been growing more than we've been taking out. I'm not worrying. But we do have some discretionary spending that we can cut back on if we need to.

This is essentially what we did, although it was 6% for 2 years.
We got lucky on SORR, but now a few years later and I'm newly on SS, I'm trying to convince DW to spend more, even if it's on the grandkids or a ClassB camper. (She grew up in the mean streets of Philly in Manyunkx). She was an accountant, so I can show her the numbers, but actual spending is a whole nother thing. Theoretically, she wants to spend everything, but that's theory, and then there is the reality of growing up hand to mouth. (It's not like I'm a spendthrift. Give me books and CDs/music and a flyrod and I'm ecstatic. "Do I contract myself/ Very well then I contradict myself/I am large enough for that"--Walt Whitman).

 

[Dtail]

So Dtail, you’ve been retired for a while, right? Are you not withdrawing now?

Retired for 8 years. I have been withdrawing all 8 years. However, I have been using more of a total expense amount for needs and wants with the actual WR% as secondary.
My net average WR% for the 8 years is around 3%.
When I start taking SS, which will be 2026 or 2027 most likely, then I will switch to the Clyatt guidance and let the WR% become the primary decider with the total expenses becoming a secondary guidance.

 

[audreyh1]

Retired for 8 years. I have been withdrawing all 8 years. However, I have been using more of a total expense amount for needs and wants with the actual WR% as secondary.
My net average WR% for the 8 years is around 3%.
When I start taking SS, which will be 2026 or 2027 most likely, then I will switch to the Clyatt guidance and let the WR% become the primary decider with the total expenses becoming a secondary guidance.

Interesting approach.

 

[Slim11]

I think its a good base for people to judge approximately what's needed. Everything is obviously baised on a case to case senerio. But it does and can work. Or can get you into the corect mindset. So while this rule may change for some ,its still a good base to build on.

 

[equakesfan]

I retired when my wife was 48 so I used a 52 year time horizon for my retirement calculations. When I was planning I used the 3% rule to determine if I could retire.
Since retirement, I haven't been limiting myself to a single plan, but I'm tracking 9 different withdrawal rates (3%, 4%, and 3.5%, adjusted for inflation, 3%, 3.5%, 4% of the portfolio, my rough budget adjusted for inflation, a modified 3% rule [a slowing increasing % of the portfolio] and the variable withdrawal rate). I'm currently spending less than all of them.

 

[marko]

I think the 4% "rule" is helpful for people just starting out or considering retirement.

It really doesn't matter if it's 3%, 4%, 5% or even 6% but sadly, there are those out there (we've seen them here on occasion) who are truly shocked to learn that their plan of 10% or 15% is just not going to work and are sent back to the drawing board. A lot of people have no clue as to the envelope.

I've never been able to hold the line at 4%, but at least knowing that there is a line has been extremely helpful in my planning. It provided a certain structure and framework early on. "You're retired! Spend whatever you want" is not a sound strategy.

 

[Koolau]

I think the 4% "rule" is helpful for people just starting out or considering retirement.

It really doesn't matter if it's 3%, 4%, 5% or even 6% but sadly, there are those out there (we've seen them here on occasion) who are truly shocked to learn that their plan of 10% or 15% is just not going to work and are sent back to the drawing board. A lot of people have no clue as to the envelope.

I've never been able to hold the line at 4%, but at least knowing that there is a line has been extremely helpful in my planning. It provided a certain structure and framework early on. "You're retired! Spend whatever you want" is not a sound strategy.

Right, and as long as you are flexible, you can spend more than the 4% rule would suggest. Just gotta be on top of your spending and your stash and be ready to cut back if need be.

Thanks for sharing. I hit the 6% level or more when I first started FIRE - but just for a couple of years or so. Then 2008 came along and I pulled in my horns, so to speak.

 

[Dtail]

That is the beauty of Firecalc. Quite a few folks are over the 4% guidance in the years before taking SS.
The income in my first 8 years of retirement has been diverse. so have had 3 years over 4%, but averaging 3%.
If one retired in 1966 for 30 years using the inflation additive of the 4% guidance then they would fail with no adjustments. However if one retired in 1982, then (in hindsight though), they could have withdrawn over 10% yearly.