Morningstar declares 4% safe once again

[GenXguy]

We have been averaging around 30% discretionary each year of retirement.

It hasn't even been a year for me, but discretionary spending for my first 8 months of retirement was 7.7% of my total spending (excluding income taxes, but including sinking funds for home maintenance and car). And discretionary spending is 6.5% of total spending year to date, or 5.9% including estimated income tax. Including taxes, it looks like my level of retirement spending to this point is running a little over 1.1% WR, but I'm a long ways from getting SS and don't get a pension. I'm keeping discretionary spending pretty low for now because I was forced into retirement nearly a year earlier than I had planned, plus I have some expensive house maintenance projects coming up.

 

[mathjak107]

money may not buy happiness , but it can sure buy many choices in life .

it’s nice to know that our spending capabilities have increased whether we decide to spend it or keep it for more choices down the road

 

[Dtail]

It hasn't even been a year for me, but discretionary spending for my first 8 months of retirement was 7.7% of my total spending (including sinking funds for home maintenance and car). And it's 6.5% year to date. That's excluding income taxes. Including taxes, it looks like I'm running a little over 1.1% WR, but I'm a long ways from getting SS and don't get a pension. I'm keeping discretionary spending pretty low for now because I was forced into retirement nearly a year earlier than I had planned, plus I have some expensive house projects coming up.

Understood. Depending if you ramp up Travel and Entertainment (2 potential larger categories) over time, your percentage should increase.

 

[pjigar]

yep , those who don’t understand how investing works over time make the biggest mistakes and poor assumptions

I have met many people like those and unfortunately exactly the kind of people who can benefit from stock investing. I mean, well meaning, LBYM, saver kind of people who simply would not invest due to fear of stock market. It saddens me to see their hard earned savings loosing purchasing power by the day.

 

[pjigar]

At a 2.6% WR, your probability of safely and easily outliving your nest egg is not only higher than 90%, it's probably > 99.9%. And here I am thinking my 3.4% WR target might be overly conservative!

We settled on 3% WR for a "perpetual/inter-generational retirement".

 

[LateToFIRE]

It occurs to me that we may all define non-discretionary vs discretionary expenses differently. Here's how I broke it down:

Non-Discretionary:
Housing (prop taxes, prop insurance, utilities, heating, grounds, etc.)
Vehicles (car pmts, insurance, maintenance/repair, fuel, etc.)
Food (groceries, at-home cooking/entertaining)
Medical (insurance premiums, deductibles, out of pocket)
Essential Personal Care

Discretionary:
Eating Out
Beer & Wine
Non-essential shopping
Wellness (ex. spas, non-medical treatments, and such)
Travel & Leisure (ex. vacation travel, clubs, etc.)
Charitable Giving
Gifts

Big Lumpy One-time Expenditures:
(also treat separately given one-time nature, but definitely discretionary)
Ex. big toys like boats and fancy cars, vacation condo, big one-time extended travel
Also, home renovation/add-on, big landscaping projects, etc.

Taxes:
(I treat as a separate category, as driven by multiple factors/strategies that may change from year-to-year).

 

[GenXguy]

Understood. Depending if you ramp up Travel and Entertainment (2 potential larger categories) over time, your percentage should increase.

I can see my discretionary jumping to 20% pretty easily, or much higher even, without travel or much entertainment, just from buying stuff. No definite planning, though.

Maybe I'll play some pickleball.

 

[Dtail]

It occurs to me that we may all define non-discretionary vs discretionary expenses differently. Here's how I broke it down:

Non-Discretionary:
Housing (prop taxes, prop insurance, utilities, heating, grounds, etc.)
Vehicles (car pmts, insurance, maintenance/repair, fuel, etc.)
Food (groceries, at-home cooking/entertaining)
Medical (insurance premiums, deductibles, out of pocket)
Essential Personal Care

Discretionary:
Eating Out
Beer & Wine
Non-essential shopping
Wellness (ex. spas, non-medical treatments, and such)
Travel & Leisure (ex. vacation travel, clubs, etc.)
Charitable Giving
Gifts

Big Lumpy One-time Expenditures:
(also treat separately given one-time nature, but definitely discretionary)
Ex. big toys like boats and fancy cars, vacation condo, big one-time extended travel
Also, home renovation/add-on, big landscaping projects, etc.

Taxes:
(I treat as a separate category, as driven by multiple factors/strategies that may change from year-to-year).

Interesting. We match on some categories.
Our discretionary is as follows:
Dining out
Travel
Entertainment
Gifts except to the Grandchild
Certain lumpy expenses

I would put some of the wellness in discretionary, but not the DGF. LOL

 

[Wile E. Coyote]

so let’s run thru a typical retirement scenario where the pay checks stopped and all you have is a pile of money with no idea what to do with it .

of course there are other ways to do it but this would be my way .

so i would add up all my non discretionary bills , including that which we would never want to not have or do unless forced to .

for us it’s our gyms , my studio time as a drummer , etc .

let’s total it all up and say it’s 50k ..

i would double that as an initial goal of comfort for non discretionary spending like audrey .

so we need 100k a year or rather would like 100k a year if possible

let’s say we have 30k in social security and 30k pension .

we have a shortfall of 40k we need to fill from our savings . let’s suppose we have 1 million dollars to make it easy .

so let’s see how we need to allocate that

we want at least a 90% success rate so consulting a safe withdrawal chart we need at least 35-40% equities .

however if we want all fixed income we will need more than a million dollars or we have to go back and review our budget to see what has to go .

there are many ways to calculate this but the important thing is the more discretionary spending you can allow for , the better and less stressful the financial life as well as the more choices in things you have

I love that chart (from Page 4 and above). However, it does not have -->

"we want at least a 90% success rate so consulting a safe withdrawal chart we need at least 35-40% equities ."

it does not have a 35-40% Subcategory. Also, it's from 2009 (does that matter)? Also, what assumption did you make for time line? Was it 30 years?

 

[mathjak107]

I love that chart (from Page 4 and above). However, it does not have -->

"we want at least a 90% success rate so consulting a safe withdrawal chart we need at least 35-40% equities ."

it does not have a 35-40% Subcategory. Also, it's from 2009 (does that matter)? Also, what assumption did you make for time line? Was it 30 years?

you can estimate it and then confirm in firecalc , which i did . it’s 30 years ..and the chart is still accurate as confirmed in firecalc which is updated

35% clocks in at 90.2%

FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

FIRECalc looked at the 123 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 123 cycles. The lowest and highest portfolio balance at the end of your retirement was $-173,739 to $3,558,380, with an average at the end of $797,155. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 12 cycles failed, for a success rate of 90.2%.

 

[Wile E. Coyote]

you can estimate it and then confirm in firecalc , which i did . it’s 30 years ..and the chart is still accurate as confirmed in firecalc which is updated

35% clocks in at 90.2%

FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

FIRECalc looked at the 123 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 123 cycles. The lowest and highest portfolio balance at the end of your retirement was $-173,739 to $3,558,380, with an average at the end of $797,155. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 12 cycles failed, for a success rate of 90.2%.

Do we keep using 30 years forever? I mean, I think I have 25 tops. Maybe 2 1/2 months if I am unlucky.

 

[mathjak107]

Do we keep using 30 years forever? I mean, I think I have 25 tops. Maybe 2 1/2 months if I am unlucky.

you can use whatever you want .

usually we plan from 62 to 92 for a man and 95 for a women so change it if you are older .

like now i would run mine for 22 years.

it is so conservative of a draw that even at 95 it’s fine .

throw in the fact most wont make it to those ages anyway and the success rate s 100%

 

[mathjak107]

if i run mine for just 22 years left now , here are the results . 55% equities , standard 4% draw .

so at this point even the worst outcome was still a positive number


FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
FIRECalc looked at the 131 possible 22 year periods in the available data


Here is how your portfolio would have fared in each of the 131 cycles. The lowest and highest portfolio balance at the end of your retirement was $435,535 to
$12,109,003, with an average at the end of $4,259,788. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 22 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

 

[jeroly]

Breaking things down into discretionary / non-discretionary can get a bit complicated.

My biggest expense is my rent, around $40k/year. Is that a discretionary expense? I have to pay my rent so from that perspective it's non-discretionary, but I could move tomorrow and only pay perhaps $20k/year. So is the extra $20k discretionary? (I'd say yes)

I'm going to be foregoing Medicare Advantage and paying all the part premiums plus Medigap coverage. Is that extra spending discretionary? (I'd say no)

What about the destinations on my bucket list? I'd argue that the costs of traveling to them is non-discretionary - otherwise, wouldn't it be a 'These are the places I'm never getting to but wanted to' list?

The thing about this '4% is now safe' line is that it's totally ridiculous. It's either safe now as well as two years ago or it is now or forever will be unsafe. If you need to change your estimate by 25% based on two more years of data, your estimates are basically worthless.

 

[mathjak107]

Breaking things down into discretionary / non-discretionary can get a bit complicated.

My biggest expense is my rent, around $40k/year. Is that a discretionary expense? I have to pay my rent so from that perspective it's non-discretionary, but I could move tomorrow and only pay perhaps $20k/year. So is the extra $20k discretionary? (I'd say yes)

I'm going to be foregoing Medicare Advantage and paying all the part premiums plus Medigap coverage. Is that extra spending discretionary? (I'd say no)

What about the destinations on my bucket list? I'd argue that the costs of traveling to them is non-discretionary - otherwise, wouldn't it be a 'These are the places I'm never getting to but wanted to' list?

The thing about this '4% is now safe' line is that it's totally ridiculous. It's either safe now as well as two years ago or it is now or forever will be unsafe. If you need to change your estimate by 25% based on two more years of data, your estimates are basically worthless.

the rent is non discretionary until you actually move unless it’s a given you will move and know what you will pay.

all insurance is non discretionary until you choose to remove it .its assumed if you are paying for it you want or need it

it’s like our gyms are such an integral part of our routines that it is considered non discretionary.

just think of non discretionary as things you would alter only as a last resort .

of course this is subject to our own interpretation.

my studio time i pay for every week for my drumming is also non discretionary to me .

i think we would consider my wife’s hair coloring non discretionary too lol

 

[Wile E. Coyote]

if i run mine for just 22 years left now , here are the results . 55% equities , standard 4% draw .

so at this point even the worst outcome was still a positive number


FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
FIRECalc looked at the 131 possible 22 year periods in the available data


Here is how your portfolio would have fared in each of the 131 cycles. The lowest and highest portfolio balance at the end of your retirement was $435,535 to
$12,109,003, with an average at the end of $4,259,788. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 22 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

I got FIRECalc to work if I do not put in SS or Pension and just focus on the portfolio.

I notice that using the % of Portfolio withdrawal method gets better results.

I also notice if I input $0 for spending I get way better results. It seems to override the Percentage of Portfolio % entered. That is one of those buggy things in the program that makes me not trust the program.

 

[mathjak107]

the percentage of portfolio gets better results because it can never go to zero because it self adjusts .

remember in an extended down turn with percentage of portfolio which is 95/5 actually , you take pay cuts ,so it will do better than a draw written in stone

there is no quirk in the program becuse zero spending means you are not taking money out.

don’t forget besides checking the percentage of portfolio box as the method you have to enter a percentage too in a little box .

for 95/5 enter 95% in the little box

 

[mathjak107]

so here is 95/5 with an initial spend on 1,000,000 of 40k , 50% equities, 30 years

FIRECalc Results
Following the "95% Rule," from Work Less, Live More, each subsequent annual withdrawal will be the greater of 95% of your previous year's withdrawal, or 4.0% of your current portfolio, with no adjustment for inflation (unlike the normal FIRECalc behavior, which uses your starting portfolio, and makes adjustments for inflation).

Although the calculations are based on unadjusted withdrawals, the charted withdrawals are shown using 2024 dollars.

FIRECalc looked at the 123 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 123 cycles.

The lowest and highest portfolio balance at the end of your retirement was $526,538 to $2,280,399, with an average at the end of $1,094,658. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)


In other models in FIRECalc, "failure" means the portfolio drops to zero. Since you are limiting spending to a percentage of your remaining portfolio, the total balance should never reach zero — but it could become pretty small in some situations.


Pay attention to the spending graph, below. Since we can't use portfolio failure as a metric, FIRECalc is following the lead of the 95% Rule from Work Less, Live More, in which one of the goals is for the portfolio to be as big (after adjustment for inflation) at the end of the 30 years as it was when you started. FIRECalc found that 50.4% of the time, the portfolio you would have left behind exceeded the portfolio you started with.

 

[mathjak107]

so here is 95/5 with an initial spend on 1,000,000 of 40k , 50% equities, 30 years

FIRECalc Results
Following the "95% Rule," from Work Less, Live More, each subsequent annual withdrawal will be the greater of 95% of your previous year's withdrawal, or 4.0% of your current portfolio, with no adjustment for inflation (unlike the normal FIRECalc behavior, which uses your starting portfolio, and makes adjustments for inflation).

Although the calculations are based on unadjusted withdrawals, the charted withdrawals are shown using 2024 dollars.

FIRECalc looked at the 123 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 123 cycles.

The lowest and highest portfolio balance at the end of your retirement was $526,538 to $2,280,399, with an average at the end of $1,094,658. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)


In other models in FIRECalc, "failure" means the portfolio drops to zero. Since you are limiting spending to a percentage of your remaining portfolio, the total balance should never reach zero — but it could become pretty small in some situations.


Pay attention to the spending graph, below. Since we can't use portfolio failure as a metric, FIRECalc is following the lead of the 95% Rule from Work Less, Live More, in which one of the goals is for the portfolio to be as big (after adjustment for inflation) at the end of the 30 years as it was when you started. FIRECalc found that 50.4% of the time, the portfolio you would have left behind exceeded the portfolio you started with.

because of the higher spending allowed with 95/5 in up years the odds of the portfolio being more than you started with is only 50.4% at the end of 30 years .

with the more traditional 4% swr odds of ending with more than you started with are 90% .

so big difference in allowable spending over time between 95/5 and the traditional 4% swr constant dollar method as well as probable balances if the spending limits in 95/5 are actually hit.

one could manually build in a system of raises for the constant dollar method though and end about the same as 95/5

 

[Dtail]

I can see my discretionary jumping to 20% pretty easily, or much higher even, without travel or much entertainment, just from buying stuff. No definite planning, though.

Maybe I'll play some pickleball.

There you go. Start playing Pickleball. Every few months I convert a few folks to playing Pickleball.

 

[Wile E. Coyote]

because of the higher spending allowed with 95/5 in up years the odds of the portfolio being more than you started with is only 50.4% at the end of 30 years .

with the more traditional 4% swr odds of ending with more than you started with are 90% .

so big difference in allowable spending over time between 95/5 and the traditional 4% swr constant dollar method as well as probable balances if the spending limits in 95/5 are actually hit.

one could manually build in a system of raises for the constant dollar method though and end about the same as 95/5

I used 4% because it is closer to what an RMD will be. I realize you have to have a separate account that is similarly allocated when you deal with RMDs. You probably have this amount in a regular brokerage.

 

[GenXguy]

Breaking things down into discretionary / non-discretionary can get a bit complicated.

I always thought it was easy.

Rent is not discretionary just because you can scale down. I could sell my house and get something less expensive, but I don't consider my part of my current property tax and insurance amounts to be discretionary.

I would consider a gym to be discretionary as you can always get exercise without needing a gym, and renting a studio to play drums is discretionary unless someone is actually earning money playing the drums.

 

[mathjak107]

I always thought it was easy.

Rent is not discretionary just because you can scale down. I could sell my house and get something less expensive, but I don't consider my part of my current property tax and insurance amounts to be discretionary.

I would consider a gym to be discretionary as you can always get exercise without needing a gym, and renting a studio to play drums is discretionary unless someone is actually earning money playing the drums.

yes i do earn money playing ….

we live in an apartment in a building so playing at home is out .

our gym is important because it has equipment we need that we can’t have at home …..it would be last on our list to go.

not being a tv watcher cable tv would be one of the first to go

 

[LateToFIRE]

^^^

For sure, we're all never going to agree on a definition for discretionary vs non-discretionary. It's kinda like the same rabbit hole of debating definition of NW, lol.

That said, I view housing expenses as largely non-discretionary. But, the rent question is tricky since theoretically, it's a relatively short-term commitment, making downsizing a lot easier than selling a home. On the other hand moving is a huge pain in the rear, and a big change in lifestyle, so my final vote would be "non-discretionary".

Just to complicate matters, I may rent a megacity pied a terre (instead of buying one). I would view this as discretionary unless had a very specific long-term reason really needed to have it other than DW likes to see Broadway shows.

 

[mathjak107]

^^^

For sure, we're all never going to agree on a definition for discretionary vs non-discretionary. It's kinda like the same rabbit hole of debating definition of NW, lol.

That said, I view housing expenses as largely non-discretionary. But, the rent question is tricky since theoretically, it's a relatively short-term commitment, making downsizing a lot easier than selling a home. On the other hand moving is a huge pain in the rear, and a big change in lifestyle, so my final vote would be "non-discretionary".

Just to complicate matters, I may rent a megacity pied a terre (instead of buying one). I would view this as discretionary unless had a very specific long-term reason really needed to have it other than DW likes to see Broadway shows.

my wife has been in the apartment we are in for 40 years , so not a short termer ha ha.

i am here 20 years since we got married