New to the 4% rule and how to make adjustments

[nicgius14]

Hello All,

This is my first post here and I am also new to the whole 4% withdrawal method that have learned from listening to various podcasts.

I understand that, simply put to calculate the amount required to reach financial independence is your yearly expenses multiplied by 25, once you have that you can start applying the 4% withdrawal rule.

In my case, let's say my current yearly expenses are 60,000, this time 25 = 1,500,000
However, I own an apartment in the city center being rented out, which brings 18,000 a year and is currently valued at 550,000

How do I adjust everything? Do I need less than 1,500,000 or do I then withdraw 60,000 less 18,000 per year but keep the 1,500,000 as is? Or either way would reach the same outcome?

I am trying to put everything in an Excel tracker and I am a little confused.

Much appreciate any suggestions you may have for me.

Thanks a lot
Nic

 

[imjustawarrior]

The 4% rule is really just a rough rule of thumb planning tool. It is also for 30 years of retirement.

E = Expenses have to include everything including taxes and health insurance.
O = other income streams that are not from your retirement portfolio (SS, rentals, pension, ...)
I = income from your retirement portfolio (dividends, selling shares, ...)

E - O = I

25 x I = nestegg at retirement for a 30 year retirement

That is the rule of thumb.

In reality, I is rarely constant because E and O are not constant. For mental accounting, the 4% rule of thumb is fine, but when you get closer to retirement, you will want to use tools that take more variables into account.

 

[LateToFIRE]

As imjustawarrior noted, the 4% rule is a very rough guide and based on a 30 year retirement - noted because a lotta folks on this board retire real young [which requires greater conservatism]. Consequently, FIRE folks seem to prefer FIRECalc as the favored tool.

Anyhow, you got the idea. If you want 95% certainty your money will last through thick and thin in a 30 year retirement, your first year WD should be [no greater than] 4% of your portfolio (i.e. 25 X $WD). The rule allows for constant inflation increases on the WD amount in each year thereafter.

The way you could approach it is $60K expenses minus $18K income (minus social security and/or pension if you will receive those benefits shortly after retiring) = WD Amount X 25 = Your required $ portfolio.

[Don't forget to account for taxes in your WD estimate]

 

[Aerides]

OP do a lot of reading, not podcasts, but old school research. 4% depends on your age, and your asset allocation. It is not as simple as 25x Expenses = Go Time.

It assumes you have an excellent prediction of your expenses based on your actual spending, including healthcare, taxes, lumpy stuff (that new roof or car repairs, etc.). It also assumes 0 withdrawals for year one.

That said, it is helpful as a benchmark for FI, for target setting a minimum bar to get serious about.

 

[Bigdawg]

The 4% rule is really just a rough rule of thumb planning tool. It is also for 30 years of retirement.

E = Expenses have to include everything including taxes and health insurance.
O = other income streams that are not from your retirement portfolio (SS, rentals, pension, ...)
I = income from your retirement portfolio (dividends, selling shares, ...)

E - O = I

25 x I = nestegg at retirement for a 30 year retirement

That is the rule of thumb.

In reality, I is rarely constant because E and O are not constant. For mental accounting, the 4% rule of thumb is fine, but when you get closer to retirement, you will want to use tools that take more variables into account.

Most concise, to the point explanation of the 4% rule I have ever read. Thanks warrior.

 

[karen1972]

The 4% rule is based on how much money do I need to generate to cover my expenses that are NOT covered by other sources. So if you have pensions or social security or stable rental income, etc, that would reduce your needed expenses... in your case $60k-$18k, leaving you $42k you need to cover.

The 4% rule has no prediction of real estate so the only number used is income generated to reduce expenses. Assuming $18k is secure and is truly NET, thus already accounts for all expenses including vacancy, repair, etc. The value of the property does no matter in this equation as you are only counting the cash flow it generates. At some point if you were to sell it and invest it, then it could be added to the equation.

That also assumes when you say $1.5M, you mean $1.5M invested in traditional stock/bonds, not real estate, crypto, etc. Lots of people with millions in real estate are no where near retiring as they can't generate enough cash to cover their expenses.

 

[bada bing]

The 4% rule is a useful, quick-n-dirty planning tool, but I doubt there are very many people applying it as an actual ongoing withdrawal strategy. I think of it as more along the lines of "I can spend up to X, inflation adjusted, for 30 years with a 95% chance of having some money left at the end of the 30 years." Certainly not "I'm going to withdraw X + inflation every year and spend it all". And remember the "30 years" and "95% chance of success" are important components.

There's lots of retirement calculators on web that are much more nuanced and useful. A couple of favorites are:
FIREcalc.com
Ficalc.app

Additionally, for most situations it's useful to have good Social Security estimates for use in the above calculators. There is a good app that allows playing with SS scenarios at:
http://ssa.tools

 

[Al18]

I agree with the posts above - the 4% is more a rule of thumb than actual withdrawal amount. A lot of users on this forum target something less (say 3%) and monitor spending accounts on a monthly or quarterly basis.

 

[Romer]

I think you also need to take the Long view with the 4% rule. For example, I am withdrawing greater than 4% now. I could adjust my expenses, but I will be collecting Social Security in a few years and my withdrawal rate will drop to less than 1% before slowly creeping up with inflation, though never hitting 4%

Everyone's situation is different. I have a pension and could cut expenses back to be below 4%. Once I get Social Security, I could live on that and my pension alone if need be with a smaller reduction.

I established my expenses baseline by reviewing 5 years of pre-retirement expenses and reducing some things not needed and boosting travel. I also added in 20% of margin for unknown unknowns.

In my opinion you start with expenses, then add in your sources of income by age and plot what additional funding you need and for how long. which will change with things like social security

 

[Markola]

OP, You need a more powerful and comprehensive retirement calculator, since you have rental income, presumably Social Security someday, lumpy expenses. The 4% Rule is a blunt instrument. Once all of the above are properly accounted for, you might be able to spend more than 4%.

Also, planning to maintain a 50/50 portfolio of domestic stocks and bonds for 30 years, which is what the 4% study was based on, is an entirely different matter than “not running out of money during my lifetime.”

Many folks here like FireCalc, while others of us prefer Empower. Both are free. IORP is another. There are others. Your brokerage likely has proprietary calculators, too, and may offer a free or cheap session to help you plan with your unique inputs and outputs.

 

[JBTX]

Hello All,

This is my first post here and I am also new to the whole 4% withdrawal method that have learned from listening to various podcasts.

I understand that, simply put to calculate the amount required to reach financial independence is your yearly expenses multiplied by 25, once you have that you can start applying the 4% withdrawal rule.

In my case, let's say my current yearly expenses are 60,000, this time 25 = 1,500,000
However, I own an apartment in the city center being rented out, which brings 18,000 a year and is currently valued at 550,000

How do I adjust everything? Do I need less than 1,500,000 or do I then withdraw 60,000 less 18,000 per year but keep the 1,500,000 as is? Or either way would reach the same outcome?

I am trying to put everything in an Excel tracker and I am a little confused.

Much appreciate any suggestions you may have for me.

Thanks a lot
Nic

If you could assume that your property will generate $18k per year (assuming after taxes) plus inflation, for the rest of your life, then

$60k expenses - $18k rental income = $42k

$42k / .04 = 1,050,000 portfolio needed to generate 4%.

Interestingly you can get fixed annuities with a 2-3% annual inflation adjustment that will get 4.0% these days. A 30 year TIPS ladder will get over 4% right now, but obviously only lasts 30 years.

 

[LateToFIRE]

OP, You need a more powerful and comprehensive retirement calculator, since you have rental income, presumably Social Security someday, lumpy expenses. The 4% Rule is a blunt instrument. Once all of the above are properly accounted for, you might be able to spend more than 4%.

Also, planning to maintain a 50/50 portfolio of domestic stocks and bonds for 30 years, which is what the 4% study was based on, is an entirely different matter than “not running out of money during my lifetime.”

Many folks here like FireCalc, while others of us prefer Empower. Both are free. IORP is another. There are others. Your brokerage likely has proprietary calculators, too, and may offer a free or cheap session to help you plan with your unique inputs and outputs.

I've used FireCalc and i-ORP, both very comprehensive. Just tried Empower - very simplistic, gave me mucho higher spending numbers!

 

[Markola]

In that case, I’d definitely go with Empower [emoji41].

 

[Lewis Clark]

Another aspect to consider is that the 4% guideline assumes capital depletion. This means that the guideline will be considered a success if, at the end of 30 years, you have at least one penny in your portfolio.

If you are hoping to leave an inheritance, or if there is a reasonable likelihood of living beyond the 30-year planning window, you might prefer to target a higher ending portfolio balance than the $0 target implicit in the 4% guideline. This might require a lower withdrawal rate along the way.

 

[dknighd]

Another aspect to consider is that the 4% guideline assumes capital depletion. This means that the guideline will be considered a success if, at the end of 30 years, you have at least one penny in your portfolio.

If you are hoping to leave an inheritance, or if there is a reasonable likelihood of living beyond the 30-year planning window, you might prefer to target a higher ending portfolio balance than the $0 target implicit in the 4% guideline. This might require a lower withdrawal rate along the way.

The other way of thinking about this is that 95% of the time you would end up with money left you could have spent. And, the chance of a 65 year old living to 95 is less than 50%. So you might be able to get away with a higher withdrawal rate. Who knows.


4% is a rough rule of thumb. No more, no less. The interesting thing is that it is probably conservative, but still not safe.

 

[Dash man]

I like NewRetirement because it helps with planning for RMDs, IRMAA and Roth Conversions. It also takes into consideration large purchases like a new roof and car replacements.

 

[The Cosmic Avenger]

If you could assume that your property will generate $18k per year (assuming after taxes) plus inflation, for the rest of your life, then

$60k expenses - $18k rental income = $42k

$42k / .04 = 1,050,000 portfolio needed to generate 4%.

This is exactly the numbers I ran in my head.

However, this also assumes you'll be renting the apartment out for the rest of your life. Do you do any maintenance yourself? That might need to change. Rental laws or changes to your condo association could affect your income, too. Those aren't to tell you that you can't do it, just to spitball other ways of making up that $18K, maybe by selling and investing the profits, or cutting your budget. Flexibility is the best tool in our arsenal, IMO.

 

[dknighd]

This is exactly the numbers I ran in my head.

However, this also assumes you'll be renting the apartment out for the rest of your life. Do you do any maintenance yourself? That might need to change. Rental laws or changes to your condo association could affect your income, too. Those aren't to tell you that you can't do it, just to spitball other ways of making up that $18K, maybe by selling and investing the profits, or cutting your budget. Flexibility is the best tool in our arsenal, IMO.

I agree, flexibility is very very important!


The back of my envelope says you can sell a $500K condo, and using the 4% guidance, spend 20K per year. So the condo provides flexibility (as long as they are not double counting it)

 

[LateToFIRE]

I agree, flexibility is very very important!


The back of my envelope says you can sell a $500K condo, and using the 4% guidance, spend 20K per year. So the condo provides flexibility (as long as they are not double counting it)

Agree, this is my underlying approach to finances. Retirement will not be a set it and forget it proposition. You can't predict the future, but enough flexibility prepares you for whatever might happen.