The 4% withdrawal "rule"

[audreyh1]

I was afraid of that. Without spending a lot of time on it, or asking my advisors to do that, I really do not have any idea what my taxes are likely to be in each year -- even under current tax rates -- and those rates will probably change anyway. (To be honest, I don't really even know what my spending will be -- but that is a different issue).

For FIRECalc purposes, I took what I think our spending will be -- my best guess -- and then I multiplied it by 250%, which is my lame and I suspect very conservative effort to account for advisory fees (30-35 bps), taxes, and the chance that my spending might be more than I am guessing it will be. FIRECalc still spit out a 100% chance of success, so I should be OK. I suppose I will have better estimates after my first year of retirement. (I am retiring end of this year).

The income taxes will probably be lower than you expect.

Plenty of simple tax calculators out there to play around with. First list your expected income from taxable investments (a few different types, any planned IRA withdrawals, SS, and pension. Then enter in the calculator.

 

[pb4uski]

I have never used firecalc. Nor have I ever used quicken. I had enough of spreadsheets and margin calculations during my career. All of our calculations, pre retirement and post retirement, were based on after tax dollars.

Instead, I tracked after tax spend. At a macro level. I have never have subscribed to the 4 percent rule, or any percent rule. Zero percentage in following this to the letter. Let common sense prevail along with some very basic math.

From my perspective it will always depend on ROI, and the change in equity balances YoY.

For us, it is all about the gap. The gap between guananteed cash flows, spend, ROI on investments, and equity balances. Net of tax, net of inflation.

What you wrote all makes sense but it doesn't really help the 55 year old with a 40 year time horizon wondering if they "have enough". That is why rules of thumb like the 4% rule are needed and can be very useful to those contemplating retiring.

 

[pb4uski]

The income taxes will probably be lower than you expect.

Plenty of simple tax calculators out there to play around with. First list your expected income from taxable investments (a few different types, any planned IRA withdrawals, SS, and pension. Then enter in the calculator.

+1 many early retirees are floored when they find out what their tax bill will be when they stop working and no longer have any income from working. For us, without Roth conversions our income taxes would be negligible for the last 12 years.

The link below is a good simple calculator.

IRS & State Tax Calculator | 2005 -- 2025

Easily and accurately calculate IRS & State personal income taxes online.

www.irscalculators.com

 

[Al18]

I’ve adopted Pb4uski spending plan suggested years ago - it’s worked well for me. Sell a combination of stocks, CD’s for a year’s worth of expenses and put it in an online, high yield (4-4.5%) savings account. Setup 1 automatic transfer at the beginning of the month, from your savings account to checking account. This is your retired ‘paycheck’. Pay all your bills from the checking account. Review checking and savings balances every 3 months - you will likely need to make some tweaks for the first 2-3 years of retirement. Lastly, enjoy your retirement and don’t worry about stock market gyrations.

 

[audreyh1]

I’ve adopted Pb4uski spending plan suggested years ago - it’s worked well for me. Sell a combination of stocks, CD’s for a year’s worth of expenses and put it in an online, high yield (4-4.5%) savings account. Setup 1 automatic transfer at the beginning of the month, from your savings account to checking account. This is your retired ‘paycheck’. Pay all your bills from the checking account. Review checking and savings balances every 3 months - you will likely need to make some tweaks for the first 2-3 years of retirement. Lastly, enjoy your retirement and don’t worry about stock market gyrations.

This is what I have always done since retiring.

 

[Lorenzo]

I’ve adopted Pb4uski spending plan suggested years ago - it’s worked well for me. Sell a combination of stocks, CD’s for a year’s worth of expenses and put it in an online, high yield (4-4.5%) savings account. Setup 1 automatic transfer at the beginning of the month, from your savings account to checking account.

This is what I have always done since retiring.

I don't mean to start an asset allocation discussion here, but are CDs the sole fixed-income portion of @pb4uski's strategy? No bonds, T-bills, etc.--just stocks and CDs? Also, do you feel that one year of cash is enough to ride out most bear markets, or are you willing to sell some stocks in a downturn?

 

[Rianne]

I’ve adopted Pb4uski spending plan suggested years ago - it’s worked well for me. Sell a combination of stocks, CD’s for a year’s worth of expenses and put it in an online, high yield (4-4.5%) savings account. Setup 1 automatic transfer at the beginning of the month, from your savings account to checking account. This is your retired ‘paycheck’. Pay all your bills from the checking account. Review checking and savings balances every 3 months - you will likely need to make some tweaks for the first 2-3 years of retirement. Lastly, enjoy your retirement and don’t worry about stock market gyrations.

My bold. We keep interest earned from treasury's and CDs in tIRA in the settlement account (earning 4.5% rolling interest). In VG, you can transfer from settlement to checking account easily or keep it there possibly reinvesting depending on the income need. As well with taxed portion, selling index funds or taking CD interest. An easy step to transfer to checking account. The difference is how much is taxed. The settlement account acts as a sort of savings account. Plus we have a high interest savings account.

 

[Sunset]

I don't mean to start an asset allocation discussion here, but are CDs the sole fixed-income portion of @pb4uski's strategy? No bonds, T-bills, etc.--just stocks and CDs? Also, do you feel that one year of cash is enough to ride out most bear markets, or are you willing to sell some stocks in a downturn?

A person can have many years worth in CDs/Treasuries/bonds.
The point was to sell a variety of holdings to get in cash the next years spending.

Should the market collapse, a person could the following year, instead of mechanically selling stocks, sell a lot more of the CDs/Treasuries/bonds than stocks. An indirect way of rebalancing, while avoiding taking a loss on stocks.

 

[pb4uski]

The idea discussed works irrespective of what your target AA is and is to have ~1 year in cash in high-yield savings in taxable accounts, have an automatic withdrawal that goes to the checking account that you use to pay bills on the xth of each month to create a monthly "paycheck" and replenish it annually as part of your rebalancing.

An extreme would be where one's taxable account, other than this high yield savings in a taxable account is 100% stocks. After 12 months of withdrawals the cash is gone, so you sell stocks in the taxable account sufficient to replenish the cash account with a year's worth of withdrawals and in tax deferred accounts sell bonds and buy stocks in the same amount. Your AA is unchanged. You just need to be careful not to buy the same stocks IF the sale in the taxable account resulted in a realized loss so you don't create wash sale problem. If it was a realized gain then you can buy whatever you wish.

I just did the above at the same time that I did my annual rebalancing. It doesn't have to be done in December, it can be done anytime.


No, I am not only CDs. Currently, I'm ~4% common stocks, ~30% preferred stocks, ~62% fixed income (corporate and agency bonds, TIPS and CDs) and ~4% cash.

 

[audreyh1]

I don't mean to start an asset allocation discussion here, but are CDs the sole fixed-income portion of @pb4uski's strategy? No bonds, T-bills, etc.--just stocks and CDs? Also, do you feel that one year of cash is enough to ride out most bear markets, or are you willing to sell some stocks in a downturn?

You rebalance by choosing what to sell each year.

 

[Lorenzo]

A person can have many years worth in CDs/Treasuries/bonds.
The point was to sell a variety of holdings to get in cash the next years spending.

No, I am not only CDs. Currently, I'm ~4% common stocks, ~30% preferred stocks, ~62% bonds and ~4% cash.

Thanks for the clarification. It wasn't that I didn't get the broader point, but rather just @Al18's statement, "Sell a combination of stocks, CD’s for a year’s worth of expenses ...." Taken literally, this sounded like an AA consisting only of stocks and CDs--nothing else. So you people do have things in the bond portion other than just CDs.

Not that there's anything wrong with having a large portion of one's savings in CDs. My grandparents who lived through the Great Depression lived in retirement solely off CDs and SS--they never owned a stock or fund in their lives.

 

[pb4uski]

^^^ A CD isn't much more than a bond issued by a bank that has a wrapper of FDIC insurance attached to it. When I have dry powder available I'm indiffereto buying CDs or Treasuries or even Agencies all else being equal... essentially the same credit risk IMO. I'll consider whatever has the highest yield for the term I am targeting and then look at call attributes.

 

[Gumby]

^^^ A CD isn't much more than a bond issued by a bank that has a wrapper of FDIC insurance attached to it. When I have dry powder available I'm indiffereto buying CDs or Treasuries or even Agencies all else being equal... essentially the same credit risk IMO. I'll consider whatever has the highest yield for the term I am targeting and then look at call attributes.

Exactly my approach to the issue. Although I will favor Treasuries in my taxable account due to state tax exemption.

 

[Al18]

iBonds also get a state tax exemption and have the advantage of federal taxes being deferred until you cash in the bond.

 

[RamStride]

I understand the idea behind the 4% rule. But I don't think that way. I am thinking that I will be withdrawing whatever percentage I need for any given year.

One year it may be 0% while other years maybe 4% or 0.25%, or any other percentage depending on what we are doing that year or how the investments are performing. I may not want to withdraw anything or too much on a down year. Is it wrong to think about it this way?

 

[braumeister]

Is it wrong to think about it this way?

Of course not.
The "rule" is simply a way of calculating what it would probably be safe to withdraw, given the assumptions in the study that inspired it.

 

[Dtail]

Of course not.
The "rule" is simply a way of calculating what it would probably be safe to withdraw, given the assumptions in the study that inspired it.

+1.
Not sure anyone on this site or very few folks use the 4% guidance for an actual withdrawal strategy.

 

[Gumby]

The 4% rule, based on the Trinity Study and Bengen, posits that if you have a balanced portfolio, you can safely take 4% out the first year, adjust that for inflation in subsequent years, and have a >90% chance of not running out of money over a 30 year retirement. It was and is merely a guideline for planning how much initial portfolio you should aim to amass given your expected spending in retirement. It is neither a rule for how much you must or must not withdraw in any given year nor a guarantee.

 

[RamStride]

Thank you all.

 

[pb4uski]

Another thing to remember is that withdrawals isn't spending in most cases, withdrawals fill any gap between spending and retirement income like pensions and SS.

 

[GravitySucks]

I understand the idea behind the 4% rule. But I don't think that way. I am thinking that I will be withdrawing whatever percentage I need for any given year.

One year it may be 0% while other years maybe 4% or 0.25%, or any other percentage depending on what we are doing that year or how the investments are performing. I may not want to withdraw anything or too much on a down year. Is it wrong to think about it this way?

Perfectly fine.

I prefer Bengen’s nomenclature of SAFEMAX instead of SWR.

 

[KiwiFI]

I understand the idea behind the 4% rule. But I don't think that way. I am thinking that I will be withdrawing whatever percentage I need for any given year.

One year it may be 0% while other years maybe 4% or 0.25%, or any other percentage depending on what we are doing that year or how the investments are performing. I may not want to withdraw anything or too much on a down year. Is it wrong to think about it this way?

No it isn't wrong. I agree with you. I don;t think about it that way either and find it curious that so many on Reddit, for example, are wedded to the 4% or less!

What I think that does is lock you in to a rigid way of thinking about your spending. But also, many people are not living as well as they could be due to this way of thinking.

I like this quote from Die With Zero by Bill Perkins. "Your biggest fear ought to be wasting your life and time, not 'Am I going to have x number of dollars when I'm 80?'"

I get that not everyone at 80 will be in the same financial position as Bill Perkins. However the point is still valid imho.

 

[big-papa]

The 4% rule, based on the Trinity Study and Bengen, posits that if you have a balanced portfolio, you can safely take 4% out the first year, adjust that for inflation in subsequent years, and have a >90% chance of not running out of money over a 30 year retirement. It was and is merely a guideline for planning how much initial portfolio you should aim to amass given your expected spending in retirement. It is neither a rule for how much you must or must not withdraw in any given year nor a guarantee.

Change the verb tense of your post and I agree with you. That is "...you could have safely taken 4%..", because it is all based on past returns sequences and there is no guarantee that all future return sequences are encompassed by the past ones. I personally don't even think it's a good method for planning, frankly. In my opinion, a better method for planning is the funded ratio (sometimes called funding ratio). Mike Piper has a good explanation and calculator available here: What’s Your Funded Ratio? — Oblivious Investor

If one is not going to go ad-hoc with one's withdrawals, in my opinion there are much better methods for calculating withdrawals than a fixed % of the portfolio, adjusted for inflation. I'm partial to methods that use amortization to calculate withdrawals - that is, the same math used to calculate loan payments. There are several pre-canned spreadsheets out there available, with 3 of them over on bogleheads in increasing order of complexity being: VPW, ABW and TPAW. The main feature with amortization methods is that your portfolio will last exactly as long as you plan for it to last. But instead of piling up all of the risk in the very last withdrawal, like the 4% rule and other Safe Withdrawal Methods do, it spreads the risk out across all withdrawals - meaning that the withdrawals themselves are going to vary each time. Some of the commercial financial planning tools also include the option of using an amortization method as well, which might be helpful for those without spreadsheet capabilities.

I use my own spreadsheet to do my calculations and make quarterly withdrawals. I treat the calculations, however, as a "max" I could withdrawal. In other words, I treat it as an upper guardrail. So far, knock-on-wood, I haven't yet had to withdraw the full amount. I simply pull what I actually need. That makes the excess available for future withdrawals.

Cheers.

 

[big-papa]

No it isn't wrong. I agree with you. I don;t think about it that way either and find it curious that so many on Reddit, for example, are wedded to the 4% or less!

What I think that does is lock you in to a rigid way of thinking about your spending. But also, many people are not living as well as they could be due to this way of thinking.

I like this quote from Die With Zero by Bill Perkins. "Your biggest fear ought to be wasting your life and time, not 'Am I going to have x number of dollars when I'm 80?'"

I get that not everyone at 80 will be in the same financial position as Bill Perkins. However the point is still valid imho.

Yep, it seems that some research that was originally done to disprove some of the crazy percentages that some financial experts were throwing around (Peter Lynch comes to mind) somehow got locked in as a "rule" in some minds. It's understandable, though. Before this research came out, there wasn't much out there for to guide retirees who didn't have a financial advisor, for better or worse, and a lot of people still had pensions back in the day.

The way I see it, is that it's fairly easy these days to figure out what sort of AA might work during the accumulation years and save as much as you can since your savings rate itself has such an outsized impact on portfolio value over time. However, there really isn't something quite as easy on the decumulation side. Doing the opposite of "Save as much as you can" by "withdrawing as little as possible" doesn't seem right. The 4% (or any other fixed percentage) while simple, comes with a lot of risk.

As I noted in another post, in my opinion there are much better withdrawal methods than a fixed %. But there aren't that many that are as simple as "save as much as you can". Probably the closest one I can think of is VPW, which is an amortization based method. You can literally pre-calculate the percentage of the portfolio value to withdraw every year and just use that. The percentage increases each and every year until the final year, in which case it's 100% of the portfolio remaining. There are some who just use the RMD tables, even for accounts not subject to RMDs. Like VPW it also has an increasing % to withdraw each year. However, depending on your age, the percentage to withdraw can be quite low early on.

I'm using amortization today with a custom spreadsheet with a lot of features. However, I also recognize that my wife is not nearly as interested in this stuff as I am, even though as a computer science major she can literally run rings around me in Excel. For her, I've made another custom spreadsheet based on VPW which simply has fixed percentages for her. She can use this if for any reason I become incapable. We've reviewed it and she understands it.

Cheers.

 

[Gumby]

I would think that most people's spending will be dynamic. That is, they will cut back some in market down years and ramp up a little in good years. It seems like basic human nature to respond to the world we live in. So we can calculate things to a fare-thee-well, but in the end we will will not religiously adhere to any withdrawal scheme.

My own approach to retirement planning was nowhere near as sophisticated as yours. In our working years, we basically just saved as much as we could while still having an enjoyable life. I estimated when we would hit 25X of our estimated spending and that was our initial goal for a retirement date. We refined the date further to account for the substantial losses we suffered in the Great Recession, as well as to align with the dates when we would each qualify for pensions and retiree healthcare (dates that kept changing as various union contracts were rewritten).

As it turns out, it has been those pensions and social security, in conjunction with the retiree health care, that fund our expenses in retirement. We could generate the same income with a 4% draw on our portfolio, but in nearly six years of retirement we have only needed to draw on our portfolio once, and that only for luxury travel (we have become accustomed very quickly to flying business class overseas).

So, while I track our expenses very closely, as I have always done, I don't spend much time worrying about our withdrawal methodology. It will likely never exceed even 1%.