The 4% withdrawal "rule"

[big-papa]

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%.

I agree - in reality, once people are actually there, most likely their spending is going to be dynamic. At the very least, not every expense is going to move in tandem with an official inflation number. And there are always those lumpy expenses and unexpected ones that come along.

The issue, though, is always going to be how close to the edge you are. You're withdrawing a tiny amount so you fall into the category of "almost anything is going to work"

No doubt, it always helps to have "more than enough" than "maybe/probably being right at the edge". And if I were close to being at the edge, I'd likely take whatever steps I could to get away from the edge as I think going ad-hoc dynamic is a bit on the dangerous side, given that future return sequences are unknown.

Otherwise, I prefer a systematic approach to this and as I noted, my systematic approach today is only an upper guardrail - something we've never been close to hitting. Early days in retirement, though.

By the way, I spent about a decade or so researching all the different ways one can withdraw before deciding on this approach, which happened a couple of years before retirement. With the spreadsheet in place, there is no more "worrying about it". It's just data entry and out pops what I need to do at the brokerage. Takes all of about 5 minutes to do the data entry and maybe another 5 minutes to make the trades, all done once per quarter.

Cheers

 

[2HOTinPHX]

I agree - in reality, once people are actually there, most likely their spending is going to be dynamic. At the very least, not every expense is going to move in tandem with an official inflation number. And there are always those lumpy expenses and unexpected ones that come along.

The issue, though, is always going to be how close to the edge you are. You're withdrawing a tiny amount so you fall into the category of "almost anything is going to work"

No doubt, it always helps to have "more than enough" than "maybe/probably being right at the edge". And if I were close to being at the edge, I'd likely take whatever steps I could to get away from the edge as I think going ad-hoc dynamic is a bit on the dangerous side, given that future return sequences are unknown.

Otherwise, I prefer a systematic approach to this and as I noted, my systematic approach today is only an upper guardrail - something we've never been close to hitting. Early days in retirement, though.

By the way, I spent about a decade or so researching all the different ways one can withdraw before deciding on this approach, which happened a couple of years before retirement. With the spreadsheet in place, there is no more "worrying about it". It's just data entry and out pops what I need to do at the brokerage. Takes all of about 5 minutes to do the data entry and maybe another 5 minutes to make the trades, all done once per quarter.

Cheers

Hey there
I like what your saying. For those that have enough from other sources that they only need to take a tiny percentage almost anything works.

But for the rest of us who think we may have enough but are unsure where is this edge you speak of and how does one find it?
I do like the concepts you mention is there one thread somewhere you could point me to read up on it perhaps. Thanks in advance.

 

[audreyh1]

Fortunately our spending is independent of what the market does any given year. Other things drive it, some very unexpected like a pandemic or family health issues.

 

[big-papa]

Hey there
I like what your saying. For those that have enough from other sources that they only need to take a tiny percentage almost anything works.

But for the rest of us who think we may have enough but are unsure where is this edge you speak of and how does one find it?
I do like the concepts you mention is there one thread somewhere you could point me to read up on it perhaps. Thanks in advance.

Thanks!

Yeah it's those of us who feel we're in that wide grey area between "anything works" and "on the edge" where I think there is value.

Lots of resources out there but here are a few of my favorites.
1. A 2 part blog series, with a sample spreadsheet. My own spreadsheet is inspired by this one. Note that this one also includes time value of money concepts - which basically says that if you have a known, future income stream coming then go ahead and count it today by calculating its NPV and adding that to your total portfolio for the withdrawal calculation. Best example of this might be future SS/Pension/Inheritance/maybe extra net $$ from a house sale, etc. Ultimately, this results in higher spending capacity today and less spending capacity in the future once SS begins, for example. In other words, it helps smooth out income.
Part 1: Early Retirement and Time Value of Money (Part 1) – Financial Page
Part 2: Early Retirement and Time Value of Money (Part 2) – Financial Page

2. Next would be the wiki for VPW. Again this is the simplest of all of these methods and also has a pre-canned spreadsheet that can be used directly.

Variable percentage withdrawal - Bogleheads

www.bogleheads.org

3. Lastly (the most complex one) would be the wiki for TPAW.

Total portfolio allocation and withdrawal - Bogleheads

www.bogleheads.org

Cheers.

 

[2HOTinPHX]

Thanks!

Yeah it's those of us who feel we're in that wide grey area between "anything works" and "on the edge" where I think there is value.

Lots of resources out there but here are a few of my favorites.
1. A 2 part blog series, with a sample spreadsheet. My own spreadsheet is inspired by this one. Note that this one also includes time value of money concepts - which basically says that if you have a known, future income stream coming then go ahead and count it today by calculating its NPV and adding that to your total portfolio for the withdrawal calculation. Best example of this might be future SS/Pension/Inheritance/maybe extra net $$ from a house sale, etc. Ultimately, this results in higher spending capacity today and less spending capacity in the future once SS begins, for example. In other words, it helps smooth out income.
Part 1: Early Retirement and Time Value of Money (Part 1) – Financial Page
Part 2: Early Retirement and Time Value of Money (Part 2) – Financial Page

2. Next would be the wiki for VPW. Again this is the simplest of all of these methods and also has a pre-canned spreadsheet that can be used directly.

Variable percentage withdrawal - Bogleheads

www.bogleheads.org

3. Lastly (the most complex one) would be the wiki for TPAW.

Total portfolio allocation and withdrawal - Bogleheads

www.bogleheads.org

Cheers.

Thanks for taking the time to reply with above...two thumbs for sure.

 

[big-papa]

Thanks for taking the time to reply with above...two thumbs for sure.

Feel free to DM me if you have any questions about them.

Cheers.

 

[KiwiFI]

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.

Thanks for this and the link to the funded ratio tool. Very handy.

Do you look at withdrawls on different time periods? i.e. twice annually, or lump sum at the beginning of each year. I'm not sure how much fiddling with these variables alters the returns/outcomes.

 

[Gumby]

...

The issue, though, is always going to be how close to the edge you are. You're withdrawing a tiny amount so you fall into the category of "almost anything is going to work"

.....

I have said before that I wage retirement the way the US Army wages war - with overwhelmingly superior firepower. When you can throw thousands of rounds downrange in a few seconds, you don't have to be a particularly good shot.

 

[big-papa]

Thanks for this and the link to the funded ratio tool. Very handy.

Do you look at withdrawls on different time periods? i.e. twice annually, or lump sum at the beginning of each year. I'm not sure how much fiddling with these variables alters the returns/outcomes.

I make my withdrawals quarterly. I don't think it makes a lot of difference but I like to keep my money as fully invested as long as possible.

I only wish that the IRS's definition of what a quarter is was the same as what the rest of humanity uses.