Sgthomas30
Confused about dryer sheets
Is the 4% withdrawal rate a reasonable target?
Thanks
Steven
Thanks
Steven
Withdraw Rate
- Thread starter Sgthomas30
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Welcome!
That's a short simple question with a long complicated answer, boiling down to "it depends", so you might want to search on the many threads that cover it. Generally referred to as SWR for Safe Withdrawal Rate.
- Most here will say 3 - 3.5% is a better approach
- Age counts. 4% at 60 is a lot different than 4% at 40. The original formula assumes a 30 year retirement.
- It's important how you have the 100% invested - allocation of equities vs. bonds, etc.
- It means taking nothing in year 1 (year 0 if you will)
- You have to be really comfortable with your budget number. 4% assumes 25x spending is your nut. If you underestimated spending even just a little, it all goes out the window. That means everything. Big stuff and little, Taxes and Insurance. If you say I need $100k per year so 25x that Ok I'm good, but you really needed 110k, then...oops.
- Have fun reading up!
That's a short simple question with a long complicated answer, boiling down to "it depends", so you might want to search on the many threads that cover it. Generally referred to as SWR for Safe Withdrawal Rate.
- Most here will say 3 - 3.5% is a better approach
- Age counts. 4% at 60 is a lot different than 4% at 40. The original formula assumes a 30 year retirement.
- It's important how you have the 100% invested - allocation of equities vs. bonds, etc.
- It means taking nothing in year 1 (year 0 if you will)
- You have to be really comfortable with your budget number. 4% assumes 25x spending is your nut. If you underestimated spending even just a little, it all goes out the window. That means everything. Big stuff and little, Taxes and Insurance. If you say I need $100k per year so 25x that Ok I'm good, but you really needed 110k, then...oops.
- Have fun reading up!
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
It depends.
The storied "4% rule" was based on the Trinity Study which suggested that a 4% WR was safe (high probability of not failing, but not 100%) for a 60/40 portfolio for a 30 year period. So if you're 70 then yes, but if your 40 then not so much.
So if you're talking about a 60/40 portfolio for 30 years then the answer would be yes. The authors of the study later suggested that the SWR was really a little higher than 4%, but other people feel that "this time may be different" and expect lower stock and bond returns in the next decade or so and would prefer a lower target WR.
^^^What she (Aerides) said ^^^^
4% is a rule of thumb. It's based on a study that looked at a 4% withdrawal of the original nest egg, then adjust that WR number for annual inflation. It assumed a mix of stocks and fixed income. It assumed that WR number covered everything - taxes, health insurance, etc. And it concluded that, historically, you had enough money to cover 30 years, in 95% of the historical markets.
There are lots of different withdrawal strategies... Some do a constant withdrawal based on 4% (or 3%, or some other number) and adjust for inflation. Some do a variable withdrawal. Some of the flavors of variable withdrawal are a percentage of assets that year - like 3% of the nest egg, each year. So if the nest egg grows, you get more, if the nest egg shrinks, you get less.
4% is a rule of thumb. It's based on a study that looked at a 4% withdrawal of the original nest egg, then adjust that WR number for annual inflation. It assumed a mix of stocks and fixed income. It assumed that WR number covered everything - taxes, health insurance, etc. And it concluded that, historically, you had enough money to cover 30 years, in 95% of the historical markets.
There are lots of different withdrawal strategies... Some do a constant withdrawal based on 4% (or 3%, or some other number) and adjust for inflation. Some do a variable withdrawal. Some of the flavors of variable withdrawal are a percentage of assets that year - like 3% of the nest egg, each year. So if the nest egg grows, you get more, if the nest egg shrinks, you get less.
That pretty much sums it up perfectly. At least in my understanding.
Chuckanut
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
At the risk of sounding like a wise-guy, if you have to ask, you need to do more 'due diligence'.
Keeping in mind that nobody, no matter how experienced and well intentioned has all the right answers, I suggest you start with the Humble Dollar website.
https://humbledollar.com/money-guide/basics/
https://humbledollar.com/money-guide/how-much-to-retire/
Keeping in mind that nobody, no matter how experienced and well intentioned has all the right answers, I suggest you start with the Humble Dollar website.
https://humbledollar.com/money-guide/basics/
https://humbledollar.com/money-guide/how-much-to-retire/
CardsFan
Thinks s/he gets paid by the post
^^^ What Rodi said.
lem1955
Recycles dryer sheets
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- 315
If you delay taking SS until 70 and/or you expect inheritance or pension at a later date, you may be able to take more than 4% as a SWR. Check out:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
Major Tom
Thinks s/he gets paid by the post
You've received some good answers so far. I'll also add, that if you're prepared to spend many happy hours reading through as many of the posts in this forum as your eager eyes, brain, and natural enthusiasm can handle, you will find the answer to your question, and learn a whole lot more in the process.
There is a lot of good reading here, for those who are willing to spend the time.
You didn't give any information about yourself or your situation in the question, so I will give a fairly brief answer. I'd say that somewhere in the range of 3 - 4% is a reasonable target, but much depends on how long your intended period of retirement is likely to be, and if you will have any other sources of income during retirement, such as from SS or a pension.
Welcome. This is a great place!
There is a lot of good reading here, for those who are willing to spend the time.
You didn't give any information about yourself or your situation in the question, so I will give a fairly brief answer. I'd say that somewhere in the range of 3 - 4% is a reasonable target, but much depends on how long your intended period of retirement is likely to be, and if you will have any other sources of income during retirement, such as from SS or a pension.
Welcome. This is a great place!
Last edited:
Dtail
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Taking the 4% and adjusting it each year for inflation is really more of an "Am I ready for retirement" analysis, rather than an actual withdrawal strategy.
Most folks have uneven withdrawal needs each year and I personally don't know anyone who strictly follows the Trinity study as a withdrawal scheme.
Most folks have uneven withdrawal needs each year and I personally don't know anyone who strictly follows the Trinity study as a withdrawal scheme.
In addition to the excellent advice you’ve already received, I would suggest running different withdrawal rates through firecalc and the competing calculator and looking at the outcomes for different time horizons. Firecalc gives you 90% of the info you need. The other tells you more about the conditions that led to historical failures (e.g. stagflation)
In addition to asset allocation, spend type matters as well. For our 45 yr time horizon planning, we have 100% historical success at 3.28% withdrawal. But having some of that spend be in a fixed rate mortgage shifts it to 3.5%.
I would also reemphsize what aerides said re knowing your spend. It doesn’t take much on the overage side to derail your plan. When you run the numbers, this becomes strikingly clear.
In addition to asset allocation, spend type matters as well. For our 45 yr time horizon planning, we have 100% historical success at 3.28% withdrawal. But having some of that spend be in a fixed rate mortgage shifts it to 3.5%.
I would also reemphsize what aerides said re knowing your spend. It doesn’t take much on the overage side to derail your plan. When you run the numbers, this becomes strikingly clear.
target2019
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Many will say it is, and targets move.
VanWinkle
Thinks s/he gets paid by the post
According to all of the prior posts, your situation dictates the withdrawal rate that is safe for you. Remember that the 4% becomes 3% if you are paying a 1-1.5% Assets under management fee to your financial advisor. It's a good way to decide if 25% of your withdrawal(1% out of 4%) is worth the help your advisor is supplying for you. 1% of 1,000,000 is 10,000 dollars of your 40,000 withdrawal at 4%, and you now net 30,000 before taxes.
Vw
Vw
youbet
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
According to some popular studies, if you follow the parameters used in those studies regarding lifespan, AA, etc., yes, 4% is a reasonable target.
There have been many comments on this forum expressing views that lean towards a "belt and suspenders" approach. And many of these strategies would positively impact the survivability of a 4% WR.
For example:
1. Estimate expenses high
2. Don't include SS or discount SS
3. Use long lifespan estimates
4. Build in a few one-off financial disasters such as a divorce or law suite.
If, like many folks here do, you're doing some of these type of things, then 4% sounds fine to me.
