4% rule. Leaving money on the table?

[nomorework]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

[Cletus Davenport]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

Nobody actually uses the 4% rule. It’s a rough planning guide……

But if you did follow it rigidly in the past, and increase your annual withdrawals to account for inflation, then you’d have a very good chance of dying with a lot more than $1M inflation adjusted dollars. This is one of the criticisms of the 4% rule……

Note. It’s for 30 years. Annual withdrawals are adjusted upwards for inflation every year, even if your portfolio is down for the year.

And in only 1 case would,you actually spend all the money.

So consider 4% a number to aim for when you’re a long way from retiring. And as you get closer, ignore it. Do more careful, well reasoned planning and analysis.

If somebody wanted to die with zero dollars, assuming they are single, they could sell all their possessions, and simply buy an annuity with all,of their money. When they die, the annuity payments stop, social security payments stop, pensions stop, etc. but nobody advocates that either…..

[bonesly]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

1) If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?

2) Are there any other mythologies that include trying to leave the world with a zero balance?

1) Yes, you'd leave a potentially large nest egg to your heirs or charity using "The 4% Rule" which is a constant-dollar withdrawal method.

2) Yes, there are Alternative Withdrawal Methods, including variable-percentage, that aim to spend the vast majority of your money without running out early (but you need a flexible spend plan as you'll take "pay cuts" in years when the market has a significant downturn). Variable Percentage Withdrawal (VPW) is worth looking into if you do not desire to leave a legacy to heirs/charity.

[sailaway]

The 4% rule actually assumes that with poor returns you will draw down your portfolio.

For one thing, it is actually 4% + inflation, whereas you would be hard pressed to find a low risk investment with consistent 4% returns not including inflation.

In most cases, the 4% rule will leave you with a large nest egg that you decide what to do with.

There are plenty of other methodologies to use which are likely to have larger drawdowns. Some provide guardrails so that you don't end up in poverty, some don't.

The difficulty with leaving the world with a zero balance is that you don't know when you will leave the world and you don't want to go to zero before then. Again, that was the principal concern when developing the 4% rule, although it did assume a 30 year retirement.

[inspector00]

If you really want to die with zero I guess you could buy an annuity with all your money instead, I don't recommend this though. You don't know when you're going to die or the stock market returns so there needs to be some buffer room in your calculation. The 4% rule is designed to give you security that you won't run out of money which means in most cases you'll wind up with more than you started.

[Hyperchicken]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?

That is incorrect.

This is where the 4% "rule" came from:

https://en.wikipedia.org/wiki/Trinity_study

For level payouts, [the authors] stated that "If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured."

So, you may draw down your portfolio at 4% withdrawal rate. You may run out of money before you die, although you are unlikely to.

[itnetpro]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

4% is a guideline. It states, you withdraw 4% every year increasing for inflation. It’s based on a 50/50 portfolio and suggest the assets (inflation adjusted) will last over a 30 year retirement.

I prefer a much more dynamic withdrawal schedule taking an average 1.25% per qtr (5% year), pivoting to 0% when necessary on down markets, drawing off 3 year cash account until underwater period ends.

My method allows me to take up to 2.5% per qtr (10% a year) to replenish our cash or drop to .60% per qtr if there is a double dip before the cash reserve recovers or extended underwater period beyond 3 years.

Because of our increased income after we retired and the size of our nest egg, we won’t need to adjust for inflation.

For you, wait until you see how much you have and when you decide to retire.

Your withdrawal strategy could look like ours and have more flexibility with a larger than needed nest egg or could look like a static 3% (adjusting for inflation) if you only have a big enough nest egg to replace a portion of your pre-retirement income.

Market conditions and your tolerance for risk will also play into those decisions when the time comes.

While we were in our income accumulation period, I based all projections off the 4% rule in today dollars. However, I would encourage you while modeling to also model including inflation to set reasonable expectations.

John

[dcabler]

Are there any other mythologies that include trying to leave the world with a zero balance?

There are some non-mythologies that include trying to leave the world with a zero (or any other number you choose).

Check out the amortization based withdrawal methods available on this forum including: VPW, ABW, and TPAW
VPW: https://www.bogleheads.org/wiki/Variabl ... withdrawal
ABW: https://www.bogleheads.org/wiki/Amortiz ... withdrawal
TPAW: https://www.bogleheads.org/wiki/Total_p ... withdrawal

Also check out this example in a 2 part series from Siamond, which also includes a sample spreadsheet.
Part 1: https://www.bogleheads.org/blog/2019/02 ... -of-money/
Part 2: https://www.bogleheads.org/blog/2019/02 ... ey-part-2/

Of course most of us don't know when our final date on the planet will be. But if you plan for 95 and you leave exactly at 95 where your original plan was a terminal portfolio value of $0, this is what you will have. So most plan with some margin.

Cheers.

[Squirrel208]

Are there any other mythologies that include trying to leave the world with a zero balance?

Perhaps, if you can accurately answer a few questions about your future:

• When do you plan to leave the world?
• How much is it going to cost you to leave in addition to your regular living expenses in retirement? I.e. How much will you need to cover the late-life costs associated with assisted living, long-term care, and/or memory care etc. At what facilities and/or care quality levels, and for how long?
• How do you expect that your investments, inflation, and general costs of living will perform between now and your scheduled departure?
• What if you're wrong about any and/or all of those unknowable future variables?

What you currently consider to be "leaving money on the table" is intentional insurance against all of those future end-of-life possibilities for many of us.

[FactualFran]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

The 4% rule, in its usual sense, involves neither living off interest nor principal never decreasing.

According to Determining Withdrawal Rates Using Historical Data by William Bengen, stock/bond portfolios of 50/50 and 75/25 supported at least 30 years of inflation-adjusted withdrawals, for all starting years, when the initial withdrawal was 4%. The annual historical data was from a Stocks, Bonds, Bills, and Inflation yearbook.

A 50/50 portfolio would not have enough of a balance for the 34th annual withdrawal for the worst starting year. Between annual withdrawals, the dollar balance of the portfolio changed based on the total return of the portfolio.

[Leesbro63]

Don’t forget about drawdown. A 65 year old, drawing 4% and increasing for inflation, starting in 1966, would have been stressed out. To say the least. The portfolio lost 80% of its real value by age 80 in 1981. Yeah, things got better out to age 95, but that’s only known in retrospect. I maintain that 4% really didn’t work.its not only about portfolio; its more about maximum drawdown.

[dbr]

To see what an investor would have experienced historically starting in different years at different asset allocations and at different rates of withdrawal see here: https://engaging-data.com/visualizing-4-rule/

What one wants to make of it is a discussion.

[rockstar]

Don’t forget about drawdown. A 65 year old, drawing 4% and increasing for inflation, starting in 1966, would have been stressed out. To say the least. The portfolio lost 80% of its real value by age 80 in 1981. Yeah, things got better out to age 95, but that’s only known in retrospect. I maintain that 4% really didn’t work.its not only about portfolio; its more about maximum drawdown.

Life expectancy was far lower back then. The 65 year old would be lucky to make it 70.

The rule is fine for actually 30 years of retirement. But I doubt most last that long.

[gavinsiu]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

The 4% rule is often misunderstood. It is not a rule for withdraw, it is a study to measure the maximum safe withdraw rate over a rolling 30 years period using a 50/50 stock/bond allocation. The study assumes a 30 years retirement because on the average, a person don't live over 30 years if they retired at 65. If you retire earlier then, the studies result may not work for you since your retirement may be over 30 years. The study assumes that principle will be expended. For example, the worst scencario for the 4% rule is if you started retirement at 1966 where your portfolio will essentially be exhausted after 30 years.

No one actually uses the 4% rule. No one will blindly withdraw 4% + inflation. It is just the maximum rate you can withdraw in known history from 1926 to 2017 (Bill updated the study later on). However since the 4% is the maximum withdraw in the worse case scenario, in many case you will end up with a lot on the table and you could have withdraw more.

There are other withdraw methods that actually have rules and methodology. You can see the list here https://www.bogleheads.org/wiki/Withdrawal_methods. In my opinion, the ideal withdraw method will allow you to withdraw more in the beginning, since you spend more money right after retirement, but your spending decreases as you age and may go up again when you are older due to medical expenses.

Note that it is difficult to die with zero. The issue is that you don't know what your future expense will be like. You don't know if you will need long term care for example. This is why people often leave money on the table.

[visualguy]

As many mentioned, 4%+"inflation" isn't meant as a withdrawal strategy. It doesn't make much sense for that purpose for many reasons beyond the one you mentioned (potentially leaving too much). Expenses tend to vary from year to year, personal inflation can be very different from official inflation, etc.

It's not a simple topic because of all the uncertainty. In particular, it's typically impossible to predict how much will be needed at the later stages of life, and this can vary a lot. Some people (a minority) pass away suddenly with no significant expenses associated with that. Others get a stroke or some other debilitating condition, and need care for many years. You simply don't know, so you have to play it at least somewhat safe, which means there's a decent chance money will be left.

[smitcat]

Don’t forget about drawdown. A 65 year old, drawing 4% and increasing for inflation, starting in 1966, would have been stressed out. To say the least. The portfolio lost 80% of its real value by age 80 in 1981. Yeah, things got better out to age 95, but that’s only known in retrospect. I maintain that 4% really didn’t work.its not only about portfolio; its more about maximum drawdown.

Do you believe that the spending pattern for a 65 year old will be the same at other various ages such as 75,80, and 85?

[itnetpro]

Don’t forget about drawdown. A 65 year old, drawing 4% and increasing for inflation, starting in 1966, would have been stressed out. To say the least. The portfolio lost 80% of its real value by age 80 in 1981. Yeah, things got better out to age 95, but that’s only known in retrospect. I maintain that 4% really didn’t work.its not only about portfolio; its more about maximum drawdown.

Do you believe that the spending pattern for a 65 year old will be the same at other various ages such as 75,80, and 85?

This statement I strongly agree with and why I prefer a flexible drawdown! Other factors that also need to be considered…

As and example, in our case… There are 6 future events that will increase our income or lower our cost that includes.
1. A decrease of 4% for state & local taxes when each of us hit 59 1/2
2. A decrease of 7k per month once our mortgage is paid off 5-6 years from now.
3. A decrease in cost 20+k per year once we start Medicare/Medicade at 65.
4. Social Security for both of us estimated 65k total when we both take it at 70

Not only that but inflation does not necessarily move in a straight line. A tv I bought when I was 20 cost me $800 for a 27 inch. I can buy one today 50”s for under $300. I remember in my 20s when a gallon of gas was higher than now. So some consumer goods have significantly decreased or not increased inline with inflation. Others like housing won’t even factor if you own your house. They become part of your nest egg if needed for nursing care. You may give up driving. We buy a new car every 3 years.

Not to mention, today we spend 20-30k a year on vacations, I doubt as we age, that we will travel as much…

These models don’t account for everything, only you can predict what your life will look like when you retire and budget accordingly. That 4% is just a general guideline for a withdrawal strategy…

[Leesbro63]

Don’t forget about drawdown. A 65 year old, drawing 4% and increasing for inflation, starting in 1966, would have been stressed out. To say the least. The portfolio lost 80% of its real value by age 80 in 1981. Yeah, things got better out to age 95, but that’s only known in retrospect. I maintain that 4% really didn’t work.its not only about portfolio; its more about maximum drawdown.

Do you believe that the spending pattern for a 65 year old will be the same at other various ages such as 75,80, and 85?

I do. I think the go-go years will see lots of "fun"/discretionary spending. And by the no-go years that will be replaced by health care expenses.

[Leesbro63]

Don’t forget about drawdown. A 65 year old, drawing 4% and increasing for inflation, starting in 1966, would have been stressed out. To say the least. The portfolio lost 80% of its real value by age 80 in 1981. Yeah, things got better out to age 95, but that’s only known in retrospect. I maintain that 4% really didn’t work.its not only about portfolio; its more about maximum drawdown.

Life expectancy was far lower back then. The 65 year old would be lucky to make it 70.

Longer life expectancy today is all the more reason that losing 80% of your stash, as you go from age 65 to age 80, could be a concern for a retiree, if we get a period similar to that. And for what it's worth, Google says the life expectancy of a 65 year old in 1966 was 12.9 years. Basically to age 78.

[coffeeblack]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

You can start with 4% and then use risk based guardrails. There are calculators that will calculate how much that would be beyond 4% and how much you would have to adjust if markets do poorly.

Incomelab will do that but it's expensive and used by advisors. I'm not sure if the other will do that.
You can also go to engaging data and use their rich, dead or broke calculator. You can set a threshold for how much the market will have to go down before you adjust your spending by 5 to 10%.

[ruralavalon]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

THE "4% rule" is not a rule, and is not a distribution strategy for retirement. It is a guide in planning, and helps you decide if your nest egg is likely enough to support a long retirement.

Is your retirement nest egg 25 times your initial retirement spending needs net of guaranteed sources of income?

[smitcat]

Do you believe that the spending pattern for a 65 year old will be the same at other various ages such as 75,80, and 85?

I do. I think the go-go years will see lots of "fun"/discretionary spending. And by the no-go years that will be replaced by health care expenses.

I do not think there is a correct answer but find the choices interesting.
Which additional healthcare expenses do you think will replace which descretionary exxpenses?

[smitcat]

Do you believe that the spending pattern for a 65 year old will be the same at other various ages such as 75,80, and 85?

This statement I strongly agree with and why I prefer a flexible drawdown! Other factors that also need to be considered…

As and example, in our case… There are 6 future events that will increase our income or lower our cost that includes.
1. A decrease of 4% for state & local taxes when each of us hit 59 1/2
2. A decrease of 7k per month once our mortgage is paid off 5-6 years from now.
3. A decrease in cost 20+k per year once we start Medicare/Medicade at 65.
4. Social Security for both of us estimated 65k total when we both take it at 70

Not only that but inflation does not necessarily move in a straight line. A tv I bought when I was 20 cost me $800 for a 27 inch. I can buy one today 50”s for under $300. I remember in my 20s when a gallon of gas was higher than now. So some consumer goods have significantly decreased or not increased inline with inflation. Others like housing won’t even factor if you own your house. They become part of your nest egg if needed for nursing care. You may give up driving. We buy a new car every 3 years.

Not to mention, today we spend 20-30k a year on vacations, I doubt as we age, that we will travel as much…

These models don’t account for everything, only you can predict what your life will look like when you retire and budget accordingly. That 4% is just a general guideline.

I would guess that you are right and the answer varies for everyone.

[sambb]

what you are left with is dependent on future stock and bond market returns, inflation, expenses that are unexpected (would you help out if someone you love became disabled?), and future tax rates for income and cap gains. If you can predict those things, then the 4% rule works for a 60/40 allocation i believe

[Leesbro63]

I do. I think the go-go years will see lots of "fun"/discretionary spending. And by the no-go years that will be replaced by health care expenses.

I do not think there is a correct answer but find the choices interesting.
Which additional healthcare expenses do you think will replace which descretionary exxpenses?

In my own extended family I’m seeing lots of dental costs, the need for temporary and permanent care givers, senior housing (independent living, assisted living and nursing home) as travel costs decline. Also other out of pocket medical…eyeglasses, hearing aids, ambulance costs, senior diapers, etc. Medicare, Supplement and Part D premiums and out of pocket rising faster than general inflation, at least in some years.

[dbr]

The 4% "rule" is actually an outcomes of investigating how a portfolio evolves over time with a fixed annual withdrawal modified by variable inflation and the portfolio increased by the statistically variable return of investments.

One can represent the variable return by tracking experience starting in given actual years over some period of years or one can represent the variable return by running a bunch of trials while sampling the annual return from an assumed statistical distribution. The first might be referred to as the historical data method, as illustrated in the previous link I gave, and the second is the Monte Carlo simulation method.

Using a fixed set of years one can find the largest withdrawal rate that does not result in any failed retirements and call that a "safe withdrawal rate." Using a Monte Carlo method one can find what withdrawal rate reduces the fraction of runs that are failed retirements below a fixed minimum, such as 5%, and call that an SWR. You could also use 5% with a historical data method.

That is what it is. How people decide to use that information to estimate their retirement situation is up to them.

[smitcat]

I do not think there is a correct answer but find the choices interesting.
Which additional healthcare expenses do you think will replace which descretionary exxpenses?

In my own extended family I’m seeing lots of dental costs, the need for temporary and permanent care givers, senior housing (independent living, assisted living and nursing home) as travel costs decline. Also other out of pocket medical…eyeglasses, hearing aids, ambulance costs, senior diapers, etc. Medicare, Supplement and Part D premiums and out of pocket rising faster than general inflation, at least in some years.

A half dozen years back when the IORP calculator was running well it had a few options for retirement draw one of which was the "smile"
curve. They also had a few articles and link or tow which decribed the reasons why retirement costs were often lower between 70-80 and relatively higher on both ends. Those article referred to LTC as being the largest difference on the higher age end but did not have any % or $$ to add any datails. At the time I got the same results with limited research on the topic. Most said that it can be a good fit to cover LTC with housing later in life as the needs for housing are replaced when in LTC. At any rate I never had any solid information on the subject.
Do you have any data or averages that source these costs by age?

[rockstar]

Life expectancy was far lower back then. The 65 year old would be lucky to make it 70.

Longer life expectancy today is all the more reason that losing 80% of your stash, as you go from age 65 to age 80, could be a concern for a retiree, if we get a period similar to that. And for what it's worth, Google says the life expectancy of a 65 year old in 1966 was 12.9 years. Basically to age 78.

But how many of them actually make it long? I’m seeing most people near me dying before 85 and a lot before 80.

So it’s also about living life since it might end sooner than expected.

[jdibber]

In addition to w/d methods, might want to consider constructing a portfolio that maximizes SWR. I'd put my effort there.

https://portfoliocharts.com/charts/portfolio-matrix/
https://portfoliocharts.com/charts/withdrawal-rates/

[goodenyou]

4% is about risk mitigation. Plain and simple. You sacrifice the possibility of dying with a pile of money for the benefit of possibly not running out of money. It can be (and is very likely to be) a great deal for financial advisors in an AUM model or your heirs and charity.

I don't feel compelled to spend down my savings akin to an all you can eat buffet where I over eat to feel like I got my money's worth. Maybe a lifetime of concentrating on savings and accumulation has tempered my spending to a point where having leftovers is sufficient.

[GlennK]

Are there any other mythologies that include trying to leave the world with a zero balance?

I recommend you listen to the Retirement and IRA show podcast. They have a strategy where you ensure your basic needs are taken care of, along with long term care needs, guaranteed inheritance to your kids, a buffer amount, etc. The basic needs should be covered by guaranteed income for life (social security, pension, annuity). You put the money for long term care and guaranteed inheritance in a "safe" investment(s) and then what remains is what they call fun money. You can spend your fun money all in one year or over how many years you desire.

https://www.theretirementandirashow.com/

The podcast is extremely informative and does NOT solely talk about their process. But at least once a year, they go into it in detail over a few episodes. This is NOT a sales podcast as they stopped taking new clients a few years ago. I am not sure if they have opened that back up or not.

[Rocinante Rider]

If using Bengen's 4% rule of thumb guideline, bear in mind that taxes and all investment fees and expenses come directly out of that inflated 4%. The 4% is not what one can spend, it's the amount that can be drawn down. For example, if one were paying an AUM fee of 1% and active management expense ratios of 0.5%, this leaves only 2.5% of the portfolio value for spending and tax payments. Just another reason to always use low cost, low tax drag index funds.

[Leesbro63]

If using Bengen's 4% rule of thumb guideline, bear in mind that taxes and all investment fees and expenses come directly out of that inflated 4%. The 4% is not what one can spend, it's the amount that can be drawn down. For example, if one were paying an AUM fee of 1% and active management expense ratios of 0.5%, this leaves only 2.5% of the portfolio value for spending and tax payments. Just another reason to always use low cost, low tax drag index funds.

Your point is still correct, but I prefer to consider investment fees and taxes as expenses out of the gross 4 (or whatever number you choose) percent withdrawal.

[goodenyou]

If using Bengen's 4% rule of thumb guideline, bear in mind that taxes and all investment fees and expenses come directly out of that inflated 4%. The 4% is not what one can spend, it's the amount that can be drawn down. For example, if one were paying an AUM fee of 1% and active management expense ratios of 0.5%, this leaves only 2.5% of the portfolio value for spending and tax payments. Just another reason to always use low cost, low tax drag index funds.

Your point is still correct, but I prefer to consider investment fees and taxes as expenses out of the gross 4 (or whatever number you choose) percent withdrawal.

Put another way, at 1% AUM fees, an advisor would consume 25% of your SWR of 4%.

Encouraging your client to spend more in retirement is a conflict of interest for the advisor.

[sf_tech_saver]

As I understand the 4% rule you would be living off of your nest egg interest

Ex: $1M = $40K annually

If the principal (Nest Egg) never decreases, is the expectation that you die and leave the Nest Egg to someone?


Are there any other mythologies that include trying to leave the world with a zero balance?

I am targeting 2.75%, and I hope to teach my son to follow the same.

The perpetual withdrawal rate isn't that far from the 4% rule.

Mr Bogle himself says in his books that your dividend/yield checks are really your baseline budget, and this is much closer to the perpetual withdrawal philosophy.

Why not leave something to your family or a charity while ensuring perpetual access to the cash flow for yourself?

To me the perpetual withdrawal rate is the single most important future in all of BH style investing!

[Rocinante Rider]

If using Bengen's 4% rule of thumb guideline, bear in mind that taxes and all investment fees and expenses come directly out of that inflated 4%. The 4% is not what one can spend, it's the amount that can be drawn down. For example, if one were paying an AUM fee of 1% and active management expense ratios of 0.5%, this leaves only 2.5% of the portfolio value for spending and tax payments. Just another reason to always use low cost, low tax drag index funds.

Your point is still correct, but I prefer to consider investment fees and taxes as expenses out of the gross 4 (or whatever number you choose) percent withdrawal.

Sure, but I expect that most people who pay AUM fees or high fund expense ratios don't take those fees into account as part of their annual expenses. No one writes a check to pay those fees. The fees just get automatically deducted from one's holdings. My guess is that very few active-management investors tally up how much they're quietly paying in investment fees when they calculate their annual expenses. Most people probably just look at things like their annual credit card or bank payments.

[BrooklynInvest]

I prefer a much more dynamic withdrawal schedule taking an average 1.25% per qtr (5% year), pivoting to 0% when necessary on down markets, drawing off 3 year cash account until underwater period ends.


John

This approach makes a ton of sense to me. But what constitutes a down market? Your portfolio value is down from the prior quarter's end for example? Taking from cash I'd view not as a 0% quarter but whatever the amount was, but that's me.

Say I have a million bucks when I retire. I take out $12,500 for the first quarter. The next quarter say I have $975k - my "pay" and a market drop. What's your adjustment to the 1.25% in practice? The quarterly assessment I bet is very efficient but do you find it hard to budget in practice given, I'm guessing, the variance in dollars?

[rockstar]

I prefer a much more dynamic withdrawal schedule taking an average 1.25% per qtr (5% year), pivoting to 0% when necessary on down markets, drawing off 3 year cash account until underwater period ends.


John

This approach makes a ton of sense to me. But what constitutes a down market? Your portfolio value is down from the prior quarter's end for example? Taking from cash I'd view not as a 0% quarter but whatever the amount was, but that's me.

Say I have a million bucks when I retire. I take out $12,500 for the first quarter. The next quarter say I have $975k - my "pay" and a market drop. What's your adjustment to the 1.25% in practice? The quarterly assessment I bet is very efficient but do you find it hard to budget in practice given, I'm guessing, the variance in dollars?

Intra year withdrawal is interesting since the market on average drops 14% each year regardless of where it finishes up.

[Jack FFR1846]

Many who use 4% (the number found to last 30 years in the Trinity study, not a rule) tend to be in the FIRE community or barely able to retire because they didn't save enough. If you're right on the edge, I'd think that instead of trying to justify stopping working and stating that you have enough, perhaps save some more by taking on part time work instead of going completely without a job.

I don't see having too much as leaving money on the table. It's a bigger safety net and a bigger wheel barrow of cash to throw at charities and your kids.

[Harmanic]

If you want to be conservative, use the 4% rule to decide if you are ready to retire and then use one of the amortization withdrawal methods described above to enjoy a slight bump in your spending, or to set aside some money for things like LTC or other big expenses.

[Leesbro63]

Your point is still correct, but I prefer to consider investment fees and taxes as expenses out of the gross 4 (or whatever number you choose) percent withdrawal.

Sure, but I expect that most people who pay AUM fees or high fund expense ratios don't take those fees into account as part of their annual expenses. No one writes a check to pay those fees. The fees just get automatically deducted from one's holdings. My guess is that very few active-management investors tally up how much they're quietly paying in investment fees when they calculate their annual expenses. Most people probably just look at things like their annual credit card or bank payments.

Most of the people who don't understand that those "automatic" fees are actually spending don't understand safe withdrawal rates etc. And I agree that they don't know what they don't know, but may have some vague idea that they heard you can spend 4%.

[smitcat]

In my own extended family I’m seeing lots of dental costs, the need for temporary and permanent care givers, senior housing (independent living, assisted living and nursing home) as travel costs decline. Also other out of pocket medical…eyeglasses, hearing aids, ambulance costs, senior diapers, etc. Medicare, Supplement and Part D premiums and out of pocket rising faster than general inflation, at least in some years.

A half dozen years back when the IORP calculator was running well it had a few options for retirement draw one of which was the "smile"
curve. They also had a few articles and link or tow which decribed the reasons why retirement costs were often lower between 70-80 and relatively higher on both ends. Those article referred to LTC as being the largest difference on the higher age end but did not have any % or $$ to add any datails. At the time I got the same results with limited research on the topic. Most said that it can be a good fit to cover LTC with housing later in life as the needs for housing are replaced when in LTC. At any rate I never had any solid information on the subject.
Do you have any data or averages that source these costs by age?

I tried to find the retirement spending data on the IORP site but it is not anywhere to be found now. I was able to find some past IORP runs from 2019 which had some of my notes on them about these later year spending summaries, It appears that the 'smile' was typical of a majority of the studied groups and that the impacts were less than most expected. Additionally the larger expenses in later life due to medical expenses mostly derived from LTC either at home or in a facility. Here is a link to one author who summarized some of these studies a while back - Wade Pfau
https://retirementresearcher.com/retire ... ing-smile/

[itnetpro]

I prefer a much more dynamic withdrawal schedule taking an average 1.25% per qtr (5% year), pivoting to 0% when necessary on down markets, drawing off 3 year cash account until underwater period ends.


John

This approach makes a ton of sense to me. But what constitutes a down market? Your portfolio value is down from the prior quarter's end for example? Taking from cash I'd view not as a 0% quarter but whatever the amount was, but that's me.

Say I have a million bucks when I retire. I take out $12,500 for the first quarter. The next quarter say I have $975k - my "pay" and a market drop. What's your adjustment to the 1.25% in practice? The quarterly assessment I bet is very efficient but do you find it hard to budget in practice given, I'm guessing, the variance in dollars?

To answer your question about budgeting, the money flows out of the investments every qtr into the cash account bucket and from the cash now earning 3.75% to the bank account savings. From savings to checking for bills. So regardless if I draw from the investment or not, unless I cut the budget, that full amount flows from the cash reserve. Therefore, income is stable.

I set a floor that can be adjusted over time based on expenses. For example, if I start out with 1 million (in our case more) the floor is 1 million. Therefore, when the investments go below, say 950k. Nothing is taken from the investments 0%. The withdraw lowers the cash reserve balance.

During the last downturn starting in 22. I pulled the full budget per qtr starting in 23 from the cash reserve. I could have cut that down to essentials extending the reserve beyond 3 years. Because the fundamentals were strong such as employment at the time. I decided the risk was minimal enough to take the full amount.

The 3 years reserve is not just a random number. It’s based on back testing my investments to 1971 and determining the maximum time underwater was 2.8 years with my mix. It assumes after the portfolio recovers, based on previous downturns and my 50/50 portfolio potential, that by increasing the withdraws to 2.5% per qtr, during the market recovery, after it exceeds the floor. I can replenish the cash reserve in time for the next downturn.

I have a plan B if there is a double dip preventing replenishment of the cash reserve. In theory, during my modeling, after a 3-5 year of decent returns, assuming I don’t increase the floor, the 3 year cash reserve is reinforced by the additional value of the investments buying even more time to recover from a downturn.

A more aggressive portfolio could need as much as 5 years to recover.

Now, in theory, if my funds do reasonably well over a period of time, I could adjust the floor up or leave the floor and take my qtr income off the higher fund to balance.

For instance say that million is worth 1.3 million. One qtr the market goes down 10% leaving 1.1 +/-. I will still take the income from the investment essentially adding one qtr to my cash reserve, extending survivability at full budget to 13 qtrs.

Our income has increased significantly since retirement so we can cut our budget almost in half. Assuming our cost over time does not exceed inflation much, we won’t need to adjust the floor. Essentially, on some down markets, extending the 3 years reserve underwater survival, using the surplus in the investments instead.

If cost goes up and I calculate a new minimum, I might raise that floor.

For instance. If my investments have 1.5 million, I might raise the floor to 1.2 million.

In theory, this works for my investment mix when Back testing as well as the size of my nest egg which is multiples of 1 million.

If I had less weath and depended on my week to week income. I would probably use the variable % method as outlined here.

https://www.bogleheads.org/wiki/Withdrawal_methods

John

[dogagility]

Agree with dcabler up thread to use a variable withdrawal method to maximize spending during retirement.

[tony17112acst]

Here are 3 notes I made when 1st researching the 4% rule:

* 4% handles the WORST historical scenario; 6.6% is the sustainable withdrawal rate based on average returns.
* Over 2/3rds of the time the retiree finishes the 30-year time horizon still having more-than-double their starting principal.
* The median wealth at the end – on top of the 4% rule with inflation-adjusted spending – is almost 2.8X starting principal.

So if your portfolio is increasing more than 4% (on average) and you're withdrawing 4%, you should have a lot left over. at the "end."

[Leesbro63]

Here are 3 notes I made when 1st researching the 4% rule:

* 4% handles the WORST historical scenario; 6.6% is the sustainable withdrawal rate based on average returns.
* Over 2/3rds of the time the retiree finishes the 30-year time horizon still having more-than-double their starting principal.
* The median wealth at the end – on top of the 4% rule with inflation-adjusted spending – is almost 2.8X starting principal.

So if your portfolio is increasing more than 4% (on average) and you're withdrawing 4%, you should have a lot left over. at the "end."

This sounds very optimistic, but other than "drawdown", Mrs. Lincoln, how was the play? The 4% 1966 retiree with a balanced portfolio was barreling toward poverty as they approached age 80. Their stash depleted to only 20% of it's original real value. Yeah, things got progressively better and the stash lasted until age 95, but that's only known in hindsight. And many think that conditions of today mimic conditions that that led to that "great inflation" of the late '60's early '70's. Imagine yourself as a healthy 78 or 79 year old who has gone through half a generation of year after year of grinding declining real portfolio value. The fact that we know, only in retrospect, that things turned around between ages 80 and 95 doesn't make this a successful withdrawal rate.

Again, I maintain that "drawdown" has been a key factor that's been overlooked by the "4% Rule" folks.

[tony17112acst]

It's neither optimistic nor pessimistic; they are raw statistics. Notice the words "average," "2/3rds of the time," and "median." These are indisputable statements on the final data run through every possible year of retirement.

[Leesbro63]

It's neither optimistic nor pessimistic; they are raw statistics. Notice the words "average," "2/3rds of the time," and "median." These are indisputable statements on the final data run through every possible year of retirement.

The part below the line is what concerns me. Losing much of your stash in the first 15 years of retirement. This appears to be NOT inflation adjusted. Supporting my FireCalc findings that the 4%er lost 80%, in real terms, before things got better late in old age. If they lived that long. Again, an 80% drawdown isn’t my definition of “4% worked”. It's a Pascal's Wager. Very likely a 4%er will do very well. But the consequences are huge (at least a partial financially failed retirement) if the 1966-81 type risk shows up.

[jdibber]

Here are 3 notes I made when 1st researching the 4% rule:

* 4% handles the WORST historical scenario; 6.6% is the sustainable withdrawal rate based on average returns.
* Over 2/3rds of the time the retiree finishes the 30-year time horizon still having more-than-double their starting principal.
* The median wealth at the end – on top of the 4% rule with inflation-adjusted spending – is almost 2.8X starting principal.

So if your portfolio is increasing more than 4% (on average) and you're withdrawing 4%, you should have a lot left over. at the "end."

Spot on. Bengen said he created his 4% rule based on an imaginary investor who retired in October of 1968 and ran into a terrible perfect storm of bad stock market returns and very bad inflation.

[heyyou]

It states, you withdraw 4% every year increasing for inflation.

The 4% SWR withdrawal amount is 4% of the retirement day asset amount, then annually boosted by inflation. With hindsight, the known worst case is retiring just before the start of the high inflation of the 1980s then blindly boosting every withdrawal with the full amount of every annual inflation number. Those retirees did not soon go broke but they were overspending so they would not have had 30 years of withdrawals.

Salute Wm Bengen for developing the first historically researched retirement spending method, then move on to a better one, likely based on a slowly rising percentage of each recent portfolio value, so the retiree is adjusting each annual withdrawal to the remaining amount of assets.

The RMD withdrawal method is your age-based (annual) RMD % times each recant annual portfolio value plus spending annual dividends and interest. I welcome the slight fluctuations in my withdrawals. I can see them in advance as my portfolio value fluctuates during the prior year, and I welcome how they boost or temper each of my withdrawals as my portfolio value fluctuates during my retirement.