I am not doing this. But, if you believe the 4% rule works, where is the flaw in the approach?typical.investor wrote: ↑Mon Feb 04, 2019 8:08 amI don’t think that’s right and will put you at risk.marcopolo wrote: ↑Mon Feb 04, 2019 7:48 amI don't think this is true.evestor wrote: ↑Mon Feb 04, 2019 1:00 amI have assumed (but will admit I have not looked at the detailed math to support) that this is where the 4% 'rule' goes off the rails. IE, if you take more than 4% when you can then you increase the risk you'll need to take less than 4% at other times to compensate.
If you're willing to do both then that's great. But if you really want the 4% rule to hold even in bad times, that you'd need to hold the line in good times too.
But I could be wrong...and would love if someone could demonstrate that this is the case. i'm always happy to learn my assumptions are too conservative.
If you believe in the 4% rule, I think you could actually ratchet up your withdrawal amount whenever the market does well to 4% of the new portfolio value, then effectively start your retirement over again. When the market goes down you can keep using the previous high water mark, adjusted for inflation, so you withdrawal amount would always be monotonically increasing, even in real dollar terms.
Here is an example of how that might work:
Let's say you retire with $1M planning on a 30 year retirement. You withdraw $40k for the first year. There is 3% inflation that year. The market has a nice run up and your portfolio grows to $1.2M. Staying with your original 4% rule, you would withdraw $41.2k in year 2. But, if you believe in the 4%, you could just as restart your retirement and start taking 4% of the $1.2M ($48k). If it works for 30 years, it will work for the 29 you have left. You could arguably take even a little more.
Now fast forward to the next year. Inflation is the same 3%, but now the market tanks, and your portfolio is $800k. But, you simply follow the 4% rule you started last year and withdraw $49,440 (Inflation adjusted $48k).
Rinse and repeat that process for the next 28 years and you real withdrawal amounts only ratchet up, or stay the same, they never go down. All that assumes 4% rule works.
This is for a more permanent portfolio so the rates are lower but I think the basics are the same.
If 2.8% is the safe rate (equivalent to your 4% for a shorter duration), you would lower that to 2.2% and take 15% of the gain if your portfolio grows.
Or you could use 1.8% and 25% of gains.
Numbers differ for inflation adjustment and would as stated be different for a normal retirement length.
Not sure what the method is called.
Anyway, increasing the base withdrawal in good years seems a sure fire way to induce sequence of return problems.
Instead of thinking about ratcheting up your withdrawal, think about if that was a different person. You retire in year one with the $1M. your neighbor waits a year, and has $1.2M at retirement. Surely, by the 4% rule, he can withdraw $48k, and adjust for inflation going forward, right?
Well, you also have $1.2M, why can't you do the same? The money has no memory.