## Need help on the 4% (3%) rule, please

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Topic Author
Bennie
Posts: 280
Joined: Wed Apr 07, 2021 3:46 pm

### Need help on the 4% (3%) rule, please

So let's say Joe needs 6,000.- /mo. after taxes or 72,000.- /year, again after taxes.

**********************************************************************************************************
Starting with 92,000.-, I got:

92K - [ ({92K-12,950.- std deduction}*22% federal tax) + (92K * 5.75% state tax) ] is about 74K and 74K/12 is > 6,000.- so 92,000.- before tax per year would be enough today.

If 92K = 4% * Nestegg then 92K *100/4 = 2.3 Mill is the required Nestegg

But Joe is 56 and plans to live to 96, 40 years not 30!

Try the 3% "rule" 92K = 3% * Nestegg and 92K * 100/3 = 3.1 Mill is the required Nestegg

*************************************************************************************************************

Is that right? Does that accomodate inflation? Can you just go from 4% to 3% to cover an extra 10 years? Or how would you do the calcs? What else should one consider here?

Any insights much appreciated!
secondopinion
Posts: 4901
Joined: Wed Dec 02, 2020 12:18 pm

### Re: Need help on the 4% (3%) rule, please

Bennie wrote: Mon May 22, 2023 3:46 pm So let's say Joe needs 6,000.- /mo. after taxes or 72,000.- /year, again after taxes.

**********************************************************************************************************
Starting with 92,000.-, I got:

92K - [ ({92K-12,950.- std deduction}*22% federal tax) + (92K * 5.75% state tax) ] is about 74K and 74K/12 is > 6,000.- so 92,000.- before tax per year would be enough today.

If 92K = 4% * Nestegg then 92K *100/4 = 2.3 Mill is the required Nestegg

But Joe is 56 and plans to live to 96, 40 years not 30!

Try the 3% "rule" 92K = 3% * Nestegg and 92K * 100/3 = 3.1 Mill is the required Nestegg

*************************************************************************************************************

Is that right? Does that accomodate inflation? Can you just go from 4% to 3% to cover an extra 10 years? Or how would you do the calcs? What else should one consider here?

Any insights much appreciated!
This assumes Joe has no social security or equivalent plan. As far as I know, the recommendation is inflation-adjusted.
Last edited by secondopinion on Mon May 22, 2023 3:51 pm, edited 1 time in total.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Wanderingwheelz
Posts: 2366
Joined: Mon Mar 04, 2019 8:52 am

### Re: Need help on the 4% (3%) rule, please

That’s right. The “4% Rule” took into account the inflation of the past.

Nobody knows the future, of course. That said, I think most people here would be comfortable drawing 3% from a balanced portfolio of broad market index funds for a 40 year period.
Topic Author
Bennie
Posts: 280
Joined: Wed Apr 07, 2021 3:46 pm

### Re: Need help on the 4% (3%) rule, please

Thanks so much for the super-fast replies, secondopinion and WanderingWheelz!

soccerrules
Posts: 1101
Joined: Mon Nov 14, 2016 3:01 pm

### Re: Need help on the 4% (3%) rule, please

yes the study behind the "4% rule" is inflation adjusted.
In Joe's scenario-- you would take the \$92K year one and then year 2 would be the \$92K plus the inflation amount. (ie \$92k x 3% inflation= \$2,276), Joe gets \$94,276 in year 2.
mhc
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Location: NoCo

### Re: Need help on the 4% (3%) rule, please

OP,

your thinking is correct, but your tax calculations may be wrong. We don't know the future tax rates. Even with current rates, I think you federal taxes will be less, especially if some of the nest egg is in a Roth or taxable account.
BernardShakey
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Joined: Tue Jun 25, 2019 10:52 pm

### Re: Need help on the 4% (3%) rule, please

Not all of his income is taxed at 22% for federal. He'll have some in the lower brackets. His effective rate will be lower than 22% and he'll have a bit more than 74k to spend.
An important key to investing is having a well-calibrated sense of your future regret.
Irishmist120
Posts: 1
Joined: Mon May 22, 2023 4:04 pm

### Re: Need help on the 4% (3%) rule, please

wingman4uz
Posts: 77
Joined: Sat Aug 06, 2022 2:46 pm

### Re: Need help on the 4% (3%) rule, please

BernardShakey wrote: Mon May 22, 2023 4:06 pm Not all of his income is taxed at 22% for federal. He'll have some in the lower brackets. His effective rate will be lower than 22% and he'll have a bit more than 74k to spend.
+1

Some of this income is taxed at 10 & 12%. It’s not all taxed at the federal marginal rate.
Jack FFR1846
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Location: 26 miles, 385 yards west of Copley Square

### Re: Need help on the 4% (3%) rule, please

You've fallen for the "There's some safe number" fallacy. If your savings is the money you can just pull out and use and your annual expenses never change then it works perfectly. But real life says you have to buy a car now and then and if you have kids, perhaps like me, you make too much money and the private college says "No Aid for YOU" and college cost \$300k. And your house needs a roof and to get painted and hey...on the good side, social security starts at some age. So what I'm saying is that there are lots of big dollar, lumpy, not-every-year expenses.

So what instead? Seeing all these lumpy expenses myself, I put a simple spread sheet together. For every year, I track expenses, income and assets. For the assets, I put a simple percentage gain on each year that's changeable. And no, this isn't a net worth thing so no, the cars and house are not included. What worked well is that every year, I'd add up all the assets and replace the predicted values. Find what my actual income was and put that in. Look at what we spent and put that in. As new things surfaced like my kids grandparents contributing towards college (surprise!), I could add that in. Inheritance (actual, not predicted), add it in. Of course when you take a pension or social security, add it in. I found this far more useful than a single number.
Bogle: Smart Beta is stupid
wingman4uz
Posts: 77
Joined: Sat Aug 06, 2022 2:46 pm

### Re: Need help on the 4% (3%) rule, please

To some extent, those lumpy expenses can be handled using the “rule”. I buy a new car for cash every 10 years, but in my annual budget, I reflect one tenth of the car cost. Same for large household maintenance expenses, I allocate an amount toward a maintenance fund that will cover major, uninsured items.

That being said, there are great free calculators out there that do a more refined analysis. Or, you can develop your own spreadsheet. I do a mix of all of it and feel good because they all largely support the same answer. That’s when you know you’ve got it close enough.
dbr
Posts: 44411
Joined: Sun Mar 04, 2007 8:50 am

### Re: Need help on the 4% (3%) rule, please

Those rules are results of tabulations of past history of the statistical performance of different kinds of assets and inflation. Note this stuff is not a rule but rather a report on tabulations of previous data.

To see examples of this sort of modeling you can see www.firecalc.com or for a visual presentation of results: https://engaging-data.com/visualizing-4-rule/

Be careful about applying simple arithmetic to the kind of methodology that is involved here.

How applicable tabulating past results is to forecasting the future is a discussion. Keep in mind the statistical nature of the problem both helps you understand why that is not a simple issue but also somewhat saves the situation in that presuming a statistical estimate of a range from the past being also an estimate for the future is not as dicey as taking an exact number from the past and expecting the same exact number in the future.

A different sort of statistical approach to this problem could be to run a Monte Carlo simulation model. Some of the fund company models are that and there is one in Portfolio Visualizer: https://www.portfoliovisualizer.com/mon ... simulation

But in any case you have to bring experience and understanding of working with things that are by very nature statistical. That means you are talking about outcomes that are results of random or partially random chance in various degrees.
FactualFran
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Joined: Sat Feb 21, 2015 1:29 pm

### Re: Need help on the 4% (3%) rule, please

Figure 1(a) on the third page of Determining Withdrawal Rates Using Historical Data by William Bengen shows that a portfolio of 50% stocks with the rest in intermediate-term Treasuries would have lasted at least 50 years when using an initial withdrawal rate of 3% for all the starting year for which the author did the calculations.
FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

### Re: Need help on the 4% (3%) rule, please

\$88,000 / 3.5% = \$2.5 million.

That should be plenty, especially due to the assumption of \$0 for social security (unless you know that Joe won't get any SS).
suemarkp
Posts: 1116
Joined: Sun Nov 12, 2017 7:18 pm
Location: Somewhere in WA State

### Re: Need help on the 4% (3%) rule, please

There were multiple Trinity studies where they came up with a % success (meaning not running out of money and increasing your yearly withdraw by the inflation rate) based on various withdraw rates, different asset allocations, and different time durations.

The common chart posted here says that with a 50/50 asset allocation, and a 4% withdraw rate, you have an 86% chance of success for money lasting 40 years, and 95% chance of success lasting 30 years.
With a 3.5% withdraw rate, you have a 98% chance of success for 40 years, and 100% success at 30 years.
A 3.25% withdraw rate give 100% for both 30 years and 40 years and 98% at 50 years.
Mark | Somewhere in WA State
Topic Author
Bennie
Posts: 280
Joined: Wed Apr 07, 2021 3:46 pm

### Re: Need help on the 4% (3%) rule, please

FactualFran wrote: Mon May 22, 2023 7:44 pm Figure 1(a) on the third page of Determining Withdrawal Rates Using Historical Data by William Bengen shows that a portfolio of 50% stocks with the rest in intermediate-term Treasuries would have lasted at least 50 years when using an initial withdrawal rate of 3% for all the starting year for which the author did the calculations.
Thank you so much, FactualFran !

Figure 1(d) shows some scenarios where the money will last for < 20 years. I will read this paper with interest.

Topic Author
Bennie
Posts: 280
Joined: Wed Apr 07, 2021 3:46 pm

### Re: Need help on the 4% (3%) rule, please

So grateful for all the replies.

Still working, so it takes me a while to work through all of those excellent points and references.

Will respond individually as I get to them. Very glad for all this material!!!
FactualFran
Posts: 2340
Joined: Sat Feb 21, 2015 1:29 pm

### Re: Need help on the 4% (3%) rule, please

Bennie wrote: Thu May 25, 2023 10:42 am
FactualFran wrote: Mon May 22, 2023 7:44 pm Figure 1(a) on the third page of Determining Withdrawal Rates Using Historical Data by William Bengen shows that a portfolio of 50% stocks with the rest in intermediate-term Treasuries would have lasted at least 50 years when using an initial withdrawal rate of 3% for all the starting year for which the author did the calculations.
Thank you so much, FactualFran !

Figure 1(d) shows some scenarios where the money will last for < 20 years. I will read this paper with interest.

Figure 1(d) shows the results for an initial withdrawal rate of 6%. Figure 1(b) show the results for an initial withdrawal rate of 4%, where the fewest years the portfolio lasted was 33 for 1966 as the starting year.
GuyInFL
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Joined: Thu Aug 04, 2016 7:17 pm

### Re: Need help on the 4% (3%) rule, please

wingman4uz wrote: Mon May 22, 2023 4:09 pm
BernardShakey wrote: Mon May 22, 2023 4:06 pm Not all of his income is taxed at 22% for federal. He'll have some in the lower brackets. His effective rate will be lower than 22% and he'll have a bit more than 74k to spend.
+1

Some of this income is taxed at 10 & 12%. It’s not all taxed at the federal marginal rate.
92K yields about 79K for a single person.
https://engaging-data.com/tax-brackets/ ... =0&yr=2022
michaeljc70
Posts: 9896
Joined: Thu Oct 15, 2015 3:53 pm

### Re: Need help on the 4% (3%) rule, please

The Trinity Study (where the 4% rule came from) was updated in 2018. There is a chart here: https://www.forbes.com/sites/wadepfau/2 ... ba06d68606

However, using one of the online tools gives you more up to date data, allows you to change your withdrawal rate (like if you spend more when you are older), take into account a big purchase, social security, pensions, test different withdrawal methods, etc. Here are some of them:

https://ficalc.app/
https://cfiresim.com/
https://www.firecalc.com/
CaptainT
Posts: 392
Joined: Tue Feb 15, 2022 7:20 am

### Re: Need help on the 4% (3%) rule, please

First it's less a rule and Morea planning guideline. For some of us having a goal makes it easier. So 25x salary is 30 years and 33.3x salary gets you 40 years. However, life and future planning is not that smooth. You won't always take 4% or 3% maybe you will have a bad stock market and a bad inflation year and cut back on discretionary spending a bit. These are guidelines and if you keep it under 4% or 3% you are likely to outlive your money. That's reassuring for some of us.
Topic Author
Bennie
Posts: 280
Joined: Wed Apr 07, 2021 3:46 pm

### Re: Need help on the 4% (3%) rule, please

michaeljc70 wrote: Fri May 26, 2023 8:28 am The Trinity Study (where the 4% rule came from) was updated in 2018. There is a chart here: https://www.forbes.com/sites/wadepfau/2 ... ba06d68606

However, using one of the online tools gives you more up to date data, allows you to change your withdrawal rate (like if you spend more when you are older), take into account a big purchase, social security, pensions, test different withdrawal methods, etc. Here are some of them:

https://ficalc.app/
https://cfiresim.com/
https://www.firecalc.com/
Awesome! Thanks so much, Michaeljc70!
WoodSpinner
Posts: 3117
Joined: Mon Feb 27, 2017 12:15 pm

### Re: Need help on the 4% (3%) rule, please

CaptainT wrote: Fri May 26, 2023 8:45 am First it's less a rule and Morea planning guideline. For some of us having a goal makes it easier. So 25x salary is 30 years and 33.3x salary gets you 40 years. However, life and future planning is not that smooth. You won't always take 4% or 3% maybe you will have a bad stock market and a bad inflation year and cut back on discretionary spending a bit. These are guidelines and if you keep it under 4% or 3% you are likely to outlive your money. That's reassuring for some of us.
Did you really mean Salary and NOT Cashflow Need (Income - Expense)
CaptainT
Posts: 392
Joined: Tue Feb 15, 2022 7:20 am

### Re: Need help on the 4% (3%) rule, please

WoodSpinner wrote: Fri May 26, 2023 2:46 pm
CaptainT wrote: Fri May 26, 2023 8:45 am First it's less a rule and Morea planning guideline. For some of us having a goal makes it easier. So 25x salary is 30 years and 33.3x salary gets you 40 years. However, life and future planning is not that smooth. You won't always take 4% or 3% maybe you will have a bad stock market and a bad inflation year and cut back on discretionary spending a bit. These are guidelines and if you keep it under 4% or 3% you are likely to outlive your money. That's reassuring for some of us.
Did you really mean Salary and NOT Cashflow Need (Income - Expense)
You are right ,I mean money needed.