4% rule

[swayswift]

I was trying this for me (47 years) and always hear before retirement age for FIRE, 4% is too aggressive. When I added social security to the income assuming it lands at 62 even with a 4.7% 50 year withdrawal rate I see 95% success. Thats huge ! What am I missing ? So counting social security (which is a pretty safe bet as you get closer to 62) the SWR seems way above 4% then. Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it). Why the fuss about 3, 3.5 or heck even 2% SWRs. I feel if things have to fail as future is not guarantee of past, one could die tomorrow or we could be a great depression or some other massive event, its futile to plan and waste life thinking about those.

https://ficalc.app?additionalIncome=%5B ... tantDollar

[typical.investor]

I was trying this for me (47 years) and always hear before retirement age for FIRE, 4% is too aggressive. When I added social security to the income assuming it lands at 62 even with a 4.7% 50 year withdrawal rate I see 95% success. Thats huge ! What am I missing ? So counting social security (which is a pretty safe bet as you get closer to 62) the SWR seems way above 4% then. Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it). Why the fuss about 3, 3.5 or heck even 2% SWRs. I feel if things have to fail as future is not guarantee of past, one could die tomorrow or we could be a great depression or some other massive event, its futile to plan and waste life thinking about those.

https://ficalc.app?additionalIncome=%5B ... tantDollar

Wow, it seems pretty optimistic to me.

I typically plan with the worst three or four or so years coming at the beginning of the portfolio (sequence of return risk). I also like the ability to test what happens if inflation runs hotter (than the 3% it assumes).

This calculator doesn't have those options.

[3dbruce]

The "normal" safe withdrawal rates of 3% or 4% are calculated without any additional sources of income, so the assumption is that all withdrawals come from your portfolio. If you have additional sources of income like social security, you can of course increase your withdrawal amount so the percentage values with respect to your portfolio will be much higher in this case.

That does not mean that the "normal" withdrawal rates are calculated too conservatively, it is simply a different kind of calculation.

[NearlyRetired]

Take a look a Ben's TPW calculator for a more sophisticated way of looking at future planned expenses and income.

The thread here explains in far better detail than I ever could.

[loukycpa]

The 4% guideline is based on inflation adjusted, but otherwise level/flat withdrawals from a portfolio for a standard 30 year retirement period. You are correct obviously that supplemental cash flows such as social security that come into play somewhere down the road, reducing your reliance on the portfolio, should allow you to increase your withdrawal rate a bit.

You aren't missing anything, but it can be tricky to figure out how much of a bump you should count on from this. A lot of variables and assumptions. How much social security you will be entitled to, how far into your withdrawal phase you will be when you can start your benefits, how future changes to the program might impact you, etc.

The increase in your SWD will probably not be as much as you might anticipate because you are most vulnerable to sequence of return risk in the early years of your withdrawal phase, when you are completely reliant on your portfolio to support your spending.

[RadAudit]

The "normal" safe withdrawal rates of 3% or 4% are calculated without any additional sources of income, so the assumption is that all withdrawals come from your portfolio. If you have additional sources of income like social security, you can of course increase your withdrawal amount so the percentage values with respect to your portfolio will be much higher in this case.

That does not mean that the "normal" withdrawal rates are calculated too conservatively, it is simply a different kind of calculation.

+1, I hope.

I have a few additional streams of income - SS, pensions. I've come around to spending from those streams and supplementing from the RMDs as necessary. Anything leftover is reinvested in taxable. So far, it seems to be working. Guess we'll find out at some point in time.

[3dbruce]

You aren't missing anything, but it can be tricky to figure out how much of a bump you should count on from this. A lot of variables and assumptions. How much social security you will be entitled to, how far into your withdrawal phase you will be when you can start your benefits, how future changes to the program might impact you, etc.

The increase in your SWD will probably not be as much as you might anticipate because you are most vulnerable to sequence of return risk in the early years of your withdrawal phase, when you are completely reliant on your portfolio to support your spending.

I've actually developed my own tool to better understand the impact of additional cashflows on withdrawal rates, because I wanted to understand my own situation as good as possible before pulling the plug and I was not really satisfied with the other tools I could find (at the time).

You can find it here if you want to give it a try (but it's still in beta so don't bet your life on the results yet )

[JohnM]

BigErn at EarlyRetirementNow did a post about this in is SWR series and has a Google Sheet available that will incorporate additional cash flows in or out. You can plug in expected SS, pensions, etc. and it calculates what he calls a "consumption rate" which includes withdrawals from retirement accounts plus the additional cash flow. I have used it to estimate my withdrawal percentage between retirement and SS beginning (which will be a little higher than after SS begins).

[David Jay]

The 4% guideline is based on inflation adjusted, but otherwise level/flat withdrawals from a portfolio for a standard 30 year retirement period. You are correct obviously that supplemental cash flows such as social security that come into play somewhere down the road, reducing your reliance on the portfolio, should allow you to increase your withdrawal rate a bit.

As an extreme example, I will withdraw nearly 10% of my portfolio next year, but I am 2 years from claiming Social Security, at which time my withdrawal rate will drop below 1%.

[3dbruce]

BigErn at EarlyRetirementNow did a post about this in is SWR series and has a Google Sheet available that will incorporate additional cash flows in or out. You can plug in expected SS, pensions, etc. and it calculates what he calls a "consumption rate" which includes withdrawals from retirement accounts plus the additional cash flow.

BigERNs Google Sheet is a great tool. It has one internal flaw, though: It translates cashflows which are not inflation adjusted into real cashflows using a constant inflation rate. This practically ignores the sequence-of-inflation risk which affects withdrawal rates similarly as the sequence-of-return-risk. So, in case you add significant company pensions there (which are usually not inflation adjusted) BigERNs sheet will show you withdrawal rates that are too optimistic. If you don't have those or if those are relatively small, its results will be very precise, though.

[Random Musings]

The 4% guideline is based on inflation adjusted, but otherwise level/flat withdrawals from a portfolio for a standard 30 year retirement period. You are correct obviously that supplemental cash flows such as social security that come into play somewhere down the road, reducing your reliance on the portfolio, should allow you to increase your withdrawal rate a bit.

As an extreme example, I will withdraw nearly 10% of my portfolio next year, but I am 2 years from claiming Social Security, at which time my withdrawal rate will drop below 1%.

This. There is no 4% "rule". It's just an approximation of what has tended to work historically and doesn't assume any financial outliers including early retirements. It is not a rigid number as fluidity has to be considered in most people's financial situations. And many people have zero or no material retirement savings to begin with, so the 4% "rule" doesn't even apply, which is unfortunate.

RM

[skime]

I was trying this for me (47 years) and always hear before retirement age for FIRE, 4% is too aggressive. When I added social security to the income assuming it lands at 62 even with a 4.7% 50 year withdrawal rate I see 95% success. Thats huge ! What am I missing ? So counting social security (which is a pretty safe bet as you get closer to 62) the SWR seems way above 4% then. Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it). Why the fuss about 3, 3.5 or heck even 2% SWRs. I feel if things have to fail as future is not guarantee of past, one could die tomorrow or we could be a great depression or some other massive event, its futile to plan and waste life thinking about those.

https://ficalc.app?additionalIncome=%5B ... tantDollar

Why 2 or 3%? 133% debt/GDP.

[skime]

I was trying this for me (47 years) and always hear before retirement age for FIRE, 4% is too aggressive. When I added social security to the income assuming it lands at 62 even with a 4.7% 50 year withdrawal rate I see 95% success. Thats huge ! What am I missing ? So counting social security (which is a pretty safe bet as you get closer to 62) the SWR seems way above 4% then. Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it). Why the fuss about 3, 3.5 or heck even 2% SWRs. I feel if things have to fail as future is not guarantee of past, one could die tomorrow or we could be a great depression or some other massive event, its futile to plan and waste life thinking about those.

https://ficalc.app?additionalIncome=%5B ... tantDollar

Why 2 or 3%? 133% debt/GDP.

[Exchme]

I was trying this for me (47 years) and always hear before retirement age for FIRE, 4% is too aggressive. When I added social security to the income assuming it lands at 62 even with a 4.7% 50 year withdrawal rate I see 95% success. Thats huge ! What am I missing ? So counting social security (which is a pretty safe bet as you get closer to 62) the SWR seems way above 4% then. Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it).

This kind of tool is not accounting for taxes, so beware, that's inherently too optimistic, particularly if you have a substantial balance in a tax deferred account (IRA, 401k, 403b). Also make sure you have a really good handle on spending, including the "once in a while" things like roofs, cars, remodeling, carpet, air conditioners, etc. Also, while you didn't mention health care, I would consider a plan extremely risky if you happened to be counting on ACA subsidies for the better part of two decades. While we can't discuss potential changes in the law, I recommend a risk assessment to make sure you are comfortable if that subsidy went away.

The data on spending vs. age show a decline, followed by an increase as old folks eventually need help and may have to start paying for things they used to do for themselves and eventually may need full time care, which is frightfully expensive. I've seen the spending curve described as a "smile", down at first, and then back up if you live long enough to need help.

[swayswift]

Exhme, if you are talking about LTC costs I think there is no end to it. You can have millions and still not know if its enough ( so even 1% SWR might be too much !), also you could argue that you save everything else if you reach LTC anyways and at some point what's the point of life This thread to me was good on this topic. The smile curve that you mention might not be true as per the expenditure data from BLS, sure its avg and if you are in the unlucky percent that needs care costing millions I would argue its better to enjoy a dollar now than live till 100 on bed for 10 years with LTC.
viewtopic.php?t=358796

[heyyou]

FI Calc is a calculator that evaluates retirement plans using historical data. To get started, change the Retirement Plan to see how it affects the Results.
https://ficalc.app/?additionalIncome

[Jack FFR1846]

Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it).

4% is considering "retirement spending", not the spending you're doing now with likely extremely low cost health cost. DW and I retired in June and our spending is 50% more than when we were working. Health cost is currently 5 times what it was when working. Developing an accurate list of "retirement spending" takes time and research. Taking some random percentage of working spending doesn't work.

The Trinity Study 4% rule in my opinion is a good gauge of "Am I close to being able to retire?". To know for sure, I would suggest putting together a simple spread sheet with each year documenting assets, income, spending and a percentage for growth of assets going forward. With this, you can add in leaving a job, paying for college, buying a new car in the years applicable. Much more accurate and you can watch future years and what you have. It can answer, can I retire in that year right there? Let's end the wages and increase health care cost. Yes? Great. No? Ok, maybe we need to work 2 more years from then.

[marcopolo]

I was trying this for me (47 years) and always hear before retirement age for FIRE, 4% is too aggressive. When I added social security to the income assuming it lands at 62 even with a 4.7% 50 year withdrawal rate I see 95% success. Thats huge ! What am I missing ? So counting social security (which is a pretty safe bet as you get closer to 62) the SWR seems way above 4% then. Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it). Why the fuss about 3, 3.5 or heck even 2% SWRs. I feel if things have to fail as future is not guarantee of past, one could die tomorrow or we could be a great depression or some other massive event, its futile to plan and waste life thinking about those.

https://ficalc.app?additionalIncome=%5B ... tantDollar

I am not sure why you are surprised.

The 4% SWR studies have absolutely nothing to do with what you spend. Your spending includes sources of income like Soc Sec, pensions, etc, and varies over various stages of life. Every individual has a different spending profile.

The studies only consider how much can be withdrawn from your portfolio to help (partially) support your spending needs. In particular, it looks at what constant, inflation adjusted amount can be withdrawn from a portfolio over a certain time period.

It is independent of you other sources of income and your spending profile.

[Ocean77]

If I click that link and uncheck the extra income (SS) box, then the success rate drops to 52%. So much for that 4.7% withdrawal rate.

With the "right" combination of portfolio size, SS income and retirement age, one can generate any desired rate. Example:
Portfolio: $25,000
Social Security income: $25,000, starting at day 1
Safe Rate: 100%

[marcopolo]

Also this does not account for fact that 80+ years spend way way less than when they are 50-70 (this is what data says so no doubt about it).

4% is considering "retirement spending", not the spending you're doing now with likely extremely low cost health cost. DW and I retired in June and our spending is 50% more than when we were working. Health cost is currently 5 times what it was when working. Developing an accurate list of "retirement spending" takes time and research. Taking some random percentage of working spending doesn't work.

The Trinity Study 4% rule in my opinion is a good gauge of "Am I close to being able to retire?". To know for sure, I would suggest putting together a simple spread sheet with each year documenting assets, income, spending and a percentage for growth of assets going forward. With this, you can add in leaving a job, paying for college, buying a new car in the years applicable. Much more accurate and you can watch future years and what you have. It can answer, can I retire in that year right there? Let's end the wages and increase health care cost. Yes? Great. No? Ok, maybe we need to work 2 more years from then.

This is false.

4% rule has nothing to do with spending.
It has to do with portfolio withdrawals.

There can be other sources of income, or there may be an excess.

[Thesaints]

What am I missing ?

"Missing", perhaps that the 4% figure is not a rule, but backtesting data showing that one can almost always withdraw that much without depleting their capital for at least 30 years.
That means one could be left with $0.50 on year 31 and it would be counted as a success (and just imagine the feelings when on year 29 almost everything has been spent.

More importantly, you are confusing things by adding social security payments. Those never end, so success rate is always 100%