I saw a short where an ex-financial advisor called the 4% rule for SWRs “fear based nonsense”. I think this was for a person retiring around 60, not 40. He said 6%, then after 5-10 years, go to 7%. Then eventually 10% once you get to 80 yrs or so. Otherwise all your doing is ensuring you die rich. He also said 90% in the stock market, 10% in a MM fund. Generally speaking, I like him.
This is him: https://www.tylergardner.com/
Thoughts?
The original 4% recommendation was back-tested to survive a worst-case scenario. Since most of us won’t endure a worst-case retirement, the real “safe” figure is endlessly debated.
The author of the linked article assumes an average 7% return on investment. In that scenario, of course you could up the withdrawals safely, but Is 7% a safe assumption? Maybe, maybe not. Most of us will exist in between the worst-case and best-case scenarios, so a sensible strategy may be to start on the cautious side, and reassess that amount as the years go by.
It seems that in most scenarios you either die rich or you run out of money within the first decade. A big part of that is sequence of returns risk. Over a long enough period of time you are going to suffer through a bad market. Whether that is early in your retirement, or later in your retirement, turns out to matter a lot. If a bad year happens 15-20 years into your retirement your balance has grown high enough that it doesn’t matter. If a bad year happens in the first 1-3 years of your retirement, it hits you in the financial gut.
This makes one think you need a balanced portfolio to survive that risk. Assuming you do however, over the long term the balanced approach can make you run out of money late in life.
Best advice I’ve seen on this is to start retirement more-or-less balanced. Drawn down the bonds in the early years. This will naturally move you to a higher equity allocation over time. Bonds early to save you from a very bad market in your first 5-7 year, equities later in life to let you keep paying the bills.
He’s right but it depends on when you retire. If he’s using “averages” , the numbers might support it but they don’t really apply except to paint a picture. Anybody who retires in a 1966 environment or any of the many many almost-1966 environments, you won’t even have 4% to run out the clock let alone 10%.
Maybe. Let too many years go by while you’re being cautious, you’re dead with a lot of money. The inverse; you’re alive and broke. Which is better is probably a personal decision. For me it would be neither. lol.
i started retirement with a 4% withdrawal from a 70% stock portfolio back in 1994. After my portfolio quadrupled in value over the first 3 years of retirement, dropping my spending to 1% of assets, i moved to an allocation of 90% stock or more.
My view is that you should start with 4% from a 60/40 portfolio (even if you’re 60 years old) since you’ll never know up front if you happen to be retiring into a bad sequence of returns. Then, if you later learn that you’re in a favorable market, you can start taking 4% from your new higher account balance, or do as I did and increase your stock allocation while keeping 10 years worth of spending in fixed income (i.e., 90/10 for a 1% withdrawal.)
If you’re 70 with presumably less than a 30-year expected life span, you can take more than 4%. I’d start with a maximum 5% withdrawal at age 70, but I have great respect for sequence of returns risk.
This was all mapped out on the REHP 25 years ago.
intercst
Yes, the 7% withdrawal rate even fooled investment legend Peter Lynch back in 1995.
intercst
From the article:
Just to emphasize my point, I ran a scenario where I retired in the year 2000, right before three straight down years in the market. I assumed the following:
- A 6% annual withdrawal rate An additional 2.5% adjustment for inflation
- A 7% real return on the total stock market
A few problems with this. First problem is that the long term inflation rate is more like 3.5%. But as we know, inflation can run higher than that for long periods of time. So he’s relying a lot on luck, here.
We also know that the stock market be flat for long periods. Both of those things happened in the late 1960s. According to cFIREsim, had he retired in 1966 using his assumptions would have gone bust by about 1980. Worse, he would have had significant decline in lifestyle as his spending failed to keep up with inflation.
So, keep in mind taking his advice might mean you are living on Alpo in your later years.
The thing about the 4% rule is that in most scenarios is that you end up filthy rich at the end of 30 years. So most of the time his advice would probably work. But there are times in the past when it definitely would have failed.
I think the most sensible thing is to do what intercst did. Follow the rule for about 10 years or so. At that point it will become apparent if your portfolio is going to the moon or or not. If it is mooning, you can safely spending more. If it isn’t mooning, hold the course.
He’s right that it’s fear based. He’s wrong that it’s nonsense.
The word fear is loaded. Manly men don’t fear nothin. Man up and take that 7%.
It’s called the safe withdrawal rate for a reason.
I’ve long felt that the 4% rule was better from a planning perspective than from a spending one. This is largely due to the reasons already discussed in this thread. The most important of which is that it was designed around a worst-case scenario rather than a typical one.
That said, if you plan for retirement based on it, you give yourself a great chance of arriving there with enough to both cover your core expenses and to enjoy those golden years a bit as well.
In addition, a lot of people who have been diligent savers their entire careers find it difficult to shift into spending mode in retirement. This can especially be true during rough markets as they watch their nest eggs drop, knowing they no longer have a paycheck to replenish that money. In that sense, the 4% rule can act as a permission slip to spend at least something, based on the knowledge of just how rough a history it has survived.
The retirement aged people in my extended family run the gamut from “still working out of necessity” to “on track to die with more than they had when they retired.” It seems to take all of them several years of adjustment before they truly accept where they are. Often, unfortunately, that acceptance involves a health scare of some sort.
Personally, I’m still working, but with two kids in college, I’m spending beyond my paycheck at the moment. I saved for their colleges via stock funds inside 529 plans. Now that they’re in college, I shifted that money to CD ladders inside those plans. It’s not growing all that much, but the balances should be sufficient to cover the remainder of 4-year programs.
I’m finding it far easier to spend that money knowing that it is there, in a stable form, and sufficient, than I would had it still been in stocks. I plan to take that lesson with me into retirement and make sure to keep spendable money in a more accessible form than stocks.
Regards,
-Chuck
Yep. Like any form of insurance (life, health, home, auto) - the vast majority of people will never “fail” resulting in the need to have the insurance cover any meaningful amount but for those that do, having insurance, or withdrawing only 4% (a form of cash flow insurance), is a substantial way to avoid bankruptcy or otherwise running out of money.
I have that problem.
We have experienced a law of diminishing returns when it comes to spending in retirement. If you travel as much as you want whenever you want, you enjoy buying fresh local food and preparing meals together, you love your modest home in a friendly neighborhood within walking distance of good restaurants and driving distance of good wineries, breweries and cideries, you love to read and can order any book the local library cannot provide, you can splurge on a nice carbon high tech 12 speed mountain bike for grocery shopping, and an ev bike later in life, and you can get to any mountain trail you want with an and crv or Subaru, why not save more than you need and give it away whenever you want?
If I had retired in 1999 with $1M, 60/40, and started and held at 6%, I would now have $281K and have a withdrawal rate of ~40% at $112K
Not sure what point you are trying to make in your reply to me. Your question certainly is not in opposition to anything I stated.
That beats, time-wise, the Guyton-Klinger Guardrails Approach by 6 years. Resetting your initial withdrawal rate in good times is a reasonable approach, but what do you do in down years?
The Guardrails Approach covers both.
It has five rules that define how much one can draw annually:
These adjusted strategies are really just ways, in my opinion, to codify a common-sense approach to retirement withdrawals. But, they all assume you have some leeway in being able to withdraw less during certain down years. The sole advantage of the plain ole’ 4% SWIR is that if you need all that money to live on, you’ll get that same money, adjusted for inflation, every year. But, if you’ve got some discretionary spending in retirement, as I would hope most Fools do, then I feel it’s too restrictive and you’ll end up retiring with a ton of money for your heirs.
Just basic math is that if you have a portfolio that only matches inflation, then the 4% rule will mean your portfolio will last 25 years. Now, the S&P 500 beats inflation, on average, by 6%-7% each year (that’s above inflation returns).
Of course, and as has been mentioned above, the problem is the Squence of Returns risk. And for this, keeping enough cash or bonds in the portfolio is important so that you’re not selling your depreciated assets at their lows, which would mean you have less invested for the eventual recovery. But, I personally feel the 40% bond rule, or anything even half as much, is overly conservative. You might only need 3-5 years worth of withdrawals in bonds or cash to survive almost all bad markets, IMO anyway.
One problem I have with almost all of these strategies is that they typically don’t account for real-world retirement spending. Many retirees spend less as they age. This makes sense - you have less energy so big travel trips are fewer and/or shorter. Kids are adults earning their own way. You don’t take up new home remodeling projects, go skiing, etc. Unfortunately, as Charlie Munger mused about years ago, people who saved for years end up not being able to spend in retirement, at least until it’s physically too late.
I’ve not seen a strategy that accommodates this well. It would seem to go against all the caution that most strategies have. But, at least when you look at the probabilities of running out of money, know that you’ll spend less money at 86 than you did at 66 without it really bothering you, at least if your 66 retirement has some discretionary income.
Probably not true if you’re in some kind of nursing home at age 86.
It’s true that retirees spend less as they age – up until they check into some kind of “facility”.
intercst
True enough, although if you owned your own home, that could be tapped to subsidize, assuming you weren’t planning on leaving it to your heirs.
EDIT: But then again, if you wanted in-home nursing in your old age, you’d want to keep your home. So, yeah, big expense and I guess that’s why some people buy long-term care insurance.
So yeah, getting sick sucks in multiple ways.
That is defined as the Go Go, Slow Go, No Go Strategy.
I don’t think there is a mathematical way to calculate such - or at least not one as simplistic as the 4% Rule.
I’m really starting to appreciate the “permission slip to spend” nature of a bond ladder or a CD ladder. When most bonds mature, they turn into cash, and many CDs can be set up to turn to cash upon maturity as well.
I find that cash is a lot easier to spend than dealing with the headspace drama of trying to figure out what assets are the right ones to sell and also how much rebalancing needs to happen in conjunction with that sale…
Don’t get me wrong — this doesn’t eliminate the need to manage the portfolio, nor does it eliminate risk. It also doesn’t eliminate the need for an emergency fund (in case of a default). But it does a decent job of separating the job of enabling spending from the job of managing the portfolio.
Regards,
-Chuck