How do you apply this during market drawdowns?
Just curious….
"How do you apply this during market drawdowns?
Just curious…. "
The 4% 'rule" is simply a guideline - and once in retirement the idea of the “rule” goes by the
wayside.
In retirement, I ask myself “What do you need?”
Then I look at our accounts and decide what is available for use - mainly trying to adjust
what is in our “cash equivalent” accounts.
We are not yet at the age of RMD from retirement accounts so at the end of the year we adjust
withdrawals to meet our projected needs - basically what was sufficient last year plus an
“allowance” for inflation and added planned expenses. This year we are renovating our house to
make it suitable for handicapped access - DW has mobility problems we are attempting to help.
So we are pulling more from our taxable accounts to cover rebuilding our emergency fund as well as
cover rental costs while we will be out of the house. Our approach is still below the annual
dividends generated by the taxable account portfolio.
Next year we will base the adjustment on how the emergency fund is rebuilt - basically sufficient
to cover things that have gone “south” in the home in the past - repairs/ appliance replacement/
taxes / auto repairs or replacement/ medical issues/ family needs.
When problems occur you have to ask yourself - can I let this go another year? If not what can
you do?
Howie52
The phrase “you can’t get blood out of a turnip” is quite true. If the family has a “need”, I would
pull more than 4% out of our investments. If the family has a “want”, then we have to talk and plan
and schedule. Life at times decides what a person can do. You may not be happy and you may
wish you had done something different - but you make a decision and live with what the future
brings.
I think the financial term is “risk”.
6 Likes
darrellquock asks,
How do you apply this during market drawdowns?
Just curious….
You take 4% of the initial starting balance when you retired (even years ago) and then adjust for inflation since then.
Historically, 4% worked both in the stock market crash of 1929 and during the high inflation of the late 70’s and early 1980’s.
Of course, most will reflexively cut back during a market downturn and take less – that just means that there’s an even greater possibility that they’ll end the 30 year pay out period with more money than they can spend.
Some one who retired when I did in 1994, holding a 60/40 stock portfolio, would have over 5 times his initial starting balance today. Note that’s “5 times his initial starting balance” after 28 years of 4% inflation-adjusted annual retirement withdrawals, and 50% stock market declines in 2000 and 2008. Pretty amazing.
https://retireearlyhomepage.com/reallife22.html
intercst
17 Likes
Has anyone come up with a portfolio in Firecalc that gets no failures with 4% withdrawal?
I get 4 or more cycles failed, no matter what combo of stocks and bonds I use.
1 Like
Let’s face it. The “4% rule/guideline whatever” is essentially a rounded off number. 3.3% or 3.5% I think, is the absolute historically safe number but “4%” is 95% or 96% safe, is easily understood, and doesn’t dash people’s hopes of early retirement the way saying “The 3% rule” does. FOUR vs THREE was sort of a “sales gimmick” to the extent anybody was “Selling” anything. Like something selling for $10,000.00 seems more expensive than the same thing selling for $9,998.99
4 Likes
The 4% “rule” doesn’t tell you anything about the future. Or the present.
It’s what would have been the 95% portfolio survival rate IN THE PAST.
For sure, the (long term) future is probably going to behave pretty much like the past, but it is not guaranteed.
Anyway, to the original question…
the 4% rule takes into account bear markets as well as bull markets, so there is no need to reduce your withdrawals in a market downturn.
5 Likes
This might be one of those “quirky times” where those retiring on May 15th 2022, say, will have to take less as a starting “4% rule” retirement withdrawal than those retiring on Dec 31, 2021. Yet both had the exact same portfolio on Dec 31, 2021.
Yeah, I get it that people adjust and it’s a rare person, if anyone, who will blindly follow a 4% or 3% “rule”. I’m just pointing out WHY people adjust…because the so-called “rule” has this one big quirk, last seen with the year end 2008 retirees vs the year end 2007 retirees.
4 Likes
Yeah, I get it that people adjust and it’s a rare person, if anyone, who will blindly follow a 4% or 3% “rule”. I’m just pointing out WHY people adjust…because the so-called “rule” has this one big quirk, last seen with the year end 2008 retirees vs the year end 2007 retirees.
There are rules and then there are rules. To me the 4% rule is a useful RULE OF THUMB, nothing more.
2 Likes
We’ve been retired for almost 18 years and never used any “rule”. The MWR thing is a PITA now, but we manage.
We have Social Security income and a little beyond and so just fine. However, we don’t smoke or drink (almost nil), never go to bars, rarely go to a show or movie, and tend to live quietly.
A lot depends on YOUR lifestyle.
Vermonter
3 Likes
The traditional TMF advice is to keep five years of living expenses in a laddered maturity bond portfolio. In normal times you are supposed to sell 4% of you investment assets each year to replace the maturing 5 yr bond. Then you live off the interest from the bonds and the maturing bond.
Worst case is to be forced to sell assets in a down market to cover living expenses. So in down market you live off the bonds but defer replacing them until market recovers.
Most declines recover in 3 yrs. Five years gives a margin of safety.
Some use dividend stocks as an alternative especially when interest rates are low.
And note that 4% gives the minimum value of your investments needed to retire. Many do better than the minimum and live well on much less than 4%. Its only a guide. Not cast in concrete.
2 Likes
Reply to just above. “Most declines recover in 3 years”. Unless you retire in 1966 or 1929.
Yes, three years assumes a well diversified portfolio not heavily loaded in speculative high fliers.
Thankfully,I did not retire either in 1929 or 1966, so I’m totally safe.
Jk
5 Likes
Most people have a buffer so they can adjust things but except for those with a hefty pension a big drop is tough to deal with. $40K (4%) on a $1M portfolio. If that were to drop to $800K just prior to retirement (20% drop) then you are talking about $32K. $8K drop in an inflationary environment right now could be tough on a lot of people.
I know I might retire late this year and get my pension but also get a contracting position for maybe 6-12 months and see how the stock market is doing. I have a buffer but I’d rather not use a chunk of it in year 1, especially since it is easier to work now, rather than quit a couple of years and have to find a job down the road. I don’t think it would be necessary but I’ve seen a lot of unexpected things the last few years.
I have some money in a couple of MYGAs to cover my expenses for probably the first 4 years but expecting a quick recovery because that is how things have gone recently doesn’t mean everything will be fine. Fortunately we aren’t big spenders so we could cut back on unnecessary stuff like eating out frequently.
Rich
How do you apply this during market drawdowns?
Just curious….
You apply the 4% rule the same way as you would when the market is going up!
I never understood why the 4% Rule is referred to as a Save Withdrawal Rate (SWR) as it defines a rate at which your consumption can exceed your dividend, interest, pensions, Social Security, and other “guaranteed” sources of income without depleting your portfolio in 30 years.
I didn’t retire until I was 68 and started RMD withdrawals a little over a year later. I paid no attention to the 4% Rule. So far, I haven’t used any of my RMD withdrawals for consumption other than Qualified Charitable Distribution (QCD) and annual gifts to my three children during the last two years.
This might be one of those “quirky times” where those retiring on May 15th 2022, say, will have to take less as a starting “4% rule” retirement withdrawal than those retiring on Dec 31, 2021. Yet both had the exact same portfolio on Dec 31, 2021.
Yeah, I get it that people adjust and it’s a rare person, if anyone, who will blindly follow a 4% or 3% “rule”. I’m just pointing out WHY people adjust…because the so-called “rule” has this one big quirk, last seen with the year end 2008 retirees vs the year end 2007 retirees.
A person can reset their starting 4% withdrawal at any time. If the May 15, 2022 retiree’s account recovers its losses and then has several years of good growth, the retiree could adjust their withdrawal to 4% of the total assets and then start adjusting for CPI for each succeeding year.
PSU
8 Likes
A person can reset their starting 4% withdrawal at any time. If the May 15, 2022 retiree’s account recovers its losses and then has several years of good growth, the retiree could adjust their withdrawal to 4% of the total assets and then start adjusting for CPI for each succeeding year.
PSU
Very true, although that doesn’t change the quirkiness. What you are REALLY saying is that the May 15, 2022 retiree could pretend that he retired 5 months earlier and take 4% of that and his safety will be no less than the actual guy who did retire 12/31/21. It’s quirky. And as I said before, I totally get it that the quirkiness gets worked out in the real world. It’s unlikely that someone who retired just before the 1929 crash didn’t adjust spending way down before things got a lot better years later.
1 Like
“Very true, although that doesn’t change the quirkiness. What you are REALLY saying is that the May 15, 2022 retiree could pretend that he retired 5 months earlier and take 4% of that and his safety will be no less than the actual guy who did retire 12/31/21. It’s quirky. And as I said before, I totally get it that the quirkiness gets worked out in the real world. It’s unlikely that someone who retired just before the 1929 crash didn’t adjust spending way down before things got a lot better years later.”
the 4% rule was based upon ANNUAL rebalancing of the portfolio.
If you were 60/40 and the crash of 1929 happened, in 1930 you would move money from bonds to stocks to retain a 60/40 allocation.
The market dropped to lowest point in 1932 I believe then slowly rose over 13 years - till 1945 or so to get back to its high in 1929.
Of course, 1929 saw rampant speculation, P/E ratios in the hundreds, etc…sort of like 2019 and 2020 with stocks run up 50% or more for no real reason other than speculation.
t.
2 Likes
I never understood why the 4% Rule is referred to as a Save Withdrawal Rate (SWR)
Hey McCrockett. I could be wrong but I think it’s referred to as Safe Withdrawal Rate.
Regards,
ImAGolfer
6 Likes
I never understood why the 4% Rule is referred to as a Save Withdrawal Rate (SWR)
Hey McCrockett. I could be wrong but I think it’s referred to as Safe Withdrawal Rate.
Dang! I hate it when I don’t notice that I hit an adjacent key to the one I intended.
1 Like