A different 4% rule

Investing Strategies Retirement Investing
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I may be the dumbest fool in the room but fwiw… Feel free to try to change my mind. I’m always open to input from adult supervision. :slight_smile:

I apply a different 4% rule to my accounts – an average of 4% in annual distributions from overall holdings (growth, bond, income, DGI).

In addition I have an eye towards some overall growth in that payout as I shift/rebalance from non or low payers when it seems like a good time (took some of my overweight XOM position as it approached a high and put it elsewhere into some beaten down higher/solid yielders).

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I apply a different 4% rule to my accounts – an average of 4% in annual distributions from overall holdings (growth, bond, income, DGI).

The problem is - when accounts decrease in value, the 4% decreases, as compared to the original 4% rule (which is dollar based after the first year) where you would take out the inflation based dollar figure, even if it’s higher than 4% The problem that you will run into with your rule is that when inflation increases and your account value decreases (kind of like 2022 so far), you are going to have significantly less purchasing power by following your rule. If you can cut your expenses that much, it can work, but if, because of inflation, you can’t cut your expenses that much, it won’t work. If it doesn’t work, you’re not going to be able to stick to your 4% rule - you’re going to need to take more than 4%

That’s no different than what you would be doing under the original 4% rule. So I’m not sure that I see what the point is in applying your 4% rule compared to the original 4% rule.

AJ

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re: The problem is - when accounts decrease in value, the 4% decreases.

How so? So long as they don’t cut dividend or distribution my income stays the same (and grows as they increase payouts). The payout as a % of holding goes up – but that’s sort of academic. My automatic reinvestments get made at lower cost.

I’ve been doing this since early 2000’s. I’ve had some along the way reduce or cut dividends/distributions but my total income has continued to increase.

I’m not trading in and out much. I’m buying on autopilot and also buying on sale at times like this.

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re: I’m not sure that I see what the point is in applying your 4% rule compared to the original 4% rule

My backhanded sort of point is that I ignore the 4% SWR rule and all the 1000’s of posts on this board discussing ad nauseum the 4% SWR. Because… drumroll I’m getting 4% payout.

“Don’t touch the principle!”

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My backhanded sort of point is that I ignore the 4% SWR rule and all the 1000’s of posts on this board discussing ad nauseum the 4% SWR. Because… drumroll I’m getting 4% payout.

More power to ya. The point behind the 4% rule isn’t that you get 4%. The point is your inflation-adjusted dollar amount never decreases.

If inflation is 8% and you get 4% payout, you are 4% behind, right? Now do that for five straight years. In this scenario you are eating Alpo pretty quickly. In the traditional 4% rule scenario you maintain your lifestyle the entire time.

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My backhanded sort of point is that I ignore the 4% SWR rule and all the 1000’s of posts on this board discussing ad nauseum the 4% SWR. Because… drumroll I’m getting 4% payout.

That 4% SWR rule comes from the desire to have a fairly constant withdrawal, adjusted for inflation so the purchasing power in constant. Similar to a paycheck.

Your 4% withdrawal rule does not have that feature. Start with a $1,000,000 portfolio. 4% is $40,000/yr or $3,333/mo.

If you have a bad year and the portfolio has a 50% loss, then 4% of $500,000 is only $20,000 or $1,666/mo.

If you have a good year and the portfolio has a 50% gain, then 4% of $1,500,000 is $60,000 or $5,000/mo.

Very few people–especially retired people, are comfortable with an income that jumps around like that.

If you have 2 years in a row where the first year the portfolio gets cut in half, and the next year it doubles, you are back to the original $1,000,000.
But your “income” (withdrawal) jumps from $3,333 to $1,666 and then back to $3,333. Most people wouldn’t like that. It’s hard to maintain a budget with the income jumping around so much. Everybody knows how to budget with a steady, constant income.

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How so? So long as they don’t cut dividend or distribution my income stays the same (and grows as they increase payouts).

Except that’s not how you explained your rule. You said:

an average of 4% in annual distributions from overall holdings (growth, bond, income, DGI)

See that bolded part there - when your investments go down, you don’t get growth, you get shrinkage. Thus, even when everything else (dividends, bond payments, etc.) stays the same, your income based on 4% will decrease, rather than increase. If you’re willing to take a higher percentage out, how do you determine that higher percentage?

I’ve had some along the way reduce or cut dividends/distributions but my total income has continued to increase.

If you are willing to increase your income by some amount that seems to be unspecified by a rule, even if it’s a higher percentage of your portfolio, I still don’t see what the point is in applying your rule vs. the original 4% rule. Seems to me that the original 4% strategy has a set rule to increase your income by, and it’s been backtested for many years. Your strategy doesn’t seem to have a set rule about how to increase your income, and you haven’t shown any backtesting to back up your rule.

If it works for you - that’s obviously your choice. But it doesn’t sound like a strategy I want to bet my portfolio on.

AJ

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Feel free to try to change my mind. I’m always open to input from adult supervision. :slight_smile:

Are you married ? Is money in tax-deferred accounts ? How close are you to RMDs (at whatever age applies at this second) ?

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when your investments go down, you don’t get growth, you get shrinkage.

In portfolio total. And your point is…?
There’s always going to be a Y2K, 2004, 2008, 2020. Those earlier cycles income stayed flat 2020 was the worst where income has pulled back ~10% due to things like REITs suspending distributions – and since recovered and grown. In the other years I’ve seen income grow ~5% on average (DGI choices).

Thus, even when everything else (dividends, bond payments, etc.) stays the same, your income based on 4% will decrease, rather than increase

“wait whut?”
I don’t get income shrinking when stocks go down. That only happens when distributions are reduced.

I don’t much care about the cycling (down) of my growth stocks. They come back. I buy good stocks with a long view. The less I look at my day to day portfolio value – the better I do.
And there’s the rub. Because I’ve got well covered income coming in from that part of my portfolio I don’t have to look at the value in downturns. I bought good growth stocks for long term and I leave them be.

FWIW, I’m not actually managing for a 4% average payout – that was just sort of literary device to hook folks into thinking about a different paradigm. <sort primal scream after years of 4% SWR handwringing threads. aaahhh how do you all live with that sort of stress?>

Me taking notice of a 4% payout number is just how it works out currently. That is increasing as dividends & distributions are increased.
Also in an upcycle as I’m moving from accumulation toward retirement I’m shifting more from growth to income stocks. But selling good growth stocks on down cycles like now is just silly when my income stream is more than sufficient. I’ll take a look sometime later this year.

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Are you married ? Is money in tax-deferred accounts ? How close are you to RMDs (at whatever age applies at this second) ?</>

Yep married 38 years to a much smarter and harder working (and better looking) woman.

Almost all the income producing stuff is in tax deferred accounts. Tax deferred holdings are about 60% of total (other than real estate – have 3 rentals).

Income in taxable accounts is from K-1 stocks. Except for that pesky employer stock that keeps coming in with it’s 2.5% divi.
Turning 62.

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There’s another aspect to this. DGI makes my instructions on death (or dementia) as simple and clear as can be for my wife and heirs.

“Don’t touch the principle. Spend the income – if you’re smart you’ll put what you don’t need onto auto reinvest”

When I imagine trying to explain to my wife how to manage a 4%SWR in the event of my passing… Well let’s just say that’s not good for my mental health or our marriage.

Also I’d hate to saddle any of my kids with managing that for her. And I’d like to condition my heirs to thinking in terms of maintaining and growing principle instead of just blowing all on Dodge Vipers and World Cruises the month after they put me in the ground.

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“Don’t touch the principle. Spend the income – if you’re smart you’ll put what you don’t need onto auto reinvest”

When I imagine trying to explain to my wife how to manage a 4%SWR in the event of my passing… Well let’s just say that’s not good for my mental health or our marriage.

That’s pretty sad. Her income taxes and medicare costs could change significantly. And RMDs need to be understood.

But who knows, maybe she know it’s “principal” and not “principle”. :wink:

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““Don’t touch the principle. Spend the income – if you’re smart you’ll put what you don’t need onto auto reinvest””

once you hit 72 now, the government will decide how much of your IRA/401K you MUST take out each year. By age 75, it is approaching 4% a year.

That is determined by the value on Dec 31 for the coming year. If you look at this year, if you were in all stocks in the index, you’re down by 20% likely, but you MUST take out money based upon that Dec 31 value this year. And pay taxes on it.

Now, maybe you sold stock on Jan 2 and put the money into a MMF to fund the year’s withdrawal. Many for the past couple years likely decided to wait until Dec to sell, seeing that the usual year had stock rises of 11% a year year after year.

Of course, if you had other assets other than stocks in your IRA, you could sell some bonds or REITs and likely not take a 20% decrease. Or if you had SP500 that pays 2% dividend, you could use that for half your yearly withdrawal and if you had some corp bonds paying 3%, or junk bonds paying 5%, you might not be so bad off.

For assets outside an IRA, if you get dividends and interest you’ll be paying income tax on them no matter whether you ‘re-invest them’ or not. You’re choice.

Now another ‘plan’ of withdrawal has always been to take a fixed percentage of total assets each year - about 5%. So your income will rise and fall with the market. Some years more, some less. It’s not ‘inflation’ adjusted. You can do it monthly so if the market is going down, you take LESS. If the market and your portfolio is down 20 or 50%, you TAKE 20 OR 50% LESS.

that, as opposed to 4% inflation adjusted from the day/year you retire.

Of course, once you hit now 72, Uncle Sam will make you take over 3% annually from tax deferred savings, and by age 80, up to 5%. 10% by age 90 should you live that long.

your options

https://money.usnews.com/money/retirement/articles/retiremen…

t.

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I don’t get income shrinking when stocks go down. That only happens when distributions are reduced.

Then you didn’t explain your rule correctly. It can’t just be 4% annually of your total portfolio if your income it doesn’t go down when your portfolio drops. And yet, this was your ‘rule’:

an average of 4% in annual distributions from overall holdings

How does distributing 4% annually from overall holdings not mean that you are taking a 4% distribution?

AJ

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Almost all the income producing stuff is in tax deferred accounts. Tax deferred holdings are about 60% of total

You seem to be setting up the survivor after one of you dies for significantly higher taxes, especially after RMDs hit. RMDs from that 60% will not change significantly, so the survivor will have similar income. Yet, their standard deduction (and exemption beginning in 2026 under current law) that will be about half, and they will be taxed at single rates. For those who are in or below the current 24% bracket, that generally results in approximately double the tax bill when than when they were filing MFJ. For those in a 32% or higher bracket, there will likely still be a significant increase.

Income in taxable accounts is from K-1 stocks.

Let’s see - you don’t feel your wife can understand anything beyond “Don’t spend the principle(sic)” and yet, you’re planning on leaving her with MLPs for a significant part of her income. What could possibly go wrong?

AJ

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I’d like to condition my heirs to thinking in terms of maintaining and growing principle instead of just blowing all on Dodge Vipers and World Cruises the month after they put me in the ground.

Don’t forget - those tax deferred accounts must be completely emptied within 10 years of being inherited by a non-spouse. Again, likely to be a significant tax bill for your heirs. Unless they have significant other assets that they are willing to spend on taxes in order to not spend your principle(sic), they’re probably going to have to spend some of it.

AJ

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But who knows, maybe she know it’s “principal” and not “principle”. :wink:

Now I’m really glad I started this thread. Something of real substance.

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“Don’t touch the principle. Spend the income – if you’re smart you’ll put what you don’t need onto auto reinvest”

When I imagine trying to explain to my wife how to manage a 4%SWR in the event of my passing… Well let’s just say that’s not good for my mental health or our marriage.

That seems really condescending re your wife. And she should know EXACTLY how everything is handled in case you die or become incapacitated.

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So, it’s really not a 4% thing. You’re just living off your dividends, correct?

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So, it’s really not a 4% thing. You’re just living off your dividends, correct?

Miss Edith gets it. Leave to a southern lady to cut thru the smoke. LOL :slight_smile: And I betcha she got the joke right up front. /heh/

Saving countless hours obsessing, fretting and reading&posting to endless threads on a forum about the apparently impossibly difficult to understand and apply 4% SWR rules.

I wonder how much hard drive space in the Fool’s forums data center is dedicated to “4% SWR”?