“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.”
Once you hit SS age…or wait till 70…
Once you hit 72 now and have to start RMDs
If you get a pension…that amount is determined…
A lot of your income will be determined by the ‘rules’ the government set up.
then you look to savings for additional income…
If most of your portfolio is in an IRA, it starts at about 3.5% RMD each year…and ratchets up year after year.
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.
It’s hard to get simpler than the 4% SWR strategy.
Setup:
Step 1: Invest all your assets in self-balancing 60/40 index fund like the Vanguard LifeStrategy Moderate Growth Fund.
Step 2: On your first day of retirement, take out 4% of your assets and live on that for a year.
Each year:
Step 1: Look up the annual inflation rate for the past year.
Step 2: Look in your records for the amount you withdrew a year ago and multiply by the inflation rate. This is your new withdrawal amount.
Step 3: Withdraw this new amount and live on that for a year.
Rinse and repeat. Takes a few minutes a year.
Your spend-the-dividends strategy is maybe a bit simpler as long as you put all your money in a single investment and never change it. Your posts suggest you actively manage your income producing investments. How many investment decisions do you make in a year and how much time do you spend researching them?
I wonder how much hard drive space in the Fool’s forums data center is dedicated to “4% SWR”?
And how much additional space did you add to that count by claiming you had a ‘different 4% rule’ that wasn’t really a 4% rule, but an income harvesting strategy?
If your income harvesting strategy works for you, that’s great. As already pointed out, you are setting yourself and your heirs up for some significant tax issues that you seem to want to ignore. But you apparently don’t want to discuss that.
“It’s hard to get simpler than the 4% SWR strategy.”
Oh really?
First and foremost, you have to consider the mix of ‘tax deferred’ and regular savings.
You can’t easily touch your tax deferred savings (unless you know about SEPP) until age 70 or maybe even want to.
The 4% rule is based upon a mixed portfolio - but who is going to have ALL their money in one fund?
Once you reach SS age, your SS payments can provide a good chunk of your income.
Once you reach age 70, your RMDs will provide a good chunk of your income (starting at 3.5% of deferred value).
Then, you might really wish to read up on Scott Burn’s Spend to the End and consumption smoothing.
"Rich or poor, young or old, high school or college grad, this book, written by economist Laurence J. Kotlikoff and syndicated financial columnist Scott Burns, can change your life for the better! If you follow the advice in this book, it will raise your living standard (possibly by a lot), improve your lifestyle, and help you spend 'til the end. And it will completely transform your financial thinking, turning every bit of conventional financial wisdom on its head.
Spend 'Til the End substitutes economic wisdom for the “rules of dumb” that currently pass for financial advice. … The result is that most people are scrimping and saving during the years when they could be spending and enjoying their money – and with no sure payoff."
claiming you had a ‘different 4% rule’ that wasn’t really a 4% rule, but an income harvesting strategy?
If your income harvesting strategy works for you, that’s great.
It also isn’t actually a 4% income harvesting strategy. The S&P500 currently yields 1.38%. BND (Total Bond Market Index Fund) yields 3.06%. The blended 60/40 yield is 2.05%. Far cry from 4%.
To get up to 4% you’d have to bring in a number of dividend paying stocks/ETFs. That becomes a lot more work, now you have to do a bunch of active management.
It also has the problem that your withdrawal/income will vary considerably from one year to the next. Not a comfortable situation for a retiree who is living off their portfolio.
As was previously mentioned, the 4% SWR rule is simple. If you think it is complicated then you just don’t understand it.
The 4% rule is based upon a mixed portfolio - but who is going to have ALL their money in one fund?
Um, anyone who wants low-effort, simple & easy? Anyone who doesn’t want to spend a significant effort on managing their investments. That is, MOST PEOPLE. Most people aren’t like us folks who haunt TMF and other investing sites.
Scott Burn’s Spend to the End
O…M…G…
Spend 'Til the End substitutes economic wisdom for the “rules of dumb” that currently pass for financial advice.
Simple?!
“advice on whether to work, how to pick a career, which job to take, where to live, what sort of house to buy, how much to save, when to retire, which kind of retirement account to use, whether to have kids, whether to divorce, when to take Social Security, how fast to spend down your assets in retirement, and how to invest.”
A 336 page book telling them how to live their life, advice on career, marriage/divorce, kids, house. Better read it in your 20’s, because when you are at or nearing retirement all that advice is much too late.
Step 1: Invest all your assets in self-balancing 60/40 index fund like the Vanguard LifeStrategy Moderate Growth Fund.
You must be assuming that everyone only has investments inside a tax-sheltered account. Otherwise, self-balancing accounts can create nasty tax surprises:
1poorlady didn’t really want to know, but once I thought I had a glioma she allowed me to show her everything. Once it was removed and declared benign, she isn’t interested again. It’s not that she can’t understand, just that she prefers to worry about other things.
I’m only interested because I have to be. Both to know our status, and plan for FIRE.
To the extent I understand “your rule”, which seems similar to conversations had around my house the pitfall is in asset allocation. IF you start with a portfolio set to spinoff 4% income, the longer term average return of that portfolio will be substantially lower than the typical portfolio used to determine the 4% SWR. That is why many are talking about your income collapsing with inflation. Attempts to preserve principle and only spend income will push you toward investments with overall lower long term returns.
A $1M principle today, isn’t as valuable as $1M 10 years from now. You can preserve the principle and you will be falling backward.
As an aside, I discovered Schwab has an online tool that looks at your assets, and projected spending, and will determine the range of your long term outcomes.
Alan
You can’t easily touch your tax deferred savings (unless you know about SEPP) until age 70 or maybe even want to.
Wow, tele - you really don’t understand taxes, and continue to demonstrate that lack of understanding in post after post.
Tax deferred savings are easily accessible without having to use SEPP or pay penalties starting:
when you leave your employer in or after the year you turn 55 for that employer’s savings plans like 401(k)s or 403(b)s
at 59 1/2 for IRAs (Roth, Traditional, Simple, SEP, etc.) and employer plans where you left the employer before the year you turned 55
at 65 for HSAs being used for non-medical expenses
at any age for Roth IRAs where you are just withdrawing original contributions or conversions from at least 5 years prior
All of those timeframes are well before age 70.
The 4% rule is based upon a mixed portfolio - but who is going to have ALL their money in one fund?
Nothing says it needs to be in a single fund, a single account or even at a single broker. Where did you get this idea? There’s no reason that you can’t have a ‘mixed portfolio’ by having bonds and stocks in one or more accounts at multiple brokerages. And nowadays, there’s a lot of aggregation software, both stand-alone and at brokerages, that allow you to track your overall portfolio allocation.
Once you reach age 70, your RMDs will provide a good chunk of your income (starting at 3.5% of deferred value).
Nope. The RMD age was increased to 72 for anyone born after June 30, 1949 with the passage of the SECURE Act in 2019. And the proposed SECURE Act 2.0 will increase the age to 75 if it passes. Not to mention, the age used to be 70 1/2, not 70.
AJ:“Wow, that sounds like a ‘mixed portfolio’. How do you do that without having it all in one account?”
Simple. Vanguard. Couch Potato Portfolio
comparison Couch Potato vs SP500
Once a year, rebalance in your IRA.
I left work at 52.5. Had no choice but to roll my 401K over to an IRA. Plus 401K had 5x higher fees than Vanguard index funds.
I had to take RMDs at 70 1/2…and that was the year I turned 70 since I was born in June. So do millions of baby boomers - the first part of the wave.
Luckily, insurance premiums for health hadn’t gone through the roof. Very reasonable first 10-12 years, getting more expensive as I approached 65. Then Medicare
If you start tapping your 401Ks and IRAs in your mid to late 50s, your looking at 35-50 0 year withdrawal periods.
Then why did you ask who was going to have ALL their money in one fund in order to have a ‘mixed portfolio’ so they could use the 4% SWR rules?
I had to take RMDs at 70 1/2…and that was the year I turned 70 since I was born in June. So do millions of baby boomers - the first part of the wave.
Except that, as already mentioned, that law changed in 2019. Only those who were born on or before June 30, 1949 had to start taking RMDs at 70 1/2. Since the baby boom started in 1946, at most, it’s those who were born in just the first 3 1/2 years out of the 19 year (1946 - 1964) baby boom. The vast majority of boomers won’t have to take RMDs until 72 - or possibly later if the SECURE Act 2.0 becomes law.
If you start tapping your 401Ks and IRAs in your mid to late 50s, your looking at 35-50 0 year withdrawal periods.
So? 401(k)s and IRAs just some of the different types of accounts that can be in your overall portfolio. No matter what type of accounts you have in your portfolio, if you retire in your mid to late 50s, you probably need to be planning on drawing down your entire portfolio over the same 35 - 50 years. In order to draw your portfolio down in the most tax efficient manner over a lifetime, you need to consider the tax consequences from each account type over your lifetime - not look at them as isolated from each other.
- at 65 for HSAs being used for non-medical expenses
This is a bit of an aside to the conversation, but HSA expenses don’t have to be withdrawn in the year of the expense. They can be withdrawn in any future year, as long as you have documented the expenses. The advantage of deferring the withdrawals is that the gains compound tax free and the withdrawals for allowable expenses are of course tax free too. Worst case is that it becomes essentially a regular IRA at age 65. This strategy requires a bit of planning and bookkeeping, but if you do it right the contributions and gains are never taxed.
And as you point out, if you plan on retiring early you have to plans financially navigate the time period between retirement and age 65 anyway.
This is a bit of an aside to the conversation, but HSA expenses don’t have to be withdrawn in the year of the expense. They can be withdrawn in any future year, as long as you have documented the expenses.
Correct, but I would add the caveat that the documented medical expenses need to have been from after you opened and funded the HSA - so you can’t claim the expenses from the tonsillectomy you had in 1975, for instance.