Said differently, for those who plan to retire before around age 74 to 75, the IRS table is actually more conservative than the 4% rule, and thus you would need a bigger nest egg to follow the IRS table with an earlier retirement date.
That said, I’ve long viewed the 4% rule as a better rule for planning for retirement than for actually spending in retirement. It’s designed as a worst case scenario type model, and in a more typical case, if you strictly follow it, you are expected to end up dying with way more than you retired with.
What I’ve never heard a clear explanation for is why, if your investments outperform what the 4% rule requires, are you supposed to keep spending at that restricted level? Why can’t you either take a one-time windfall bonus to spend while you’re still young enough to enjoy it or boost your ongoing withdrawal rates to reflect your new higher balance?
For the sake of making the math easy, say you retire with a $1,000,000 nest egg, all in a Roth IRA. Again, for the sake of making the math easy and the allocation consistent with Bengen, you withdraw the $40,000 permitted by the 4% rule on “day 1, year 1” of retirement and keep the remaining $960,000 split 50/50 in stocks and bonds ($480,000 in each).
Say your stocks earn 10% in the first year (not far off from the long-run historic returns) and your bonds earn 5% (not far off from the current Fed Funds rate). Your $480,000 in stocks grows to $528,000 and your $480,000 in bonds grows to $504,000, giving you a total balance at the end of year 1 of $1,032,000.
If inflation ended up being 3% over that time period (not far off from the historical long run average), Bengen’s original 4% rule would say your year 2 withdrawal should be $41,200. Yet if you were a new retiree with a nest egg of $1,032,000, you could technically withdraw $41,280 and still be ok from the 4% rule. Or alternatively, if you wanted to hold to the $41,200 of the original schedule, you could support that as a new retiree from a nest egg of $1,030,000 and still be ok.
So in that scenario, why couldn’t you make the decision to either boost your inflation-adjusted withdrawals up by $80 a year or take a one-time $2,000 ‘extra’ withdrawal and spend it or help a grandkid out or give it to your favorite charity or something like that?
I completely understand the fact that the 4% rule is designed to provide a good reason to believe that you can follow it and still have a high chance of winding up ok over a 30-year time horizon if those early returns are not rosy. Yet if they do turn out okay, why not take advantage of that, rather than putting yourself in the position of where you’re likely to die with unspent millions?
Regards,
-Chuck
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