Let’s say I retire today and have 1,000,000 in my retirement account.
The safe withdrawal rate is $40,000
the next year will be $40K + inflation, etc.
what about the situation, if your portfolio went up 50% and you are sitting at 1.5 million next year…
Is it ok to re-set my 4% to $60K a year. (no rebalancing)
or
Does one rebalance the account, take the original 40K + inflation as planned, and move money into bonds/cash???
The short answer is that the 4% rule expects you to maintain a well-diversified and well-balanced portfolio throughout your retirement. So if you do find yourself in a situation where you can reset your withdrawals upwards, to stay within the bounds of the 4% rule, you would need to rebalance.
Regards,
-Chuck
Thanks Chuck,
How do I not fell guilty buying non-Costco gas or paying “regular” price for things.
I want a guilt free spending mentality in Retirement…I don’t have a saving problem, I have a spending problem. 
I would readjust the spending target to 4% of the accounts value each year whenever you can. But note you do not have to spend the full 4% each year. Accumulating a surplus is fine.
And notice that some years 4% of your account balance might be less than $40K. That’s a good reason to accumulate a surplus when you can.
I plan not to make any withdrawals from the retirement accounts on a down year.
Will spend from the high yield savings account, pension and brokerage accounts first…
@darrellquock - My understanding of the 4% rule, as William Bengen initially conceived, is that you withdraw 4% in year one. In successive years, you take the amount from the previous year and adjust it by the inflation rate. It doesn’t go back to the 4% starting baseline, unless inflation takes you there by coincidence. So, for example, if you took $40k in year 1, and then in year 2 inflation is 5%, you take ($40k * 1.05 = $42k). In year 3, you start with what you took in year 2 ($42k), plus/minus inflation. Now, suppose in year 3 inflation is at 3%, your withdrawal would be ($42k * 1.03 = $43,260). And on it goes from there.
Bengen’s ideology was that markets and the economy will rise and fall, so a 50% increase in portfolio value this year may be followed by a 30% decrease next year, or multiple years of decline. I do not recall that Bengen ever adjusted the withdrawal rate based on the growth or decline of the portfolio. However, that has been a common criticism from various financial professionals.
Now, Bengen did tell us about his views on allocation, and his research clearly showed that a portfolio of no less than 50% in stocks worked best. He tested multiple allocation ratios (from 100% stock to 100% bonds). Based on the results, he settled on 75% stock, 25% intermediate-term Government bonds as the best ratio overall. As he stated, allocations of less than 50% or over 75% were counterproductive.
Having said that, bear in mind that Bengen’s research was based on 50-year cycles, from 1926 to 1994, with the specific intent of finding the safest withdrawal rate to make a retirement portfolio last for a minimum of 30 years.
The Trinity study confirmed Bengen’s findings that a portfolio allocation of 50% to 100% in stocks worked the best. But, you should also consider:
The last point is important to keep in mind if the portfolio owner is already retired and has a portfolio that is growing, but doesn’t anticipate spending it all before dying.
The standard disclaimer here is that history is not a good predictor of the future, so use your judgment to adjust accordingly.
I’m not retired, but I do have two kids in college where I’m paying the bills from 529 plans where I’m the account owner and where I made the vast majority of the contributions. What I find that helps is the following:
The money was saved for a particular purpose – college education. It’s now being used for that purpose, which makes spending it more guilt-free.
As the kids picked their colleges and I was able to get a handle on what the costs would look like, I converted their 529 plans into CD ladders, scheduled to mature just before the start of each semester. Maturing CDs inside my state’s 529 plan turn into cash, which I find to be a lot easier to spend than stocks where I’m always wondering whether they might be worth more tomorrow.
Translating that into retirement terms, I expect to have a bond ladder where the maturing bonds in that ladder provide enough cash to cover my core costs. Similar to those CDs, maturing bonds turn into cash, which I find easier to spend than money that’s still tied up in investments.
The thing about a bond ladder, though, is that as individual bonds mature, new rungs need to be added to keep it going. I plan to use dividends, interest, and proceeds from the sale of other investments to maintain that ladder. When things are going particularly well in the market for my investments, I should be able to tap more than I strictly “need” to maintain those core costs and help cover other priorities or goals.
That should serve as a “permission slip” to spend more than absolutely needed…
Regards,
-Chuck
Hi @darrellquock,
Why spend from a taxable brokerage instead of from a traditional retirement account? If you are in a lower tax bracket, taking some cash from the traditional retirement accounts will reduce your future RMD’s for those accounts. Pay a little tax now vs …
Selling in down years is a bad idea. Taking cash that is already there is just taking cash.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
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Gene,
I was just following the order of operations…
If I plan things our right, I should have 1- 3 years of living expenses in high yield savings account/Cds.
I guess I am mixing the 4% rule with the bucket approach…
Im gonna hire a fee only certified financial planner once I get closer to retirement.
There’s a couple of good recent articles out there about adjusting the withdrawal after the initial year’s 4% based on market results (responding to “sequence of returns risk” or a better-than-planned market.
Recently discussed in Of Dollars and Data is the concept of splitting retirement withdrawals into a “mandatory” bucket allocated to cover must-pay expenses (house, car, etc.) and a “discretionary” one for trips, gifts, extras, what have you. Then, always withdraw what’s needed for mandatory. If the market drops between 10 and 20%, cut the discretionary withdraw (and expenses) in 1/2 for a year. If the market drops >20%, zero the discretionary for the year.
The other approach is Guardrails, put in a paper (MStar link) by Guyton & Klinger. MStar’s summary is here, go about 1/5 of way through transcript. Essentially, if the market goes much higher to the level where your withdrawals represent less than 3%, bump the withdrawals up. Conversely, if market down, cut the next year withdrawal down so it’s back under 5%.
FC
And if you don’t need the money right now, and you are in a lower tax bracket, it often makes a lot of sense to convert some IRA money into Roth IRA money.
And if you are in the zero percent long term capital gains tax bracket, it almost always makes sense to take gains each year up to the edge of that bracket.
I retired early, about 18 years ago. For the last six years my investments (IRA, ROTH) have been at least as much as I need, much more than that now. RMD started for me this year, and it is far more than I will spend. My attitude toward money and spending is really screwy. For everyday stuff I shop at Costco, check supermarket flyers, and even venture into Walmart now and then. I can’t help it, and I’d even say I enjoy it. I regularly ask myself why it matters how much I pay for such things, but it is ingrained in me since I was a kid.
On the other hand, for pretty much everything else, I just buy whatever I want. If I want something I mostly just buy it. When I do resist the temptation it is because I realize that I’m not going to use it, but sometimes even then I succumb. One example of resisting: I think drones are so cool, and I’ve thought about researching what would be a good one and buying it… but I know damned well I won’t use it. And of not resisting: audiophile headphones, when my hearing is terrible.
So I guess all I can suggest is that if buying gas anywhere than Costco bothers you, maybe accept it and get your gas at Costco. Better yet, pay for it with a Costco Anywhere Visa and get 5% back! (Full disclosure, COST is my third largest position.)
I have 14 projects in the workshop for which I have bought the materials. I just need to get started on one of them.