The 4% Rule Use To Be THEE Rule But Now.....

OneEyedDiva

OneEyedDiva

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The efficacy of this long standing rule for withdrawing retirement funds for your portfolio is being questioned. I've read several articles about it over the last few years, below is the latest.
https://www.kiplinger.com/retirement/retirement-planning/603831/the-4-rule-faces-new-problems-today
Here is an alternate method for retirement withdrawal...The Bucket method:
Bucket 1: Cash and liquid assets, for near term expenses of a year or more
Bucket 2: For 5 or more years of living expenses and contains high yield fixed income & some dividend paying investments
Bucket 3: Long term portion contains stocks and more volatile bond types.
Bucket maintenance may be required.
https://www.morningstar.com/articles/840177/the-bucket-approach-to-retirement-allocation
I don't have a "strategy" because I don't need to make withdrawals from my retirement nest egg. Your thoughts?
 

This is a great article. Thanks for posting!

"Experts" are all over the board on the 4% Rule. Some say it is too high. Some say it is artificially low. I'm just trying as much as I can right now to live off the savings I accumulated before being forced to retire. I was lucky enough to receive unemployment for 15 months and I started drawing Social Security at 63. Now the savings is dwindling.

I figure I have 6 more months before I have to start withdrawing funds from my investments. I know I will eventually have to do it but I'm not looking forward to seeing my balance at that point. The market is so erratic. The thought that the Fed may raise interest rates in March spooked Wall Street, but if the rise in interest rates reduces inflation it may be a good thing. We shall see.

I try to invest as wisely as I can and hope I will have enough money to see me through my final years. I'm not leaving the stock market. The latest figures I've seen are that the S&P was up 13% in 2021, down 9% so far in 2022 but up 90% over the past 5 years. It's a long-term proposition.
 
IMO there is no set it and forget it method to manage a self-directed retirement. Unfortunately, none of us will know how we did until we run out of money or die.

It depends a great deal on how accurate/honest you are about forecasting your expenses, your investment choices, and how heavily you rely on your investments for retirement income.

I would encourage people to begin retirement on 3% or less until they develop a good understanding of the market/economy cycle's impact on their portfolios.

If you simply draw a flat 4% of your portfolio every year you will never run out of money, but you may reach a point where the draw is not sufficient to meet your needs.

I try to keep roughly enough cash on hand to cover five years of expenses above and beyond those normally covered by my SS and pension income. Basically looking as far down the road as I can to anticipate fluctuations in spending for things like cars, vacations, dental expenses, etc...

I look at the 4% draw, adjusted for inflation, on a three-year rolling average. You draw a little less in good years and a little more in bad years.

After you are well into retirement you should be able to look at portfolio growth and draw up to 8% every few years without putting your future in jeopardy.

Go slow, be careful, and try not to get wet!
1000_F_155128423_zUznOX17O3kTCARDbw37i615MuSHvBBk.jpg

I'll see you on the other side! ;)
 

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dseag2 said:
This is a great article. Thanks for posting!

"Experts" are all over the board on the 4% Rule. Some say it is too high. Some say it is artificially low. I'm just trying as much as I can right now to live off the savings I accumulated before being forced to retire. I was lucky enough to receive unemployment for 15 months and I started drawing Social Security at 63. Now the savings is dwindling.

I figure I have 6 more months before I have to start withdrawing funds from my investments. I know I will eventually have to do it but I'm not looking forward to seeing my balance at that point. The market is so erratic. The thought that the Fed may raise interest rates in March spooked Wall Street, but if the rise in interest rates reduces inflation it may be a good thing. We shall see.

I try to invest as wisely as I can and hope I will have enough money to see me through my final years. I'm not leaving the stock market. The latest figures I've seen are that the S&P was up 13% in 2021, down 9% so far in 2022 but up 90% over the past 5 years. It's a long-term proposition.
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I'm glad you find the article useful Dseag2. Yes, I saw those same stats on a World News Tonight report. It's best to look at long term results, not short term ones which can be downright scary and for some, cause panic selling (at a loss, of course). For people who need to access their investments now current and near future market volatility is more concerning. The hope that raising the interest rates will ultimately be a good thing is out there...but like you said..."we shall see". I hope your portfolio will see enough gains to last your lifetime my friend.
 
Well, no one likes to see "negative compounding" with respect to their hard earned money, but it is money and we are old so we may need what we need someday, or not. Living frugally certainly helps.

Don't need a money manager to tell us that.

Keeping many years in emergency funds and a good dividend growth ETF has been helpful in avoiding the negative compounding. With the stock market you never know what will happen with the S & P or total market so diversification is best. Of course in a crash, nothing except time can rectify that disaster. What bothers most seniors is the fact we don't have that precious time on our sides...lol.
 
Aunt Bea said:
IMO there is no set it and forget it method to manage a self-directed retirement. Unfortunately, none of us will know how we did until we run out of money or die.

It depends a great deal on how accurate/honest you are about forecasting your expenses, your investment choices, and how heavily you rely on your investments for retirement income.

I would encourage people to begin retirement on 3% or less until they develop a good understanding of the market/economy cycle's impact on their portfolios.

If you simply draw a flat 4% of your portfolio every year you will never run out of money, but you may reach a point where the draw is not sufficient to meet your needs.

I try to keep roughly enough cash on hand to cover five years of expenses above and beyond those normally covered by my SS and pension income. Basically looking as far down the road as I can to anticipate fluctuations in spending for things like cars, vacations, dental expenses, etc...

I look at the 4% draw, adjusted for inflation, on a three-year rolling average. You draw a little less in good years and a little more in bad years.

After you are well into retirement you should be able to look at portfolio growth and draw up to 8% every few years without putting your future in jeopardy.

Go slow, be careful, and try not to get wet!
1000_F_155128423_zUznOX17O3kTCARDbw37i615MuSHvBBk.jpg

I'll see you on the other side! ;)
Click to expand...
Seems like you have everything well under control Aunt Bea. We are blessed to be getting pensions (and SS). You're right..."set it and forget it" is not a good tactic. The 4% method definitely calls for adjustments up or down according to the yearly circumstances. Having a 5 year emergency fund is great!
 
We set up several annuities that will pay monthly - for life - whether there is money in there or not. Several of them pay out 5%+ I'm happy with that. We have them both as Qualified and Non-Qualified. We'll probably tap into the Qualified (IRA) accounts first and let the regular ones simmer and, hopefully, continue to grow. 4 Years retired and we haven't touched them yet.
 
OneEyedDiva said:
Seems like you have everything well under control Aunt Bea. We are blessed to be getting pensions (and SS). You're right..."set it and forget it" is not a good tactic. The 4% method definitely calls for adjustments up or down according to the yearly circumstances. Having a 5 year emergency fund is great!
Click to expand...
The biggest wild card for all of us will be the cost of end of life care.
 
Hey, just got contacted from our ex-business partner... ask if I wanted to invest in bitcoin, he knows a bank that's paying 35% interest.

Told him that sounded like a "pump 'n dump" ...what I really need is a good "pump 'n dump "FDIC insured bank paying a great CD rate!
 
Aunt Bea said:
The biggest wild card for all of us will be the cost of end of life care.
Click to expand...
Absolutely. My father tried to get LTC insurance for my mother when she was in her 50's but she had so many pre-existing conditions it was declined. She lived to be 89 y/o, the last 4 of them in Assisted Living. I calculated the total of the payments and they were almost exactly equal to the amount we received for the sale of her house, which was fully paid for.

I have also thought about LTC insurance but the premiums keep increasing, even if you have had it for years.
 
we have not had an increase in our ny state partnership plan in 5 years .

many older plans were way under priced as the statistics from a generation ago were wrong about usage .

many insurers were so far off they pulled out of the market place.

all the insurers that were taking part in our state partnership plan pulled out . it seems the old stats were greatly flawed and usage of both facility's and home care were far far greater .

if you have a plan they are grand fathering you but no new plans are offered .
 
OneEyedDiva said:
Seems like you have everything well under control Aunt Bea. We are blessed to be getting pensions (and SS). You're right..."set it and forget it" is not a good tactic. The 4% method definitely calls for adjustments up or down according to the yearly circumstances. Having a 5 year emergency fund is great!
Click to expand...
the whole idea of a safe withdrawal rate is no yearly adjustments are needed .

it is designed to provide a safe , secure income stream in good and bad times .

the income stream has very high odds with at least 40% equities of not needing a lowering in bad times .

only the balance left over varies.

out of the 121 30 year rolling retirements we have had to date only 6 needed to be adjusted downward slightly to 3.60% from 4% .

that is a 96% success rate .

90% of all those time frames left you with more than you started with 30 years later with a 60/40 or 50/50 portfolio.

we have had no worse outcomes since 1966 .....
 
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Victor said:
4% seems low to me but it depends on the size of the retirement money and when you begin. I think 6 or 7% is better for me. My financial advisor does not use this rule. He uses the Monte Carlo system to predict
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6-7% is what we would use , if it wasnt for the fact safe withdrawal rates are based on the worst outcomes we have had .

so figuring 6 to 7% in the early years is as risky as you can get .

the worst years for a retiree were those who retired in 1907 , 1929 , 1937, 1965 and 1966 .

taking 6-7% is like building a house , not to the worst storms your area ever saw but to the average storm .

you can see that may not be a good idea .
 
Aunt Bea said:
IMO there is no set it and forget it method to manage a self-directed retirement. Unfortunately, none of us will know how we did until we run out of money or die.

It depends a great deal on how accurate/honest you are about forecasting your expenses, your investment choices, and how heavily you rely on your investments for retirement income.

I would encourage people to begin retirement on 3% or less until they develop a good understanding of the market/economy cycle's impact on their portfolios.

If you simply draw a flat 4% of your portfolio every year you will never run out of money, but you may reach a point where the draw is not sufficient to meet your needs.

I try to keep roughly enough cash on hand to cover five years of expenses above and beyond those normally covered by my SS and pension income. Basically looking as far down the road as I can to anticipate fluctuations in spending for things like cars, vacations, dental expenses, etc...

I look at the 4% draw, adjusted for inflation, on a three-year rolling average. You draw a little less in good years and a little more in bad years.

After you are well into retirement you should be able to look at portfolio growth and draw up to 8% every few years without putting your future in jeopardy.

Go slow, be careful, and try not to get wet!
1000_F_155128423_zUznOX17O3kTCARDbw37i615MuSHvBBk.jpg

I'll see you on the other side! ;)
Click to expand...
actually we do know how we are doing .

thanks to research by micael kitces , we now know all we need to see is a 2% real return the first 15 years of a 30 year retirement for 4% inflation adjusted to hold .

of course you may end 30 years with a buck so we do want more than that , but that really is not much .

everyone of those failures happened because the first 15 years fell below 2% inflation adjusted .

even the best bull markets couldnt save them because of all the excess spending that had to be done .

so if 5 years in you are averaging less a red flag should go up . 8 years in i would consider a cut in draw sensible
 
One thing I want to add is that this idea of cash buffers being a safety net has really no merit .

one can simply rebalance a 60/40 , 50/50 or 40/60 and get all the cash they need anytime they need it …

even 100% equities with no cash and no bonds has a 95% success rate almost the same as 60/40 .

the reason is the bigger up years without the drag of cash and bonds compensates in the down years .

so having these cash buckets is mentally comforting , but financially really adding nothing extra

https://www.kitces.com/blog/researc...s-dont-work-unless-youre-a-good-market-timer/


https://www.kitces.com/blog/are-retirement-bucket-strategies-an-asset-allocation-mirage/
 
ronaldj said:
according to "experts" we don't have enough to retire. Only been retired for almost ten yeas, it's not having what you want it's wanting what you have.
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No such thing as a number , so they ain’t experts .

how much do I need to retire is like asking how long is a rope .

we all see what we have when the pay checks stop and we make it work .

for many it means relocating or living golden girl style ….

so if anyone shoots you some magic numbers , they have no clue how retirement planning works…avoid their advice like the plague

click bail articles love to have articles like that
 
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OneEyedDiva said:
The efficacy of this long standing rule for withdrawing retirement funds for your portfolio is being questioned. I've read several articles about it over the last few years, below is the latest.
https://www.kiplinger.com/retirement/retirement-planning/603831/the-4-rule-faces-new-problems-today
Here is an alternate method for retirement withdrawal...The Bucket method:
Bucket 1: Cash and liquid assets, for near term expenses of a year or more
Bucket 2: For 5 or more years of living expenses and contains high yield fixed income & some dividend paying investments
Bucket 3: Long term portion contains stocks and more volatile bond types.
Bucket maintenance may be required.
https://www.morningstar.com/articles/840177/the-bucket-approach-to-retirement-allocation
I don't have a "strategy" because I don't need to make withdrawals from my retirement nest egg. Your thoughts?
Click to expand...
We usually fill our checking account once a year for spending ….we keep a year in reserve , even though cash buckets do nothing ..it is just my brain likes to compartmentalize things

the 4% swr is really only good in my opinion as a guide for the first year .

following it can leave you with way to much money left over unused and enjoyed most of the time so a system of raises is needed besides inflation adjusting .

we use bob clyatt 95/5 method .

each year we take 4% of the actual balance to set our goal posts .

in a down year we simply take the higher of 4% of the balance or 5% less then the year before .

that’s it , it is simple , and it rewards us in up years without hitting you to hard in down years .

firecalc actually has a selection tab for using it instead of the “ constant dollar “ method , which is what the 4% swr actually is called ….it tries to preserve spending by inflation adjusting
 
Thanks, this is a good article and timely for me. I am going to be retired enough by the end of the year that I will need to start drawing from my savings. I turn 70 in September, that is my target to start social security, and I am now winding my business down. I should be done working in a few months.

I think the 4% rule is good guidance, but we will need to watch how it goes and make adjustments along the way.
ronaldj said:
it's not having what you want it's wanting what you have.
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Great advice! Just adjust your lifestyle to what you have. Its what I plan to do, will have to see how it works out.
 
Alligatorob said:
Thanks, this is a good article and timely for me. I am going to be retired enough by the end of the year that I will need to start drawing from my savings. I turn 70 in September, that is my target to start social security, and I am now winding my business down. I should be done working in a few months.

I think the 4% rule is good guidance, but we will need to watch how it goes and make adjustments along the way.

Great advice! Just adjust your lifestyle to what you have. Its what I plan to do, will have to see how it works out.
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When the pay checks stop it doesn’t matter what your expenses were ..all you have is what you actually have to work with and back in to a lifestyle that fits what you have
 
Since I spent a lot of time learning from the brightest minds on the subject when it comes to setting those initial goal posts I thought I would give you one example of the entire process recommended by the likes of kitces , blanchette , Bernstein, milevsky


so what I would do is add up all my non discretionary spending ..that is all the things you currently have no leeway in .

plus I would add in the things that you wouldn’t give up unless push came to shove …as an example for us it’s my studio time for my drumming , our gym , etc .

let’s say that is 50k ….I would double that for all the discretionary spending .

that give a comfortable margin if you need to make cuts If things go worse than planned .

it can be all well and good you are living below your means but if the bulk of that budget is non discretionary you may have an issue cutting back ..

so let’s say you would like to see if you can do 100k .

subtract out any income streams like ss , pension ,annuity , rental income , alimony ,etc .

so say that is 60k ..

that means 40k has to come from your savings and investments .

now we will use firecalc to stress test the allocation and investments you will use to see how it would have met goal in the past .

playing in firecalc we see that 1 million in at least a 40/60 portfolio can give a high rate of Success ..over 90% is considered acceptable.

but suppose you want to not use equities .

well changing the tab in firecalc to fixed income only shows trying to draw 4% failed so many times it is considered unsafe so you either need 1.25 million or you will need to reduce the draw to 3% .

that means you need to go back and work on that budget and start cutting

https://firecalc.com/
 
Here is an example of firecalc .

1 million at a 4% draw , 30 year retirement , using first 50/50 and then just fixed income

under 90% success rate means it already failed to many times to be considered safe

50/50

FIRECalc Results​

Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.



FIRECalc looked at the 121 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 121 cycles. The lowest and highest portfolio balance at the end of your retirement was $-223,952 to $4,145,063, with an average at the end of $1,156,780. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.


FIXED INCOME ONLY

FIRECalc Results​

Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.



FIRECalc looked at the 121 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 121 cycles. The lowest and highest portfolio balance at the end of your retirement was $-517,560 to $2,349,575, with an average at the end of $191,362. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 64 cycles failed, for a success rate of 47.1%.

just for fun here is 100% equities and no cash or bonds …despite the myths about high equity levels for retirees it performed almost as well as 50/50 and acually did better over longer retirement periods then 30 years .

100% equities , no cash or bonds , just spending right from equities in good and bad times

FIRECalc Results​

Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.



FIRECalc looked at the 121 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 121 cycles. The lowest and highest portfolio balance at the end of your retirement was $-931,017 to $8,509,297, with an average at the end of $2,751,225. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 8 cycles failed, for a success rate of 93.4%.
 
dseag2 said:
I have also thought about LTC insurance but the premiums keep increasing, even if you have had it for years.
Click to expand...

LTC insurance is Very expensive, unless you initiate such a policy at a fairly early age. When I saw my parents beginning to decline, years ago, and taking out a home equity loan to help pay for "in home" care, we took out a LTC policy. Over the past 30 years, or so, we have paid out quite a bit in premiums, and I hope that is money down the drain, and we never need it. However, should we become disabled, there is enough built up in that policy to give us several years in a high quality Senior facility....rather than being shuffled off to some minimal State facility.

Retirement funding, and things like LTC are things that people Must take into consideration at a fairly early age, if they want to avoid issues in their later years.

Looking back, I just wish that 401K's/IRA's had been available when I first started working, and that I has been wise enough to get into such plans when I was in my 20's and 30's. IMO, that, and SS, are about the Only things our government has done to make retirement more affordable.
 

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