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Say goodbye to the 4% rule

Can result in you outliving your wealth

Approach to consider
1. 2-3% max annual withdrawal
2. 50/50 investment mix between stocks and Single Premium Immediate Annuity
3. Using IRS Life expectancy table for withdrawing and then adjusting life style to deal with income fluctuations

Understanding this will drive up the required savings to support the desired lifestyle

I've been working my plan with a 3% number thinking I was being conservative. Might not be conservative enough


Seems like I will also need to investigate SPIA

Thoughts? How is everyone else thinking about this?

Member Summary
Most Recent Posts
Something else to consider is out-living your health. The big Alz is on both sides of my family.

Jahx (Mar. 06, 2013 @ 7:59a) |

Not to get off the original topic, but AIG's problems had no effect on their annuity customers. AIG's problems were wit... (more)

RBirns (Mar. 06, 2013 @ 9:05a) |

Probably not the ideal example but I would not sink all my eggs in one issuer annuity basket. Just wanted to highlight ... (more)

DamnoIT (Mar. 06, 2013 @ 9:36a) |


Just work longer or buy some non-retirement assets that either appreciate or produce income and keep building that? Become more active with your retirement savings and grow it more aggressively? All easier said than done, but you either spend less, earn more, or some combination of the two.

Retirement with 55% of your money in stocks (which are, on average, leveraged 2:1 on their own)? That isn't my retirement plan.

When you start hearing how 'Buy and Hold doesn't work', it's time to buy and hold.

When you start hearing how smart it is to 'Buy and Hold'.. it's time to sell..

WSJl wants dramma, I don't want any of that in my unexciting, bland, plain jane functional retirement portfolio. Right now 3% may be a fair return expectation for the withdraw period over then next few years and then it may become 5% we don't know. The only hedge is to have investments all over and with the SPIA you have risk that the issuer could go under, don't think so with regulation? Consider AIG, sure they got backed up but if 50 went insolvent at once the printing presses couldn't go fast enough for the government to back the loss. I would say depending on your egg and need for risk one should only really have 35% in stocks when retired unless they are ready to ride the volatility coaster, the rest in bonds and CD ladders is the way to run it. To each his own.

I'm confused - was this 4% rule actually a widely-used benchmark that had until this time never contemplated whether a sharp market correction in the very beginning of a retiree's term could adversely affect the result? Is this the mathematical rigour that rules in the personal financial arena are generally subject to?

bigdaddycincinnati said:   I'm confused - was this 4% rule actually a widely-used benchmark that had until this time never contemplated whether a sharp market correction in the very beginning of a retiree's term could adversely affect the result? Is this the mathematical rigour that rules in the personal financial arena are generally subject to?There was no rigor. It was monte carlo analysis and vetting against historical windows of performance

It's worth keeping in mind that 4% gave acceptable returns for 30 years even if you retired in mid-1929 (just before the Great Depression), and even if you retired in the mid-late 1960s (before the stagnation/inflation of the 1970s/early 1980s). There are pretty good chances that it will still give acceptable returns now, too, even if there's another dip in the market.

Keep in mind that 4% per year, with returns just keeping up with inflation, would give you 25 years. 2% would imply that you're expecting below inflation returns in all of your investments for the next 30 years.

ellory said:   bigdaddycincinnati said:   I'm confused - was this 4% rule actually a widely-used benchmark that had until this time never contemplated whether a sharp market correction in the very beginning of a retiree's term could adversely affect the result? Is this the mathematical rigour that rules in the personal financial arena are generally subject to?There was no rigor. It was monte carlo analysis and vetting against historical windows of performance

Why would something as simple as factoring for a quick correction right after retirement fail to be used for something this important? Why would a rule that didn't take that into account gain popularity as a smart tool to base withdrawals on? Doesn't make any sense at all.

I thought the 4% rule was to always take 4% of the account balance, not a base amount of 4% adjusted for inflation. Of course if you're taking an ever increasing amount without regard for your actual account balance you have a high risk of going broke. But if you never take more than 4% it's impossible to go broke, although your level of income may degrade sharply over time if that rate is too high.

bigdaddycincinnati said:   ellory said:   bigdaddycincinnati said:   I'm confused - was this 4% rule actually a widely-used benchmark that had until this time never contemplated whether a sharp market correction in the very beginning of a retiree's term could adversely affect the result? Is this the mathematical rigour that rules in the personal financial arena are generally subject to?There was no rigor. It was monte carlo analysis and vetting against historical windows of performance

Why would something as simple as factoring for a quick correction right after retirement fail to be used for something this important? Why would a rule that didn't take that into account gain popularity as a smart tool to base withdrawals on? Doesn't make any sense at all.
http://www.bogleheads.org/wiki/Safe_Withdrawal_Rates

winter said:   bigdaddycincinnati said:   ellory said:   bigdaddycincinnati said:   I'm confused - was this 4% rule actually a widely-used benchmark that had until this time never contemplated whether a sharp market correction in the very beginning of a retiree's term could adversely affect the result? Is this the mathematical rigour that rules in the personal financial arena are generally subject to?There was no rigor. It was monte carlo analysis and vetting against historical windows of performance

Why would something as simple as factoring for a quick correction right after retirement fail to be used for something this important? Why would a rule that didn't take that into account gain popularity as a smart tool to base withdrawals on? Doesn't make any sense at all.
http://www.bogleheads.org/wiki/Safe_Withdrawal_Rates


Thanks for that -- I quoted the "controversy" that I didn't know existed:

Unfortunately, the term "Safe Withdrawal Rate" is necessarily an ambiguous term. This is because initial methods utilized historical data to statically determine what would have been safe given the actual results that past portfolios would have generated with the variables given. The next logical step, of course, was to use that information to predict future SWRs. Either use is technically correct, but one should always be sure to be clear whether the use is in reference to past or projected SWRs, so that unnecessary argument can be prevented.


I suppose I still don't understand why anyone would be comfortable to use only historical data when there are, obviously, other possible results that just haven't happened yet and, statistically, are not only bound but I would think likely to happen.

bigdaddycincinnati said:   I suppose I still don't understand why anyone would be comfortable to use only historical data when there are, obviously, other possible results that just haven't happened yet and, statistically, are not only bound but I would think likely to happen.Going with a withdrawal rate that has worked for all recent periods (including the worst possible timing) seems like a conservative approach to me. What % would you use instead?

Keep in mind that someone planning on using x% isn't forced to keep doing so throughout their retirement. If the market crashes after you retire and 4% isn't looking good you can always adjust your SWR for future years.

I don't know what percentage I'd use. Here's my thought: I imagine that there have been only several sharp corrections (akin to 2008) over the period used in the Monte Carlo simulations. So there's hardly any historical data (if that's what we think is so important and want to base a model on) as to whether a certain percentage will work or not when an immediate setback occurs. We don't even know whether those in 2008 would ultimately make it using the 4% rule. Sure doesn't seem like much of a sample size to build a model from. Though sharp corrections are relatively uncommon, I don't think rational people would believe that there won't be more sharp corrections in the future.

Added edit: As far as changing your % downward, that's fine except that a lot of people don't have that kind of leeway and end up going back to work.

awstick said:   I thought the 4% rule was to always take 4% of the account balance, not a base amount of 4% adjusted for inflation. Of course if you're taking an ever increasing amount without regard for your actual account balance you have a high risk of going broke. But if you never take more than 4% it's impossible to go broke, although your level of income may degrade sharply over time if that rate is too high.

I agree with this approach. If my income were to dip by 20% this year, I wouldn't keep spending the same amount of $, I would adjust accordingly. The downside of this approach is that if you have a great year, you shouldn't automatically start spending more than you normally would have. The 4% rule isn't a rule, it's a guideline...a quick, easy guideline that needs to be reviewed & reconsidered based on circumstances.

A good reason to consider delaying social security to age 70

Your typical American hasn't saved anywhere near enough for retirement and will be so broke that they are forced to work until they drop dead... so perhaps they should come up with a new rule that acknowledges reality.

If 2.5% (I'll use the average) is truly the SWR, then it means you need to save 40x whatever you're hoping to use from your cash hoard.

Or put another way: If you want a mere $40K per year, you need $1.6 million.


Yeah, good luck with that for 90%+ of the American population.

awstick said:   I thought the 4% rule was to always take 4% of the account balance, not a base amount of 4% adjusted for inflation. Of course if you're taking an ever increasing amount without regard for your actual account balance you have a high risk of going broke. But if you never take more than 4% it's impossible to go broke, although your level of income may degrade sharply over time if that rate is too high.

It is to take an amount that is 4% of the initial balance adjusted for inflation without regard to the actual account balance. The reason that this became the "4% rule" was because one actually had very little chance of going broke. Depending upon the mix of stocks and bonds, one had between a 90-99% chance of still having money left after 30 years and more often than not had more money than they started with.

However, the 4% rule was never designed to say that is what people should do. It simply shows what would have happened over past periods of time.

I like the 4% rule, but only to use it as a guide to show how much people should save for retirement. It lets people know that they need about 25x their annual income need in order to have enough to retire. If they want $50,000/year above their pension and SS, they should shoot for $1,250,000 for retirement.

dhodson said:   A good reason to consider delaying social security to age 70

Hell no. I'm taking it as early as possible. Maybe you have good genetics and think you will make it to 80. I won't.

I'll save as much as I can, "retire" a few years before I can take early SS (and live off savings) and then adjust lifestyle again when SS checks start rolling in.

brettdoyle said:   Your typical American hasn't saved anywhere near enough for retirement and will be so broke that they are forced to work until they drop dead... so perhaps they should come up with a new rule that acknowledges reality.

That's what I wonder about.

We have 5%-10% that have saved adequately, and 90%-95% that have not. What will that do? I can see real estate flooding the market, plenty of elderly working at minimum wage or under the counter, lots of scammers promising 10%-25% returns, possibly food/utilities/housing subsidies. After that, my crystal ball gets cloudy.

BrodyInsurance said:   awstick said:   I thought the 4% rule was to always take 4% of the account balance, not a base amount of 4% adjusted for inflation. Of course if you're taking an ever increasing amount without regard for your actual account balance you have a high risk of going broke. But if you never take more than 4% it's impossible to go broke, although your level of income may degrade sharply over time if that rate is too high.

It is to take an amount that is 4% of the initial balance adjusted for inflation without regard to the actual account balance. The reason that this became the "4% rule" was because one actually had very little chance of going broke. Depending upon the mix of stocks and bonds, one had between a 90-99% chance of still having money left after 30 years and more often than not had more money than they started with.

However, the 4% rule was never designed to say that is what people should do. It simply shows what would have happened over past periods of time.

I like the 4% rule, but only to use it as a guide to show how much people should save for retirement. It lets people know that they need about 25x their annual income need in order to have enough to retire. If they want $50,000/year above their pension and SS, they should shoot for $1,250,000 for retirement.
I plan to defer SS and use all the "exotic rules" I can. (I will file and suspend at my normal retirement age and allow my spouse to collect off mine. Then will begin to collect at 70. Still the amount of SS is a huge unknown, especially since I am / will be in a bracket that would mean means testing). Both my parents are still going strong in their 90s, so I need to plan for an extended period of time

Not me. I plan to start at 62 and get an interest free loan as FW has shown me the light on interest free arbitrage.

Link to Smart Money article on taking and repaying Social Security

xelint said:   Not me. I plan to start at 62 and get an interest free loan as FW has shown me the light on interest free arbitrage.

Link to Smart Money article on taking and repaying Social Security


That this option is no longer available.

http://money.usnews.com/money/blogs/planning-to-retire/2010/12/0...

The problem with any plan is "sequence of returns" risk. If you suffer a big loss in the first few years, you are toast.

brettdoyle said:   Your typical American hasn't saved anywhere near enough for retirement and will be so broke that they are forced to work until they drop dead... so perhaps they should come up with a new rule that acknowledges reality.

That ain't gonna happen. The "suckers" who saved all their lives will be taxed more or means tested because "they can afford it".

beltme said:   The problem with any plan is "sequence of returns" risk. If you suffer a big loss in the first few years, you are toast.

No you are not. That is where the "safe withdrawal rate" comes into play. It's a small enough amount that one will still be ok despite retiring at the "wrong" time due to the sequence of returns.

The sequence of returns can be used as the starting point for a great explanation of why even if you were 100% sure that your investments would average an 8% return, one could not safely take out 8%.

I intend to convert all or almost all of my assets into inflation-indexed SPIAs upon retirement. If I die with a single dollar to my name, it'll be due to an unforeseen failure in my financial plan.

Then again, I don't plan on having children so I don't worry about leaving an estate.

bigeye said:   brettdoyle said:   Your typical American hasn't saved anywhere near enough for retirement and will be so broke that they are forced to work until they drop dead... so perhaps they should come up with a new rule that acknowledges reality.

That ain't gonna happen. The "suckers" who saved all their lives will be taxed more or means tested because "they can afford it".


Perhaps the new retirement plan will be called "steal from responsible savers through a ballot box".

ellory said:   Say goodbye to the 4% rule

Can result in you outliving your wealth

Approach to consider
1. 2-3% max annual withdrawal
2. 50/50 investment mix between stocks and Single Premium Immediate Annuity
3. Using IRS Life expectancy table for withdrawing and then adjusting life style to deal with income fluctuations

Understanding this will drive up the required savings to support the desired lifestyle

I've been working my plan with a 3% number thinking I was being conservative. Might not be conservative enough


Seems like I will also need to investigate SPIA

Thoughts? How is everyone else thinking about this?


I think that it's best not follow some hard and fast rule. When you are 80 is there any reason why you need to hold to a plan that should still allow your money to be there 30 years later? Does it make sense not to do that once in a lifetime trip while you are still young enough to enjoy it because it means that you'll be spending more than 3-4% that year?

If the market does great, don't you want to be able to spend more?
If the market does terrible, if you do have the ability to cut back, might this make sense?

I like the conceptual idea of using a SPIA for fixed expenses. I KNOW I need $4,000/month so let me use a SPIA to cover this. I can then adjust my other expenses based upon how the investments are performing.

As for your approach, aren't #1 and #1 mutually exclusive? If you choose a number for your initial SWR, you won't have any income fluctuations. Instead, your fluctuations will be with your networth.

I didn't read the WSJl article, but I was wondering what people think of firecalc.com as a basis for how much you need to retire.

samko said:   I didn't read the WSJl article, but I was wondering what people think of firecalc.com as a basis for how much you need to retire.Firecalc is based on the patterns of historical investment performance
Therefore, even though it includes the Great Recession in the model, it only includes it for the end of your retirement, and cannot include it in the model for when it hits at the beginning of your retirement

Pick one
1. Die a few years after retirement - dont live 20-30 years past retirement . Retiring at 65 worked for previous generations bc you died by 75.

2. Move to a foreign country with cheap cost of living , cheap maids and nurses, or a young foreign spouse to care for you till you die

3. Don't plan to save - enjoy your life pre-65 or 67 and set yourself up so all your expenses are fully covered just by SS . You won't enjoy much travel or luxuries but you should have done that while young- and you can get by in a modest paidoff home in the cheaper parts of the USA

4. Work your butt off to accumulate $2-5mm then watch it all get pissed away to medical bills, nursing homes , ungrateful relatives and scammers.

Most people here seems to be shooting for #4 but it seems like the worst choice to me

I'm shooting for a mix of #2 and #4. Raise a few $M and moving to a country with less wealth redistribution.

#3 seems like the worst to me. If you're unlucky and live long into your upper 90s, you're in for a pretty depressing 30 yrs in the middle of nowhere (only place you can afford). Won't be able to afford traveling to see family and since you're broke, chances of them coming to you are zero too.

I think the percentage of people in their 90s traveling is probably quite small.

Shandril said:   I'm shooting for a mix of #2 and #4. Raise a few $M and moving to a country with less wealth redistribution.

#3 seems like the worst to me. If you're unlucky and live long into your upper 90s, you're in for a pretty depressing 30 yrs in the middle of nowhere (only place you can afford). Won't be able to afford traveling to see family and since you're broke, chances of them coming to you are zero too.

If your plan is to move to a foreign country you won't see your family either , unless they live in that foreign country or you pay their travel costs to come see you .
Most people in their 80s and 90s dont do much foreign travel , they just sit in their home .

Communities with large senior populations like FL and AZ have homes that are affordable and neighbors to socialize with. Most seniors aren't out with their family , its a neighbor or close friend . Expecting your family to visit the old people happens a couple times a year and all the grand kids hate being dragged to smelly grandpas house

brettdoyle said:   bigeye said:   brettdoyle said:   Your typical American hasn't saved anywhere near enough for retirement and will be so broke that they are forced to work until they drop dead... so perhaps they should come up with a new rule that acknowledges reality.

That ain't gonna happen. The "suckers" who saved all their lives will be taxed more or means tested because "they can afford it".


Perhaps the new retirement plan will be called "steal from responsible savers through a ballot box".
Correct. In a democracy, there is no reason to think that the 90% of americans who have not saved adequately for retirement will just accept a lower standard of living.

Why you got red is beyond me. May I add that you should use some of that SS money (interest free loan)at 62 to purchase life insurance...or lottery tickets...

xelint said:   Not me. I plan to start at 62 and get an interest free loan as FW has shown me the light on interest free arbitrage.

Link to Smart Money article on taking and repaying Social Security

Shandril said:   I'm shooting for a mix of #2 and #4. Raise a few $M and moving to a country with less wealth redistribution.

#3 seems like the worst to me. If you're unlucky and live long into your upper 90s, you're in for a pretty depressing 30 yrs in the middle of nowhere (only place you can afford). Won't be able to afford traveling to see family and since you're broke, chances of them coming to you are zero too.


If you are 90, nobody wants you to come to them either... unless you are filthy rich...

What things do you enjoy anyway when you are 80+? Most of the body parts stop working, you can't eat/drink/go places...most old people live pretty much miserable life even though they have decent amount of money.

Skipping 52 Messages...
RBirns said:   DamnoIT said:   WSJl wants dramma, I don't want any of that in my unexciting, bland, plain jane functional retirement portfolio. Right now 3% may be a fair return expectation for the withdraw period over then next few years and then it may become 5% we don't know. The only hedge is to have investments all over and with the SPIA you have risk that the issuer could go under, don't think so with regulation? Consider AIG, sure they got backed up but if 50 went insolvent at once the printing presses couldn't go fast enough for the government to back the loss. I would say depending on your egg and need for risk one should only really have 35% in stocks when retired unless they are ready to ride the volatility coaster, the rest in bonds and CD ladders is the way to run it. To each his own.


Not to get off the original topic, but AIG's problems had no effect on their annuity customers. AIG's problems were with their main casualty insurance business, the parent company if you will. Their subsidiaries for life insurance and annuities (SunAmerica, VALIC, American General) are separately operated, with their own separate assets and liabilities, each heavily regulated by the states where they do business. Throughout the crisis, it was business as usual for their customers. The AIG parent company, by law, was unable to pillage their subsidiaries. Even if the feds had let AIG go under, it would not have affected the annuities with these companies.



Probably not the ideal example but I would not sink all my eggs in one issuer annuity basket. Just wanted to highlight how an insurer can get off track and go crazy issuing securities/garentees and fall flat on it's face. Back to the original cost of living concern, if inflation is going rampant I would think the money markets and saving accounts would follow suit a bit and a person could shift some into that class of investment to keep up. Granted that is not the case now but I think the subsidized interest rates will go up soon. I guess I have personally observed a 70/30 bond/equity portfolio return a little over 5% APR over the last two years (I know short period) and I think it is well positioned to return the 4% over the 30 year horizon The bond outlook is maybe bleak at 2% at best over the next few years but I think the 30% equity position should make up the difference to keep the happy number. Not gonna rattle my cage any.



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