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I think it really depends in your lifestyle,where you live and your budget but if you don't want to hire a professional who will makea carful study of your situation its certainly a good place to start.,
Most financial experts are predicting lower total returns moving forward. If that is the case, and I believe it is, the 4% rule can not hold up. It's based on earnings return of 4% plus inflation. That is suppose to keep the retiree solvent for 30+ years.
Mike said: "It's based on earnings return of 4% plus inflation."
The inflation rate is key here. Whose numbers? We all know the government's are highly suspect. The Social Security Administration put the inflation rate at around 1.4% in determining benefits for retirees in 2015. It's been in that very low area several years now and may be accurate for some.
It's also very situation dependent. If you own a home or make fixed mortgage payments you'll probably experience lower inflation than renters. If you drive an electric car or subcompact or live in a warmer climate, the drop in oil isn't having the same inflation lowering effect as for others. If you've become more health aware in recent years, your food expenses are much higher. Lower cost starches and red meats are out. More expensive veggies , fruits, nuts and fish are in. -
We've been fortunate to only have to pull maybe 4-5% annually to supplement our pension for many years. But, I wouldn't be adverse to taking up to 7% if the need arose.
As a generic rule of thumb, the 4% retirement drawdown is an excellent departure point. But like all general rules, it depends. Adjustments must be made depending on specific circumstances like age, wealth, lifestyle, inflation, flexibility, expected market rewards, and portfolio asset allocation comfort zone.
Let’s put the 4% withdrawal recommendation in its proper historical perspective.
The original work is called “The Trinity Study" because it was completed by three Trinity University professors: Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz . The title of a 6-page readable summary is “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable”. Here is a Link to this now classic work:
The Trinity study contains market data through 1995. It manipulated the historical market return outcomes in the sequence that it was actually recorded using different starting times to test portfolio survival rates. So it has definite limitations with respect to all market possibilities.
To a large extent, modern random Monte Carlo simulations address these limitations. They can do thousands of possible Market outcomes in a matter of seconds using statistical distribution data sets.
Monte Carlo methods were developed to support the design of the Atomic bomb in World War II. The uncertainties of market returns are precisely what Monte Carlo was designed to handle.
I suggest, if you are even slightly interested in retirement portfolio survival likelihoods as a function of expected returns, inflation, asset allocation, and time scale, that you give Monte Carlo computer codes a try. It’s a super tool to add to your investment toolkit.
Here is a Link to an easy to use Monte Carlo simulator from the Portfolio Visualizer website:
Please do some what-if scenario test cases on both resources. Inputs are easy and results are almost instantaneous. It’s fun and you’ll learn something with each case examined. Since these are Monte Carlo analyses that use randomly selected numbers, results will vary with each completed exploration, but the trendlines are firm. Good luck.
Some folks will be happy with a 95% portfolio survival rate while others will be uncomfortable with a 97% survival projection(a 3% portfolio failure probability). Like almost everything else in life, it all depends.
Best Wishes to all for the coming year and beyond.
As we look forward to a seventh year of this fat cow (bull market), it's hard not to think about Genesis 41 in response to your question about what to do with the extra money.
It occurs to me that the stock market may not remain forever at record highs. And that bonds might someday cease to be the safe & profitable investment they've been for a couple decades now. That inflation may not be forever tame. And that infirmities, new taxes and calamities unforeseen might require a greater reserve than we currently envision.
(My third grade teacher explained this as squirrels stashing away a few extra nuts in case of a harder than expected winter.)
World according to Tampabay: IF you have saved and invested all your life,SPEND what you need (forget all this 4% BS ect.) if you run out of money call me or a politician, they will take of you
>> We all know the government's are highly suspect.
Actually no: MIT's Billion Prices data, collected independently, from online prices, do not track the official CPI exactly — the basket of goods sold online doesn’t exactly match the coverage of the CPI — but there has not ever been a large, persistent discrepancy:
Comments
The inflation rate is key here. Whose numbers? We all know the government's are highly suspect. The Social Security Administration put the inflation rate at around 1.4% in determining benefits for retirees in 2015. It's been in that very low area several years now and may be accurate for some.
It's also very situation dependent. If you own a home or make fixed mortgage payments you'll probably experience lower inflation than renters. If you drive an electric car or subcompact or live in a warmer climate, the drop in oil isn't having the same inflation lowering effect as for others. If you've become more health aware in recent years, your food expenses are much higher. Lower cost starches and red meats are out. More expensive veggies , fruits, nuts and fish are in.
-
We've been fortunate to only have to pull maybe 4-5% annually to supplement our pension for many years. But, I wouldn't be adverse to taking up to 7% if the need arose.
I agree with the many earlier posters.
As a generic rule of thumb, the 4% retirement drawdown is an excellent departure point. But like all general rules, it depends. Adjustments must be made depending on specific circumstances like age, wealth, lifestyle, inflation, flexibility, expected market rewards, and portfolio asset allocation comfort zone.
Let’s put the 4% withdrawal recommendation in its proper historical perspective.
The original work is called “The Trinity Study" because it was completed by three Trinity University professors: Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz . The title of a 6-page readable summary is “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable”. Here is a Link to this now classic work:
http://209.31.88.154/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable
The Trinity study contains market data through 1995. It manipulated the historical market return outcomes in the sequence that it was actually recorded using different starting times to test portfolio survival rates. So it has definite limitations with respect to all market possibilities.
To a large extent, modern random Monte Carlo simulations address these limitations. They can do thousands of possible Market outcomes in a matter of seconds using statistical distribution data sets.
Monte Carlo methods were developed to support the design of the Atomic bomb in World War II. The uncertainties of market returns are precisely what Monte Carlo was designed to handle.
I suggest, if you are even slightly interested in retirement portfolio survival likelihoods as a function of expected returns, inflation, asset allocation, and time scale, that you give Monte Carlo computer codes a try. It’s a super tool to add to your investment toolkit.
Here is a Link to an easy to use Monte Carlo simulator from the Portfolio Visualizer website:
https://www.portfoliovisualizer.com/monte-carlo-simulation
Here is a Link to a similar Monte Carlo formulation from the MoneyChimp website:
http://www.moneychimp.com/articles/volatility/montecarlo.htm
Please do some what-if scenario test cases on both resources. Inputs are easy and results are almost instantaneous. It’s fun and you’ll learn something with each case examined. Since these are Monte Carlo analyses that use randomly selected numbers, results will vary with each completed exploration, but the trendlines are firm. Good luck.
Some folks will be happy with a 95% portfolio survival rate while others will be uncomfortable with a 97% survival projection(a 3% portfolio failure probability). Like almost everything else in life, it all depends.
Best Wishes to all for the coming year and beyond.
Dumb stuff...Those Guidelines...Forget about it...
Tax deferred (IRAs) requires distributions at age 70.5 due to RMD. What dynamic does this play in the 4% rule?
I can imagine that if RMD is anywhere near 4% of my overall portfolio then possibly 1% of this 4% will be going to the IRS (25% tax bracket).
So, in terms of after tax dollars, I might need to live on 3%, me thinks
Umm ... What's wrong with letting the pot grow?
If your needs are met and you're otherwise living comfortably, there's nothing wrong with that.
Dumb stuff...Those Guidelines...Forget about it..."
Save it for the years your portfolio goes negative.
It occurs to me that the stock market may not remain forever at record highs. And that bonds might someday cease to be the safe & profitable investment they've been for a couple decades now. That inflation may not be forever tame. And that infirmities, new taxes and calamities unforeseen might require a greater reserve than we currently envision.
(My third grade teacher explained this as squirrels stashing away a few extra nuts in case of a harder than expected winter.)
And Happy New Year All.
Actually no: MIT's Billion Prices data, collected independently, from online prices, do not track the official CPI exactly — the basket of goods sold online doesn’t exactly match the coverage of the CPI — but there has not ever been a large, persistent discrepancy:
http://www.pricestats.com/us-series