The Rule of 4% Was ALWAYS Made To Be BROKEN
Вставка
- Опубліковано 1 лип 2024
- 00:00 4% Rule
00:56 The History
02:23 Bengen & The 4%
03:43 The Push Back
05:48 Deviating from 4%
06:38 Inflation
08:00 Very Conservative
08:40 Withdrawal Rates
09:51 Example
11:03 The Ideal Rate
Some of my favorite books: amzn.to/3KF3tlr
Camera & equipment I use: amzn.to/3Z20lof
Disclaimer: Please note that this video is made for entertainment purposes only and not to be taken as financial advice. Always make sure to do your own research.
Join the family & subscribe to my channel here: / erintalksmoney
Thanks for watching, I appreciate you!
HERE is where the rule of 4% is AWESOME! Say, you're 35, and have maybe $100k or $200k in your 401k after being in the workforce for 13 years. You have no clue if you are on track? behind? ahead? what does this mean? The rule of 4% can create FOCUS for the person just entering middle age / their real "earning years".
You can quickly get to: "I think I need $8k a month, Social Security will be $3k, so I need $5k, so that's $60k a year....I need $1.5 million in my 401k" It's math you can do in your head EARLY ON to figure out what your savings/investment profile needs to be.
Exactly. Later on you can try running a more specific scenario in Excel or online calculator with more variables to really nail down what target you need.
100%!
I am 61 and retired. I use 4% withdrawal rate.
Do you increase your withdrawal with inflation every year?
I planned for 4% but overshot. My portfolio target was $2.5M so I could withdraw $100k/year, but since retiring I haven’t spent anywhere close to that (though I’m considering a vintage Porsche 911). On the plus side, it means my investments are still growing and I don’t worry about inflation or medical bills.
Interesting. I'm in my early thirties and I like the information in the comment thread.
@@epbrown01 same here, money goes a lot further in retirement. $100k when working isn’t that much, when retired it is way more, due to better pricing for things and less outflows like taxes, and work related expenses. When flexible and paying attention you can spend less for the same things easily, and we just don’t need much “stuff” anymore.
As Bill Murray said in Ghostbusters, it’s more of a guideline than a rule.
Another splendid video, Erin. You've really grown as a financial educator on the channel, and are a natural on camera.
The 4% rule achieved the visibility and attracted the debate it has because it codified, even against William Bengen's wishes, an answer to one of the most anxious questions in retirement finance: can I afford to retire? The fear of running out of money before you run out of time is real, and 4% offers a clear and conservative metric for what is, allowing for the amount of our savings, our need for cash, inflation and longevity, a complex calculation.
My one concern with the rule is that, in favouring capital preservation as it does, you can end up dying at 100 with a million in retirement savings. I like the idea of a higher rate earlier in retirement, when you are more likely to be healthy and open to travel or larger discretionary purchases, then decreasing the rate as you become less active, this tracking that "smile"-shaped pattern you noted we follow.
Yeah I'm aiming for a 5% withdrawal rate :).
I've always seen those types of rules which I call ROTs (rule of thumbs) are only for getting me a starting input value or a ballpark for an expected but needed outcome. Also sometimes useful for generic guestimatting. I actually first wrote a Monte Carlo simulation algorithm for analysis of construction projects back decades ago but the custom nature and the compute requirements at that time made it useless for fast computations on most consumer grade computers. Now, a person who has access to Google can set one up that will do over a million simulations on their spreadsheet in no time.
The secret is to be flexible. On good years you spend more and slow years you spend less.
Skipping an inflation adjustment is more powerful and less painful than doing a big income cut for a year or three when the market turns down
I planned for 4% when I first started planning in my 20s, because I also assumed that SS would be irrelevant and that I would not have a pension.
Now in early retirement on a decent pension and zero debts, we only pull from our nest egg for vacations/etc. Eventually, SS will add to the nest egg. We are very lucky.
But this brings me to my question:
If SS and/or a pension are covering 50% of your needs, then the investment mix and safe withdrawal rate would be significantly different that if “guaranteed” income is only covering 10% of your needs.
I guess it depends on whether or not you believe SS is going to exist and maintain the level you're getting. Assuming it's all political bluster and neither party would actually let SS slide into extinction, I think you could very well be more aggressive with your investment mix, but maybe not as much with your withdrawal rate. The more aggressive mix would provide more volatility, but should yield a higher return rate. Since half your needs are coming from SS and a pension, the higher volatility for the other half probably wouldn't bother you, and may be a good tradeoff for the higher return. But I'd be a little more reticent with increasing the withdrawal rate. Theoretically, a higher return should be able to sustain it, but I'd be careful not to get carried away and kill the golden goose.
@@dstevens518The most important thing to politicians is getting re-elected. Politicians *will not* piss off their voters with the highest turnout rate. What *will* happen is the younger generations will get stuck with the bill- higher FICA taxes and an increased full retirement age
@@dstevens518
Good discussion, Dan
My parents told me that SS would not be there and that I needed to save and invest for my own retirement. So, for the last 40+ years, I have been saving and investing versus speding. As I get closer to retirement, looks like SS will be there. But it is planned to be treated as extra money.
@dstevens518
Social Security may go away in the future but I do not believe that that will affect anyone currently receiving distributions
10:42 'The target is what your income needs are...' This is a good starting point for figuring it all out when you have SS income and a pension, then you should have a leg up towards figuring the amount needed to fill the gap.
4.1% was the original number. Every portfolio has its own unique safe withdrawal rate. The creator retired way too late and only withdraws sub 2% from his portfolio as his desired life in his late years costs very little.
IMO, it's a great planning tool, that's all.
The thing about the rule is it's not actually a rule and you can do whatever you like with your money, but it's a good figure to keep in mind when planning, and a good jumping off point when starting retirement.
Its like the rule of 72. That's not actually a rule. I see rules for budgeting, retirement, or debt management from financial planners. I wonder why are they are trying to hide the fees with rules.
@@jjred233
Really?!
Being retired we just use the RMD withdrawal only which actually works out to be in the same area as 4% guide post. This seems to allow steady growth while providing additional income to social security and allows for additional withdrawal if needed. Great commentary on withdrawal concepts.
So your entire Portfolio is in an IRA?
Or are you applying RMD percentages to your entire portfolio, regardless of its status?
@@timsans1170 We also have a cash brokerage account that also has a couple of stock funds along with a money market fund..
There is actually research on using the RMD tables for a withdrawal strategy and it is much the same as a 4% rule type strategy. Main issue is that it starts later.
My wife and I both retired at 58. Im 62, and she's now 60.
We have used the 4% rule to guide our budgeting.
We use our invested assets to determine the 4% we withdraw and we have a diverse portfolio so we can adjust the "buckets" based on market conditions. We currently have about 20% in cash investments because we are getting over 5% on that money.
We DO NOT include real estate in our calculations!!!!!
We have our farm where we live.
We have one rental house.
We have a farm where we play.
The value of these investments is certainly a part of our net worth, but we don't count them in our 4% withdrawals.
Everyone will be totally different in their retirement, so using a number as a "rule" simplynmakes no sense, and it was never meant to be a strict number. It's a guideline that helps simplify the planning process.
Your income needs, assuming you have no debt, can ebb and flow based on a lot of factors. Some, you control, like travel and new cars. Some you can't control, like health issues and major home repair. On down market years, don't take the Alaska cruise. On up market years, take the Africa safari you always dreamed of.
Great video. Keep up the unique takes with detail, why I subscribe to you!
I don't like the Rule of 4%, because it's simply a tool that says how much youu can withdraw, but has nothing to do with actual expenses! I know too many people that use the 4% rule as their retirement plan, without knowing do they really need more or less, based on expenses. Having retired in June, I will need to withraw about 6% for 4 years, until SS kicks in, then I will need about 1.5%. Once my wife collects SS 3 years lated, our SS and a small annuity we have, will more than cover everything. KNOW YOUR EXPENSES, and that is your withdraw rate!
Love This!!
Another brilliant video, Erin. Thank you! One point you have covered in many other videos: Once you know how much you need/want to spend annually in retirement, first remove what Social Security will already cover before applying the "4%" rule to see how much savings you need. If your retirement budget is $50,000 a year, subtract your Social Security of $20,000, leaving you with $30,000 that you will need to draw from your portfolio. At 4%, that indicates that you may need non-home equity savings of $750,000. If one is pessimistic on Social Secuity, then you are back to savings of $1.25M. For me, domestic GDP is highly reliant on consumer spending and Social Security is funding (via consumer spending) a significant portion of GDP right now. I can't imagine the politicians not preserving Social Secuirty as it will anger both voters and corporations - and the amount of adjustment needed to preserve full benefits is far from radical.
In planning for retirement, I'm envisioning a 4 to 5% withdrawal rate, coupled with a three-bucket system. I believe a three-bucket system is a great way to manage the market swings over time.
Im not entirely sure how different tax treatment of your money really affects your ability to manage during market swings?
@@justthebrttrkI believe @TerribleTampaTim is referring to a three bucket asset allocation system like that recommended by Joe Kuhn here on UA-cam. Bucket one would be 2-4 years of expenses in cash. Bucket two would be 2-4 years of expenses in fixed income or other”safer assets”. Bucket three would be everything else in stocks. The idea is that if the market is down then you spend from cash bucket one. When bucket one is empty you refill it from bucket two. When those are empty you refill them from bucket three. This works because there has never been more than three consecutive years of negative returns so ideally you never sell stock in a down year. This also eliminates sequence of returns risk for up to eight years (bucket one + bucket two). I found this three bucket system coupled with even a 5% withdrawal would have worked during the “lost decade” of 2000-2010 where the S&P was basically flat. I plan on using this system when I retire.
@@justthebrttrk
Buckets are also used for time horizons, I believe that is what is being referenced
Erin, you covered it all (well, maybe not ALL, but you get my drift). I'm going to be retiring this year, and we've got our expenses set to the point that with our SS, payouts from a variable annuity (probably not the best financial move at the start, but we're here now), and my pension we aren't expecting to have to use our investment portfolio at all, which leaves it for discretionary expenses. Will it stay that way forever? Probably not, but keeping lifestyle creep down goes a long way towards extending that date out.
Pretty similar to my situation. My wife and I will both have our pension and SS, which should cover most expenses and some travel. I plan on taking 2% out of our investments for fun money and using the rest for the “unexpected “ expenses like new roof, furnace, cars, repaving the driveway, etc. This should allow our investments to grow over time and help out our children in the future.
10% YOLO rule
lol
Well explained the why/logic behind the number 4%, with that we now can easily make our informed decisions.
Your take is quite informative. I wish more UA-camrs would put the same effort into producing a video. Thanks for sharing this. Keep it up!
The original study that the 4% rule derives from actually said that pulling 4% would let you last thirty years before the money ran out, but the latter bit has been almost completely forgotten
I have been following your advice for some months now and it is really helping myself and wife plan for retirement.
9 years ago at 44 years old my net worth was around 160k now it’s 1.1million.
I achieved this by cutting back and placing additional money in my 401k from 8% to 18%.
Also by investing in the s&p with a mixture of tech stocks MSFT, AMZN etc and an ETF called QQQM.
I wish I started much earlier however things look on track now.
It would be great if more financial education was given in elementary and high school.
I certainly had no idea of the power of compounding until I started witnessing it in action.
Interesting history.
I've been living off of a 7% pull and have a lot more money now than I did when I stopped working 3 years ago.
Two comments. I am semi-retired for a few years and continuing to add to my nest egg. For about half of my portfolio, I am just pulling out the dividends and that is working great. For the other half, I am re-investing the divs and letting that part of my portfolio build. Though Erin commented everyone's situation is unique, what has not been commented on that I have seen is the question of one's goals in their estate planning. People have differing views on monies they want to leave vs. not leaving inheritance monies. This is a factor that will play heavily on withdrawal strategies. Peoples' mix of resources and personal strategies differ person to person. All that said, great video and content. The planning really never stops.
Go-go, slow-go, and no-go
Higher withdrawal while lots of travel is happening. Lesser withdrawal once you slow down. Even lower withdrawal when age and health no longer allow any travel.
THANK YOU SO MUCH,
This is sooo reassuring for us 🙋🏻♀️🙋🏻♂️
My portfolio will be 100% stocks.😊
I tend to use 3% as my estimate. I'll go as low as 2% and as high as 4%. The reality though is that when I get to retirement age I'll have the historical returns to look at, plus will watch my spending. If I need more money I'll try and work longer or get a part time job is possible.
Today I will just enjoy life and save whatever I can.
Thank you. That was a really good explanation.
Glad it was helpful! 😊
I'm aiming for a 3% since it means I retire now if I retire using the 4% rate.
Thanks Erin. Great video
Great video Erin! How RMD's affect the 4% rule? It is another variable to consider.
Great video Erin. I chose a 5% withdrawal rate for my early retirement and will keep an eye on Sequence of Return risk. I feel 4% is too frugal and conservative, except in the worst-case scenario. If that happens, I will adjust downward.
Using 2 percent plus any big purchases. Retired a year ago, have bought a Corvette, gone on a cruise to Greek isles, turkey, cypress, Crete, and briefly Israel (was there October 7).
YIKES!
Glad you're OK!
Thanks!
I’ve watched a bunch of your videos and they’re great but this is probably the most important video you’ve ever made. Thank you for speaking up and over the noise of all the repeating voices getting this wrong. Being aware of the economic environment you’re currently in and having flexibility on what you can withdraw is key to ensuring you neither run out of money nor are at the end of your life having never truly enjoyed all the money you had.
I sure do like learning about the 4 percent rule. It gets you thinking about how to do things At least. I run between three and seven percent calculations...with running between four and twelve percent returns on average.. With estimated savings. Kind of fun. Obviously the higher you get before you retire, the higher percentage.You can withdraw if you need to.
How would the Safe Withdrawl Rate change if your timeframe was 20 years and not 30 years? Would it increase from 4% to 5% ?
Thanks for another great video
Good One😊Thanks
Welcome 😊
It’s good to use conservative estimations when planning for such things. The closer you get the more clear it will become. It’s easier to take your foot off the gas than it is to play catch up.
I retired at 61 about 2 years ago. My plan was 4% withdrawal, but the stock market plunged, so we withdrew only what we needed on months the market was up. We weathered that just fine. I think most people would do the same.
Very interesting video! I think variable works for me. Based on market performance 😊
i think people are confused by the 4% rule. The 4% rule takes into account market fluctuations. What that means is that the equivalent value of that 4% is gonna be lower when your portfolio is lower due to market decreases and higher when market is up. So you only get $44k if the market is up increasing your $1m portfolio by $100k to $1.1m, but only $36k if market is down decreasing your $1m portfolio by $100k to $900k. If you need a constant $44k from your portfoliio, the % withdrawal is going to change when the market changes. This is the point people miss and why focusing on 4% rule isn't the best way to view things. The 4% rule is meant for your portfolio to last however many years you are assume for your life expectancy. This means you are still going to reduce your portfolio.
I am retiring this year at 55, I will be using 3% as a rough guideline to start. There will be times where I need more and years where it will be less but as a rough conservative guide it's an easy calculation to make in your head. One of the things that are rarely said about the 4% rule is the expected time horizon, if you're 50 3% is safer, if you're 70 6% is conservative.
Same, plan and calculations based on 3% to start with. I plan to retire in my early fifties, so I want my portfolio to continue to grow at a healthy rate for the first 7-10 years, then adjust my withdrawal rate based on income needs at that time.
I plan and calculate my portfolio withdrawal rate based on 3% to start with. I plan to retire in my early fifties, so I want my portfolio to continue to grow at a healthy rate for the first 7-10 years, then adjust my withdrawal rate based on income needs at that time.
Hello Erin, in my country of Soviet origin we have great rule of eating only 4 turnip. How grand for states to adopt such rule. Many thanks.
It's like the "rule of 3rds" when it comes to art. It's a general guideline and is commonly broken. Often with good outcomes.
It's great to say that 96% of people end up with more than they started with. But if you end up being one of the other 4% the consequences are pretty severe. And the issue is you'll be most of your way through your retirement before you have any clue which category you fit in. Far too late to just go back to work.
keep track and you wont be too late. Its very simple to check if your portfolio is rising or falling. And if it falling you will need to either cut spending or determine how you will supplement the portfolio so you have sufficient.
As sequence of returns risk goes, early down years in the markets have bigger effects on the long term viability of your retirement plan than later years. If you have down years during the first 5 years after retiring it’s probably a good idea to either work some or find ways to cut expenses if you can. Maybe a blend of both.
@buyerclub2 @tylercampbell6058 throw those scenarios into historical models or monte-carlo simulations and you'll see that it's not anywhere near that simple.
96% don't end up with more money though. The 96% success figure for the 4% rule simply means one did not run out of money by the end of year 30. That could mean you have $1 left.
I think only like 50% of portfolios had maintained their values, inflation adjusted in the trinity study. I have no idea where they got that figure from.
@@justthebrttrkmy last $1 is definitely going to a stripper…then again by then inflation is really gonna hit and $1 won’t cover a single lyric
In order for the rule for ANY percentage to work for long periods of time, ideally you want your money to grow at no less than the percentage of your initial withdrawal plus the average rate of inflation. Having a 4% initial withdrawal rate adjusted for an average inflation rate of 4%, you want your investments to grow by no less than 8% on average per year. I built something in a spreadsheet and I discovered that an average investment growth of just 7% should last about 40 years. Of course, if you have to also consider sequence of returns risk. So maybe, you really want your investments to grow at no less than 8%, just to be really safe, otherwise, you need to withdraw less.
It sounds like you are re-inventing the wheel. Obviously the 4% rule uses historical returns data.
In the early 1990s it wasn't just the last 10 years of stock market boom. Bonds were also paying very high rates - above historical stock market returns - leading credence to the idea that you could live on a part of your income, say 6%, and reinvest the rest.
If you use a lower withdraw rate, the added bonus is that the growth of your portfolio will allow for bigger withdrawals in the future. Drawing down (decreasing) your portfolio can be dangerous once you get below critical mass and it free falls.
But the risk is that you'll end up with far too much money, and you won't get the same utility when spending at older ages.
And the obvious cost is that getting that lower withdrawal rate requires either spending less early on (when utility is higher) or working longer, with your best/healthiest years.
@@ordinaryhuman5645I'm willing to take that risk. When I go, my money will help friends and family have an easier time, and the rest will go to fund research. I would rather give it all away while I'm alive, but that's kind of hard to plan without knowing my "end date".
@@ordinaryhuman5645 I've read Die With Zero and I understand your point. However, there's a point where you've got enough to live your best life and still grow wealth. Especially if you're retired very early and still have a few decades of reasonably expected healthy life. A decaying portfolio makes very little sense in that case.
@@ordinaryhuman5645, the risk of too much money...
Unless your goal is to create generational wealth?
I'm targeting a 2-3% withdrawal rate so my investments grow exponentially to generate wealth for my family.
I'm working towards $1 million invested by 45, $2.5 million by 50, then probably partially retiring and pushing for $5-10 million by 60.
I'm an Engineer, I don't live extravagantly, or have a desire to. I just need a nice garage with some fun equipment in it to play with.
What I do want to do is setup a trust to hold family assets and provide for them in the future.
If I pull less than $200k a year off a $5 million portfolio, I can expect that to grow to over $50 million by the time I hit 90.
If I get to $10 million at 60 that could grow to almost $140 million in the same time.
Create a substantial resource to provide for future generations of my family.
I honestly don't know what I would do with $200k a year and no bills... I live happily on less than $50k right now, investing the rest.
Wouldn't it be cool if everything a grandchild or great grandchild was born the medical costs were covered 100% and 2-3 funds were setup. $20k in something like a 529 to help cover their college, $20k in a retirement account that could sit and grow to $5-6 million for them by retirement, and $40k in an outside retirement investment account to help towards the purchase of their first home.
Makes me happy just thinking about it. 😊
That’s why there is a “4% rule” , it gives reasonable guidance. There is no “critical mass” that will cause a free fall, just a too high withdrawal rate. The withdrawal rate can always be adjusted. Most retirees spend less as they age.
Should I try a 50% withdrawal rate?
Lol good luck with that
If you have a VERY short life expectany!
The annual average spending shown on the chart at 12:00 seems really high. Is this correct?
If you notice, that is spending done by those with 2-5 million dollars worth of assets. So yeah, their spending will skew higher that your average Joe.
5:12 If 3% is a 'Safer Withdrawal Rate' then by the same logic a 2% or 1% withdrawal rate could also be called 'Safer'. At what point do we say that all of life has some risk and part of living is also accepting that we don't control everything?
Think of the 4% rule as being an acceptable rate for the majority, providing the right level of minimal risk of running out of cash. Invariably, some people want to be even more conservative (moi), and some think it's already too conservative. Kind of like asking how much money is enough? Well, depends who you ask...
While everyone has a different risk personality, I also see folks would land on the more conservative or riskier sides of the argument based on their ability to save the amount they need. If you're running out of time, or not that keen on delayed gratification, I can see that rationalizing a riskier, higher rate would be tempting. And if the opposite is true (us), then I can see why leaning toward a lower rate providing increased buffer room and flexibility sounds like a good idea.
going from 4% to 3% is a huge change - 3% is approaching infinite portfolio longevity at low risk rates. Vanguard showed that 3.3% should last for 50 years at the same risk as 4% lasts for 30. 1% is basicially spending rounding errors.
The 3% was for the 100 in stock equity or retire very early. That's more for 40+ years withdrawl rate.
We are retired, we use the what are we going to do with in next 18 months rule adjustment every half year, since we book trips around six months out.
I am saving 14% into my Roth at work, wife is saving 20% into her roth at work. We are also saving a LOT to our swab account. Managed to put almost 200k in it in under 4 years. Plus we have a IRA and a Roth IRA.
I'm using 3% as a percentage of portfolio each year. I'm in my late 20s experimenting with financial independence / early retirement. I still want my portfolio to grow over time even with my withdrawals.
Buy income producing real estate and forget this crap. All of my properties, which are paid for, produce 10%+ returns with very minimal effort. With leverage the returns would be much higher, but I'm in my 60's now and want everything paid off.
I have two rental properties, and I am in the process of converting my primary residence into the 3rd :) Also, househack with finished basement.@@rowdybush1
I'm planning with a 3% SWR, because the future could be kinda crazy. This plus assuming no pension or SS will need quite the nest egg even for a modest budget.
96% of portfolios using the 4% rule end up leaving a significant portfolio last end of life. 4% is for a WORSE case scenario. Unless you're retiring really young 3% is overkill. Especially when you can account for those uncertainties in much better ways such as skipping a year or two of inflation adjustments. This also has a profound impact on preserving the portfolio since skipping inflation adjustments has a positive compounding impact on the portfolio.
The best strategy is two rental single family homes a working 4% rate of withdrawal and SSI. Make it so you can get by from one of these and have all 3 as an option. This way if one is not performing as you would like or hope you have backup. If all are doing well you can grow the rainy day fund.
7:30 You should adjust your rate..... Do RMDs actually give you enough flexibility to make such adjustments? If so, by what margin?
RMDs are set by the government to drive you to liquidate your IRA before death. They are completely unrelated to your personal financial situation.
I'm planning to retire in about 3 or 4 years...... At 65 or so. I'm thinking of starting out with 5 or 6 percent until taking Social security at seventy, then maybe dropping down to 3 %. That way, I can maximize social security and not deprive myself the first 5 years. Planning a bond and CD ladder for the first 5years as well to minimize sequence of returns risk.
We are about to enter retirement and are looking at 5 to 5.5% for the first couple of years. Since we are retiring later it seems reasonable to draw more at this time and then less in the middle of the “smile”.
That is not the 4% rule. The rule is the first year you take 4% of the portfolio. That is the *LAST* time 4% comes into play. Every year after that you increase the dollar amount by the previous year inflation.
8:40 'That is a make it last method....' That would be assuming 4 to 4 1/2% per year for 30 years. So as the average retirement is less than 20 years (Men) to slightly over 20 years (Women), what figures are appropriate if you are looking to end with a zero balance?? I am not thinking of shorting my kids, but rather I would like them to have the same opportunity to make something of their own lives. This may mean giving a portion of the remainder to charity and part to my kids.
If you look at the pictures in Bengen's book, you might notice that the "optimal" percentage and investment mix are very sensitive to the length of time one is expecting the money to last. For 30 years somewhere around 50% stocks and 50% bonds might be "optimal". But a couple years longer and 100% stocks is "optimal".
In addition, as one's time runs out and the money dwindles there is a real possibility that the money will not last. That can cause a good deal of stress.
The 4% rule is statistically a terrible rule to follow if you want to optimize spending in retirement.
It’s a great rule to optimize continued wealth building in retirement while spending far less than you most likely could have.
I personally plan to shoot for a high withdrawal rate, probably around 6% in top of taking SS at 62. Definitely prioritizing spending in the years I expect to be most active.
Having no debt, low fixed expenses, and higher discretionary expenses, I can easily adjust spending in a down market. In my opinion, removing uncertainty by eliminating debt and maintaining flexibility via low fixed expenses are both key aspects of having a successful retirement, both financially and emotionally.
A tax efficient withdrawal strategy, living in a low tax state/county, having 2 years of cash on hand, and having the option to do some part-time consulting in our 60s will be other factors that will also be big boosters to that strategy.
I'm planning between 2.5% and 3% to start from just my brokerage account. I want to retire at age 40 and never work again. I'm also planning for 0 social security just to be sure I'm good. I'll probably start with a very low rate and increase it the closer I get to 59. Once I can start withdrawals penalty free, I should be able to do 4-5.5% easily after age 59.
Most videos i watch are not very informative, alot of them are just common sense fluff without any real details. This video is very informative with little fluff. Please make videos like these. Maybe videos about different type of ETFs and bonds that are popular in the FIRE community. Anyways, subed!
4% but at what investment mix?
i have been withdrawing nearly 6% for years. Works for me. Not worried about it.
I only would withdraw dividends.
I actually like the idea of 4-6 percent initially, Then 3-5 percent later in life when you're not spending as much depending on health. Not sure period I'm still learning as I have 5 more years. I'm guessing the Wife and I will both be pulling about 4 grand total a month from social security at 62
In my opinion you have a 50/50 portfolio in retirement. 50%b stock funds and 50% bonds.
Regardless of the % you choose, the key is to go into retirement with zero debt. That will be a huge burden lifted.
Just remember that the “best case” and “worst case” scenarios in a Monte Carlo simulation are selected by the person running the model.
We have a long history of poorly predicting the future!
(I’m sure there are industry standards for these simulations. I use Fidelity as an advisor, but I do not think their model is pessimistic enough.)
Why is there a rule based on withdrawal from the principle? Is it not possible to live off the interest?
Erin you've gotten so good at doing these videos. Retired over a year now. Last year I took out about 3.3%, this year about 4.3%. The 4% rule is a guidepost for me. I'm still invested over 75% in stocks and a major chunk of the remainder 25% is in cash. I hope it works out for me!
When you say "Cash" do you mean bonds or a high yield savings?
@@timsans1170 Yes. Roughly 10% in high yield savings. I don't have a lot of faith in bonds recently and the cash account is less risky and has performed better. I don't know when this will change.
@@timsans1170 Yes, 10% in high yield savings.
@@timsans1170 high yield savings
Cash is in high yield savings.
How long do you practice before you shoot these? You articulate very well and clearly!
It takes about 45 min to film :-) lots of bloopers haha
I think the general rules of thumb are good to give young adults a vague notion of the target they are heading towards in their first decade or two of adulthood. But a person who is retiring should be way past the point of following a simplified rule of thumb to ensure they will be financially secure for the rest of their life. That means putting in the work, prior to retirement, to learn and understand what an ideal withdrawal rate for their situation would be.
I do it somewhat inversely. Determine what I need, and confirm what percentage that is. I don't get to 2% so I guess I need to find ways to spend more. :-). This is why I continually advocate to people to invest when they are young. So they can have a similar "problem", such as having to learn what a DAF is.
Definitely invest when you are young. Getting the first amount threshold, $100K, is common, which is the hardest. And may require the most sacrifice. But, as you get more money, the next thresholds become more accessible and easier because you are adding money to money that is already working for you and throwing off gains (interest, etc.).
EXACTLY. You withdraw rate should be based on your expenses. If you don't have enough to pull out $X dollars a year for your retirement, you aren't ready to retire!
Im retiring soon at age 58 with a healthy portfolio. I plan on using the 4% rule until I take SS at age 65 and then reassess
It’s like the “rule of 72” is an approximation for estimation
Fortunately, I don't need my portfolio to live on; I'm just going to take required RMDs, which will be too much.
I watch way too many of these types of videos. This one however was immaculate.
Dave says i can pull out 37% each year and still be able to retire early.... lol
lol
The stock market isn’t an indicator of the health of the economy. The stock market goes up even as homelessness rates go up, like it has consistently for 4 decades. It’s a bad look for economists and personal finance advisors when they constantly point to measures like market growth or GDP as signs of a healthy economy, ignoring rising poverty and homelessness.
I think the only rule I want to follow for now, is to make sure that I take my RMD for the first year or two, and then adjust from there
I m investing for 4-5% dividend yield so I don’t have to worry about withdrawing… dividend got rarely cut in down markets
In retirement, I have about 25% of my portfolio in dividend paying stocks and funds, as "Income." However, be careful in saying that dividends don't get cut in down markets. This may be mostly true, but they get cut of eliminated for any number of reasons. Ask shareholders of GM, GE, and recently INTC. These were considered very strong dividend companies. GM obviously went bankrupt, so they lost not only their dividend, but their stock became worthless. GE cut is dividend, and also saw their stock price fall to about a dollar, before initiating a 10 for one reverse split. They are again paying a small dividend, but nothing near previous amounts. INTL cut their dividend, because they fell behind other chip makers in texhnology, and lost market share. These are just three of MANY examples. So yes, dividends are a great income source, but they are far from guarenteed!
People confuse dividend yield with rate of return.
Then we have Mr Ramsey advocating for 8+...
well, if everything was linear, he'd be correct, but the problem with his rant was markets fluctuate. Sure you may have 10% over a 20year period, but that doesn't mean you have 10% ROR every year, which is what his 8% presupposes.
For some lucky people, their SWR realistically can actually drop significantly over time (assuming their spend over time is stable). Think pensions and SS. Or large inheritances
Why is it that nobody seems to be addressing that the solution is simple - build a portfolio of stocks and ETFs that pay just over 4% with increases at or above the inflation rate over time. Take out only 4% and then reinvest any dividend income that is over that amount, thus you ensure your income goes up every year and you never touch principal.
4% rules and portfolios are ALWAYS built out of bond and equity combinations (using SP500) that sometimes yield more than 4% (rarely) and almost always less than 4%, thus you are always having to sell principal to bridge the gap. This is fine when bonds or equities are in a bull market but in a flat market or falling market that end up extended you are destroying the ability to survive. But with a portfolio that starts off just over 4% right out of the gate, you never erode your principal and end up better off every year.
When the solution is so often ignored it really turns the 4% Rule problem, that has been debunked many times over the years, into a strawman that people keep writing articles on and making videos on over and over again.
Lol I was waiting for the comment on dividends. Dividends aren't magical free money and there is loads of historical data to show that choosing stocks because they pay dividends is completely irrelevant. The only thing that matters is total return. Ben Felix (who has more finance certifications than you can shake a stick at) has an excellent video titled "the irrelevance of dividends" that shows how this train of thought is flawed.
Dividends get cut or eliminated all the time. Inflation is not predictable. Your entire argument is debunked in those two points alone. Not to mention the tax inefficiency of dividend stocks while you are still working, among MANY other factors.
And to your point that a portfolio of s&p500 and a bond fund "rarely" returning over 4%... are you mad? We've had two 20%+ years in the last three alone.
You gotta start drawing down the money and pay the taxes before the IRS demands RMD's that may push you into a higher tax bracket, higher Medicare rates through IRMMA, being pushed out of property tax savings and more. Even if you are not spending it it's good to get it on your side of the tax man.
I think 4% rule is awesome ⚓️
I will probably aim for 4% or less. Since I have 3 children I hope not to spend all of our money and to leave an inheritance for them. I appreciate how you presentes this information and the different portfolio sizes you would need.
Don't understand that graph at 12:00 like ages 50-54 the average spend is $343k ?
It could include things like paying for college for kids.
And consider that those are high net worth retirees - with assets from two to $5 million. Those are not your typical retirees. So those spending amounts are going to be very much elevated. I really used that graph more to display the spending patterns and trends not necessarily the dollar amounts (also I wasn’t able to find one of lower net worth retirees spending trends), and the subsequent graph of the retirement smile.
I’m 27 and my hope is a 3.5% rate of withdrawal with retirement age of 55. I know my number will have to be bigger but I feel like I have the time to get there
3%
It’s a guide nothing more market is down 17 percent I won’t take anything out. It it’s up 17 percent I’ll take out more.
Erin, I know you are a supersaver at heart. I am curious whether you think that when you get to retirement age, are you going to feel comfortable watching your net worth go DOWN? You have spoken about the "die with zero" approach but what super saver is going to feel comfortable seeing their nest egg decline? Bengen stated that 96% or more of people (following the 4% rule) end up with MORE than they started with on a nominal basis". How do we keep our sanity while letting our nest egg get depleted? And if we don't, then we are continuing to make the same sacrifices while we are retired that we made while we were working and saving towards retirement. I almost think that the 4% rule is actually more often than not a way to practically assure that you end up dying with as much (or more) as you started with when you retired.
I would agree with you, that, using the rule of 4% is kind of a way to ensure that you end up with dying with more money. And that is not my goal. I can say personally when I get to retirement, I will likely use a much more aggressive withdrawal rate.
I am a super saver at heart, but I can honestly say that, as a time goes on, my attitude is shifting. As I’ve gotten older, my priorities have changed. This past year has been honestly one of the hardest years of my life. my mom had a health scare, and I almost lost her. My dad had a health scare, and I almost lost him. my husband and I had our son this past year, and I almost didn’t make it through childbirth. All of these events happened within six weeks of each other. it was lot to deal with, it’s still a lot to deal with. But I can say my attitude on money has changed more in the past four months, than it ever has in my entire life. I have zero intention of dying with the biggest bank account. I would rather spend time and money with my loved ones while I have them. Money a secondary to all of it. So I can positively say with 100% certainty that I am A-OK with my net worth going down in retirement.
@@ErinTalksMoney Excellent (that you have a great attitude and know what is most important in life!), but how do you think you are going to approach retirement, financially?? Using a specific percentage as a guidepost or might you use a guide rail approach or just go a little crazy for awhile, thinking you will follow a "smile" curve in retirement and thus best to start out as best you can because you don't know how long you will remain healthy, etc.? random
I will use a flexible withdrawal rate. I will set aside as specified amount that I don’t touch, and don’t withdraw from. And that can be the oh shit fund, in case things go terribly wrong. And the rest I plan on spending and giving away. 😂
@@ErinTalksMoney love it. You need to copyright that account name. Maybe use it as the title of your first book. 😆
😂 - if I call it that on UA-cam, I would get demonetized
“This is not a drawdown method, this is a make it last method”
Exactly this. I actually want to run out of money, on my last day. That’s the perfect scenario
Yep, I’m gonna be higher than that for my “die with nothing” plan. I’m happy to adjust as needed in line with the market though.