How to Safely Spend More Money in Retirement | The Ratcheting Rule
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- Опубліковано 18 кві 2023
- The 4% Rule is designed with one goal in mind--to give retirees the best chance of not running out of money over a 30-year retirement. In most cases, however, a retiree ends up with significantly more money after 30 years of following the 4% Rule. In some cases 6x what they started with!
The Ratcheting Rule, developed my Michael Kitces, is designed to increase spending throughout retirement if market returns and inflation turn out to be favorable.
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Ratcheting Rule Article: www.kitces.com/blog/the-ratch...
Early Retirement Article: www.kitces.com/blog/the-probl...
Guyton-Klinger Article: www.financialplanningassociat...
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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As Rob points out, the problem with this is that it doesn't at all match the "retirement smile" spending pattern. All the income increases are back-loaded. A good spending plan front loads the highest spending levels into the "go-go" years when you are active. Otherwise you end up the richest person in the assisted living facility, or worse, the cemetery.
Some of us have offspring
@@rajvo7406 Well, right but this particular video is about how to spend more money in retirement, not how to be frugal and leave a pile of money to your heirs.
@@RogerMKEthis video is about spending more money while never going below your starting portfolio balance. So yes you can spend more AND leave money to heirs
@@RogerMKE
You should do both if at all possible.
Though as we've observed in our society ,all that "pile" is likely to do is get our offspring in trouble!
My prayer is that I live long enough to see them all healthy and successful and place provisions in my Will limiting their access to my hard earned and well looked after money.
But I agree, It's my money and I'd like to live comfortably and be generous while on this side.
Assuming their well adjusted and gainfully employed, better for them if they aren't burdened with my money!
Couldnt agree with this more. Just need to find a plan that optimizes front loading while not risking being broke at 80. Any recommendations?
At 73 met with my retirement financial advisor,, he had good news and bad news,, good news was I had enough money to spend until I die,, bad news was I had to die in 3 years,,lol
Good content as always Rob. I’ve been listening to you since the beginning of your podcast and I’ve learned a lot along the way and the day is finally here! I’m retiring at 60 at the end of this month (April). Please more content on spending more in early retirement. Like you mentioned, I plan to spend more in the early years while my health is at it’s best.
You may want to consider waiting, even a year or two could make a World of difference!
Follow this,
At 60 you're not even eligible for retirement which means that you've already decided that you can live off of your already accumulated assets.
Therefore, your Entire income could be fully allocated to savings!
If waiting is not an option and assuming you have enough saved already, you can allocate a portion to a separate fund.
Said fund would equal an amount which would be enough for the first years of retirement.
As I stated above in a separate post;
A trip to Europe for 2 is approximately $6,500.
If you were to allocate $100k to that separate fund, the straight math is 15 trips!
If you can manage to generate just 4-6.5% on that one allocation, then your money will likely last you indefinitely.
THANK YOU ROB! I had commented on a video you had a little while back about guardrails, and wished someone would do a comparison between it and safe, and you delivered! As always, spelling things out clearly for all of us. Keep up the great work!
Hi Bob - I wonder if there's a simpler solution to the "ratcheting". As you and others have argued, 4% of all retirement accounts is generally accepted as a safe withdrawal amount for a 30-yr retirement. So let's say you start with $1,000,000 and take 4% ($40,000/yr +inflation). But then your investments do well and after 2 years you have $1,300,000. The annual inflation adjustments might mean you are now up to $42,500/yr. But here's my hypothesis: Pretend the 2 year mark is the first day of your retirement and you have $1,300,000 in the bank. Just re-calculate 4% of the current balance and start taking $52,000/yr. The 4% rule says you should be good for another 30 years at that rate. So basically, it boils down to this: each year when you calculate your new withdrawal rate, compare the conventional 4% rule against "resetting" at 4% of your current account balances, and take whichever is higher. What do you think?
Yeah, but you're going to have massive swings in spending each year. ITs the percent of portfolio model you're recommending. That said, if you're super flexible, this could be a strategy.
@@rootedrotor525 Notice how you never actually reduce your spending in this strategy
Historical data is just historical data, not a law of nature. Can you gamify the numbers a bunch? Maybe not always.
Thank you for all your helpful videos. So timely for me as I just retired and read Die With Zero.
interesting approach. thanks
Very interesting take on withdrawals during retirement..thank you!
I'm retiring in 3 months, planning on roughly following this spending rule calculated each year ...
yearly $ amt from investments =
$ investments / (95 - my current age)
... that's it. it factors in ups and downs of markets and is inheritently conservative by planning based on 95 life expectancy
I’ll be using Guyton-Klinger guardrails when I retire next year. Since I’m a programmer, it was easy to make a spreadsheet to implement the rules. I just have to put in my portfolio balance each year and CPI. The spreadsheet then shows my budget adjusted for the rules. Very simple. I’ve role-played it using Portfolio Visualizer to simulate different starting dates and it works well in testing. Takes all the guess wok out and the spreadsheet does the math work for me. Easy-peasy…
Would you be willing to share the spreadsheet.? Maybe Rob can put it on his website if he likes it.
Is there a Guyton Klinger easy app for the not so math person?
@@caliwish7585 Sure. I guess I could share a copy with Rob and see what he thinks. I’ll clean it up a bit and make some notes on the various fields and how they are used for the calculations. I put some stuff in there for myself to let me try tweaks from the GK rules and don’t want them to be confused with the real G-K rules. Also, need to double check everything and make sure I didn’t miss something…
@@mikephilpot9857 thanks so much for the public service. I was just going to ask if anyone has a calculator to do the work instead we are all guessing using GK’s rule.
would be interested in a spreadsheet of this sort also. The caveat however is life expectancy which is also a wild guess and depends on many factors. Race is a major consideration and probably should be factored in. Consider in this country black american males life expectancy is 70.8 yrs while asian american woman is 82.7 yrs. Can a spreadsheet be constructed with a dynamic life expectancy incorporated?
Thanks for all your informative videos! I understand the ratcheting strategy, but how would someone account for future bumps in income, like starting to collect a pension or social security?
If someone has upcoming increases to their income, I would think it's ok to spend more of your retirement savings early on (because you won't need as much later when you start taking your pension or social security) but how can you calculate how much more can be withdrawn during your first few years of retirement?
good advice...A troubling question for me: is it best to have bonds held in a bond only fund rather than in a stock/bond fund? To access bonds I must also sell shares of stocks. I have had Vanguard Wellington for years and it worked well for me for a couple of decades. Now as I near retirement I think I should consider creating a 3 fund portfolio with proceeds.
I agree with wanting to spending more money in the beginning of retirement when I am still younger and more active. That's why I like Guyton Klinger better. (G-K also has 40 year withdrawal tables in his white paper.)
Thanks for the great video! How do we apply SWRs when we retire in Year 1 (say age 62) but begin taking Social Security in Year 8 (say age 70)? Mike Piper recommends using a Social Security bridge, but I know you’re not a fan of that approach. What do you recommend to harmonize SWR analysis with deferring Social Security?
I took SS early and never regretted. First you can have less money in the stock market to reduce risk. You die before receiving any. The payback is about 8 yrs you die before break even. We took the money and bought a lifetime income annuity.
Hi Rob, I appreciate your comments near the end of the video mentioning how people actually like to spend their money.
I've often wondered if anyone who has come up with a withdrawal strategy first examined the typical spending pattern of someone in retirement (something like the Go go, Slow go, No go pattern) and then figured a withdrawal strategy to fund that spending pattern?
It seems a bit pointless for the experts to come up with withdrawal strategies that the average person wouldn't want to use.
Take a look at Income Lab. I'm sure some of their videos cover this.
You can take some of your money and create a bond ladder to fund extra spending for the go-go years.
As you pointed out the bumps in spending may come when you no longer need the money. Most people spend less in their 80s. I’m spending a lot on travel in my 60s while my wife and I are still healthy under the assumption that our spending will decrease later. I’m betting that the risk of reduced health-span is higher than the risk of running out of money.
What are your thoughts on counting soc sec income in essence like the fixed income (bonds) portion of your portfolio split?
Rob as I near 69 and about to pull the pin, no male in my family, save one, has ever made it to 90 years of age. Depressing as it might be, I am in average health, not perfect, but avoided major diseases thus far. All research points to 30+ years but for us that are realistically planning for 20, and hoping for 15 what do the studies show? I will have enough cash on the side and a very good social security check aside from my portfolio to cover extended care should it be needed but curious about any studies for lesser number of years?
Perhaps I'm misunderstanding the accompanying charts, but is this all based on data that is almost 40 years old? The world is a much different place now than in the 1980s. Have models been run on these rules on more recent data? Forgive me if I'm missing something here.
Any thoughts on Ty Bernicke's "Reality Retirement Planning: A New Paradigm for an Old Science" which describes extensive research showing that most people start spending significantly less starting at about age 56 (not related to reduced assets or income) and don't actually need 4% per year?
Hey Rob love channel. my problem with this vid is 60% equity exposure. I have 1.5m and am 74. Im converting all to fixed income, mainly CD ladder. I get SS as does wife and rental income. So I never really dip into retirement funds. But my strong feeling is once you've won the war go home. stop exposing your assets to the market. So how about a vid/research on what I could give away to kids now when they need it and have it last say 25 years?
Does all this assume you drop dead and not get eaten alive by long-term care costs?
Yes
I think the,
"I'm going to be spending more in my early retirement" thing
Needs to budgeted for is all.
Most of us get to decide when we're going to retire.
That gives us options.
You want to travel?
How Nice for you!
SET ASIDE AN EXTRA $100K BEFORE YOU RETIRE!
A 2 week trip to Eurpe for 2 is approximately $6500.
Just the staight math (ie: without any investment returns) is 15 trips!
If you retire at 67 or even 62, that should just about cover it.
I'm trying to follow along (please bear with me). In your scenario, we start with $100,000, (4% - $4,000), The portfolio grows to $150,000 so we increase our spending by 10% ($4,400). Three years go by, and the portfolio is still roughly $150,000. Increase another 10%?
Is the 150% adjusted for inflation?
What am I missing? How often does your balance go from $100k to $150k in a year? I thought the stock market was like 7%/yr. Bonds 5%.
Do all this rates assume is 6040 portfolio
Does the ratcheting rule also allow you to increase spending by inflation each year as well?
I’m new to your UA-cam channel and all your great insights. That said, I’ve been retired going on ten years and lucky enough to not have had to pull from my 401K. With inflation over the last year going up and maybe a recession looming, we need to to some long over due home remodeling. As a best guess, would someone just start with the 4% rule? Also, it there an online calculator to see where savings can be adjusted for inflation that you can link e too. Thanks again for all you do and all your podcasting and videos.
Remodeling prices doubled after Covid. I would spend the remodeling money today. Your home price went way up right?
If you haven’t touched your 401k through 10 years of retirement I’d be seriously considering whether Roth conversions are beneficial ahead of reaching RMD age (assuming you’re not already there). The trump era tax cuts are only valid for a couple more years.
@@rapfreak7797 there are should I convert calculators out there, But the payback of you live long enough is always the bet.
With anticipated 7% return on investment (staying in the S&P 500 that averages 11%), not adjusting for inflation, and the same monthly installment for decades, you can go over 6% of the initial value divided by 12 for more than 30 years. I delayed starting withdrawals for a year, but now the market has recovered so I am starting monthly installments at 6% now. This exceeds the 4% rule but does not ratchet up each year for inflation. RMDs don't hit 6% until age 83, but the account should be smaller by then, so the same monthly installment should be good well beyond that. Retirees spend less as they get older, so why adjust for inflation?
I think people who retired in 1999 would have ran out of money no mater how little they withdrawn. With inflation it took 15 years just to get back to where you started in January 1st 2000.
As for me I will have 30 months saffy net and pull out what ever I make in that year. If I have a really good year I will increase my saffy net. If I have a bad year I will cut spending so my saffy net will hold out longer. If i pull from my saffy net i cant increase my spending until I full refund my saffy net. If you make your spending flexable you can really enjoy the good years but you will need to cut back on the bad years.
Is that a 9.8 rom #1 in the back?
I just saw that too LOL
Could you send your dividends first and then 4% on top of that?
NO! Dividends are just a portion of your total return.
@@davidtvedte1337 Agree. But you don't have to sell securities when spending the dividends.
Would you agree this ratcheting strategy assumes that we are retiring when we are not in the so called "sequence of returns risk" of bad market with high inflation in first few years of retirement?
Well, if you retired during a "bad" sequence of risk, the ratcheting strategy may not result in a bump in spending for some time. That's what we saw for retirements starting in 1973.
6 times what they started with - in real terms??
At this point I'm only comfortable spending guaranteed income (social security + pension + dividends/interest). I sleep well.
Is the 10% bonus applied to the 4%, (so 4.40%), or is 10 added to 4? (so 14%)
I believe it’s the formal. We all wish we can spend 14% of portfolio. But we will deplete our portfolio in 10 years or less.
My take is you add 10% to the 4% so 4.4%
@@evelynmurphy9102 by the time you add the 10% it will no longer be 4% as the portfolio value will have increased. it's just 4% of year 1 in $ terms, inflation added each year to that $ amount then add 10% to that $ amount when the method tell you to.
i mean surely any year 4% of your portfolio is larger than your inflation adjusted original 4% you can increase your spending to 4% and reset the clock on the 30 years. a new retiree would be able to according to the 4% rule so why can't a currently retired person in exactly the same financial position. eventually you will hit a year like 1966 (was it?) where the 4% truly is the highest % you can spend and from then on you just inflation adjust with no real increases. of course this logic only works if we believe that 1966 will forever be the worst case scenario. also probably not a good idea if you want a good possibility of leaving a good amount behind to loved ones. you'd be guaranteeing a worst case of spending down your capital. but for single, childless risk takers why not.
It seems to me that if you are also willing to decrease your spending, then sticking to "4% of current portfolio" should work regardless of something like 1966 happening, right? Or am I missing something here?
@@DanielSantaCruz that's not what i'm suggesting. upwards only "re-set" to 4% of current portfolio with those warnings i outline is what i'm suggesting. allowing downward adjustments is a different strategy which i'm sure has been covered on robs channel before.
Of course all we can do is backtest things and there's been some major stock market issues in the past but I feel like as a country, we are rushing to a cliff as fast as possible, through reckless spending, terrible immigration laws and the whole DEI mess. Just feels like outside of just the numbers, society is rapidly falling apart. It used to be a crime to be a communist, now we elect them to congress.
Love your work but that ratcheting rule is far too confusing for the average retiree. Ever heard the term. Keep it simple stupid. When you're getting older you don't want to try and calculate all that business!!
You're not the target audience then haha