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The Right Way to Think About the 4% Rule for Retirement Income

Elan

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That’s true if your goal is to retain a particular nest egg through your lifespan. The approach I’ve used for planning purposes is to map out my cash flow sources over the projected years, accounting conservatively for expected growth and inflation, and evaluate my options. I haven’t completely retired yet, but could do so and draw down one retirement account until one pension kicks in. This gives me a basis to compare the various possibilities and choose one, then adjust for realized rather than anticipated changes.
Sure, everyone can use their nest egg to their best advantage, but strictly speaking, the 4% figure is derived from the premise of making a nest egg last 30 years over any market return. As I posted earlier, the "net net" is that one has to achieve returns that beat inflation by 1.5% to make a nest egg last 30 years if withdrawing 4%, inflation adjusted.

I have no pension, just a 401K. So my plan is to save enough outside my 401K to either 1) delay 401K withdrawal, 2) be able to skip withdrawal on years with low return or 3) live it up for 30 years, supplementing my withdrawal with my savings, and then lean on my kids when I go broke :).
 

VacationForever

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I have a spreadsheet that shows projected expenses for the next 20 years... so between annuities (factored in with net present value with a 3% "depreciation"/inflation per year), social security and Minimum Required Distribution (also brought back to net present value), our income needs should be met. We have a separate sum of money which we do not use as income to us. We don't even think about the 4% rule. I did recently use MRD withdrawal against our savings/investments and it amounts to about 2% withdrawal.
 
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Elan

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We don't even think about the 4% rule. I did recently use MRD withdrawal against our savings/investments and it amounts to about 2% withdrawal.

The 4% rule is just a "rule of thumb". It's intended to give those planning for retirement some idea of what their nest egg will provide over 30 years. If one's planning on retiring at age 60, and living until 90, then a $1M nest egg will provide ~$40K per year, inflation adjusted. Whether that's enough, solely, or combined with other income sources, is up to the retiree. If one has a $50M nest egg, they probably don't need to dial in to the implications of the 4% rule. Again, it's a planning guideline -- not a requirement.
 

Talent312

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I have a spreadsheet that shows projected expenses for the next 20 years...

I feel lucky if I can estimate expenses for the next two months.
Recurring monthly bills and annual expenses are easy, but CC's can vary wildly.
I track CC spending as we go, and near the end of each cycle, I'm like, "Holy cow!"
.
 
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VacationForever

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I feel lucky if I can estimate expenses for the next two months.
Recurring monthly bills and annual expenses are easy, but CC's can vary wildly.
I track CC spending as we go, and near the end of each cycle, I'm like, "holy cow!"
.
It is called a budget. The challenge is to be able to stick to a budget. We do have a problem especially in the area of entertainment and travel which is a little out of control where spending is quite a bit higher than the budget. Our Jan bills (due in Feb) for our credit cards totaled about $20K. Ouch... about 5K of that was not in our budget. I normally drill down to see the deviations, one item is my March trip back to Singapore that was not originally planned and my husband wanted me to fly business instead of economy plus. Some are incurring spending earlier than planned which is not an issue.
 

x3 skier

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I have a budget. Income = Outgo:D Works for me since just about every month, I wind up with zero in my checking account on the last day of the month:cool:. SS+RMD+Pension = Income. Wine, women and song + some other frivolous stuff like food, health insurance and housing = Outgo.

Life is good:thumbup:

Cheers
 

klpca

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Yes, a key part of any financial discussion is the spending side. I keep a tight rein on everything, and am not above buying things used. Living within your means is a key part of financial success, imo. In my immediate family (parents/siblings) I am the only member who is chronically thrifty. Of course they can't figure out how we vacation as often as we do, but we use miles, fly economy, and stay in timeshares that run us about $100-$150/night. We make meals at home. And we have a great time. We don't have to live this way, but after awhile it becomes a habit.
 

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The first question that one must answer is "Do I want to leave an estate or do I want to die broke?". Ones answer to this question will shape how one manages their money.

George
y

That's how we determined we really could afford to move into a CCRC sometime in the not too distant future. I hope there is enough leftover so that Delta Rescue and my high school could each get $50K. High school may end up being disappointed because before we decided to "spend all the money on ourselves", I had designated them beneficiary of my estate.
 

Passepartout

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The 4% rule applies to any nest egg. Doesn't matter if it's a sole source, or not. It's really just a math problem solved, at it's root.
The primary reason I went with the annuity when I retired (or in preparation for it) was that it was offered with 7% guaranteed payoff until age 98. The difference between what the insurance company pays and what I could have contrived in 2009 (remember the market in '09?) is thousands of bucks a year for life. This product is no longer available.
 

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The primary reason I went with the annuity when I retired (or in preparation for it) was that it was offered with 7% guaranteed payoff until age 98. The difference between what the insurance company pays and what I could have contrived in 2009 (remember the market in '09?) is thousands of bucks a year for life. This product is no longer available.
Every time I've read about your annuity, it seems you got one of the better products, which I'm sure isn't coincidental.
I need to look into them more. Not inherently a fan, but having a small percentage of my savings in one might make sense.

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Passepartout

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Every time I've read about your annuity, it seems you got one of the better products, which I'm sure isn't coincidental.
Yeah. I get the Fisher junk mail, and pop-ups too, and for every 'Don't buy an annuity because they blah, blah, blah', I say, but mine doesn't DO that. I did go through a broker, and I suppose he gets a few scheckles a month or year for his trouble. I'm happy. If he's happy too, the world goes around.
 

lizap

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I feel lucky if I can estimate expenses for the next two months.
Recurring monthly bills and annual expenses are easy, but CC's can vary wildly.
I track CC spending as we go, and near the end of each cycle, I'm like, "Holy cow!"
.

We also have a budgeted income/expense statement for post retirement.
 

lizap

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The primary reason I went with the annuity when I retired (or in preparation for it) was that it was offered with 7% guaranteed payoff until age 98. The difference between what the insurance company pays and what I could have contrived in 2009 (remember the market in '09?) is thousands of bucks a year for life. This product is no longer available.

As interest rates head back up (and they are very likely to as the economy 'appears' to be growing strongly), annnuity rates will increase. This is a very unusual period. Historically speaking, rates should be a good bit higher by now. The FED has been very slow in increasing rates, which may well have adverse consequences down the road.
 

lizap

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Yeah. I get the Fisher junk mail, and pop-ups too, and for every 'Don't buy an annuity because they blah, blah, blah', I say, but mine doesn't DO that. I did go through a broker, and I suppose he gets a few scheckles a month or year for his trouble. I'm happy. If he's happy too, the world goes around.

The key to annuities is to buy with a highly rated company. Annuity companies do not advertise this (I don't believe they are allowed to), but annuities are protected by state guaranty associations up to a certain amount (usually around 300k, but depends on state). If you want to annuitize more, it's best to spread around to more than one company, as you are protected up to an amount per annuity.
 

SmithOp

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Meanwhile, how many here are using the 4% plan or expect to? If you are using 4%, do you also have a pension or are you completely self-funded (401k in my opinion is "self-funded")? I personally don't see the point of "the rule" if a person has pension or annuities but since Tug collects a diverse set of folks, it seems to me that someone has a situation for which it makes sense and I am endlessly curious.

I’m not following a formula, I take out what I need for right now and we are enjoying life in our 60s. I wont take SS until 70 and then will just take RMDs. Not concerned about running out since we both have joint/survivor pensions also.



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VacationForever

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I’m not following a formula, I take out what I need for right now and we are enjoying life in our 60s. I wont take SS until 70 and then will just take RMDs. Not concerned about running out since we both have joint/survivor pensions also.



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Ah.... pension.... Lucky you!
 

Elan

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Some random thoughts on retirement planning: 1) I've seen the "80% of pre-retirement income" guideline kicked around, and that seems absurd to me. If I need 80% of my pre-retirement income to get by, I'll just shoot myself now. 2) Most retirement analyses don't mention home equity. When I'm retired, I won't need as big of house as I have now. My house is paid off, so I could sell it and buy something smaller and easier to maintain, in a similar location, and net around $200-250k in the process. That's not insignificant. 3) I'm always guilty of thinking of income going to zero in retirement, but one can always go mow greens at the muni or shake paint at HD a few hours a day, a few days a week. Just enough to generate some pocket change or get free greens fees while getting out of the house and staying socially active (away from old folks :)). 4) There are other stay-at-home ways to generate income on a piecemeal basis. Things one enjoys doing, when they feel like doing it.

In short, the key to retirement for me will be adaptability. Live simply and don't do anything extravagant until it's justified. Kind of like I do now.
 

lizap

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Some random thoughts on retirement planning: 1) I've seen the "80% of pre-retirement income" guideline kicked around, and that seems absurd to me. If I need 80% of my pre-retirement income to get by, I'll just shoot myself now. 2) Most retirement analyses don't mention home equity. When I'm retired, I won't need as big of house as I have now. My house is paid off, so I could sell it and buy something smaller and easier to maintain, in a similar location, and net around $200-250k in the process. That's not insignificant. 3) I'm always guilty of thinking of income going to zero in retirement, but one can always go mow greens at the muni or shake paint at HD a few hours a day, a few days a week. Just enough to generate some pocket change or get free greens fees while getting out of the house and staying socially active (away from old folks :)). 4) There are other stay-at-home ways to generate income on a piecemeal basis. Things one enjoys doing, when they feel like doing it.

In short, the key to retirement for me will be adaptability. Live simply and don't do anything extravagant until it's justified. Kind of like I do now.

We are hoping for a better lifestyle post-retirement. We have elected to work until we are around 64, so we can build the house we want in the NC mountains.
 

Elan

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We are hoping for a better lifestyle post-retirement. We have elected to work until we are around 64, so we can build the house we want in the NC mountains.
Yep, everyone's different. I can't imagine a better lifestyle than not going to my current job every day. Personally, I'm more concerned about running out of health than I am running out of money.
 

lizap

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Sure, everyone can use their nest egg to their best advantage, but strictly speaking, the 4% figure is derived from the premise of making a nest egg last 30 years over any market return. As I posted earlier, the "net net" is that one has to achieve returns that beat inflation by 1.5% to make a nest egg last 30 years if withdrawing 4%, inflation adjusted.

I have no pension, just a 401K. So my plan is to save enough outside my 401K to either 1) delay 401K withdrawal, 2) be able to skip withdrawal on years with low return or 3) live it up for 30 years, supplementing my withdrawal with my savings, and then lean on my kids when I go broke :).

If you have adult kids you can 'lean' on, consider yourself lucky.
 

lizap

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Yep, everyone's different. I can't imagine a better lifestyle than not going to my current job every day. Personally, I'm more concerned about running out of health than I am running out of money.

Love my job as well. Have known so many people who retire and just 'waste' away by basically doing nothing. We recently bought a large lot in a gated development in western NC (it is not a 65+ community, but there are alot of retirees who live there). There are many activities for people, form social clubs to hiking, golf, tennis, etc.. The key (I think) is to stay active. Your're right, health is also key.
 

PigsDad

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I still don't want to part with a lump sum to have one, however, preferring to manage for myself how much $ I get per month. Money in my account today is more valuable that money in my account tomorrow. I've never seemed to have the same "sleep well at night" requirements that others do, but I understand the serenity of knowing a payment is going to show up every month for the rest of your life. For me, that payment is SS only, eventually.
I have similar thoughts for managing my retirement (7-10 years away). Just doing some estimations, between my wife's and my SS benefit, that will account for ~40% of our expected living expenses. To me, that is plenty in the "annuity" category. We also have some farm and oil royalty income (from inheritance) for another ~20%. Given those factors, I feel we can be more invested in equities for our retirement investments (401k, IRAs) vs. someone who is completely relying on investment accounts, as these other sources of income provide a stability "buffer" for our retirement income needs. A good portion of those equity investments will be held for the dividend earnings.

What do you (the collective "you") think of this plan? Is it too risky? Am I missing something?

Kurt
 

Elan

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Love my job as well. Have known so many people who retire and just 'waste' away by basically doing nothing. We recently bought a large lot in a gated development in western NC (it is not a 65+ community, but there are alot of retirees who live there). There are many activities for people, form social clubs to hiking, golf, tennis, etc.. The key (I think) is to stay active. Your're right, health is also key.

Although I like my work, I don't like some of the restrictions of my job, but more importantly, I have so many other interests that I feel like I don't/won't have time to pursue them all. I am relatively certain I'll be far more busy in retirement than I am holding down an 8-5, and that's not even thinking about any travel. That's why I'm prioritizing earlier retirement over lavish retirement lifestyle. Again, there's no one answer that suits everyone.
 
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