How long should a retirement saving last, and still relying on the 4% rule?
I assume you mean the 4% rule that a 4% withdrawal rate is considered normal/safe for retirement savings. At my firm we target between 4%-4.5% ourselves.
And the answer is….forever, particularly if you have one year of savings in cash on top of your retirement account.
This is just a matter of simple math. If you are taking out 4% per year and your average growth rate is 7%-8%, then you should die with more than you started retirement with, even with taking out 4%.
Advisers use 4%, instead of 6%-8% (average portfolio returns), because of the risk of draw downs.
One of my favorite questions to ask people, but in particular one to ask clients: “If you have $100 invested, and you lose 10%, what percentage does the market have to go up to get back to $100?”
95/100 people will answer 10%. That’s wrong. If you have $100 and lose 10%, you now have $90. If $90 gains 10%, you then have $99 — in other words still not back to where you were. So if you lose 10%, you have to gain MORE than 10% back to get back to “even.”
Which brings us back to the 4% rule. By ensuring that your withdrawals are LOWER than the average returns, you should still be in good shape. To help with draw down risk, I also like to have a cash reserve. If the market ever declines by more than 15%-20%, I have clients STOP withdrawing from their investments, and switch to their cash reserve. That way, when the market rebounds, they’ll rebound quicker than if they had also taken out 4%.
That’s a long way of saying, yes, the 4% withdrawal rule is still a good one.
If you’re only taking 4% from current valuation, then it already is inflation adjusted. Furthermore no one should be paying 2% fees- if you’re not doijg direct stock picking then invest in tracker funds. Nothing like 2%
Are people understanding this graph? I thought it might generate more interest. Do you understand this graph? Thanks for your input.
How long should a retirement saving last, and still relying on the 4% rule?
I assume you mean the 4% rule that a 4% withdrawal rate is considered normal/safe for retirement savings. At my firm we target between 4%-4.5% ourselves.
And the answer is….forever, particularly if you have one year of savings in cash on top of your retirement account.
This is just a matter of simple math. If you are taking out 4% per year and your average growth rate is 7%-8%, then you should die with more than you started retirement with, even with taking out 4%.
Advisers use 4%, instead of 6%-8% (average portfolio returns), because of the risk of draw downs.
One of my favorite questions to ask people, but in particular one to ask clients: “If you have $100 invested, and you lose 10%, what percentage does the market have to go up to get back to $100?”
95/100 people will answer 10%. That’s wrong. If you have $100 and lose 10%, you now have $90. If $90 gains 10%, you then have $99 — in other words still not back to where you were. So if you lose 10%, you have to gain MORE than 10% back to get back to “even.”
Which brings us back to the 4% rule. By ensuring that your withdrawals are LOWER than the average returns, you should still be in good shape. To help with draw down risk, I also like to have a cash reserve. If the market ever declines by more than 15%-20%, I have clients STOP withdrawing from their investments, and switch to their cash reserve. That way, when the market rebounds, they’ll rebound quicker than if they had also taken out 4%.
That’s a long way of saying, yes, the 4% withdrawal rule is still a good one.
If you’re only taking 4% from current valuation, then it already is inflation adjusted. Furthermore no one should be paying 2% fees- if you’re not doijg direct stock picking then invest in tracker funds. Nothing like 2%
The 4% “guidance” was first developed by William Bengen in this paper,
https://www.retailinvestor.org/pdf/Bengen1.pdf
Several years later there was a second study called the Trinity Study that came to the same conclusion.
The general idea is you can withdraw 4% per year, you do get an inflation raise each year and you will have a 96% chance of your money lasting 30 years. The idea is based on having some of your money invested in the stock market.
Here is a retirement calculator that assumes you have a portion of your money in the stock market. It then runs 30 year segments of stock market returns. The first segment is 1891 to 1921, then 1892 to 1922, 1893 to 1923, this continues until the present, each segment is put on a graph, the only line that really matter are the ones that fall to zero dollars, that would mean your portfolio failed and you don’t have any money. The program has tabs that can be used to add in addition income (SS, Pension) change the inflation rate, change the allocation to fit how you have your money invested, and more. The program also includes an inflation raise each your so you don’t fall backwards on your income. It’s very easy to use for a first approximation, then you can add more and more details to get a more accurate picture.
Here is a FireCalc graph using a $1,000,000 portfolio with a $40,000 yearly withdrawal. (4%) You can see 4 lines fell below $0. (the red line) With this scenario, you could end up with $0 or over $5M, just depends on which 30 year period you started withdrawals.
Are people understanding this graph? I thought it might generate more interest. Do you understand this graph? Thanks for your input.
Hi Chris, My comment about “one size fits all” is based on my own experience where the 4% investment withdrawal rule, in addition to the rule that a retiree needs 75% of their income to retire, was consistently mentioned by independent advisors wanting my investment business.
I was told in order to retire I needed an investment portfolio of $2.5 million so the 4% withdraw would provide $90,000 a year in additional income.
None of them ever asked about my estimated retirement expenses or took the time to create a budget.
It’s based on standard models. I feel the same. They all assume your goal is to retire with a comparable lifestyle. My goal is to grow wealth.
But you are not counting your SS income are you? I have 1.3M saved and 2 years away from retiring. If I use the 4% rule, I can take out $4800/mo in investment proceeds plus my $3750 in SS$ would give me approx $8550 per/mo to live on. Am I figuring it correctly? My financial planner keeps telling me I don’t have enough $$ to retire at 67!
Bad advice given here. Inflation rate plays a big part in how long your money will last and not a word about that has been spoken here. We (US) have been fortunate to have a low inflation rate but up it to 5% and the length your money lasts reduces significantly. Add in sequence of returns risk and that length reduces even further.
There's A LOT not covered in my above statement, as I was trying to answer the question asked, not to teach a primer in financial planning.
Though the concern over inflation for those invested in hard assets like real estate and stocks really don't need to be concerned with normal inflation rates over the long term because those assets rise with inflation (not always in short term). If I have a million dollar house and there was five percent inflation, that house is now worth$50k more. All inflation is is a devaluation of the dollar, NOT a devaluation of the underlying asset. Historically stocks have also done a great job of pacing inflation.
NOTE I'm not saying ignore inflation, it absolutely is counted in these calculations. I'm just saying a lot of concerns about it are overblown unless you're mainly in cash.
<<< . . . a lot of concerns about it are overblown unless you're mainly in cash.>>>
And it depends how you’re holding the cash. If it’s in a money market account (for example) those tend to have an interest rate very similar to inflation, if maybe a skosh less.
Now, right at this instant in mid-2020, all bets are off of just about everything and even money market accounts are paying paltry percentages. But I have to figure that real inflation is also incredibly low — if not negative — right now.
Absent predatory price gouging on certain high-demand items of course.
There’s certainly very little pressure on wages to increase — people with jobs right now are just glad to have them.
And wage increases are often what drives inflation.
There’s a built in assumption in the 4% “rule” that on average the stock market will increase in value at or greater than the rate of inflation. So the real growth rate isn’t 7–10% but that minus inflation.
For example in the late 1970s that did not happen until it did — starting in 1983 or so the market started to rise at a remarkable pace and did so for a decade, with the stumble of 1987 a momentary blip along the way.
You are absolutely correct if you retire just before a big recession and don’t have the cash to carry you through it without drawing against your investments you’ll take a permanent hit.
And it’s possible that we could have an extended draw down — look at 1930–1942 / 1968-1983, when the market went essentially nowhere. You’d have to have a huge cash pool to avoid having to not draw down against your investments for that long.
in general I think the O.P. Is correct insofar as anyone can practically plan, but you are also correct that there have been historic periods where you’d be in big trouble if the timing was wrong.
What more can you do but save, save, save and hope for the best? What’s your suggestion?
I’d like to add another perspective to this: when are you going to need your money? At age 65, your remaining life expectancy in the US is of about 20 years (OECD 2017 numbers). That would mean you’d need to withdraw about 5% of your assets per year to use them up (if they didn’t grow, that is). However, these 20 years are an average figure - you might end up living 40 years more - congratulations! - but as you’re unlikely to find another source of income, this has to be sufficient for your (and your dependants) to live on it.
To make things more complicated: a lot of people like the thought of benefiting from retirement when they start and think the should most benefit from being fit, with travels and datchas. But the moment in life where you actually most need your assets is statistically the last couple of years - where you are more likely to develop some kind of disability or chronic disease that drives your health care expenditure nuts. This is a major problem in the UK where a recent reform has allowed people to take out all their occupational pension pot at once rather than converting it into an annuity, as it used to be the case.
So, without putting numbers on it - because it obviously also depends on how much you get out of your statutory pension - use only as much as you need and be modest about your needs. Most people end up realising late that they should have been more modest when starting.
That's always considered when we plan, and we actually use 95 for most planning now, which some advisors consider crazy. But most of my clients are very healthy, decently well off, and could easily live that long.
No one gripes if they end up with more than they need
Most advisors think 4% is too much and (I think) suggest more like 3%. From my POV, one should ideally tailor their cash flow, insurances, and spending to INCREASE savings from age 70 on. I pick 70 because - ideally - that is when folks should start collecting SS.
Hi, Advisers and others use a “one size fits all” approach and the 4% rule may not apply.
The time retirement saving will last is based on the return on retirement investments, the amount withdrawn each per a budget and any other non-budgeted actual expenses.
A realistic Budget and a reserve fund for addition expenses is very important to determine how long savings will last.
No good advisor uses a one size fits all. Things are adjusted for age, goals, earning potential, health, etc.
For instance, we are perfectly content using a 7 or 8 percent rate of return for a 25 year old for a 45 year period. History tells us we actually should do better than that.
For a 65 year old working five more years? That rate drops to four percent and gets adjusted every six months depending on what factually has occurred.
Similarly, the four percent for the 25 year old is great. For the guy that has $10m and lives on $100k? Maybe a one percent number is better. Or the 70 year old with $1m that lives on $100k…. Well we have to have a come to earth conversation.
My 2 cents are: (a) 4% is actually too optimistic since you have not taken into account the medical cost, especially the long term care, (b) one must be careful in assuming any even medium growth rate in any portfolio. You see, the world most stable investment, i.e., US treasury paid almost zero interest. This means that any number higher than zero is actually a gamble. BTW, the historical number of long-term positive growth may no longer work in the future.
The only way to make your retirement work IMHO are (a) you need to have solid savings + adequate passive income streams, not depending upon the stock market , (b) you need to be health and (c) you must avoid long term care.
Sequence of returns is a big risk in 4% rule. If the early years of retirement are weak stock market years, you can run out of money even if the average rate of returns over the entire retirement period was good.
Exactly, that's why I said for people nearing retirement we try to setup at least one year and ideally two years of cash. If the market drops more than a bit, your stop withdrawals and take from cash instead. After the market turns, replinish the cash and go back to regular drawdowns.
While not perfect, it does REALLY smooth the risk curve particularly as to sequence risk
I am surprised that in all these comments no one has indicated what exactly is the 4% rule, where it came from as well as what are the assumptions that are built into the rule. The 4% rule is decades old (and tested) and simply says that if you withdraw 4% of your retirement assets on day one and then increase that withdrawal rate by inflation, your fund has a 80% to 90% chance of lasting 25 to 30 years. The rule does not say that the fund will “last forever.” Any advisor who says that should be avoided.
Further, the rule assumes that your funds are invested in a diverse portfolio of 50% equity and 50% bonds. Any advisor that does not include in his analysis an portfolio allocation strategy should be avoided. And, of course, any advisor that advises a person in or close to retirement to have a equity allocation in retirement over, say, 70% should be avoided. The “current” equity allocation rule is to take 120 and minus your age and put that portion in equity. (e.g. 55% at age 65). However note that it was only a little while ago that the “rule” was 110 minus your age and not too long before that that the rule was 100 minus your age.
It is true that there are modifications of the 4% rule that are wise and will increase the percentage of likelihood of the funds lasting 30 years to higher than 90% and that these rules include not increasing your withdrawal by inflation in cases where the market goes negative and perhaps not taking any withdrawal at all from the invested funds (I.e take from cash reserve instead) if the market goes substantially negative in any particular year as previously mentioned. Thus, it is also true that it is wise to have a cash reserve equal to the gap between guaranteed income from Social Security, pensions and annuities and your non-discretionary expenses. There is some debate as to how much of a cash reserve you should have. For me, one year is on the low side. Most advisers recommend at least two years, three years is not uncommon and very conservative advisers can even recommend up to five years.
Those are the facts. Advisors who do not tell you these facts should be avoided.
That's not really true right now. Fifty percent bonds with current interest rates is basically a no go. You've got to explore various hedged equity positions and perhaps things like low leveraged lower risk real estate.
I've also yet to see any reasonable thirty year Monte Carlo that, using a 4 percent withdrawal rate AND a one year cash reserve you draw from when the market drops over 15 percent, that the funds don't last over 30. Could it happen? Sure, but it's very unlikely.
That said your note has increases due to inflation, my comments above do not. When including inflation, your risk of running out starts to increase drastically…. But then that's not really a four percent withdrawal rate anymore.
Appreciate your reply. The 4% rule, or any retirement percentage rule for that matter, must include an inflation adjustment to be useful. For a good, albeit general, overview and history of the 4% rule, see investopedia’s Four Percent Rule.
GMAB! I retired 14 years ago. Put all my 401K , 100% in dividend equities. I have withdrawn 5% for 14 years and have 10% more now than I started with.
Alan, you are not doing that good, if indeed you are following the 4% method with your 5% withdrawal rate, your balance should be over 45% higher, not the 10% you quote. (Actually much higher) The stock market over the last 14 years has been well above average, you should have more in your portfolio, if you have very long to live you might think about lowering your withdrawal rate, on the other hand, it can take many years to spend your portfolio down to $0, so you probably have an idea if your money will out live you. I have a friend that will turn 100 in July, you never know!
I just checked my wife’s and my portfolio is 2.98 times what it was 14 years ago, however we have only been living on it for 6 years not 14.
What does GMAB mean?
Keeping cash equivalents is important. Part of the reason Berkshire out performs S&P and many ETFs without dividends is because buffet keeps a huge amount in cash equivalents and buys buys buys during downturns.
How about the taxes we have to pay on the 4% withdrawal? Let’s say, I withdraw $60k in a year. I have to pay 20% to 40% on taxes depending on my tax bracket(state and fed). So, 4% withdrawal won’t be enough. One has to draw down more.
It doesn’t matter if 4% is enough or not, do you want to have $0 years before you die? The 4% rule is designed to prevent you from being broke, before you die. You might need to adjust your spending.
I agree with everything you said, but I worry about having a cash balance making nothing at all. “High interest” savings accounts are down to .74%. We have been considering moving our emergency money to some sort of fund. But, as you say, that exposes us to the market, which is where our IRA is (and doing well now, but not forever). Real estate isn’t liquid. Do you just leave money sitting like a lump in a savings account?
How things change, today 3 yrs later, a high interest savings is paying 5.29%.
It’s sad and amazing to see how people are fear mongered in this country and can never retire or live a good life while working. There’s nowhere in the World you see this many elderly still working even in the third World countries. It also benefits financial advisors and planners who are trying to fit most everybody in an established mold like %4 and get done with it. You have to have at least $2 million to be able to live a halfway decent retirement in this country based on that rule. Give me a break!
We are living in one of the most expensive countries in the World without meaningful social safety nets and put into debt by the system so you work till you die. My advice is if you are not wealthy get out. Go live somewhere where life is cheaper like Mexico, Ecuador, Panama or even some EU countries like Portugal and enjoy your retirement even on a dual social security income. If you also have some money saved on top of that you’ll live like king and don’t start me about planning to 95 ! What a joke.
