Modifying the 4% Rule

[Mustang]

Pretty much everyone is aware that every financial advisor selling something is criticizing the 4% Rule.  Most criticizing it want to sell annuities.  They misapply it maybe using a 35 year payout instead of the 30 year payout, or they tack expenses and fees on top of the 4% withdrawal effectively making it 5 or 6%.  Since history is fixed many are using Monte Carlo simulations.  Those critical of Monte Carlo simulations point out that small changes in inputs make big changes in outputs. Morningstar, big believers in the bucket strategy, has been very critical of the 4% Rule and has published several articles about it expressing their concern.

John Rekenthaler wrote an article in Morningstar (October 8, 2020) “The Math for Retirement Income Keeps Getting Worse: Revisiting the 4% Withdrawal Rule.” He said in 2013 he thought everything was OK. He now writes we are in changing times. His article compared a 2013 retirement to a 2020 retirement.  Using Buffet’s forecasting formula he tested a portfolio of 50% S&P 500 stocks and 50% treasury bonds and showed that it survived a 30-year payout period. That’s interesting! In spite of the eye catching headline, he proved it could still be successful.  His main complaint was that it didn't have as big of an ending balance as he would have liked.

Another Morningstar analyst (Amy Arnott “Will the Real Retirement Income Number Please Stand Up, March 3, 2021) using Monte Carlo analysis and a different set of assumptions found that the 4% Rule had an 86% chance of success.  That actually is great news.  Most financial advisors believe that when using Monte Carlo simulations 70% is acceptable.

Chistrine Benz and John Rickenthaler (What’s a Safe Retirement Spending Rate for the Decades Ahead, November 11, 2021), were using Monte Carlo simulations and were shooting for a high 90% success rate. They included their assumptions in the report: equity returns 6-11%, fixed income returns 2-3.5%, inflation 2.1% and a 30-year payout period.  They compared portfolios with various amounts of equity.  Their simulations suggested a 3.2% initial withdrawal rate for a portfolio that is 75% equity and a 3.3% initial withdrawal rate for a portfolio that is 50% equity. They also pointed out that the initial withdrawal rate could be increased from 3.3% to 3.9% by reducing the probability of success to 80%. Since Monte Carlo simulation have many flaws most would consider that acceptable.

I thought something was curious in their analysis. Their  equity's returns were 4-7% higher than bonds yet for every single payout period from 15 years to 40 years the initial withdrawal rate was higher for the portfolio with the least amount of equity.

The 4% Rule may have been forged from the worst 30-year retirement period in history (1966) but there are still legitimate concerns about future returns.  Critics worry that future returns will not be as high as the very high returns of the last 30-year. (None of them talk about 1966.)  Most of the solutions, including Morningstar's, is to reduce the initial withdrawal rate.  Morningstar prefers 3.3%.

In 1998 the Trinity Study authors wrote that many economists believe the Consumer Price Index (CPI) overstates the actual increase in cost of living by 1 to 1.5% per year. In 2017, Michael Kitces wrote that in the last 5 to 10 years some very good national data about retiree spending patterns had become available. Apparently we spend less as we grow older and slow down. The data suggests that spending trails off by 1% per year in our 60s, 2% per year in our 70s, and another 1% per year in our 80s but there is an uptick in health care expenses. Because of this he says the safe withdrawal rate increases. For example, if an initial withdrawal rate of 4% was safe before then 4.4%-4.8% is safe factoring in lower than inflation annual adjustments.

That is a 10-20% increase in the initial withdrawal rate and if the data is correct it would hardly impact the retiree's standard of living.  That would make Morningstar's 3.3% initial withdrawal 3.63-3.99% even at the desired 90% success rate. Drop it down to a more reasonable 80% success rate and the safe initial withdrawal rate becomes 4.29-4.68%.  That makes Bengen's 4% rule look conservative.  I incorporated this modification to the 4% Rule in my withdrawal strategy.  Planned inflation increases are 1 point below the CPI  used for social security.  If social security is using 5.8% then the increase will be 4.8%.

Morningstar's Christine Benz has recently written about the same subject (Does the 4% Guideline Rest on Flawed Assumptions, December 10, 2021).  My answer is no but it doesn't hurt to be careful about an unknown future.  Her data is based on the Bureau of Labor Statistics' Consumer Expenditure Survey.  She writes that people spend more when they first retire and lower their spending latter on.  She includes a table of possible withdrawal rates should the annual inflation increases be reduced.  They differ slightly from Kitces comments.  www.morningstar.com/articles/1071612/does-the-4-guideline-rest-on-a-flawed-assumption

She also mentions that she liked the idea of pre-retirees calibrating their inflows and outflows for retirement on a year-to-year basis, or perhaps in five-year increments if going year by year seems too onerous.

In 2015 Michael Kitces wrote that the 4% rule was designed for the worst case scenario. Yet in a number of overwhelming scenarios returns were not bad enough to justify such a low initial withdrawal rate.  It would be the same for Morningstar's 3.3% initial withdrawal rate.  He said that historically, the maximum initial safe withdrawal rate on a 60/40 portfolio falls between 4 and 10% with the average around 6.5%. For the retirement period 1990-2017 the maximum safe withdrawal rate was 7.5%.  That is far above the 1966 safe withdrawal rate.

Kitces suggested a three year review to see when it was safe to increase spending.  He discovered that any time the account balance grows 50% above of its starting value (after withdrawals), the portfolio is already far enough ahead that it won’t be depleted in a 30-year time horizon. This provides room to ratchet the withdrawals higher, but it’s important to not go too fast or the higher spending could overwhelm available assets. To avoid going too fast the increase should occur only once every three years and only 10% (or less) over and above the regular inflation increase.

That too was added into my withdrawal plan.

I don't see gloom and doom.  There are many ways to mitigate longevity risk.  I'm glad Morningstar is finally writing about one other than significantly reducing the initial withdrawal.  For a lot of people cuts like that affect more than vacations.

[retiredat48]

Nice summary...

[oldskeet]

Hi Mustang ,

Nicely written recap on a subject that is important to many on the board. I enjoyed the read and found some good value in the different withdrawal perspectives presented. It is for certain that money will not last if one overdraws. This is why me and my family live below our means as our withdrawal rate from our portfolio, on average for the past five years, is about 2.5%. About 70% of our invested assets are not held in retirement accounts. With this, we have been able to grow our principal as our annualized total return for the past five years has been better than ten percent. My rule of thumb has been not to take more than a sum equal to what one half of my five year average total return has been. In this way principal grows over time along with allowable distribution amounts. I am sure this strategy is not for everyone ... but, it has worked for my parents during their retirement years and now I am using it.  Generally, excess portfolio cash genration get reinvested within to grow my portfolio's footprint.

Old_Skeet

[roi2020]

Bill Bengen is the guest on the latest episode of Morningstar's The Long View podcast.  
The creator of the 4% guideline discusses the implications of higher inflation and elevated equity valuations for new retirees.

[Mustang]

Interesting interview. Bengen clearly is expecting a crash. He said in 2008 Kitces found a strong inverse correlation (74-75%) between the CAPE ratio and safe withdrawal rates but the correlation isn't close enough for predictions. In unpublished research he said he added inflation and made the correlation stronger. Basically the higher inflation + CAPE ratio the lower the safe withdrawal rate. Inflation is similar to sequence-of returns. High inflation early in the payout period has a bigger impact than high inflation at the end. Since withdrawals are adjusted for inflation that makes sense. Larger withdrawals at the beginning leave less to build upon.

Bengen said, "I still think something in the middle range, 50-60 is good with the exception is that you are absolutely sure you are at the start of a bull market." He said that you might have wanted to chance 90-100% in 1982 when CAPE was around 7. With CAPE around 40 he said he personally only has 20% equity. He is clearly expecting a crash and if I remember correctly a 10 year recovery. He said he couldn't predict when, six months or two years, but he believes in mean revision.

I'm not a statistician but I remember one analyst saying that about the time Shiller's CAPE ratio could be proven it stopped working.

I cannot do the math but I called up some charts to see if I could get at least a rudimentary understand what they are talking about. www.longtermtrends.net/sp500-price-earnings-shiller-pe-ratio/

I remembered someone saying the mean was 20. I've been repeating that. The chart uses 17. It shows the CAPE ratio from 1871-2020. Revision to the mean seemed to be clearly working until around 1990. Like earlier years the CAPE ratio goes up and down mostly between plus or minus 50% but for the last 30 years the mean appears to be closer to 25 than 17.

Talk of a 10 year crash is reminiscent of 1999 to 2009 when CAPE fell from 44 to 13 (the only time in recent history that it fell below the mean of 17). I looked at that 10 year period to see what happened to the returns of my funds. Below is the data. The moderate-allocation funds experienced their first loss three years after the peak. At that time CAPE went flat and they made very good profits until 2008. The conservative-allocation fund didn't experience a loss until the 2008 crash. There was a quick recovery from 2008 and returns have been positive since.

           CAPE          SP500           ABALX           VWELX           VWINX
1999      44           +21.0%           + 3.5%              + 4.4%             + 4.1%
2000      37           - 9.1%            +15.9%             +10.4%             +16.7%
2001      30           -11.9%           + 8.2%             + 4.2%               + 7.4%
2002      23            -22.1%           - 6.3%             - 6.9%               + 4.6%
2003      26            +28.7%          +22.8%             +20.8%            + 9.7%
2004      27            +10.9%          + 8.9%             +11.2%             + 7.6%
2005      26           + 4.9%            + 3.2%              + 6.8%             + 3.5%
2006      27           +15.8%           +11.8%            +15.0%            +11.3%
2007     26            + 5.5%            + 6.6%             + 8.3%             + 5.6%
2008     15           -37.0%            -25.7%              -22.3%              - 9.8%

But conditions were different in 2000. Interest rates weren't zero and the bond heavy fund (VWINX) did well during the early part of the crash. Today, inflation is also a concern with the fed trying to stimulate and already overheated economy. According to historical data 1966 was the worst time to retire. 1968 was the second worst. Why? Inflation was one of the reasons. The worst period for a drop in CAPE ratios was 1929. It fell from 30 to 6 in just 2-3 years and stayed under the mean (17) for most of the years from 1932 to 1955. But this wasn't the worst time to retire because of deflation.

The 1966 period basically stayed between the plus and minus 50% range. CAPE hit a high of 24 in 1966 and fell to 7 in 1982. It trended upward hitting +50% in 1996. That was pretty much when CAPE stopped working. It kept going up. But that is outside the 30 year payout period. The 4% Rule successfully lasted though out the 30 year payout period using Bengen's assumptions.

A couple of years ago I tested Wellington during this period (mistakenly using 1968 as the starting date). Starting with $500,000 the initial withdrawal was $20,000. Ending balances struggled to keep up. In 1973 the portfolio's balance was $505,000 but inflation adjusted withdrawals were $25,000 (approximately 5%).  5% should work for a 20 year payout but its iffy for a 25 year payout.  The portfolio's balance continued down and Wellington ran out of money in 1992 during the 25th year.  Using one point less than inflation increases saved it. Payouts lasted 30 years.

Looking at today's CAPE at 40 a decline similar to 1966 would put it at around 12 in 2037. Even if inflation matches that of the stagflation years it would seem to me that if CAPE can predict a safe withdrawal rate then the 4% Rule would have a high probability of success. But depends upon the sequence-of-returns and the sequence-of-inflation. The plateau between 2003 to 2007 really helped that 10-year period.

I don't see any reason to change my plan. One point below CPI annual increases will do a lot to mitigate this risk.  But the risk to our retirement is less than that to others.  We have other sources of income.

[Deleted]

Mustang - how 'bout 4.7% per Bengen? Apologies if already posted/discussed. I like the sound of this. Explains, as you have said before, 4% based on retiree retiring at worse time possible.

www.investors.com/etfs-and-funds/retirement/retirement-savings-4-percent-rule-401k-ira/

[steelpony10]

Mustang ,

         Instead of relying on studies there is another way of customizing your income to your actual needs. If/when you decide you don’t have enough money to do it this way you can go back to questioning every expenditure you’ll have the rest of your life as a typical retiree not believing the rules and studies. How about something you can see for yourself and adjust if needed?

          As an example if you need 5k a month to pay your bills and SS pays half how much do you need to invest at your risk parameters to receive the other 30k a year as a start point. Using a compound calculator will tell you the answer filling your years, 20,25,30 and personal inflation rate. Play with the numbers.

           We projected and invested enough to theoretically break even at age 90. Banking our excess until then into growth. We used a 3.5% yearly personal inflation rate and using past data figuring SS will pay 2% a year of that leaving us with the other 1.5%.

            The net result to date, dumb luck, is our growth investments have skyrocketed, our personal inflation rate isn’t close to 3.5% and SS has risen 2.2%+ over the last ten years. So far we don’t have to question any reasonable purchase, we have a large cushion on reinvestment for extras and a growing LTC fund. I check this plan maybe twice per year but since there’s so much slop built in there hasn’t been much need to adjust it much the first 10-12 years.

[retiredat48]

I did similar to you, steelpony.

I used similar calculations, 28 years ago, needing to get from age 48 to age 60 (pension kicked in), then to age 62 (soc security)...then age 70 RMDs.

My analysis was 20% chance of running out of money at age 88.  No Bengen or similar stuff around...like the 4% rule.  I took 6.8%, age 48 to age 60.  Then reduced it.

Assumption of inflation rate is a key, and most difficult thing, affecting analyses.  Most were advising using 6.5% inflation in studies; I used 4.5%.  This turned out to be high!

Having done well, at age 60 I took a lump sum from GE in lieu of pension, hoping I would leave some to children.  This is now possible, as the portfolios have grown in size, not shrunk.

A fallback was I could always go back to work some.

And if we ran out of money at age 88?:  Call the kids and tell them to come and get us!

R48

[saratoga]

R48, you did well after your retirement - but perhaps you could have done even better if you did not retire at 48? An engineer at 48 sounds like near his peak in his 'human capital.'

[chang]

Dec 24, 2021 7:37:56 GMT saratoga said:

R48, you did well after your retirement - but perhaps you could have done even better if you did not retire at 48? An engineer at 48 sounds like near his peak in his 'human capital.'

And I happen to know that his (our) boss worked until he was 82!

en.wikipedia.org/wiki/Hyman_G._Rickover

[FD1000]

Dec 24, 2021 7:37:56 GMT saratoga said:

R48, you did well after your retirement - but perhaps you could have done even better if you did not retire at 48? An engineer at 48 sounds like near his peak in his 'human capital.'

This is mainly an American mentality 
In other countries, many work just to live. If they have the option to retire, they would do it earlier.
As an immigrant, I only started to invest at the age of 38 and retired after 23 years. I didn't want to leave any chance we don't have enough and why our LT withdrawal will be around 1%, if I'm totally wrong, maybe 2%. After 3 years in retirement, it looks much better than my forecast as I think the years to age 70-75 are significantly important for retiree portfolio longevity. 

[galeno]

Using "firecalc.com". Our 50/50 port with a 0.25% ER has a 95% SWR = 4.0% over the next 31 years.

When we add our Costa Rican state government pensions which will start in 2028 (age 70 for both) our 95% SWR goes to 5.0%. This year we spent 4.1% of port.

[Mustang]

Dec 24, 2021 1:24:45 GMT steelpony10 said:

Mustang ,

         Instead of relying on studies there is another way of customizing your income to your actual needs. If/when you decide you don’t have enough money to do it this way you can go back to questioning every expenditure you’ll have the rest of your life as a typical retiree not believing the rules and studies. How about something you can see for yourself and adjust if needed?

          As an example if you need 5k a month to pay your bills and SS pays half how much do you need to invest at your risk parameters to receive the other 30k a year as a start point. Using a compound calculator will tell you the answer filling your years, 20,25,30 and personal inflation rate. Play with the numbers.

           We projected and invested enough to theoretically break even at age 90. Banking our excess until then into growth. We used a 3.5% yearly personal inflation rate and using past data figuring SS will pay 2% a year of that leaving us with the other 1.5%.

            The net result to date, dumb luck, is our growth investments have skyrocketed, our personal inflation rate isn’t close to 3.5% and SS has risen 2.2%+ over the last ten years. So far we don’t have to question any reasonable purchase, we have a large cushion on reinvestment for extras and a growing LTC fund. I check this plan maybe twice per year but since there’s so much slop built in there hasn’t been much need to adjust it much the first 10-12 years.

I am not sure I understand this post.  I read the reviews of the research because I want to know facts not myths.  I have no idea what you are talking about when you say that "If/when you decide you don’t have enough money to do it this way you can go back to questioning every expenditure you’ll have the rest of your life as a typical retiree not believing the rules and studies" since I do look at the studies. 

It takes a much larger portfolio to have use an income withdrawal strategy.  To use your example, the retiree needs $60,000 per year and social security pays $30,000.  To make up the $30,000 difference if using the 4% Rule the portfolio would needs to be around $750,000.  If withdrawing 1% it would have to be around $3 million.  For someone who has only managed to accumulate $750,000 a 1% withdrawal would result in an annual income of $37,500, not $60,000.  That is a significantly lower standard of living.

I also wouldn't use the last 10-years as an example.  That has been a very good period for investments.  If someone wasn't able to make money during that time frame they made some very serious mistakes.  The return on my balanced portfolio was 11% and inflation was only around 2%.  I wish I could see the future but I suspect (as do a lot of other people) the the future will not be so rosy.

[retiredat48]

Dec 24, 2021 7:37:56 GMT saratoga said:

R48, you did well after your retirement - but perhaps you could have done even better if you did not retire at 48? An engineer at 48 sounds like near his peak in his 'human capital.'

Hi saratoga...life does not stop when one retires!!

It's like one third my life was educating myself; one third working, and one third being financially independent, doing whatever I want.  Each third was equally rewarding.

Who wants to keep working with nerdy engineers?

And if you knew Admiral Rickover, cited by Chang, then you would realize why eliminating that stress, was paramount!

This is an individual matter, of course, but I note current trends are for working less, not more.  And COVID time off has clearly allowed many to reassess their careers, and work situation.  Many have retired early; many changed jobs (good for them); many have stopped with the two-working family, an almost insanity for some. 

I have friends, a young age 50 couple (W/o children) who live in Princeton NJ.  They each awake at 5 am, one getting to a train station to go into downtown NY City (one hour plus); the other driving a car to Philadelphia; each to a job.  They get home at 7 pm...dinner...then shortly to bed.  Insanity!  All for careers and money.  They have now stopped this.

My youngest (48 y/o)daughter, who was head of direct-to-consumer sales DTC for a major NAPA winery where on-line sales dominated during COVID, recently left to start her own consulting business in DTC wine (and marijuana) delivery.  She has contracts already.  COVID resulted in this change...she is rejuvinated.  Sets her own hours, manages no-one, her success is 100% her doing.  She estimates financial independancy by age 55.

R48

[cactusjack]

Aha, I suspected I was surrounded by engineers (a compliment, by the way).

My approach is much simpler, and for 22 years, it has worked. Though I had a few hiccups along the way, it has served me pretty well.

My Dad was a part time sheriff, part time politician, part time small business owner, and a full time cowboy. When I was about 14, he gave me the following advice:
1. Live within your income.
2. Save a bit.
3. Don't spend your principal.
I have tried to follow his advice.

Approaching retirement, I estimated the income I needed for a comfortable living during retirement.
Pension provided 30% (cut almost in half due to scam bankruptcy by my employer)
Social security provided 20%
IRAs needed to provide 50%

I adjusted dividends and interest in a 45/55 investment mix to provide 6% (increased CEF% to 30%).
I take around 5% from IRAs.
So far, so good after 22 years. Haven't spent more than income yet.
The principal has fluctuated up and down (especially during 2008) but is basically intact today.

My financial advisor calls me his unicorn, and disagrees with some of my decisions (particularly CEFs), but adjusts pretty well.

I trade quite a bit, and the capital gains go to savings.

I suppose there are quite a few holes in my approach, but it has worked so far for me, and is pretty simple compared to some of the calculations I have seen by the experts.

Ready for the incoming.

[Mustang]

Dec 28, 2021 2:24:57 GMT cactusjack said:

Aha, I suspected I was surrounded by engineers (a compliment, by the way).

My approach is much simpler, and for 22 years, it has worked. Though I had a few hiccups along the way, it has served me pretty well.

My Dad was a part time sheriff, part time politician, part time small business owner, and a full time cowboy. When I was about 14, he gave me the following advice:
1. Live within your income.
2. Save a bit.
3. Don't spend your principal.
I have tried to follow his advice.

Not everyone is an engineer.  In one of my careers I was an accountant. 

Your father gave you good advice.  And for the last 22 years it should have worked well.  It was a period of high returns and low inflation.  The initial safe withdrawal rate for that time frame was something like 7.5%.  But a lot of people are saying that the future is looking a little dimmer.  Bonds pay next to nothing. Stocks P/E ratio is off the charts. Inflation is on rise.  Morningstar analysts are predicting that the maximum safe withdrawal rate in the future will be 3.3%. And for those who do not have a lot of wealth not spending principle may not be an option.

My only point here is that past successes may not be an indicator of future successes.  Be careful.

You must be a little older than me.  The RMD tables show a 5% withdrawal for those who are 78 or 79.  Did you take an early retirement?  If you have been retired 22 years then I would guess around 56?  I first retired at 46 with a military pension. It and my social security (taken at 62) pay all of our bills.  One of the rules I believe in is that needs should be covered by a stable income, wants can be covered by variable incomes.

My problem is that my pension and social security go away when I die and my wife, who has absolutely no interest in trading, will have to live off of income from her social security and our investments which come mainly from my second career 401k and her 403b.  They have been transferred to traditional IRAs but RMDs do not provide a stable income.  If the market drops 50% so does the income.

Most of the time advisors will recommend an annuity for those without a pension.  We have an annuity purchased in 2006 but she absolutely refuses to annuitize it. She is aware that the insurance company keeps any unused money and that it would leave nothing for the kids.  She intends to take the death benefit and invest it.  This complicates things.  I need a portfolio and withdrawal method simple enough for her to manage that will provide a stable income to cover her needs.

The 4% Rule (or 3.3%) was not designed for people with a lot of wealth.  They can live off a 1% withdrawal of mostly interest and dividends.  The 4% rule is more useful for those in the middle class who do not have pensions.  Since withdrawals are adjusted for inflation its purpose is to give a stable income similar to that of an annuity but with a little more risk.  It has been proven to be successful during the worst economic period in history but during bad times its success depends on spending principle.  That would not have been the case during last 20 years.  Using the 4% Rule would have left behind substantial wealth.  But the future is uncertain and those days may be behind us.

It is best to plan for the worst and hope for the best.  There are several ways of adapting to these gloom and doom predictions.  Morningstar's way is to reduce the early withdrawals.  This reduces income when the retiree is most active and can use the additional income.  Another is to reduce the annual increases.  Since studies have shown that we spend less as we grow older and slow down, the second method would match spending patterns a little better.

How and what we do with investments depends upon our individual situation and our goals.

[retiredat48]

Mustang posted: " ...They have been transferred to traditional IRAs but RMDs do not provide a stable income. If the market drops 50% so does the income."

This does not compute with me.

RMDs are not income...they are amounts required to be withdrawn from a Trad IRA, every year...mostly taxable income.  They go into taxable accounts first.

You do not need to be held to these as the only income available to a spouse.  You can withdraw more if needed.

If the market declines by 50% for a portfolio in one's IRA, the income of the portfolio clearly does not drop by 50%.  Often it does not drop at all...it requires some companies going bankrupt, or reducing their annual dividend, to decline.  Own Mutual funds/ETFs and the income may have only a marginal decline.  That is the benefit of dividend yield investing in IRAs for retiree situations.

Lastly, using strategic buckets approach to withdrawals, allows one to tap into short term bond funds in a bear market, or other like assets that may not have declined in value.  In fact, bonds usually move opposite market declines...they go up in NAV.

It is why so many retiree posters in the past have shouted from the roof-tops:" Forget Market Fluctuations; it is the dividends that count...spend these first."

R48

[Mustang]

It is true that a different method can be used to withdrawal from an IRA. You can take more but not less and if I remember correctly there is a 50% penalty for taking less.

I'm not sure what you mean by RMDs not being income. American Funds takes the taxes out and makes a deposit directly into my checking account every month. They do not move it to a taxable account. My statements show that shares are sold directly out of my IRA mutual fund every month. (I have only one fund in my IRA, American Funds Balanced Fund.)

Since RMDs are a dynamic withdrawal method based upon a percent of the previous end of year balance (It's actually a divisor but it works the same way.) the only way the income will not drop is if you use a withdrawal method other than RMD. RMDs do not require companies to go bankrupt. If the market goes down then RMD income goes down. The opposite is also true. All that is necessary for the RMD to change is for the end of year balance to change. 2020 was a good year. My RMDs automatically went up 10.6% between 2020 and 2021. I did absolutely nothing to get the increase. It was completely automatic.

The bucket approach is a very complicated method of taking withdrawals. It has absolutely nothing to do with RMDs but it is an alternative withdrawal method that could be used. Harold Evensky, who pioneered the bucket approach, said in a 2010 interview that the sensible number of buckets for a do-it-yourself investor was two. He is said to have simply bolted on a cash account to his total return portfolios. Distributions are only from growth. Cash is spent first and replenished from growth. A failure is when cash runs out.

Modern advocates have clearly complicated it with three buckets and dozens of fund. This is in direct contradiction of my goal of a simple method. Christine Benz of Morningstar tested a simplified bucket approach. She attached a cash bucket to Vanguard Balanced Index Fund (60% stock and 40% bonds). For the period 2000-2017 she compared it to her multi-fund approach. She said she preferred the multi-fund approach to the single fund approach because when rebalancing once per year to replenish cash there were always funds that needed pruned. She said using Vanguard Balanced Index, the cash account was sometimes depleted and funds had to be sold early. She said the simplified approach finished the test having a balance that was $400,000 less than the multi-fund approach.

But why did she pick Vanguard Balanced Index? Tests have shown that stock index funds have outperform managed funds but tests on bond and balanced funds show different results. And why an 18-year period starting in 2000 instead of a 20-year period starting in 1998? There was a big correction in 2000. Vanguard Balanced Index suffered a sequence-of-return loss losing money in 2000, 2001, and 2002 and it took a huge 22.2% loss in 2008. A reader pointed out that if she had used Vanguard Wellesley Income Fund instead of Balanced Index, the single fund approach would have had a ending value greater than her multi-fund portfolio. Wellesley Income had solid returns 2000-2002. And, it only lost 9.8% in 2008.

Complicated is not always better.

Your advice on "spend dividends first" is well taken. But if dividends are reinvested then that happens anyway. Dividends buy shares. Withdrawals sell shares. The only difference is perhaps the timing. If dividends are greater than the withdrawal then the number of shares grow. That happened in 2020. Dividend and Capital gain distributions exceeded RMDs.  I held more shares at the end of 2020 than at the beginning.

You clearly are not using the RMD method to withdraw from your traditional IRA. You have set up something completely different.  There is nothing wrong with that but it looks like it would be complicated and require active management.  That is not what I'm looking for.  A simple RMD method works just fine.  For your reference here is a table of the RMD divisors.  smartasset.com/retirement/rmd-table

[retiredat48]

Mustang, I see we have at least a terminology problem, and I will not be able to sway you.

I take RMDs to live on.  However, I stand by what I posted, namely:

--RMDs are not income for retirement planning.  Many posters do not spend them at all...simply moving money from one account to another.

--Operating under a 4% portfolio withdrawal rate means just that...you withdraw the annual amounts regardless of market performance, and regardless of the amounts you have in IRAs...or taxable accounts.  After all, many are retired who do not yet have RMDs, but live off their IRAs.

--Bottom line, IMO, is stating if market declines 50%, your income declines 50% is not correct, and can be very misleading.

--Most portfolios contain bond funds, an asset allocation such as 60/40 or 40/60% bonds.  So that 50% (stock) market decline does not reduce income by 50%.

R48

[Mustang]

Yes, we do have a terminology problem and you will not sway me because taking Required Minimum Distributions (RMDs) as a method of withdrawing from the portfolio means you are using the government's divisor. From the IRA website: "The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.”   www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

It is taxable income whether or not the retiree chooses to re-invest it or not. I currently paying taxes and re-investing mine because I do not need them. My wife will need them if she is the survivor.

Needing them makes RMDs income for retirement planning. They are a flexible or dynamic withdrawal method and you would be surprised at the number of articles I have read recommending that they be used not only for IRAs but other investments as well. Everyone seems to be pushing flexible withdrawals right now. Why? Because they adapt the withdrawal to the portfolio's performance protecting the portfolio's value and limiting the risk of running out of money. I have included them in my succession plan for that vary reason.

Other flexible methods are Guyton-Klinger's guardrails and Vanguard's floor and ceilings. Both are somewhat complicated methods of withdrawing money.

I don't believe I ever said RMDs and the 4% Rule are the same. They are not. As far as I know you can use the 4% Rule to withdraw from an IRA as long as the withdrawal is more than the RMD when they become required. But I don't intend to do that. As I said I want a stable income for needs and a flexible income can be used for wants. RMDs are the flexible income. The 4% Rule will be used on a different sleeve of investments to provide the stable income.

I did make a mistake. I said RMDs would drop 50% if the market dropped 50%. As you pointed out that would not happen with a balanced portfolio. I meant to say that a 50% drop in portfolio value would result in approximately a 50% drop in the RMD. It not exactly 50% because the divisor changes but that is getting the fine details. That needed to be corrected. Thanks for pointing that out.

[retiredat48]

Very well Mustang...

but you didn't say "I said RMDs would drop 50% if the market dropped 50%."

your actual words were: "If the market drops 50% so does the income."

My Dad, who taught public speaking, would always say to me: If you are speaking (posting) to people, and even one misunderstands something, that is on you, not them.

I considered it was misleading to say the income dropped the same %, and posted such.

Good day.

R48

[Chahta]

Mustang, do you know if the divisors for RMDs stay the same if one is starting RMDs at 72? Seems like they should.

[yogibearbull]

Chahta , it was 3.65% at 70, & will be 3.65% at 72. www.kitces.com/current-vs-new-uniform-lifetime-table-rmd-as-a-percentage-of-account-balance/

[Chahta]

Nice, so they actually delayed the start of RMDs, not just allow the skipping of 2 years.

[saratoga]

Dec 27, 2021 16:40:49 GMT retiredat48 said:

Dec 24, 2021 7:37:56 GMT saratoga said:

R48, you did well after your retirement - but perhaps you could have done even better if you did not retire at 48? An engineer at 48 sounds like near his peak in his 'human capital.'

Hi saratoga...life does not stop when one retires!!

It's like one third my life was educating myself; one third working, and one third being financially independent, doing whatever I want.  Each third was equally rewarding.

Who wants to keep working with nerdy engineers?

And if you knew Admiral Rickover, cited by Chang, then you would realize why eliminating that stress, was paramount!

This is an individual matter, of course, but I note current trends are for working less, not more.  And COVID time off has clearly allowed many to reassess their careers, and work situation.  Many have retired early; many changed jobs (good for them); many have stopped with the two-working family, an almost insanity for some. 

I have friends, a young age 50 couple (W/o children) who live in Princeton NJ.  They each awake at 5 am, one getting to a train station to go into downtown NY City (one hour plus); the other driving a car to Philadelphia; each to a job.  They get home at 7 pm...dinner...then shortly to bed.  Insanity!  All for careers and money.  They have now stopped this.

My youngest (48 y/o)daughter, who was head of direct-to-consumer sales DTC for a major NAPA winery where on-line sales dominated during COVID, recently left to start her own consulting business in DTC wine (and marijuana) delivery.  She has contracts already.  COVID resulted in this change...she is rejuvinated.  Sets her own hours, manages no-one, her success is 100% her doing.  She estimates financial independancy by age 55.

R48

R48, thank you very much for your reply.   I am transitioning to retirement.   I agree that retirement decision should be based on the best allocation of one's time whatever it is.   While I aspire to a different model of retirement from you in detail, I do feel that I should have retired a few years ago.   Working full time (by inertia?) while my energy level was diminishing was not the best use of my valuable time in retrospect.

[retiredat48]

Dec 30, 2021 18:12:40 GMT saratoga said:

Dec 27, 2021 16:40:49 GMT retiredat48 said:

Hi saratoga...life does not stop when one retires!!

It's like one third my life was educating myself; one third working, and one third being financially independent, doing whatever I want.  Each third was equally rewarding.

Who wants to keep working with nerdy engineers?

And if you knew Admiral Rickover, cited by Chang, then you would realize why eliminating that stress, was paramount!

This is an individual matter, of course, but I note current trends are for working less, not more.  And COVID time off has clearly allowed many to reassess their careers, and work situation.  Many have retired early; many changed jobs (good for them); many have stopped with the two-working family, an almost insanity for some. 

I have friends, a young age 50 couple (W/o children) who live in Princeton NJ.  They each awake at 5 am, one getting to a train station to go into downtown NY City (one hour plus); the other driving a car to Philadelphia; each to a job.  They get home at 7 pm...dinner...then shortly to bed.  Insanity!  All for careers and money.  They have now stopped this.

My youngest (48 y/o)daughter, who was head of direct-to-consumer sales DTC for a major NAPA winery where on-line sales dominated during COVID, recently left to start her own consulting business in DTC wine (and marijuana) delivery.  She has contracts already.  COVID resulted in this change...she is rejuvinated.  Sets her own hours, manages no-one, her success is 100% her doing.  She estimates financial independancy by age 55.

R48

R48, thank you very much for your reply.   I am transitioning to retirement.   I agree that retirement decision should be based on the best allocation of one's time whatever it is.   While I aspire to a somewhat different model of retirement from you in detail, I do feel that I should have retired a few years ago.   Working full time (by inertia?) while my energy level was diminishing was not the best use of my valuable time in retrospect.

Saratoga, what I can add from experience is this:  In my 27 years of retirement, most retirees consider they could have, and perhaps should have retired, EARLIER...only few say later.  And a few found new paying-type jobs, as they may have been bored in retirement.

Now if you can hit a five-iron, retirement will be a lot easier!

Best wishes.

R48, from Saratoga, NY...summers.

[saratoga]

R48,

Maybe over 5 years ago, not too long after the Whole Foods store opened in the Colonie Center in Albany, I was eating in the dining area of the store, when a man walked over and pointed to the Four Pillars book by Bernstein I had with me and said emphatically, `THIS is a VERY good book.' I keep wondering if it was you. More likely, there are more than one R48s walking around.
Happy new year!

[retiredat48]

Dec 31, 2021 20:08:11 GMT saratoga said:

R48,

Maybe over 5 years ago, not too long after the Whole Foods store opened in the Colonie Center in Albany, I was eating in the dining area of the store, when a man walked over and pointed to the Four Pillars book by Bernstein I had with me and said emphatically, `THIS is a VERY good book.' I keep wondering if it was you. More likely, there are more than one R48s walking around.
Happy new year!

The average age, at one qtr buildout of my Florida retirement community, was 53, 25 years ago.  Now we are all over 75!

Occasionally other posters have visited my golf clubhouse for lunch.  Enjoyable.

R48