4% withdrawal rate

[StarTrekDoc]

I really agree that the cash bucket is for SORR mitigation. I can speak to the psychology of cash in retirement. When you have no more earned income I think it would be easy to panic and make poor decisions. I found that in the COVID downturn the fact that I knew I had about 500K in cash allowed me to view it as an opportunity rather than panic. I recognized that this could be the start of a bad sequence for a new retiree like myself. I tax loss harvested and actually bought some stock. The cash allowed me to do this. I lost 1.3 million in 3 weeks during this time. Of course it came back nicely. The cash and bond positions allow you to sleep and occasionally be opportunistic.

Yeah that's my plan to accumulate cash last three years before retirement and ride that first few years as we do Roth conversions as allowable.and it'll be the buffer for any SORR.

We also plan to continue HELOC too really smooth the curve and tsp that before draining principle.if that's ultimately needed as SORR won't impact a long hold hard asset and secured debt.

Hatton - curious how.much did you reenter the cash to the market during the buying opportunity of mid 2020? That would.be my biggest concern of changing investment mentality.

[Tim]

There is a misconception about the 3-5 years cash buckets. There is no question about when you use it. You use it to draw from for your cash needs.
The question is when do you replenish it and from what account? This is the reality of retirement. The reality is RMD's and Social Security have historically provided more than enough to cover the cash needs. The investment piece (even after the cash buckets) provide a surplus. These are either spent or put into a taxable which only provides more flexibility.
The big unknown is your health. That determines your quality of life and spend. Life will be drastically different and the costs aren't covered and drastically change your annual spend rate. Then you have to contemplate the impact on the surviving spouse if you are married. The anticipated retirement spend rate will probably double.
There are statistics, but translating that into your plan is inconclusive.
SORR is not just the 5 years before and following retirement (no more personal earned income). SORR is the "next 5 years" each and every year. Replenish it one way or another. The FOMO on the cash reserves never comes into play. Why? The risk of the market is not worth the return. Regardless of the gain or loss.

Statistically, your heirs will end up with more money than you retired with for those that have the ROT 25x's+ saved. A 10 year down turn or a need for assisted living are the landmines that will blow up the plan. In that case, you probably will be forced by your health to change your life anyways and won't outlive your savings. If my spouse has a problem with that, she would still be in much better shape than 99% of the population. Pretty good odds considering it was for "better or worse".

Annual ups and downs do not matter. It is the 5 and 10 year periods. The bonds are your safety net or self insurance. Zero negative behavioral finance impulses. You got it covered.

[Hatton]

Yeah that's my plan to accumulate cash last three years before retirement and ride that first few years as we do Roth conversions as allowable.and it'll be the buffer for any SORR.

We also plan to continue HELOC too really smooth the curve and tsp that before draining principle.if that's ultimately needed as SORR won't impact a long hold hard asset and secured debt.

Hatton - curious how.much did you reenter the cash to the market during the buying opportunity of mid 2020? That would.be my biggest concern of changing investment mentality.

Around 50k. Bought small cap value Last Friday also 25K.

[Shant]

Rich, broke or dead helped me understand the risks that I should really be worried about.

https://engaging-data.com/will-money-last-retire-early/

The adjustment I plan to make to the 4% rule is to increase the equity component. In the original study 4% did the job for 30 years as long as you were at least 50% equities to keep pace with inflation. I think the cutoff will probably be closer to 65-75% in the current era with the amount of cash sloshing around keeping loan returns (bonds) so low.

There is also a question of what your other backups are. If you are planning to leave an inheritance that provides a cushion that can be spent if disaster hits. My VHCOL priced house is a pretty big insurance blanket too - I can sell it outright or just move downstairs and rent out the top half to cover most of my expenses. If I didn't have that insurance I would probably start closer to 3.5% and increase to 4% if I don't hit a downturn right out of the gate.

[okayplayer]

Curious what folks think about the role of margin loans and/or HELOCs to mitigate SORR and allow one to be heavier in equities as a % of asset allocation at retirement time.

[GasFIRE]

I view the 4% rule as an accumulation guide but less relevant on the withdrawal side. Much will depend on the distribution of assets between taxable, IRA and Roth and the availability of recurrent income such as pensions, SS, etc. The tax hit can vary tremendously depending on where you opt to or are required to withdraw funds. I don’t know if the initial study took taxation into account but I do know it better be included in analyzing how much anyone must actually withdraw to meet their expenses.

[Hatton]

I view the 4% rule as an accumulation guide but less relevant on the withdrawal side. Much will depend on the distribution of assets between taxable, IRA and Roth and the availability of recurrent income such as pensions, SS, etc. The tax hit can vary tremendously depending on where you opt to or are required to withdraw funds. I don’t know if the initial study took taxation into account but I do know it better be included in analyzing how much anyone must actually withdraw to meet their expenses.

Agreed. It is a guide. Withdrawal is much harder than it appears.

[Eye3md]

My confusion, with the 4% SWR, has always been how to account for Social Security? If I retire at 55, and don’t take SS until 67, do I use the 4% SWR until age 67, and then reduce it to 3.0-3.5% SWR (at 67yo) since SS will replace some of the withdrawal from my standard retirement accounts?

[Tangler]

Curious what folks think about the role of margin loans and/or HELOCs to mitigate SORR and allow one to be heavier in equities as a % of asset allocation at retirement time.

Sounds complicated and perhaps has unseen / unpredictable scenarios and thus increased risk.

In "theory" should work well. However, you are dependent on a 3rd party (bank / lender).

More risk.

I would rather just save a little more, work a little longer, or spend a little less and have more money than I need and create a pile of cash.

Pile of cash = simple.

Less moving parts. Lower return, but lower risk of failure and the whole point of this maneuver is to mitigate against the risk of failure.

If you want higher returns / larger nest egg, my suggestion would be to work a little longer (part time even) and during that time keep throwing money into equities.

Once the equity pile is robust, and you want to totally quit, a cash pile is the best option IMO.

[Shant]

Taxes should be a projected expense. I use Actuary on Fire's spreadsheet to project taxes and where to withdraw from each year because I have 5 or 6 different income streams that drop in and out at various years. It's the only spreadsheet I've found that can manage more than one or two extra income types.

[Kennyt7]

Christine Benz from Morningstar says the new SWR is 3.3% with a 50/50 AA and 90% success(30yrs)

[Tim]

I view the 4% rule as an accumulation guide but less relevant on the withdrawal side. Much will depend on the distribution of assets between taxable, IRA and Roth and the availability of recurrent income such as pensions, SS, etc. The tax hit can vary tremendously depending on where you opt to or are required to withdraw funds. I don’t know if the initial study took taxation into account but I do know it better be included in analyzing how much anyone must actually withdraw to meet their expenses.

Yes it is a guide. However, the taxes need to be included in the annual spend computation. Assumptions of course.

[Dewangski1]

I too, would view the 4% as a guide or a starting point. Once you build a nest egg where you can live off 4%, then you can get serious about retirement. And when you’re serious about retirement, I think you need to use dollar amounts because then you can factor in what other posters bring up like SS and taxes, etc.

[Lordosis]

If you are going to retire 15-20 years before collecting ss I would just ignore it. Consider it gravy when you get it.

[Tangler]

Christine Benz from Morningstar says the new SWR is 3.3% with a 50/50 AA and 90% success(30yrs)

I like Benz and her podcast but I don't think this makes a lot of sense.

I do not think anyone should retire with a 50:50 AA. I think 60:40 is as conservative as one can be with current bond yields and inflation.

I think 70:30 is as low as I will ever go.

If 3.3% fails for a 30 year time horizon you need a better plan. Buy an annuity or something.

Big ERN has such a lot of good info on this. I would go with him over Benz.

If you have a 10% failure rate for 30 years and you are only spending 3.3% you did something wrong.