4% rule/ 25x rule question

[pedsmd]

I understand the basic concept of the 4% rule/ 25x rule. You figure your income you need multiply by 25 OR take 4% of your nest egg out each year. Does this only apply if you assume a normal life expectancy and retiring at 65? Does this work for earlier retirement as well? Is the idea that market gains will keep up with your withdrawls so once you hit "your number" you can stop working even if you're younger than 65? Or do you have to adjust?

I've played around with FIRECalc and the scenarios at personal capital so personally that's what I use vs. the 4% rule. However, I bring this up since i'm giving a talk to residents about personal finance so I want to get a better handle on the 4% rule.

Thanks!

[jacoavlu]

google trinity study

[WallStreetPhysician]

The original study that Popularized the 4% raw assumed a 30 year retirement. Everyone wants to be optimistic, so they assumed they will live to 95.

I tend to think that the 4% rule can work infinitum, especially if you have any sort of flexibility in your retirement spending (which most doctors should). But to be safe, respected bloggers who have thought about this a lot, such as earlyretirementnow.com tend to prefer lower numbers such as 3.5% or 3.25%. Some of his pessimism is related to the current high valuation in the market, which may not be relevant when you retire.

-WSP

[CordMcNally]

I think 4% is too aggressive for an early retiree. I think the age of retirement and life expectancy plays a huge part. I do all my calculations off of 3%.

[ENT Doc]

The 4% rule is not as you state. The 4% "rule" is that the initial sum withdrawn is 4% of your invested assets and that in the remaining years you increase your withdrawal based on inflation, using that initial sum as the base on top of which all future increases occur. I defer to BigERN's calculations. I do not use 4%.

[PhysicianOnFIRE]

4% will work most of the time, but not all of the time, and if you're looking at 60 years of retirement instead of 30, the colored lines in FIREcalc will show huge discrepancies. You could end up broke or worth $100 million at the end.

Since we make good money as physicians, I recommend overshooting the target and amassing 28 to 33.3 times your anticipated expenses when you start retirement for a 3 to 3.5% initial withdrawal rate. It also helps to have some fat in the budget so that you can get lean (spend less) after a particularly bad downturn in the market.

If you want to get into the thick weeds on this, review the 20-some parts of the SWR Series on Early Retirement Now (Big ERN as ENT Doc referenced).

Cheers!

-PoF

[Peds]

pedsmd wrote:

I understand the basic concept of the 4% rule/ 25x rule. You figure your income you need multiply by 25 OR take 4% of your nest egg out each year. Does this only apply if you assume a normal life expectancy and retiring at 65? Does this work for earlier retirement as well? Is the idea that market gains will keep up with your withdrawls so once you hit “your number” you can stop working even if you’re younger than 65? Or do you have to adjust?

I’ve played around with FIRECalc and the scenarios at personal capital so personally that’s what I use vs. the 4% rule. However, I bring this up since i’m giving a talk to residents about personal finance so I want to get a better handle on the 4% rule.

Thanks!

Click to expand...

the rule is based off a 50:50 portfolio of S&P 500 and corporates that one can withdraw 4% per year, indexed to inflation, and have a 95+% chance of having money at the end of a 30 year period.

it can be any 30 year time frame, but yes people assume 65. it might work for early retirement. it might not. it was not meant to be an indefinite concept. as stated above some use <4% or variable strategies to stretch this out.

you should hold off giving a talk to others before you solidify some of these concepts.

[Hatton]

The value of the concept is to give you a goal.  In order to figure it out you must know how much you spend.

[Raddoc123]

What multiple of expenses do you save if you have a 20k/yr pension at 62, and 30-40k in ss income for couple at 67-70?  How about potential inheritance coming 500k-1 mil?

[ENT Doc]

Raddoc, it depends on your level of expected spending in those years. Is the pension indexed to inflation? SS is. Certainly your required nest egg will be lower, but your calculations are a bit more complicated because of different step ups in fixed payments and then a bolus of inheretence at an unknown time.

Also, to be clear, it's not a multiple of expenses saved now but rather that your nest egg goal at retirement is a multiple of planned expenses in the first year of retirement with the remainder indexed to inflation.

[q-school]

Raddoc123 wrote:

What multiple of expenses do you save if you have a 20k/yr pension at 62, and 30-40k in ss income for couple at 67-70?  How about potential inheritance coming 500k-1 mil?

Click to expand...

i think that’s the point that we are seeing from those physicians approaching retirement.  if your age is < 65, the cost of health insurance is difficult to estimate and covering years 62-65 may be 20 thousand or 100 thousand.  maybe more depending on how health insurance evolves.  although it appears that short term SS is intact, they may means test or other things as we look further into the future.  the inheritance may disappear if someone needs an extended stay in nursing home, so don’t want to count on that.  pensions from non federal sources seem up in the air.  lastly inflation may erode the value of the dollar.

so long version short, perhaps as aging occurs, the brain changes to a more conservative approach towards life, and the older physicians are curious how the younger ones are so certain they can stop working when we are seeing people with 10 million and twenty million still have concerns.

 

[VagabondMD]

q-school wrote:

Raddoc123 wrote:

What multiple of expenses do you save if you have a 20k/yr pension at 62, and 30-40k in ss income for couple at 67-70?  How about potential inheritance coming 500k-1 mil?

Click to expand…

i think that’s the point that we are seeing from those physicians approaching retirement.  if your age is < 65, the cost of health insurance is difficult to estimate and covering years 62-65 may be 20 thousand or 100 thousand.  maybe more depending on how health insurance evolves.  although it appears that short term SS is intact, they may means test or other things as we look further into the future.  the inheritance may disappear if someone needs an extended stay in nursing home, so don’t want to count on that.  pensions from non federal sources seem up in the air.  lastly inflation may erode the value of the dollar.

so long version short, perhaps as aging occurs, the brain changes to a more conservative approach towards life, and the older physicians are curious how the younger ones are so certain they can stop working when we are seeing people with 10 million and twenty million still have concerns.

 

Click to expand...

This!

But getting back to the OP, I would have no qualms discussing the "4% Rule...of Thumb" with the Residents. It is a starting point for discussion, not an entitlement. Maybe it's 3%, maybe it's 5%, depending on where you are in the market cycle and other personal factors, but it's definitely not 10%, and you also do not have to work forever if you plan properly, and that should be the overriding message.

[Raddoc123]

q-school wrote:

Raddoc123 wrote:

What multiple of expenses do you save if you have a 20k/yr pension at 62, and 30-40k in ss income for couple at 67-70?  How about potential inheritance coming 500k-1 mil?

Click to expand…

i think that’s the point that we are seeing from those physicians approaching retirement.  if your age is < 65, the cost of health insurance is difficult to estimate and covering years 62-65 may be 20 thousand or 100 thousand.  maybe more depending on how health insurance evolves.  although it appears that short term SS is intact, they may means test or other things as we look further into the future.  the inheritance may disappear if someone needs an extended stay in nursing home, so don’t want to count on that.  pensions from non federal sources seem up in the air.  lastly inflation may erode the value of the dollar.

so long version short, perhaps as aging occurs, the brain changes to a more conservative approach towards life, and the older physicians are curious how the younger ones are so certain they can stop working when we are seeing people with 10 million and twenty million still have concerns.

 

Click to expand...

I get your concerns, but shouldn’t we plan based on what we know now?  A lot of change and badness can happen, but working longer than needed is also not ideal.  Firecalc covers some terrible years of war, conflict and market turbulence, but 4% still worked most of the time. If not constant withdrawal why not VPW as outlined on bogleheads?  It is guaranteed to last until your 100 (or whatever endpoint you specify) assuming your ok with changing your discretionary spending budget each year based on market returns.

[VagabondMD]

Raddoc123 wrote:

q-school wrote:

Raddoc123 wrote:

What multiple of expenses do you save if you have a 20k/yr pension at 62, and 30-40k in ss income for couple at 67-70?  How about potential inheritance coming 500k-1 mil?

Click to expand…

i think that’s the point that we are seeing from those physicians approaching retirement.  if your age is < 65, the cost of health insurance is difficult to estimate and covering years 62-65 may be 20 thousand or 100 thousand.  maybe more depending on how health insurance evolves.  although it appears that short term SS is intact, they may means test or other things as we look further into the future.  the inheritance may disappear if someone needs an extended stay in nursing home, so don’t want to count on that.  pensions from non federal sources seem up in the air.  lastly inflation may erode the value of the dollar.

so long version short, perhaps as aging occurs, the brain changes to a more conservative approach towards life, and the older physicians are curious how the younger ones are so certain they can stop working when we are seeing people with 10 million and twenty million still have concerns.

 

Click to expand…

I get your concerns, but shouldn’t we plan based on what we know now?  A lot of change and badness can happen, but working longer than needed is also not ideal.  Firecalc covers some terrible years of war, conflict and market turbulence, but 4% still worked most of the time. If not constant withdrawal why not VPW as outlined on bogleheads?  It is guaranteed to last until your 100 (or whatever endpoint you specify) assuming your ok with changing your discretionary spending budget each year based on market returns.

Click to expand...

This seems most logical to me, and almost automatic. Portfolio down 30%? Okay, no trip to Europe this summer. Instead, we'll take a driving trip to Utah and stay with Dahle family.

Portfolio up 30%? Okay, Europe back on the table, and let's make it three weeks instead of two. We'll send the Dahle's postcards.

[docnews]

I still believe in the 4% suggestion. And I worry others who talk about 3% are trying to be 100% safe which I think is a fallacy. I think 80% is safe enough and anything higher than that is not really accurate. Don't delay retirement to be falsely 100% sure.

More eloquently: http://www.efficientfrontier.com/ef/901/hell3.htm