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I have not discussed this with them in depth but I will get more info this afternoon..
They have always used 4 % of portfolio as a rough rule of thumb of how much
annual withdrawal to estimate without outliving retirement funds....
Everything I have read confirms that 4% is a common rule of thumb.
Example- 1 million portfolio can estimate 40K per year..
Suddenly one new guy to my team is using 2.5 %
Based on 2.5% I need to return to work...
Based on 4% I am where I need to be...
I am a skeptic and wondering if they just want
people to work longer and save more than needed so their
fee based on percentage of total portfolio is larger....
Has anyone else had this happen ??
I think your advisor's 2.5% is perhaps on the optimistic side. Depending on your age. Health. Estimates of futures expenses and the like. How old are you?
OTOH - I am somewhat confused. Is the 2.5% draw down the max - or is that on top of portfolio earnings? Really makes a big difference. I pretty much look at my portfolio earnings (my portfolio is mostly in fixed income) as a paycheck. And I spend it these days. At age 68 - I have never spent a penny in principal. And have saved a fair amount of my earnings over the decades in years when returns were a lot better. To compensate for things like inflation - higher living expenses - etc.
I'll have to take RMDs in 2019 (thought it was 2018 - but it looks like 2019). But - looking at things - I will probably start to spend more than tiny amounts of principal in 2018. Because I have a large number of high coupon bonds that will be called in 2018. Note that I will be 70-71 then - and my husband will be 72-73.
I think the problem is the "new normal" = fairly low portfolio returns. Also - a lot of people are retiring younger - and living longer. Also - things that you may wind up spending money on when you're older - well the prices have been going up.
FWIW - I think your advisor is more concerned with your not running out of money than getting more fees. I manage everything myself - and would be in a much worse place if I had spent 4% principal/year for the last decade or so in my 50's and 60's. OTOH - it would have been nice for your advisor to go down in small increments - as opposed to 4% to 2.5% in a single fell swoop (I have thought the 4% was out of date for a fairly long time now). Robyn
it is normally based on 4% of the asset base value you are committing to income the day you start .
it is inflation adjusted each year off the starting level .
so if your portfolio is 1 million dollars day 1 you can draw up to 40k assuming at least 35-40% equity's . next year it is increased by the rate of inflation as a max amount .
portfolio income is all part of that 40k draw . you are drawing from the whole pie if you want to maintain your allocations .
notice i said the asset base you are committing to income . the draw rate always assumes under the worst cases your portfolio can go to zero eventually .
so you may want to set a side money for emergency's , long term care , a wedding , a car , etc . no different then when you were working and you had to decide what to save . anything that exceeds your budget you may want to plan for outside of the money creating that income stream .
at 4% inflation adjusted you can have more then 2x what you started with if outcomes are better then average to nothing at all left at 30 years if sequences are poor .
so keep that in mind when setting up how much to commit to income creation , you may not want to count it all .
we have set a side low 6 figures as an emergency fund and savings for cars and other big ticket items . the rest goes towards income creation .
in my opinion this 4% safe withdrawal rate is a ballpark to start out and not an ideology that is a life long plan . i know i use a dynamic system that works off each years actual balance and sets my maximum goal posts for the year .
Last edited by mathjak107; 05-12-2016 at 03:17 PM..
I realized the 4% was out of date about 2-3 years ago when I first started researching retirement in more depth. For what it is worth, I plan to retire at 62 with a life expectancy to 95 (a conservative estimate) with a 3 to 3 1/2% withdrawal rate. Probably a 60/40 or 50/50 asset allocation. My investments are only 1/4 of my retirement income so I feel comfortable starting at a 3 1/2% withdrawal but decreasing that if needed.
BTW - I think all the "stocks will do it" stuff is a bunch of hooey. I have been retired for a long time. Like 30 years. The 80's and 90's were great - but they are long gone. The SP500 was at about 1500 in 2000. It is about 2000 today. That's a big 1.8%/year over the course of the last 16 years. Add in 1-2% in dividends - well it's not a pretty picture. You could luck out in terms of your timing - but people who have been buy and hold investors for a long time haven't been lucky. Note that I trade a small % of my portfolio in equities - and I have done better than buy and hold. Still - I wouldn't count on my trading prowess to spend more than I'm spending now.
I have done better than the SP500 in fixed income over the last 16 years. OTOH - the fixed income environment today is as challenging/lousy as I've ever seen it. You're lucky to get 3% in anything safe today. And what do I see in the future? Range bound or even lower interest rates. And up and down (tradeable) equities markets.
I guess a relevant question is what have your portfolio returns been over the last 1-5-10-15+ years? And what do you invest in. Robyn
I realized the 4% was out of date about 2-3 years ago when I first started researching retirement in more depth. For what it is worth, I plan to retire at 62 with a life expectancy to 95 (a conservative estimate) with a 3 to 3 1/2% withdrawal rate. Probably a 60/40 or 50/50 asset allocation. My investments are only 1/4 of my retirement income so I feel comfortable starting at a 3 1/2% withdrawal but decreasing that if needed.
That's a good point too. Our investment income is well over 75% of our retirement income - not 25%. If you have something like a pension/SS that pays all your basic expenses - you don't have to pay as much attention to portfolio income/spending. Robyn
I realized the 4% was out of date about 2-3 years ago when I first started researching retirement in more depth. For what it is worth, I plan to retire at 62 with a life expectancy to 95 (a conservative estimate) with a 3 to 3 1/2% withdrawal rate. Probably a 60/40 or 50/50 asset allocation. My investments are only 1/4 of my retirement income so I feel comfortable starting at a 3 1/2% withdrawal but decreasing that if needed.
when polls are done over on the early retirement and financial independence forum the bulk of withdrawal rates actually end up in the 3-3-1/2% range under actual conditions .
keep in mind the difference between 3 and 4% is a 25% pay cut so most folks plan their lives well under 4% .
i am around 4% now but we both are not collecting ss yet and it is only for a few years . once we do we drop quite a bit for life .
....
I think the problem is the "new normal" = fairly low portfolio returns. ..... (I have thought the 4% was out of date for a fairly long time now). Robyn
Why is the "new normal" supposed to be low portfolio returns? We have had hand over fist, whopping returns since 2008. We have only seen a slow down for one year. It looks like this year will be another slow year. I have no guesses after that. Another boost to the 4% rule predictability is the low rate of inflation. With inflation in the 2% range, it only takes a return of 4% (2% over inflation), to keep even. Of course we recently had years with returns minus inflation in the 8% range for a mixed portfolio. Maybe we are due for some lean years but that does not negate the 4% rule.
If you want to be exceptionally safe and then take even less, and then a bit less again to be even safer, that is your choice. Personally I want to be safe with my withdrawals but I want to enjoy my money in retirement.
If the bulk of your retirement income is coming from tax deferred accounts (traditional IRA, 401k, etc.), then what that advisor says is nearly irrelevant. The IRS RMD beginning at 70 1/2 is about 3.5% and increases each year afterward.
Some of this would depend on how old you are, how healthy you are, and when you're going to retire. I guess 2.5% might make sense if you're going to retire at 50 or 55. But at 65 it doesn't make much sense in my book. Even 3% would be conservative then.
Why is the "new normal" supposed to be low portfolio returns? We have had hand over fist, whopping returns since 2008. We have only seen a slow down for one year. It looks like this year will be another slow year. I have no guesses after that. Another boost to the 4% rule predictability is the low rate of inflation. With inflation in the 2% range, it only takes a return of 4% (2% over inflation), to keep even. Of course we recently had years with returns minus inflation in the 8% range for a mixed portfolio. Maybe we are due for some lean years but that does not negate the 4% rule.
If you want to be exceptionally safe and then take even less, and then a bit less again to be even safer, that is your choice. Personally I want to be safe with my withdrawals but I want to enjoy my money in retirement.
we had a retracement back to where we were . new gains have been tough . retracements have generally been quick and easy historically . usually within 5 years , but forging forward with anything decent has usually been slow as crap each time
Last edited by mathjak107; 05-12-2016 at 04:52 PM..
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