[Kyle]

Can I get a reality check to see if I’m doing something wrong as this is quite a revelation.

The 4% withdrawal rate fails a couple times in history from what I understand because we are withdrawing in certain down markets.

However 3% withdrawal rate has 100% success. But nobody wants to save that much money and most of us want to die with as little as possible knowing we made most of our money.

I did some backtesting specifically starting in 1968 which is the worst time to retire and where 4% fails.

Instead I did a 1 year look back and if market was down, only withdraw 3%. If market flat 0-5%, withdraw 4%, but if market up over 6%, withdraw 6-8%.

Not only did this not fail like 4% did, we would be able to enjoy our money through life and and the end of life not have $22m but instead around $600k therefore not depleting funds but using as much as we can.

I tested a 45 year period.
Does anyone see any issues with this math?

If this works then we only would need to save half as what we thought given the larger withdrawals in up years.

I get there are swings with this strategy, but I’m fine with that.

[Bill]

The market can be down for 10 years in a row, so you need to actually be able to live for an extended period on that 3%.

But yes, almost everybody does something like this in practice.

Ie cut when the market is down and splurge when it’s up. 0% of people just spend exactly 4% every year.

[Ed]

While a sound strategy, the important thing is if the 3% rate will cover core expenses with some extra room for actually enjoying retirement, and having a needs or desires plan that actually spends 6%.

I think a more measured approach is devising a portfolio that gives a historically higher steady SWR without having to worry as much about market fluctuations.

I’m currently studying Paul Merriman’s and Risk parity radio styles to find that sweet spot, so I may not have to cut back during the next downturn.

[Jeff]

That’s why I keep 2 years living expenses in cash. Historically bear markets last a little over 9 months.

The longest was around 3 years from 1929-1932.

[Stacey]

Showing my ignorance, but do people check their balances each January to figure out their annual return in order to adjust their withdrawal rate?

Is there math beyond that to adjust for inflation?

[Rick]

I like the creativity and time to test it. Fun stuff, at least to me.
I see two concerns:
1. This is fitting the outcome into some data. Now to be very honest, much of what we do is the same or at least fairly similar.

But there is a difference in data fitting to avoid 80-90% of the outcomes and data fitting to avoid the last 1% of outcomes.

2. What you describe is something human emotions struggle to do. Which is why so many people using various forms of guardrails use advisors.

A very high % of people, just need someone telling the what/how to do something with more than 2 steps.

But again, I really enjoyed reading your post and thought process.

We need creativity like this in a semi constant flow. Tunnel vision.

[Adam]

Frank may chime in but he talked about doing a similar concept. Specifically, 3% swr is for the basics of life, 1% is for fun stuff, 1% is for splurging.

So, in up years, the following year he sets a budget for 5% withdrawal, and in down years he sets a budget for 3% swr.

But as Bill mentions above, you have to be okay with your life on 3% swr because it may be for multiple consecutive years.

Don’t be miserable in a bear market! lol

[Ron]

These rules are never going to account for extreme stock market events, especially early in retirement. Say you save $1,040,000.

Really doesn’t matter if you pull $30 or $40k if the first year after the pull the stock market goes down 30%.

You are now down to $700k to last you the rest of your life. Are you going to continue to pull $40k by rote?

The theory says you’ll probably be okay, but my bet is you’ll alter your behavior until the market recovers, probably back to the $1 million.

Say that’s 5 years from now. Will you then splurge because you need to cover 5 less years of life, by definition?

Given the 1st year experience and the uncertainty as to exactly when you will die, you are likely to be cautious IMO. Note, I have lived through this in miniature.

Say after the first pull, the next year after is a 10% increase in your portfolio. You now have $1.1M, 2.5 extra years of the original 4% pull. You’ll now think about your splurges.

Even when you are 85 you may not know if you have 2 or 20 years left.

It’s difficult for most people to go down below a certain amount for security and so as not to be a burden on others.

[Sara]

Sounds like the variable withdrawl rate with guardrails strategy which is what I am leaning towards with a cash buffer.

[Angelo]

I think the big problem people will have with this approach is reducing spending in the lean years.

Once you expand your lifestyle it can be very difficult to reign it back in.

[Paul]

I forget where I heard it first, but using something like 3% for basic living, another 2% for extras you want most years but could do without in a pinch, and 1% for bucket list expenses you’d like to do but have flexibility, can be a really good plan.

[Sofia]

I’m trying to do 4% but my usual actual expenditures are approx 2.5%. I have a pension so I’m only using the withdrawals to backfill my pension shortfall.

I upped to 3.5% because if I don’t those RMDs gonna kill me. Plus I’m considering a Roth conversion.

But if I take closer to 4 or 5% I put myself in a higher tax bracket all because of my pension.

[Dave]

The original architect of The 4% Rule recently shared his updated findings on the Afford Anything podcast and said that 4% is now considered conservative and that 5% would work for most people.

[Suzann]

A may be way off, but in my head the 4% rule is great for a investment target to retire on.

The drawing down strategy will depend more on the market or need in any given year.

This is more the personal side of it all.

[Lindsay]

One thing I see very few people adequately planning for is that end of life costs are massively different than the normal everyday 4 percent rate.

As POA for 2 over 85 couples the past few years, I have seen it cost more than 70 percent of their portfolio to handle memory care, 24 hr care after a spinal fracture, etc.- and of course there is the 5 year Medicaid lookback, so if you run out of money, there is no additional help for 5 years from the government.

I mean sure maybe we all age perfectly and drop dead healthy, but in my experience that off ramp from life costs more than many are projecting accurately for.

[Peter]

You don’t need to cut so drastically. I don’t think anyone would be able to. The difference between 3 and 4% isn’t 1%. It’s a 25% reduction in spending.

Look up and apply a guardrail system like guyton-klinger or kitces.

[Karen]

Data since 1946
Bull market (rise of at least 20% from previous low)
Ave. Price return 177.4%

Ave. Duration 62.6 months
Bear market (decline of at least 20% from previous high)

Ave. Price return -33.5%
Ave. Duration 13.4 months.

[Justin]

Love this idea and I plan on doing something similar. Another option is to be willing to pick up some work here and there you enjoy.

You could use that to cover “fun money” expenses during the down years.

[Conner]

What you’re describing is called a variable withdrawal rate. It has the downside of inconsistency and having to adapt your spending as well as being more complex than a constant withdrawal (though most versions are still pretty simple).

There are plenty that are often considered superior to a constant withdrawal rate and most of those are similar to yours in that they are determined by recent performance OR total amount in the account.

For example, one is to take out 3% of whatever amount is in the account.

This takes advantage of the fact that the stock market is a seemingly memoryless random process. So, it’s like starting a new retirement each year with a 3% withdrawal rate.

Since those are so safe, it’s unlikely to fail.

However, when your account grows a lot, you are increasing withdrawals to keep pace.

In a long downturn, though, it can be hard to sustain.

[Author]

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