Why the 4% rule is actually (still) a decent rule of thumb
I’m not a huge listener to podcasts but I do enjoy them from time to time…
A few years back, I listened to a BiggerPockets Podcast with financial independence enthusiast, U.S. financial planner, commentator and educator Michael Kitces as a guest.
This podcast delved into the 4% safe withdrawal rate that so many, many, many….DIY investors in the early retirement community rely on and why Michael Kitces ultimately believes the 4% rule actually remains a very good rule of thumb to plan by – to a point.
If you don’t have an hour and 22 minutes to listen to this episode (not many people do…) then no worries, I’ve captured the essence of the interview below.
In this updated post (with some new links), I share my own thinking on this subject and why I won’t use the 4% rule myself for any detailed planning work for us.
Could the 4% rule remain a decent rule of thumb?
In general terms, the “4% rule” says that you can withdraw “safely” 4% of your savings each year (and increase it every year by the rate of inflation) from the time you retire and have a very high probability you’ll never run out of money.
Some things to keep in mind when you read this:
- This ‘rule’ originated from a paper written in the mid-1990s by a financial planner in the U.S. who looked at rolling 30-year periods of a 50% equity/50% fixed income asset allocation. His name was Bill Bengen.
2. This rule was developed almost 30-years ago. A lot has changed since then including real returns from bonds. There are also products on the market now that allow investors to diversify far beyond the mix of large-cap U.S. stocks and treasuries the Bengen study was based on.
3. The study was designed to answer the question: “How much can I safely withdraw from my retirement savings each year and have my nest egg last for the duration of my retirement?” Little else.
4. The study assumed (at the time) most retirees would retire around age 60. Therefore, a “good retirement” would be ~30 years thereafter; what is the safe withdrawal rate to make it through retirement until death.
5. The rule takes none of the following into account:
- Will you (or your spouse) have a defined benefit pension plan?
- Do you expect to receive an inheritance?
- Will you downsize your home?
- Do you have a shortened life expectancy or health issues that should be considered?
- Will you continue to earn some form of income in your senior years?
- And the list of what ifs goes on and on and on…
My 4% rule example:
My wife and I aspire to have a paid off condo AND own > $1M personal portfolio to start semi-retirement with. We hope those days are near. We’ve always considered the 4% rule a decent starting point for our portfolio drawdown ideas but that’s where it ends for us.
Using that desired investment value, if we can grow our portfolio to over $1M, the 4% rule tells us we could expect to withdraw about 4% of that million-dollar nest egg ($40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (early 80s).
But just living off dividends or distributions (which is about 4% of our portfolio yield) doesn’t make much sense in perpetuity. I’ll come back to that point in a bit.
To the podcast and some takeaways!
On the subject of a 4% withdrawal rate – is that conservative?
Michael: Yes. If your time horizon is 30-years, it probably is. Because, when Bengen looked at his different rolling periods…he found the worst case scenario was a withdrawal rate of about 4.15%. “It was the one rate that worked in the worst historical market sequence…”.
Does recent data say anything different since the 1994 study?
Michael: Not really. Michael and his team replicated the Bengen study and generally arrived at the same number. And that’s not the only good news…50% of the time using the 4% rule you will as Michael puts it “double your wealth”.
So, 50% of the time (market returns willing) you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.
“…the reality remains that by withdrawing at “only” a 4% initial withdrawal rate, the overwhelming majority of the time retirees just finish with a massive excess amount of assets left over!”
Check out the outstanding Michael Kitces study on the 4% withdrawal rule – that shows the extraordinary upside potential in sequence of return risk.
From that post:
“…taking even “just” a 5% initial withdrawal rate (and adjusting spending for inflation in each subsequent year) actually runs out of money in nearly 25% of historical scenarios… even though a higher 5.4% withdrawal rate “worked” when projecting the lowest 30-year average returns in history!”
What if you retire at the worst possible time? Example, on the eve of the 2008-2009 financial crisis?
Michael: Doesn’t matter. 4% worked. Thanks to a massive bull run for the 10 years that followed, as bad as the 2008-2009 financial crisis was, you were still trending far ahead.
What about FIRE (Financial Independence, Retire Early)? What if your time horizon was say 40-years or more?
Michael: You’ll need to go down to 3.5% rule. Why? The longer your retirement time horizon, the more you’ll need to pull down your “safe” withdrawal rate. But, it’s not as much as you might think even if you’re talking 40, 50, or 60-year retirement periods.
Is 3.5% a super safe withdrawal rate?
Michael: Yes, but he wouldn’t advise it. From a purist perspective, 3.5% withdrawals will work if you literally never make an adjustment. You could have retired on the eve of The Great Depression, coming out of the date withdrawing 3.5% and gone for 50 years, and you still had money left over at the end. Sure, there is always a risk that the future could be worse (series of market returns) than the investing past but nothing is a guarantee. The 4% rule is just ratcheting down to the worse case scenarios to be our baseline.
On the subject of a cash wedge…
Michael: Lots of cash hurts more than it helps. Why? The hard math answer is at the end of the day, it hurts more than it helps. This is why you have bonds in your portfolio. Cash doesn’t provide the yield or upside that bonds do in a bear market. Mind you, if you can get 2%+ interest on your cash, well, that’s largely a wash these days.
Here is more on the cash wedge approach.
On the subject of a FIRE (Financial Independence, Retire Early) movement…
Michael: Kitces believes as I do that the “RE” part of FIRE is rather sensational. Again, nobody in their 30s or 40s really “retires” and does nothing for income for decades on end. Most just spend their time working on something, for income, and good for them. Don’t believe all the hype. He cited when he sees clients in practice, when they actually retire, he sees depression increase, isolationism increase, divorce rates increase. There’s actually “all sorts of bad stuff that happen after retirement”. The reason? You need a reason to get up in the morning and be productive. Michael would argue that’s just how humans are wired. Don’t fight it.
Overall, I enjoyed the podcast with Michael Kitces and the discussions related to the 4% safe withdrawal rate.
Kitces’ position on the 4% rule, on financial independence over retire early, always keeping some cash but not too much, and constantly being willing to adjust your plans aligns to my DIY investing and thinking.
As we consider part-time work, our plan is largely the following:
1. Live off dividends and distributions from the taxable accounts, for a few years, as we work part-time:
2. Make slow, methodical RRSP withdrawals during our 50s, 60s and 70s and spend all capital.
3. Allow TFSA assets to compound away, over the coming decades in Canadian stocks and low-cost ETFs to enjoy tax-free dividend and distribution income as we age.
In reality, instead of following of the 4% rule let alone living off any dividends or distributions in perpetuity, we’ll likely use some sort of Variable Percentage Withdrawal (VPW) strategy. Probably most investors should do the same.
VPW = spend more money in good times and cut back some spending during bad market times.
Check out this post on that subject here – the benefits of variable percentage withdrawal.
For further reading on the 4% rule including other articles on my site, check these ones below. Using the 4% rule for your retirement plan might make no sense at all AND there are ways to retire early ignoring this rule altogether. 🙂
Let me know your thoughts on this subject.
Mark
Related Reading:
On the subject of ignorning 4% rules and more reasons why:
Thanks for reading.
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Hi Mark, I think the 4% rule makes a great start off point for planning. Without experience or not knowing where to start, using 4% to calculate if it is adequate to meet your lifestyle needs or calculate roughly if you will out live your savings makes a lot of sense. For DIY folks who average more then 4% ROI on investments, adjustments are made to withdrawals to live accordingly while not forgetting lifelong security.
Ya, I don’t mind rules of thumb. Here are others:
-spend less than you make (but more work to unpack what that really means…)
-keep your costs (as above)
-invest in what you know (as above)
-pay yourself first (as above)
I find the personal finance sphere full of rules of thumb and heuristics to employ but then after that, the plot thickens!
Anyone that has a bias to equities, that can generate about 5%+ over a few decades of investing including during retirement, assuming they have saved enough to cover the first few years of retirement spending from their portfolio without fail, they really should have no retirement worries whatsoever especially when government benefits like CPP and OAS kick-in. The math just works.
Cheers,
Mark
Sometimes we as investors cannot see the forest for all the trees. Your thoughts on spending more during good years and less when markets are bad is very insightful. Something to definitely keep in mind and to do in retirement. Also congratulations on the reference to you in Money Sense-The 5 factors of retirement for Canadians. Well done Mark!!! I guess the KISS rule applies to retirement as well
Thanks very much, Don.
Yes, really trying to simplify my life/investing life as I age and approach any form of semi-retirement in the coming years.
As for spending more in good years vs. bad, yes, exactly my plan to “eat some capital” as well and avoid living off dividends or distributions in perpetuity. Trust me, I like getting paid to be an investor but hoarding money forever and being frugal for the next 40+ years doesn’t make sense. Who knows what the future holds. Money is a tool to enjoy.
I appreciate your kind words!
Mark
Hi Mark: Gary that is fantastic news. My brother and his wife will be celebrating their 50th anniversary next year. they have already gone to Ireland. I kidded them if they kissed the blarney stone. They did a trek all around southern Ireland. Maureen bought some stem ware in Cavin and had it shipped back home. Barbara that is a great idea. My dad use to say that he wondered why kids weren’t taught about the stock market in school. As for the 4% rule Mark I did my finances roughly and it worked out to 3.6%.This year will be different as I have some big ticket items to buy. Luckily they can partially come off my taxes. My portfolio is mainly 99.99% stocks as I have had bad luck with bonds in the past and bonds pay only interest so would be better suited to a registered account.
Ya, I don’t hold any bonds but I do own a bit of CBIL now to park cash in my registered accounts.
https://www.myownadvisor.ca/are-cash-alternative-etfs-right-for-you/
Otherwise, beyond our small but decent emergency fund ($10k), our portfolio is 100% stocks.
Mark
Hi Mark: Ya the late ’70’s were rough on bonds but if one had looked ahead they could have made money. Bonds that I bought in’76-77 at $94.00 dropped to $64.625 so you could have bought it then and cashed when it matured at $100.00. I’m still a bit ashamed of my cash wedge in the TD non registered account (916k) but I don’t see any stocks to invest it in. I still think the program Barbara mentioned is great. Even today there are thousands of people who think that the stock market is a crap shoot. Once coming home from bowling a friend and I stopped for coffee. He wanted to know the stocks I had so I said do you want me to start at the top of alphabet and go down or start at the bottom and go up. I decided to start at the top. He was impressed and later wanted a list of stocks which I gave him and broke into two categories. One for non registered and one for registered. Everyone on this blog seems to know something about the stock market but there are thousands who live paycheck to paycheck. Saving a bit and investing for a rainy day is not a bad thing.
There are some very wise and smart readers that enjoy this site – very happy to have them here. I learn from all readers too. 🙂
I can’t imagine the stress of living paycheck to paycheck. I would be a mess.
Mark
Hi Mark: I say that because I’ve seen it. When I was going to college we would walk over to the Manpower after school and mom would pick us up and drive down to the Market Plaza to pick up dad when he got out of the GE. Every Thursday we would see cars line up in front of the Beer Store and one in particular caught my attention as he would open the trunk lid and then go into the store to get a trolley and bring it out and stack 4-5 cases of empties on it and wheel it inside. He would then bring back 4 cases of 24 and load the trunk and take the trolley back in and then take off. I used to think that that was a lot of beer eventually down the toilet. I think his son learned from him and there are probably many more like that. Beer I can drink but rather have a rum and coke. As mentioned dad started investing before I started working so I had a grounding in it. By the way my dad never stopped investing and had around $11,000.00 when he retired and when he passed and the estate was wound up had $1.2 million so just because you retire doesn’t mean you have to stop investing.
Great interview. Really sets out how different types of investments/styles/philosophies are out there and seem to work for the individual investors.
Close to the end of the Karsten interview, he says:
“Automate not just your savings but also your investments”. I think I know what he means by “Automate your savings” but I don’t know what he means by “Automate your investments.”
Mark, at the end of your response to some comments on LIRAs and LIFs, you state that you hope to unlock 50% of your LIRA before the LIRA funds become LIF funds. My question is: Why not wait until the LIRA is a LIF at age 71 and then unlock 50% of the LIF, which I believe turns that unlocked 50% into a RRIF and the locked 50% turns into an LRIF at age 71?
I appreciate your website and enjoy reading it and gleaning some investing knowledge.
I recall Karsten is a fan of indexing and seeks to rebalance his portfolio very methodically but potentially he can comment on that.
As for the LIRA to LIF and unlocking, I might do that but I figure the sooner I can get my $$ out of the LIRA to RRSP (age 55 I believe in Ontario), the better. It’s a small amount and no real value in keeping it since it’s also a long-term tax liability. It’s more about account simplification for me in my 50s and freeing up the cashflow for semi-retirement. That’s the plan, not 100% sure it will come to that, just current thinking of course.
Thanks for the kind words 🙂
Mark, I just saw your article posted in another newsletter so I’m late in commenting. I agree, when you are relatively young, with using 4% as a guideline for planning withdrawals and thus your required capital to retire but as you approach your retirement, the first thing is to determine how much you will need, ie what will be your cost of living in retirement. Later, you can also use 4% guideline to monitor annual withdrawals funding your life’s expenses. Remember to use it as an average, as for example, in the next 12 months, we’re going to replace my wife’s 16 year old car with a new one.
But first, before you retire, you should track your living expenses and project your expenses when you retire as the typical big bank ‘advisor’ or broker will tell you use 70% or more of pre retirement income. BS and lazy thinking to get you to save more with them so that get their 2% of your assets. So for 20+ years I’ve been doing it myself and have done OK, being fortunate to work for companies that had matching RRSP plans with mutual funds, which I put into 100% equity or as close as possible. Spreadsheets are your friends. I determined when I was 64 that I had enough and was not really happy in my job, so I retired. I / we haven’t had to withdraw 4% as our lifestyle has been relatively economical but over the last couple of years, we’ve taken longer and more expensive holidays as we age, monitoring withdrawals against the benchmark 4% and spreadsheet projections. COVID-19 and the drop in equity markets are offset by closure of borders and difficulties getting safe flights means no expensive holidays this fall. So things balance out.
It is good to have some rules-of-thumb but don’t let them control your life.
I like your thinking Hugh. As I approach some form of semi-retirement myself (likely ~5 years away) I am starting to run more math to see how much we can spend from our portfolio using far more than the 4% rule of thumb.
We are tracking our living expenses now and if we continue on this trend, excluding any major high-class vacations or trips we need about $4,500 per month after tax to live the lifestyle we want. We will need to draw down our portfolio if we want that income since I’ll be too young to get CPP and OAS in any semi-retirement.
We figure $1 M invested will allow us to draw down that portfolio in our 50s and 60s, leaving CPP + OAS + TFSA assets and any pension funds “until the end”. That should be enough. I’ll be posting much more detailed articles on this thesis this year.
If you’ve been managing to withdraw less than 4% then that is excellent during these times for your portfolio longevity. Kudos.
Mark
How does the 4% rule work in Canada if most of your nest egg was RRSP and now its in a RRIF with ever increasing mandatory withdrawals. TFSA is still relatively new and Boomers are most likely RRSP heavy. Sure I understand that you can re-invest the excess over the 4% in non-registered vehicles, but you are still taking a hit on the income taxes for the entire RRIF withdrawal each year. Is your 4% then including this additional and increasing tax hit each year over 71? If you are including the additional taxes within the 4% total, then your net spending amount available would be increasingly reduced each year of mandatory withdrawals. Something else to think about?
Fair question. The 4% rule is really a starting point. Certainly with RRIF rules you’re “forced” to take out more because the government wants their tax-deferred $$$ back.
Recall the 4% rule is only a guideline and applies to an overall portfolio value, not just one account.
Personally, if you are using any 4% rule as your starting point for a 30-year retirement horizon, I would tally the total portfolio value; determine 4% of it and see how much your RRIF withdrawals are as a subset of that.
You are correct Rob that you’ll need to think about inflation, taxation, etc. for your portfolio as well and this is why folks should not look blindly at some constant 4% withdrawal rate.
All the best,
Mark
Mark!
You ought to put that caveat right at the beginning. It can apply to the overall portfolio value but withdrawals from a RRIF are mandated (percentage wise) by the government(s).
You can withdraw whatever percentage you wish to from taxable accounts as well as from a TFSA but RRIF withdrawal rates are mandated.
Personally I was going to convert my LIRA in to a RRIF this year but CV-19 has reduced my spending to the extent that I am quite able to live off the CPP/QPP, OAS and a small company pension – and still have a little money left over which increases my balance. One of the benefits of this is that when I convert next year the RRSP and LIRA may have decreased in value and therefore I will not have to withdraw as much as I would have if I had converted this year. The stock market may change that from here to the end of the year the way it is going up at present.
RICARDO
Hope you don’t mind me jumping in here, Mark.
Hi Ricardo,
Just a small point of fact here. A LIRA needs to be converted to a LIF, not a RRIF. The difference is that a LIF has both a minimum and a maximum that has to be/can be withdrawn each year, whereas a RRIF only has minimums.
I find LIFs to be somewhat of a tricky account as they can take a long time to withdraw. Depending on your province and circumstances, you may be able to unlock 50% of the LIRA to ‘free up’ that money by putting it into your RRSP.
Here in BC, unlocking is not possible, so we try and drawdown that money as soon as possible as the remaining balance will be taxable as income at death.
Steve
Thanks Steve. Yes, interesting that some provinces like Ontario (but BC does not) allow for LIRA unlocking. I hope to unlock 50% of my LIRA before it must be a LIF in the coming decade.
Mark
Thanks for the info Steve.
Yes, I was aware that it was a LIF just the abbreviation slipped my mind so I just put in “RIF”
I have discussed the possibility of transferring 50% to my RRSP but that might screw things up a bit as it boosts the RRSP value significantly. The LIF gives some leeway to min/max withdrawals. At any rate I am not quite there as my 71 years of wisdom is next year.
Prior to CV-19 the idea had been to make a large withdrawal from the LIF to lower it before I am obliged to take money out of the RIF. I might do that and delay the RIF until 2022 which is allowed. The whole idea is to try and keep me below the next tax level.
CV-19 has twisted the thinking a bit so I will have to book another review with the bank financial guy to see which way will keep the tax man at bay.
https://www.youtube.com/watch?time_continue=4&v=l0zaebtU-CA&feature=emb_logo
RICARDO
Seems smart to avoid any “next level” tax range Ricardo.
Mark
Yes, there are RRIF and LIF minimums. The government wants their tax-deferred $$ back!
I think it’s VERY good if retirees can live off government benefits and their small pension (should they have one), leaving personal invested assets for “extras”. I hope to be in that lucky position in the coming decades!
I have a small LIRA and I’m hoping to unlock 50% of that here in Ontario in the coming decade before I have to move the rest into a LIF.
Mark
Good review of the 4% rule approach. It’s definitely the known and widely used method and the one to use in quick conversations and quick math. However, I do believe using 3% is better now due to low interest rates for fixed income. A lot of investors confuse fixed income ETFs or Mutual Funds for a real fixed income with a guarantee. One is an “equity” vehicle investing in fixed income, and the other is actually fixed income. The “equity” vehicle moves with the markets whereas the other one doesn’t.
Just last week, I reviewed plans for a relative and the investment portfolio was not optimal. So many people still have financial advisors selling mutual funds that cripple the portfolio performance. I looked at 2 situations and one portfolio was doing well with a 4% withdrawal rate but it was built from a gold plated pension fund and the other one was managed by a financial planner and is barely making 4% a year.
I believe that based on the type of portfolio, an appropriate withdrawal rate needs to be derived. That’s my finding.
Happy investing!
Hey my friend!
Geez, advisors pushing high-priced products still eh? Not going to go away sadly.
I think with bond yields as low as they are now and likely going to be for the coming decades, folks wishing to leverage the 4% rule as a starting point for their withdrawal strategy are essentially going to have to do one of two things:
1. Increase their equity holdings beyond 50% (including large cap U.S. stocks that Bengen had in his study) to about 70% or so in retirement, and/or
2. Potentially lower their withdrawal rate closer to 3.5% for make it more bulletproof for future uncertainty.
Good on you to help relatives out and help them understand the crippling effects of pricey products 🙂
Mark
It sounds like i should try and watch the whole video. Thanks for posting and your article. I’m not sure if you’ve read about variable portfolio withdrawal on the financial wisdom forum which i believe originated with the bogleheads. You calculate each year what your optimum withdrawal is based on returns using a provided spreadsheet. Maybe that is what you are talking about doing.
Yes, I think that is a much better way to manage withdrawals personally!
https://www.myownadvisor.ca/the-benefits-of-variable-percentage-withdrawals-vpw/
🙂
Mark
Just another comment that for me i am investing in equal parts canada, us and eafe. My understanding is the 4% rule only works historically with US and canada returns.
Correct. Bengen’s work was based on 50% U.S. large cap stocks + 50% U.S. Treasuries over rolling 30-year periods. I.e., what is the worse case therefore “safe” withdrawal rate not to run out of money in any 30-year period. 4% withdrawal was “safe” and it did not include Canada nor any other international market beyond U.S.
So, interestingly, take less bonds (e.g., 30%) and add more international (e.g., add 20% Canada or international) and give or take you’re still looking at 4% or so being “safe”.
Thoughts?
Mark
Here’s an article that refutes the 4% rule works: https://www.pwlcapital.com/fire-heres-why-the-4-spending-rule-does-not-apply-to-you/
Its good to be aware of both sides of the argument. I would personally probably feel safer using a 3.5% rate.
I think depending upon your retirement timeline with a balanced portfolio of 60/40 (stocks/bonds), I would think 3.5% is rather safe over a 30-year period going forward. You have to factor in taxation, other income sources like CPP, OAS, pensions; inheritance, etc. but by and large if you’re planning only to withdraw 3.5% in the coming 30-40 years, you might just be able to with that 3.5% AND have quite a bit of money leftover.
I think the key is really to be flexible with spending. That will do more good than the 4% rule 🙂
Mark
+1
While I agree that the 4% rule is a handy rule of thumb and it’s important to understand the parameters around it (asset allocation, fees, retirement timeframe, etc), there seems to be too much focus on debating the merits and validity of it in isolation. IMO, it should be used as an initial checkpoint point for one’s decumulation analysis but it really needs to be discussed in the context of an overall retirement income strategy like how Kitces discusses course corrections, flexible spending, guardrails, ratcheting, etc. Instead of somewhat blindly following a SWR or whatever starting point one uses, the conversation needs to include How do I check/evaluate the health of my portfolio (both trending to being underfunded and overfunded), What options do I have for making course corrections, and What the scale of those corrections need to be.
Just my two bits.
I would agree it makes very little sense to blindly make 4% withdrawals. The reality is, life will send you course corrections whether you want them or not.
Every investor would be wise to use a starting point, map out their withdrawal plan, and make some corrections along the way with a combination or spending less or spending more when it makes sense.
I figure if I can “live off dividends” (and distributions) in the early years or retirement I should certainly have enough coupled with part-time work. Markets willing, 5-years or so and counting for me.
Our dividends and OAS, CPP cover our day to day expenses but we have to sell equities in order to travel. BONUS: No travel this year so no equities will be sold until next year. If equities are still down then we’ll use our small emergency fund. After all it’s our 50th anniversary this month. Thanks for your posts Mark; always a great read.
50th anniversary! Congratulations!
That’s still a very, very good position to be in, in that dividends and government benefits cover all the basics.
All the best Gary.
Mark
Thanks Mark.
Congrats on 50 years Gary.
We were with my in-laws in Ireland at the time when they were celebrating 61 years and my hubby and I were at 16. They had been through a lot but were still together.
I am hoping to travel next spring no matter what, it is has been a long time since I have been back to Ireland.
Thanks Barbara. We stayed a week in Ireland 2 years ago checking out where my Grandfather was born. We loved every minute of our time there. Happy travels!
I think the idea of a 4% rule is brilliant. Great place to start your calculations to suit your personal needs. One year you need a new roof so the withdrawal may jump to 8%. How does that affect your nest egg? Recalculate and adjust. As self directed investors we have a huge advantage of having control and in time understanding how it all fits. Whether it is 4% or 6%, understanding the rule of pacing your money to last is what we learn from the 4% rule.
I like it as well, as a general rule of thumb but I think you’ve nailed it. Worse case, you recalculate and adjust. That’s life in a nutshell.
Buying anything these days Paul?
Mark
Any thing that helps people save towards their retirement is good. Having said that I’ll stick with Divinvestor. Invest to generate an Income and you won’t be watching the market or thinking about how much capital you need to sell to meet expenses.Wonder how those who are relying upon drawing capital feel, wondering how long the markets will stay down and how much more capital they must sell?
Yes, not really relying on capital gains here – rather – how much income can my portfolio reasonably generate?
I figure I’m 50-60% of the way “there” to what I/we need for a comfortable retirement right now based on income from our overall portfolio (less pensions; less government benefits).
I look forward to the other 40% or so 🙂
Mark
Great article. I wish that I had the opportunity to have these kind of articles when younger. But the information was not so easily obtained. I agree with the first comment that scale your income on retirement to what you income is and leave the principal alone. What I find hard is trying to get my kids to listen to some of this advice. A lot of that is due I believe not discussing financial planning with them in there younger years. It’s not taught in schools yet is one of the basic fundamentals to living. Enjoy your site and subscribe (and donate once in a while). Cheaper than financial advisors and 5i ???
Great to hear from you Ross. I don’t know what to say about “kids these days…”. I’m not sure I listened well in my 20s either 🙂
That said, age 30 is when I woke up in a big way financially and I’ve been better since.
I think the plan to focus on income will eventually be a good decision. I can’t tell you how many retirees I’ve heard from that say because they focus on the income their portfolio generates, and what they can spend from that, they sleep very well at night vs. just thinking about the portfolio value. I’ve taken those words to heart and it is my hope I can be as successful as they are and/or you are!
Kind words about the site – thanks very much Ross 🙂
Mark
Ross, there is some financial planning–required course–taught in high school in BC. All my 3 kids did it and I saw their work sheets. But it wasn’t retirement focused, that would be too much for 16, 17, 18 year olds. It was more of a budgeting and living within your means focus. Even then, I think at that age many just aren’t thinking that way.
I was more wired that way–at age 6 apparently I would take all the other kids Sunday school collection money for safekeeping. Ha, that story was told at my wedding during the toast to the bride. So I did always try to discuss finances with my kids. It doesn’t always help, I have two great with money and one who is abysmal, but denies it.
That’s great in BC Barbara, I didn’t know that!
Mark
Hello Mark, the 4% rule doesn’t make any sense for a dividend investor in my opinion. We are now retired and live mostly on dividends. (I have a small pension but have not started drawing CPP and OAS) The dividends alone cover a very comfortable lifestyle. so there is no need to draw down any amount. For those where dividends alone are not enough you can start withdrawing capital as well. But a solid dividend portfolio will return 3-4% in dividends without touching the principal. So only small amounts would occasionally need to be cashed in. If we had retired in 2009 our income would have dipped by 20%, then right back to the original amount in two years.
I think it will be much better for retirees to adjust their lifestyle to the income they have from dividends and other sources. This way you never have to worry about a withdrawal rate. Live on what comes in. This does not apply to everyone, I’m talking about investors that follow and profess to invest for dividend income.
So far still only one dividend cut this year. Could be more to come??????
I think there is some truth to that DivInvestor. Although I have a plan to follow some sort of VPW method in retirement (withdraw more $$ in good times and less $$ in bad times) I figure my dividends and distributions from ETFs should deliver ~3-4% returns without touching the capital. I will do that in the “early years” of retirement.
After the first decade or so, I then have plans to slowly draw down the capital since otherwise I will have more than I can spend. I am also optimistic my pension will kick in, in my 60s and bolster my fixed income.
“Live on what comes in” is largely how I’m trying to build a portfolio that is income focused. We figure we’re about 5 years away from doing just that now.
Only one cut? Well done. I have 3 and yes, likely more to come I suspect. Not selling anything!
Thanks for your detailed comment.
Mark