# Does Anyone Follow The 4% Rule?



## Lon (May 18, 2015)

The 4%  Rule is a Guideline for a sustainable rate of spending from ones investments for a 30 year period.
 I have followed this rule since retiring 25 years ago and still have more than I started with.


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## Bullie76 (May 18, 2015)

It's a pretty well known rule of thumb. Some think 4% might be on the high side now days with such low returns on safe fixed income investments such as cd's. Although I am fairly conservative, I do keep a chunk in stocks for growth. And it has help to offset the low rates in fixed income. Fortunately, my annual spending is low as compared to others and my spending is well below 4%. Below is a pretty good calculator to test the 4% rule with different variables. 

http://firecalc.com/


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## QuickSilver (May 19, 2015)

Absolutely.   I have not turned on the spigots yet as I am still working, but that is the plan.


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## Cole Slaw (May 19, 2015)

I plan to take it to Vegas and put it all on Red!


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## Cali-Guy (May 20, 2015)

Lon said:


> The 4%  Rule is a Guideline for a sustainable rate of spending from ones investments for a 30 year period.
> I have followed this rule since retiring 25 years ago and still have more than I started with.


That 4% rule is a worst case scenario. Even during the 2000's you could have taken out more than 4% if you were properly diversified into bonds and not loaded up on stocks like a greedy idiot. 
Many of the people who are questioning the 4% rule are trying to sell low return financial products like annuities and cash value life insurance. 
Money has to go somewhere. If bonds provide poor returns then stocks will do better.


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## QuickSilver (May 20, 2015)

All this is mumbo jumbo to me.   My goal is to live comfortably with an income that can keep my present lifestyle and to outlive my money.  How I get to that point is in the hands of my trusted financial advisor.  My present financial assets make that goal attainable... how he gets me to that point is out of my realm of expertise.  Just like I don't expect him to be able to configure a dopamine drip for a patient, I cannot be expected to understand all the ins and outs of finance and retirement planning.  That's what he is there for.


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## mathjak107 (Jul 14, 2016)

it is a good way to get a ball park for your opening day .  no one really uses a fixed system in real life . we all tend to spend dynamically .  i know i use a dynamic system that lets me spend more in good years and a bit less in down ones .

the 4% rule really was never meant to be a rule .  it is merely a way to get to the starting gate with a plan that has been stressed tested against the worst scenario's to date .

but keep in mind a 90% success rate eliminates the 5 or 6 actual worst case scenarios like those who retired in 1907 , 1929 , 1937 and 1965/1966 . i much prefer seeing a 100% success rate .


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## mathjak107 (Jul 15, 2016)

for those who never saw it this chart is a good guide to success rates .  while 90% is considered acceptable to some i like to see 95% to 100% .  

while the 100% rates have passed the test of some pretty nasty times the other factor that helps us is the fact that most of us will not see full 30 year retirement time frames .

so as an example when you consider the fact that a 65 year old couple today has a 73% chance of one of them seeing 85 that improves the overall success rates since there is a good chance for a 65 year old you might nto make 30 years so your money does not have to last 30 years  .


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## mathjak107 (Jul 15, 2016)

Bullie76 said:


> It's a pretty well known rule of thumb. Some think 4% might be on the high side now days with such low returns on safe fixed income investments such as cd's. Although I am fairly conservative, I do keep a chunk in stocks for growth. And it has help to offset the low rates in fixed income. Fortunately, my annual spending is low as compared to others and my spending is well below 4%. Below is a pretty good calculator to test the 4% rule with different variables.
> 
> http://firecalc.com/



firecalc is excellent but unless you manually take control and enter  your healthcare and long term care costs they will tend to be stated on the low side . they have been escalating at a much higher rate then general inflation .

i prefer fidelity's planner because it automatically uses 5.50% for healthcare as well as uses monte  carlo simulations to try to find even worse case scenario's then we actually had .  what i do not like is the fact it uses only a 90% success rate and can't be changed . i think today you want that extra slack in the plan . my feeling is at least start out having survived the worst the past has thrown at us .

the worst ever were the retiree's who started out in 1965/1966 .    the worst modern day is the y2k retiree who is on par 16 years in with the 1929 retiree .  not failing but not in great shape either  by these laboratory standards


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## Brookswood (Aug 15, 2016)

I follow a variable withdrawal plan.  In good years I get to withdraw a bit extra.  In bad years, I get to withdraw a bit less.   The idea is to maximize total withdrawals over my expected lifetime without risking running out of money.  If it works I will get to spend more on fun and games.  But, my heirs will inherit somewhat less.  

This year my withdrawal rate went down by about 0.2% because of the flat year I had in 2015.   But, I can still pay the rent, put food on the table, and have some money left over for wine, women and song.


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## mathjak107 (Aug 16, 2016)

same here , i am dynamic also . i use bob clyatt's simple 95/5 method . we take each years balance on 12/31 and our goal posts for spending are 4% of the balance . if markets are down then we take 5% less then the year before or 4% of the current balance ,whichever is more .


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## OneEyedDiva (Aug 18, 2016)

I've been reading that the 4% rule is becoming obsolete, does not consider each persons individual circumstances, may be too much etc. Some financial advisors are saying 2 or 3% may be better to start especially since so many Americans ( probably will not) have not saved enough. Then there are those who tout the buckets (or envelopes) methods. I will not have to take distributions until next year when I'm 70. I will take 4% from my traditional IRA and have it donated directly to St. Jude's Children's hospital since I am a Partner in Hope. That way Uncle Sam will not tax me on it and it ups my contribution to them by an average of $4 a month. The 4% is coming from an investment that is only about 6% of my total portfolio. So actually, I'll be following the .003% rule.  Here's an article on the bucket method. http://www.forbes.com/sites/investo...-strategy-for-retirement-income/#7fa8d9f87c4c


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## mathjak107 (Aug 18, 2016)

those who say the 4% rule is becoming obsolete do not really understand that first of all it was never a rule and 2nd of all just how bad the math has to be for it to not hold in real life .

it was never meant to be a rule and no one actually lives off it as a rule . it is only a way to ball park your first year .

it is based on the absolute worst conditions in history . anything better than worst case is a big plus .

for a 4% draw to fail you need to have less than a 2% real return (after inflation) average  over the first 15 years .  that has happened about 4 or 5 times to date at 4% out of 116 rolling 30 year periods .

in fact just stepping down to 3.70% has never failed . so how you are doing is easy enough to monitor .

if you are 5 or 6 years in and are not seeing 2% real return averages than you need to adjust a bit . it is the first 15 years in every 30 year period that determined the outcome .

in real life we have to figure in two other statistics .

life expectancy , most of us will not live 30 years in retirement so that increases success rates on a statistical basis . we also tend to spend in a smile shape as we age with spending falling quite a bit before older ages . that means we don't need inflation adjusting every year . as long as you have discretionary income  what you no longer buy or do as you age helps pay for a lot of what went up


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## Brookswood (Aug 18, 2016)

The big problem with having a never fail withdrawal amount is that it is most likely you may be denying yourself the goodies of life and end up leaving a huge pile of money on the table.  I have no problem with leaving some cash for my heirs.  But, I would not like to think that I gave up a chance to take my grandchild to England with me next Summer just so I can leave an extra $50,000 to somebody twenty years from how. 


That's why I use a variable withdrawal rate.   There is less chance of dying with a huge pile of unspent money, yet if financial matters  go badly there is also less chance of running out of money.


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## OneEyedDiva (Aug 18, 2016)

Mathjak107. I keep reading that we are living longer generally speaking. If I live to be as old as my mother lived to be (97), I will have lived 47 years in retirement!! I read it also depends on at what point in your retirement there's a market crash and how long that downturn lasts. I agree with you that 4% SHOULD last but I imagine it would also depend on how much a person started with in the first place and what other sources of income he/she has (or doesn't have). Another issue...there are those who do not monitor their finances. I have a friend like that. He has money but lets his broker monitor his investments. And in the crash...his broker made him broker. He fired him and got another one.


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## mathjak107 (Aug 18, 2016)

4% is based only on a 30 year retirement .  3%-3/1/2 % has held up well to 40 years .  for longer i suggest running scenerios in firecalc .

the most damage is done not by crashes . if you did not exhibit bad investor behavior ,the crash of 2008 was a non event even if you retired in 2008 . the recovery was so quick that this many years in the balance of the 2008 retiree would be no different than any other retiree group . the y2k retiree is a different story . two back to back recessions and a slow recovery left them on par with a 1929 retiree .still passing at 4% but not by much and going beyond 30 years is iffy .

so a modest extended downturn is far more harmful up front than any crash that is v-shaped .

after a nice run up you are relatively out of the danger zone as far as drops as the gains up front give you a cushion .


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## Bobw235 (Aug 18, 2016)

mathjak107 said:


> 4% is based only on a 30 year retirement .  3%-3/1/2 % has held up well to 40 years .  for longer i suggest running scenerios in firecalc .
> 
> the most damage is done not by crashes . if you did not exhibit bad investor behavior ,the crash of 2008 was a non event even if you retired in 2008 . the recovery was so quick that this many years in the balance of the 2008 retiree would be no different than any other retiree group . the y2k retiree is a different story . two back to back recessions and a slow recovery left them on par with a 1929 retiree .still passing at 4% but not by much and going beyond 30 years is iffy .
> 
> ...



I think one of the biggest dangers right now would be a large drop in stocks, followed by a prolonged period of low/no growth.


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## mathjak107 (Aug 18, 2016)

you got that right . that is why we are delaying social security. we want to cut dependency on markets as much as we can .we are even thinking of adding some spia's to our own investing at some point .

even a modest prolonged downturn in the beginning can be painful and damaging .


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## Bobw235 (Aug 18, 2016)

mathjak107 said:


> you got that right . that is why we are delaying social security. we want to cut dependency on markets as much as we can .we are even thinking of adding some spia's to our own investing at some point .
> 
> even a modest prolonged downturn in the beginning can be painful and damaging .



I think that's one reason our financial advisor is being so conservative. There seems to be little rationale for the market being as high as it is. Certainly it's not justified by productivity or corporate earnings, yet it continues to go up, but logic and history would say that it's not sustainable. At some point a correction is coming and if you're not prepared for it, the consequences could be dire for some seniors. Keeping a fair amount of cash on the sidelines right now.


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## mathjak107 (Aug 18, 2016)

actually corporate earning expectations were so low that now many are beating expectations . the last 2 quarters have been pretty good . you also have the fact the rest of the world sucks ,rates are negative on 35% of the worlds gov't debt  and inflation is tame . all of these factor in to valuations .

the biggest factor is sooooo much money is not in stocks . bull markets don't end when  folks are bearish and so much money is not in stocks . bull markets end when the wives are discussing their day trading at the beauty parlor .

back in 1982 when rates were in the teens stocks were considered sky high when the p/e jumped from 7 to 12 in one year . that was high because rates were so high .

well while investors shunned stocks because valuations were so high the greatest bull market in history started its rise .


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## mathjak107 (Aug 18, 2016)

OneEyedDiva said:


> Mathjak107. I keep reading that we are living longer generally speaking. If I live to be as old as my mother lived to be (97), I will have lived 47 years in retirement!! I read it also depends on at what point in your retirement there's a market crash and how long that downturn lasts. I agree with you that 4% SHOULD last but I imagine it would also depend on how much a person started with in the first place and what other sources of income he/she has (or doesn't have). Another issue...there are those who do not monitor their finances. I have a friend like that. He has money but lets his broker monitor his investments. And in the crash...his broker made him broker. He fired him and got another one.



i ran 47 years with a 50/50 portfolio and a 3.50% draw inflation adjusted had a 90% success rate .  truthfully i only like 100%. i don't really care if we had a million great time frames , i want to construct to get through the worst of the worst. if things are better  than i would take a raise every so often . the size of the portfolio is irrelevant . i started with a million dollar portfolio but the math stays the same even if it is 100k 

FIRECalc looked at the 99 possible 47 year periods in the available data, starting with a portfolio of $1,000,000    and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 99 cycles. The lowest and highest portfolio balance at the end of your retirement was $-462,880 to $8,344,453, with an average at the end of $1,805,859. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 47 years. FIRECalc found that 9 cycles failed, for a success rate of 90.9%.


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## Dennis K (Sep 1, 2016)

Isn't the 4 percent rule just a guideline for the 1st year of withdrawal? Or with whatever percent you take the first year. This givse you a dollar amount where you have to figure in inflation every year thereafter. From a theoretical stand point any way. But I guess it gets even more complicated in reality because your spending habits will change from year to year and could offset inflation somewhat. And then there is the few years of a down side market that will come sooner or later.  In which case taking out the same amount of money will result in taking out more shares if you have mutual funds. This can lead to running out of money sooner than you thought.  You also have to keep in mind that studies that support the 4 percent  rule count on the market following historical averages which has come  into dispute recently. And we all know you cannot predict the future and cannot count on historical data. It should be obvious by now that as I have been approaching retirement I have been doing way too much research. I just need to do it and retire.


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## mathjak107 (Sep 2, 2016)

you are only partially correct .  it is a guideline but it is more than that and yes it accounts for what we call sequence risk which means the order of gains and losses . by the way  it was never meant to actually be a rule either , it was just some lab experiments to determine how low of a draw would make it through the worst of times , either that we actually had or the worst monte carlo simulations could come up with ..


think of it as building a house in a hurricane area . if i was building a house in nyc i would want to build my house to sustain the likes of hurricane sandy .  that way i would be sure it could withstand the worst to date . while it still could get whacked by something stronger ,odds are pretty good it won't since sandy was such a rare occurrence itself .

so if you were a retiree starting out in 1907 ,1929,1937 or 1966 you retired in to the worst math for withstanding up to the worst case's in retirement history  .

a safe withdrawal rate is one that would have endured all that history has thrown at you in the worst possible sequences . sequences meaning order of gains and losses .

an acceptable number was about 4% for a 50/50 mix . in fact to actually clear those time frames 100% you need to draw less than 4% or about 3.60% . 4% eliminates some of those worst  date's .

the safe withdrawal  rate is so conservative because it has to account for the worst sequencing in history that if we just eliminated those dates above the draw rate would be 6.50% .

90% of every rolling 30 year time frame here has left you with more than you started with at the end of 30 years with a 60/40 mix . 2/3's of the time it left you with more than 2x what you started with .

so if anything , trying to pass through those worst dates has been to conservative .

throw in another factor : life expectancy .

good planning says plan out to at least 90 or better 95 . even a couple has less than a 47% chance of one of them living that long so statistically you are planning for 30 years but reality say you will likely not be here for 30 years . that increases the success rate even more of not outliving your money .

next we throw human spending patters in . we tend to spend smile shaped .we spend more early on and less as we age  until our 80's when healthcare goes up .

the end result is the things we no longer buy or do helps cover increases in what we still buy and do . that makes a lot less inflation adjusting needed than the every year increase the safe withdrawal rate figures .

so what you end up with is a number that ends up being far more conservative and in real life just keeps increasing it's probability of success through human actions .

so how does this help us in the future ?

well famed researcher michael kitces went searching for the common denominator to all the failures and what he found was this :

every single historical failure happened because the first 15 years of a 30 year retirement had the real return average fall below 2% . no matter how good things got after 15 years it was to little to late .

so now we can monitor things . if 5  years in to retirement we are still below a 2% real return , you may want to look at cut backs .

if you are way ahead you may want to take a raise


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## mathjak107 (Sep 2, 2016)

just for laughs lets look at some of the worst case data sets .  one thing you will notice is over 30 years the markets returned some healthy gains .

but it was the fact the first 15 years sucked and required excessive spending that did every worst case in .



suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64-- 

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38 

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23% 

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

while 6.50% to 4% does not sound like a lot 1 million at 4% is an initial draw rate of 40k , at 6.50% you could have had 65k . that is a whopping 60% more .


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## Aunt Bea (Sep 9, 2016)

I have been living on my investments since 2005.  Each year I look at the straight 4% calculation, the 4% calculation adjusted for inflation and the 4% three year average.  I don't actually withdraw that much each year, my normal withdrawal rate is about 1.75%.  Some years I go as high as 8%, it depends on my needs.  The high years are for large dental bills, a new car, the trip of a lifetime etc...  I really think taking a set 4% can be dangerous for folks that are not honest about how much they actually spend.  If you use the full 4% for day to day expenses and then need a new roof, a car, etc... you could run into trouble.  I think the best approach is to look at as much information as you can find and then create your own plan that fits reasonably within the conventional wisdom.


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## Brookswood (Sep 9, 2016)

I think the 4% is a guideline but just that.     Personally, as I have said before, I like a variable withdrawal plan that is buffered on the up and down sides.  In this way, I will cut my spending a bit if the previous year's results for stocks and bonds were not very good and increase my spending a bit if the previous year's results were good.  But, the buffer prevents me from having to cut drastically or from taking a windfall.   In this way it protects me  while keeping my overall spending level on a relatively descent path.  Of course, if the market plummets down for a decade and then stays there, nothing will help much except cutting expenses drastically and  maybe going back to work.


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## mathjak107 (Sep 9, 2016)

no one ever just spends like a robot ,spending 4% and inflation adjusting every year .  we are all variable . we tend to spend more when markets are up and we tend to have no desire to over do things when they are down even though you likely could make no changes .

what you really want is a variable plan but one that keeps income in a tight range . you may not be able to take the pay cut dictated if markets fall 40% .  

i set my max goal posts using bob clyatts simple variable plan . that has been back tested through the worst cases in the usa and never failed .

it rewards when markets are up put only  cuts you slightly when markets are down .


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## Knight (Oct 2, 2016)

I didn't know there was a 4% rule. What I did know was that when the company I worked for changed the pension plan from automatic this is what you will get to a self directed 401k with 6 options.  I scrambled to find out what that would mean for me. Mutual funds with decent returns to build a retirement account made sense but along with that investing in stocks could be risky but have the desired effect of living well in retirement. 

Beginning by purchasing company stock thru payroll deductions made it possible to avoid broker fees and at a 5% discount. Kraft stock during the early 1980's varied but my wife managed to accumulate 1600 shares before things got a little hairy. Kraft was taken over by a smaller company that cut the work force and benefits. Once operating more efficiently the stock doubled and that company parted ways with Kraft. The stock rose in price and split 2 for 1. Proud owners of 6400 shares now. Enter Phillip Morris tobacco company as the major stock holder and decision maker. Employees could sell at a 25% over market price or hold and get their shares doubled. Phillip Morris no minor league company we held and are new owners of 12,800 shares plus what was gained during the dividend reinvestment plan. Kraft was enjoying great market volume for their product. The stock rose to I think around $142.00 a share. That was higher than MO or Phillip Morris thought would generate stock purchase so they split the shares to 4 for 1 or $35.50 a share.  Really tempting to sell but the thinking at that time was hold long term. Long term holding is no longer the thinking but I digress. Kraft stock rose to a little over $48.00 a share and we sold all 51200. shares. The tax on that was horrendous but considering the gain and wanting to retire early well worth the pain of giving that much in taxes to the gov. 


Since then GE in Jan of 2009 10,000 shares at a little less than $6.00 was worth the risk. Sold that in Jan of this year and bought 15,000 shares of TLN in Jan for a little over $6.00. $13.00 + a share seems to be a stable price so were holding until we are taxed at the long term rate. Even so that will be a tax bite that is hard to take. Out of this our goal of not depending on Soc. Sec. or society we've achieved. Better than that is the inheritance our children will receive when they probably will need it most if the middle class population in America continues in my opinion to decline. 


Explaining good fortune to people my own age might sound useless but maybe this kind of long term planning to have a nice retirement would be passed along to someone younger. What does the future hold for investing?


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## mathjak107 (Oct 2, 2016)

Near term i think investing for retirment is going to be tough. I think we have some very unconventional times and i think more and more insurance products coupled with our own investibg is going to be the norm


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## OneEyedDiva (Oct 15, 2016)

Thank you for the chart...very interesting. I can use this info to share with others. I'm hoping not to have to use the 4% rule with the following exception. In a little less than a year, I will start taking my RMDs and that will be about 4% of my very small traditional IRA. The RMDs will go directly to St. Jude's so that I can avoid paying taxes on the distributions.  My income from SS & my pension is more than enough to cover my expenses and discretionary spending.


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## OneEyedDiva (Oct 15, 2016)

Thank you for the chart...very interesting and good info to share. I'm hoping not to have to use the 4% rule with the following exception. In a little less than a year, I will start taking my RMDs and that will be about 4% of my very small traditional IRA. The RMDs will go directly to St. Jude's so that I can avoid paying taxes on the distributions.  My income from SS & my pension is more than enough to cover my expenses and discretionary spending.


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## mathjak107 (Oct 15, 2016)

the amount you start with does not matter . it is just 4%  of a lower amount . but that 4% is based on certain allocation assumptions and the big assumption that the past wort case scenario's were so bad that we are unlikely to hit anything as bad . that remains to be seen 

getting hit the first 5 years of retirement in an extended downturn can hurt . it does not matter on how steep as much as how long .

the first 15 years are the most crucial .and you live or die by the first 15 years .

once you have a decent run up the down turns have less of an effect .

the 4% swr is based on some pretty crappy outcomes .

they are based on had you started a 30 year  retirement in 1907,1929,1937 or 1965/1966 . those were the nastiest time frames to have retired . all of them failed because the first 15 years were terrible .


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## Victor (Nov 19, 2016)

Is this firecalc a good estimate? Under spending, is this all your spending for the amount of your time you will probably live?
I do not see how this can be accurately done, to project that much into the future----especially if you will be moving to
a different state or area where the variables will vary.

Also how reliable is this longevity rate?


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## mathjak107 (Nov 19, 2016)

it isn't firecalc that is not accurate . it is you guessing at your needs .

all firecalc does is take whatever amount you tell it you need , it subtracts out all the other sources of income you feed it other than your portfolio ,and then it simply stress tests your portfolio for that remaining amount .

it stress tests your portfolio to see how you would have done if you drew that amount , for how ever long you put it in , with the allocations and amount and see's of the nastiest time frames left you broke .

the idea is we have seen conditions for retirees in the past like those who retired in 1965,1966,1929,1937 , etc which have never been duplicated in 50 years .

if you survived retiring through those years you are at least getting to the gate with a decent plan .


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