Dave Ramsey and the 4% Rule

[David]

Spreadsheet seems the safe way to go. I look at how much I’ll have at retirement, how much return I’ll make on that money a year minus what I’ll spend a year and then back calculate how much I can spend a year ending with zero when I die. Using 5% growth and dying at 85, this results spending about 7% of savings first year but that increases every year after. As far as living longer or wife living longer and leaving something for my one child, I figure my spending won’t actually increase all the way to my death so there would be substantially more money left towards the end.

[zakthor]

Originally Posted by David

Spreadsheet seems the safe way to go. I look at how much I’ll have at retirement, how much return I’ll make on that money a year minus what I’ll spend a year and then back calculate how much I can spend a year ending with zero when I die. Using 5% growth and dying at 85, this results spending about 7% of savings first year but that increases every year after. As far as living longer or wife living longer and leaving something for my one child, I figure my spending won’t actually increase all the way to my death so there would be substantially more money left towards the end.

The problem is you cant foresee the growth youll actually get, nor can you forsee how long youll live.

Heres 7% withdrawl rate:



Rich, broke or dead says 19% chance youll die with money left.

[tdw28210]

This is my "go to" free tool. https://www.portfoliovisualizer.com/backtest-portfolio

I spend time tinkering with variables in this tool but typically find that I can safely survive on a 6% withdrawal rate (.5% per month). If you have a portfolio with a lot of positions this could be time consuming to enter them. I normally tinker with a few funds and ETF's.

[flatbutt]

One off purchases can really throw a kink into our plans. When I spend any amount outside of the plan it is with the knowledge that those dollars will not be replaced. ie my recent motorcycle purchase.

[red 928]

If market performs significantly below average,
net assets will continue to outpace spending
And my kids will have a nice early retirement.
Hopefully not TOO early.

[zakthor]

“End of Plan”

[red 928]

Originally Posted by zakthor

“End of Plan”

Estimated year we are both dead, 2054.
just a guess.
Pretty sure she'll outlive me by quite a ways.

[David]

Originally Posted by zakthor

The problem is you cant foresee the growth youll actually get, nor can you forsee how long youll live.

Heres 7% withdrawl rate:



Rich, broke or dead says 19% chance youll die with money left.

You’re no fun!

I played around with that site and it’s interesting. My plan is still to spend more than 4%, probably less than 7% since that would be quite a bit more than I spend now. Whatever I decide to spend, I’ll adjust as time goes on and I see how my finances are doing but I certainly don’t want to be sitting around at 80 wishing I’d done something earlier while my body and brain were still functioning pretty good.

[MBAtarga]

That engaging data analysis doesn't allow enough variability in the model to work for me. The wife will likely take SS security earlier than me - even though we are the same age. I've got an excel model that I built that takes into account the various SS numbers as well as an expected budget - with a few years of additional costs for insurance before we are Medicare eligible. I can vary the market return numbers and inflation rate to see what occurs with our 401k balances.

[911 Rod]

Can you live off of $50,000/year?

[rwest]

Originally Posted by 911 Rod

Can you live off of $50,000/year?

So far so good, I retired at the end of May. Everything is paid for, no dependents and because my house is so tiny, all the bills are much cheaper- think utilities, taxes, insurance and repairs.

[72doug2,2S]

So, the percentage has me questioning. I get the percentage year one, but then that same percentage will likely net you less dollars each year.

Isn't the idea to spend it down to zero, or whatever you leave for legacy. But if you are down to your last dime, your no longer pulling 4% your pulling 100%

[zakthor]

Originally Posted by David

You’re no fun!

I played around with that site and it’s interesting. My plan is still to spend more than 4%, probably less than 7% since that would be quite a bit more than I spend now. Whatever I decide to spend, I’ll adjust as time goes on and I see how my finances are doing but I certainly don’t want to be sitting around at 80 wishing I’d done something earlier while my body and brain were still functioning pretty good.

I really like the graph because its got a standard mortality built into the graph. Helps you visualize that 'ol 'end of plan'.

Originally Posted by MBAtarga

That engaging data analysis doesn't allow enough variability in the model to work for me. The wife will likely take SS security earlier than me - even though we are the same age. I've got an excel model that I built that takes into account the various SS numbers as well as an expected budget - with a few years of additional costs for insurance before we are Medicare eligible. I can vary the market return numbers and inflation rate to see what occurs with our 401k balances.

Right, we all makes our bets and we takes our chances.

The really important thing for successful 'retirement' is that you spend less when the market is down.

The very worst case is you retire and then are immediately exposed to a long steady decline - for example if inflation was high and market stayed the same. In that case every penny you spend is 'expensive' in the long term because those dollars spent aren't coming back to appreciate for the next 20 years.

The above graph is probability of an outcome. That means there is actual historical precedent to go broke at 7% withdrawal rate. In fact the probability of failure with 7% withdrawal is 0.19, so almost 20%. If you actually do spend 7% (or even 5%) in the face of a long recession then you really, actually aren't going to make it. Outcome depends on what actually happens in the future. You can be optimistic and bet on it, up to you.

Originally Posted by 72doug2,2S

So, the percentage has me questioning. I get the percentage year one, but then that same percentage will likely net you less dollars each year.

Isn't the idea to spend it down to zero, or whatever you leave for legacy. But if you are down to your last dime, your no longer pulling 4% your pulling 100%

Right! Like xeno's paradox? Everything gets discrete once you can't actually live on the 4%. Suppose market drops 50% and stays down for 5 years. The 4% withdrawal rate on half'd money is effectively 8% as far as damage done to future returns. Even when market recovers those big bites have done serious damage to the portfolio. Damaged portfolio is going to produce withdrawals that are too low and you can't reasonably live on the 4% - even though you're getting that cat food on sale.

[cstreit]

Kinda dumb. You can live off 1% if you have a big enough portfolio. Funny how no one is willing to DELIVER 8%.

[zakthor]

Originally Posted by cstreit

Kinda dumb. You can live off 1% if you have a big enough portfolio. Funny how no one is willing to DELIVER 8%.

8% and more as long as you ask for it early:

https://en.m.wikipedia.org/wiki/Madoff_investment_scandal

https://www.economist.com/finance-and-economics/1999/07/15/money-for-nothing