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April 21, 2012


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4% rule actually incorporates inflation - it's 4% + inflation.

I think you're not actually arguing that the 4% rule doesn't work. You seem to be arguing that you don't like the discipline of having an income level that is inherently volatile, because it's tied to market volatility. But living with a volatile income is what real estate agents & others do throughout their careers. It's feasible - just not easy - to do that in retirement.

To be more specific, Dave, the 4% rule as I've read in the research was intended to be 4% of your initial portfolio amount at retirement with each subsequent year's withdrawal increased by inflation.

Many people make the mistake of thinking their spending in retirement will drop, not considering they may do more traveling and eating out. 4% may not be enough if your needs increase!

Thats a strange attack on the 4%. It was meant to give a simple number and incorporate both inflation and market volatility, which i think it does quite nicely when you look at monte carlo results.

(Discounting inflation and market volatility is done by someone like Dave Ramsey who says you can make on average 12% and inflation may take 4%, so you can spend 8%).

If you can get beyond two standard deviations based on prior results I consider that pretty good and that anyone trying to beat that (or thinks they have) doesn't understand black swans and the inability to prepare for them (why go from 98% to 99% when there's a greater chance at that point your principal just gets nationalized in the next 50 years).

In my opinion, the biggest threat to a good retirement for someone trying to be safer than the 4% is them not retiring (out of fear of runnning out of money) before they discover they have cancer.

I believe the safest approach to having a happy and secure retirement is as follows.

+ Live frugally your whole life, it becomes a habit that stays with you forever.
+ Save all you possibly can and invest it in either real estate or the market.
+ You MUST learn to be a proactive investor to be able to navigate through Up and Down markets.
+ Don't spoil your kids with private schools and paying for useless degrees.
+ Don't cheat on your spouse, divorces can kill your dreams. Strive for a happy marriage.
+ Don't pay for lavish weddings.
+ Don't put vacation spending ahead of retirement saving.
+ Keep the number of children down to two - the world is fast running out of resources.
+ Don't worry about what your friends and neighbors think of your lifestyle.
+ Eat healthy - minimize your sodium, sugar, and saturated fat intake.

I plan to work as long into retirement as I can, which will limit the amount of money I ultimately have to withdraw. Luckily, my husband is of the same mindset, so we will probably continue to do freelance work or part-time work as long as we are able to or want to.

The size of your portfolio and how much growth you get will also help determine how much you can use each year.
Another factor most calculators do not allow for is the amount you need will probably go down some with each passing decade.I do not see my husband and I spending the same amount on travel and entertainment at 85 that we do at 65.There are other expenses we will no longer have.So even with added health care costs and inflation I believe our living expenses will go down.

You're exactly right about travel.
Old age does have a way of eventually catching up with everyone. We retired at the ages of 58 and 59 and went on some astounding vacations early on. One was with leaders from the Smithsonian museum and called "Climbing the Sacred Peaks of China. They weren't traditional climbs because the Chinese make a straight stone staircase fron the bottom of the mountain to the top - very tiring but no climbing skills required. Also with them we went on one called "The Celebration of Flight" touring WWII airbases in England as well as some of the ones used by the USAF, and also the control rooms used in the war and several Air museums. We also trekked through the Annapurna villages in Nepal, and went to Turkey, Russia, and to Bali numerous times before finally settling on Europe because travel is much easier. As our investments grew we also started flying Business class which makes the journey less tiring and also did five European river trips. However after our 2010 trip down the Rhine and Mosel rivers, my wife's walking abilities (at 77) had lessened to the point where we decided it was time to call it quits. It was very heartbreaking sometimes to see a couple with very different capabilities where one would consistently let their partner fall way behind on walks, struggling to keep up, and requiring assistance from other group members.

Thanks for the inclusion, FMF. Much appreciated!

We were planning on living on our interest/returns alone and never take a set percentage of our principal unless absolutely necessary. It is going to be a little tough saving that much, but that is my idea of financial freedom.

I never understood the 4% rule to be one-size-fits-all.
But it's a pretty good start.

Likewise, most of Limey's adivce is spot on, but not necessarily best for everyone. For one thing, I'm glad my folks didn't stop at 2 kids, as I'm their seventh. Everyday, I cherish my younger siblings and I'm beyond thrilled to have them around. It was arguably my folk's best retirement plan to have as many kids as they could and instill in each of us a desire to take care of them.

Any one size fits all for retirement planning is never going to work. Many people end up spending more in retirement than they did in the working lives. If you spent most of your time working and now have a lot of time on your hands, you may fill some of it with activities that cost rather than make money.

The same goes for telling everyone to retire at 65. It's nice to have the option to retire at that age. However, many people would benefit from working a few more years and making sure they have enough money, rather than hoping they do.

Old Limey - excellent advice. Personally I agree that all of it is quite smart thinking.

Catherine - I agree that 4% is probably supposed to give you a sense of the rough scale of withdrawals you should make, rather than an exact figure. The point this post makes is good, though -- and I think that if anyone WAS using 4% as one-size-fits-all, posts like this make a fair wake-up call.

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