Comments on: Are you saving enough for retirement?

By: Philip Brewer

Philip Brewer — Mon, 08 Feb 2010 21:31:06 +0000

It’s long been a rule of thumb among trusts and foundations that you can spend about 5% of your capital each year, and still be able to expect to grow your capital over time.

The reason this doesn’t work for individuals is that it supposes that you can cut your spending sharply in years that your capital has fallen sharply. (If the market is down 40%, you need to spend 40% less than you spent last year.) It’s a rare household whose financial structure supports that kind of flexibility.

So that’s where the 4% rule comes from: It’s the 5% rule with a bit of slack to cover down years in the market, and to allow for a bit of inflation adjustment in years when the investment return doesn’t quite cover inflation.

By: Adrian

Adrian — Mon, 08 Feb 2010 13:09:40 +0000

@ Scott – You and TraineeInvestor have been peeking / reading ahead

By: Scott

Scott — Mon, 08 Feb 2010 12:04:59 +0000

An 8-10% annual ROI = ~3-4% left in the portfolio to allow it to grow along with inflation, so that your portfolio has the same ‘value’ to you in 30 years as it does today. In other words, it ‘grows along with inflation’.

~1% or so to go toward trading/brokerage fees, provided you’ve done your due diligence and are not getting ripped off.

Effectively leaving ~3-5% that you can draw as ‘annual income’ and live your life’s purpose off of.

But an even better ‘retirement use’ of this porfolio is to use it to purchase several really good real estate investments, via commercial properties to lease or good residential properties to lease and live your life’s purpose off of the eggs that those Golden Geese provide.

By: traineeinvestor

traineeinvestor — Mon, 08 Feb 2010 09:50:29 +0000

@Jake – With respect, when people talk about safe withdrawl rates, they mean the rate at which funds can be depleted without running out of money: http://www.retireearlyhomepage.com/safewith.html

As mentioned, my view (for what its worth) is that unless you are looking at a very limited time period, a safe withdrawl rate is a meaningless concept. I’d rather look at the ROI required to at least maintain my wealth in real (inflation adjusted) terms.

By: Jake @ CareerAde

Jake @ CareerAde — Sun, 07 Feb 2010 16:26:19 +0000

AJ – I think folks are really not understanding what draw-down rate means (=budgeted, required yield, not necessarily depletion rate). Maybe you can use your 1st post to define the vocabulary and bring everyone onto the same level.

By: Rick Francis

Rick Francis — Sun, 07 Feb 2010 15:09:41 +0000

>roughly 8% is a safe withdrawal rate, at >least for men who choose to retire at the >standard retirement age in the USA

I don’t know what fantasy land they are living in because all the estimates I’ve ever seen give a maximum of 4% to last at least 30 years! Traineeinvestor brings up a good point- if you retire earlier you need to take a smaller % to insure you don’t outlive your money.

Maybe he is only expecting to live another 20 years after retirement I guess that would make sense if his budget includes for a couple of packs of cigarettes a day for a chain smoker!

-Rick

By: traineeinvestor

traineeinvestor — Sun, 07 Feb 2010 13:56:56 +0000

At the risk of going out on a limb, I’d like to say that, in the context of what this blog is advocating, I think the question is meaningless. If you can get your ROI high enough to make your number in relatively short period of time, you should be (i) “retiring” for a very long period of time which makes any draw down of principal a very dangerous proposition and (ii) should be aiming to produce a post retirement ROI sufficient to meet your needs and have enough left over to combat inflation.

Put differently, if a 3% SWR was good enough to cover me for 50 years with sufficient certainty I would have retired years ago.