The 4% rule

[Gulliver]

With the recent 7% inflation figure in the US I wonder if the retirement savings 4% withdrawal rule is still viable.

Is anyone using (or planning to use in the future when they retire) a different/better method? Is the answer just sticking to a 2% estimated average inflation assumption every year? Living in Japan the exchange rate would offset the problem to an extent. But who knows how long that will last.

[RetireJapan]

As I understand it, the 4% rule involves setting an initial annual sum (4% of the portfolio, say 4m yen) and increasing that amount by inflation each year regardless of what happens.

This always seemed kind of weird and robotic to me. I doubt anyone is actually going to do it in real life.

Personally I am planning to withdraw a fixed % of our portfolio each year (haven't decided the % yet, but possibly 5% or so) as cash, and add it to our 'cash bucket'. Any dividends and income will also go into the cash bucket. We will spend from the cash bucket based on how much money is in it (our baseline spending is low and pension income should cover it, so the cash bucket will mainly be for discretionary spending and emergencies).

I imagine the cash bucket will grow over time and our portfolio will also grow over time, leaving us with the nice problem of figuring our who to give our extra money to.

[Tkydon]

The people at the Rational Reminder recently did a couple of videos where they checked the math of the 4% Rule, and their conclusion was that it was not viable at 4%, and should be more like 2.x%...

Recent - Dec 2022
https://www.youtube.com/watch?v=Fny-pvZS-lo

Previous - Aug 2021
https://www.youtube.com/watch?v=umJvMGOu6DY

i.e. You would need to work out your living expenses for a year, divide that by 0.8 to account for taxes, and then divide that by 0.02x to determine how much of a nest-egg you would need...

For an annual initial income of Y5,000,000, you would need to target Y6,250,000 before Taxes, and a Nest-Egg in excess of Y215,000,000.

[mighty58]

Morningstar just released their latest safe withdrawal rate report a couple weeks ago, they say it's 3.8% right now.

https://www.morningstar.com/articles/11 ... es-in-2023

[goodandbadjapan]

Does the 4% rule usually mean that you are keeping your capital sum at retirement more or less stable. If you have no need or desire to leave any money behind, does that alter things considerably?

[TokyoWart]

Does the 4% rule usually mean that you are keeping your capital sum at retirement more or less stable. If you have no need or desire to leave any money behind, does that alter things considerably?

No. It is based on success rates for being able to continue to withdraw at the inflation adjusted 4% (actually slightly higher in Bengen's later work) for 30 years without hitting 0 as measured in Bengen's several studies and the Trinity study. Following the 4% rule historically meant that in most cases you ended the 30 years with more funds than when you started but there a few sequences where it gets very close to 0.

[TJKansai]

i.e. You would need to work out your living expenses for a year, divide that by 0.8 to account for taxes, and then divide that by 0.02x to determine how much of a nest-egg you would need...

For an annual initial income of Y5,000,000, you would need to target Y6,250,000 before Taxes, and a Nest-Egg in excess of Y215,000,000.

True, though if they have a Y2,000,000/yr pension then a smaller nest egg would get them to their target.

[Tkydon]

i.e. You would need to work out your living expenses for a year, divide that by 0.8 to account for taxes, and then divide that by 0.02x to determine how much of a nest-egg you would need...

For an annual initial income of Y5,000,000, you would need to target Y6,250,000 before Taxes, and a Nest-Egg in excess of Y215,000,000.

True, though if they have a Y2,000,000/yr pension then a smaller nest egg would get them to their target.

Yes. I wrote a diatribe on budgeting and retirement drawdown about 2 years ago...

Y5,000,000 - Y2,000,000 = Y3,000,000 you would need to target Y3,750,000 before Taxes, and a Nest-Egg in excess of Y130,000,000.

Or maybe stepped requirements as pensions, iDECO, NISA, etc., kick in between 60 and 70.