How do you withdraw 4% from your portfolio when you enter FI

[George the original one]

@robby152 provided a nice example of what I was saying.

[elegant]

Well, I'm 29 and I plan to ERE in half a year, so I can relate.

In terms of SWR, I try to prepare myself for the worst possible outcome.

I think that it would be possible for me to live on an extremely austere budget (~1-2% of my portfolio adjusted for inflation, which would roughly be around 4000-6000$ a year). This is what I'm planning to do in the next five years, just in case Mr Market enters an apocalyptic mood.

This way, higher safe withdrawal rates become more of a "bonus" in later life.

BTW, FWIW, I only invest in accumulating funds and not in income distributing funds, which means I have to "produce" the dividends myself by selling.

[ohcanada]

Toska is right!

[Asgard01]

The idea of selling my shares/bonds every year for 30-50 years seems to me like I will run out and that the basic 4% rule would not apply. I don't know how that 4% rule was performed or checked during the people checked. Would they have been spitting out dividends in an income portfolio of say 1.7% then selling their bonds at 2.3% a year! loosing 2.3% of your bonds/shares just seems to me like you will lose out ultimately unless the shares you do have perpetually keep rising ultimately which I guess is what the stock market hopefully will do albeit a couple steps back before going forward now and then.

I want to be overly paranoid as I don't like the idea of running out of money before life, even if I took 3% I would be selling 1.3% of shares/bonds every year. When I first got into this, I assumed that my interest would just be spit out like regular savings, I know that dividends are close to this but much lower in percentage terms and you only get the rest of the percentage gains if you sell your shares.

I still feel confused about this to be honest

Chris

[workathome]

You're not taking 2.3% / 1.7% every year, you're taking 4% of your portfolio the *first year* and only increasing it by inflation. So if you take 10k the first year, the next year you'd take $10,200, then so on. If dividends + interest don't cover it, you could sell off whatever % of the portfolio has appreciated in order to keep your 60/40 balance, or whatever % allocations you decide.

[Asgard01]

I'm saying that I am taking 4% of which above the principle amount would come from 1.7% dividends and then 2.3% that can only come from selling stocks as interest is not kicked off as an income like savings. My shares are simply worth more and the difference from when I brought them is called interest. I still am loosing total numbers of shares every time I have to sell the 2.3% and only if those shares I already own keep rising will I be ok but even with that. I own a finite number of shares that will eventually be depleted. That is my understanding anyway, please feel free to correct me, I am sure I may be wrong. I am new to all this

Chris

[workathome]

No.. that's accurate, the research on a 4% SWR is aimed at 30 years, with the potential that at the end of that 30 years you will have drawn down all your money. So you're right trying to figure it out - the thought behind ERE requires understanding the framework behind the rules and bending them where possible instead of just following the rules! Shiller P/E and predicted returns (like if the market really crashed and the Shiller P/E was at 8, you might feel safe with even a 9% withdrawal rate) based on historical data is highly relevant, along with age and the potential that you may do something in the future that earns money between now and the next 30 years, or aiming for 3% instead, etc.

Personally, I *hope* to always have a mostly passive/semi-active "investment" or business covering much of my yearly expenses. Whereas others may spend more time researching potential value investments with a Graham active-investor mindset, doing carpentry, consulting, doing home improvements, etc. Say you only need 3%, and dividends cover 2%, you're only looking to cover that final 1% (or something like 2-3k/year at Jacob's levels - not hard!) and you never have to touch your shares, you could die with a large nest egg to leave to charity/kids/etc.

[Asgard01]

I think Its fair to say I have been too optimistic with all of this. I have taken 5% real growth average as a given for future returns and even if this occurred, as I could pull the trigger on FI in 5 years which feels very tangible. It is now coming to my attention that I could end up with a loss at the end of 5 years for all anyone knows. I may increase my portfolio in the long long term but at the 5 year scale, who knows.

This has also of course made me think about withdrawal, it seems that 3% maybe more of an aim but that would delay my FI for years. It's a bit frustrating but I should of knew all this really. It's just that 4% rule was drilled into me as if it was a real fact. I could get 3% from a UK CASH ISA, no inflation but still almost 100% safe. I will need to think about this some more, my confidence has been shattered a little with my latest readings and understandings. Pulling FI trigger at your basic FI level assuming 4% which you could not be flexible on as this is for minimum living seems far too risky! I know you could supplement it with part time work! business ventures etc.

Ponders....

Chris

[ohcanada]

Chris - UK market isn't nearly as highly valued as the US! Based on historical returns you might very well have 5%. Shiller PE there is half the US (only 13). If yore buying the SP500 though, (if I were in your shoes, based on research I've seen) it would be prudent to move more money to your home country's index fund.

[JamesR]

It was somewhere above 10% (11.x%?), so most folk should be okay if they make adjustments when it hits 10%. Adjustments like going back to work or reducing expenses or finding a sugar daddy.

This kind of implies that we can do a 10% SWR for ERE, especially considering most EREists are willing to "make adjustments".

[dot_com_vet]

Here's a handy calculator for maintaining (rebalancing) asset allocation on contributions/withdrawals:

http://optimalrebalancing.tk/

[jacob]

Incidentally, it's good that you think about this before pulling the trigger. I would even recommend delaying RE for a year (or more or less) and doing a test run until you feel completely comfortable with the idea.

Executing the test run simply means directing all the income (you plan to lose) into another investment account and living off of your FI plan.

This is easy for the dividend investors since they can scale into it, first paying minor bills, then paying major bills, and then everything.

It's non-trivial for total-return investors.

[Asgard01]

I like the idea of a trial run, that's interesting. I think I am going to concentrate in building my wealth more so before I majorly consider how to draw an income from it. I will go on a 3.5% rule most likely and then at the time I have enough money if I still want to do this! I will research my options. 1.7% dividend, I just need to figure how I will get the 2.8%. Selling my shares seems obvious but that still strikes me as being a way to ensure eventually I will have zero money as my shares will continue to go down in number for 40-60 years.

To be honest Jacob, I am rethinking whether I even want to achieve FI in the sense of not working anymore, escaping the rate race for good, kick it back at home with the 1 can of beer I can afford a week hehe. I am concentrating more on finding happiness and some peace of mind in the here and now instead of putting this on a pedestal and thinking/idealising what life will be like afterward.

I am thinking that achieving financial independence will be a goal still, but retiring as it were in my early thirties is out of the question now. I still want to contribute to society at the level of working and creating, doing etc. I just like the idea of being able to cover myself if anything happened, like the idea of being able to change jobs if I don't like things, take a pay cut to do things I prefer, eventually go part time perhaps etc. the idea of stopping working altogether has lost its allure as of late, this could change though I'm sure hehe

I have freed my mind up a little from obsessing over purchases, and having to pay for such and such, I am not wasting money on things that provide little gain or use but neither am I so concerned about hitting bang on 50% of savings, or bang on such and such. I budgeted to tightly and I am realising this now. I have relatively small outgoings but I have added in more 'unexpected outgoings' money if which I only had $1200 a year. I also had $0 big purchases (more than $150) and $0 for holidays. I feel like I would become like my father and be a Scrooge at this rate so I am changing that.

I think for myself and my own needs, I was being too extreme, concentrating too much on the numbers and changing from 23 years, to 20 years, to 13 years, 10, 8 and now 5. I think I would rather push this back to 8 years. I wasn't even happy with the prospect of 3 years which would of been possible if I kept my part time job of helping my disabled friend and living on bare minimum. I guess I prefer a life with a little more flexibility with regard to spending, and less strictness, penny watching etc.

I may be back to chasing FI though when I go back to work on Tuesday