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The general rule of spending 4% of your total savings per year to sustain your money in retirement is repeated often. Not explained is whether this is before or after tax money. If one has $1 million in a retirement plan and needs $40,000/ year to live do you really need more than a million since that money will be taxed when it is removed from the retirement account?
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Yes, while just a guideline, the 4% is the amount you can withdraw and so if you consider that you have to pay taxes, you will need more.
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The 4% rule is just like the salary you draw from your employer. You have to pay your taxes from the gross amount.

intercst
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The 4% withdrawal rule relates to the portfolio survival -- how many years before it is all gone. It says nothing about what you do with the 4% that you withdraw.

To you, taxes are just one of many expenditures, like paying the mortgage and buying food.
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The 4% rule is not carved in stone. If you want a rule to carve in stone, use the 3% rule. But if you are willing to think, read and use common sense, 4% is a good starting point. The actual percentage depends on how much of your funds are in IRAs as opposed to investment accounts, assumes you follow a rather specific set of investment rules, how long you expect to live (20 years, 30 years, more than 30 years - which is considered forever) and what level of risk you are willing assume. By risk assumption I mean are you willing to accept 5% chance some very uncommon thing happens and you will run out of money if you do not adjust your spending? What would be an odd event you might ask. How about the next 20 years being as bad for investments as the last 10? In our specific situation we decided that 3.8% was our withdraw rate.

If you want to read about withdraw rate, a place to start is:
http://www.amazon.com/Conserving-Client-Portfolios-During-Re...
Not well written, dull, full of graphs and numbers. But it just happens to be very informative.
Another good read
http://www.amazon.com/Conserving-Client-Portfolios-During-Re...

Gordon
Atlanta
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We include income taxes, expense ratios and hidden costs such as fund/etf commissions, spreads, impact costs and taxes paid to foreign governments in our SWR calculations.

Expense ratios and income taxes will eat about 0.7% of assets per year. We assume hidden costs at 0.3% of assets per year so our total portfolio costs are 1.0% of assets per year.
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If you want to read about withdraw rate, a place to start is:...
what level of risk you are willing [to] assume...
we decided that 3.8% was our withdraw rate.

It's a big balancing act. If you want to have a 100% guarantee, you have to pick a very low SWR. Problem is, if the world doesn't come crashing down during your lifetime, what you've done is lived a miserly retirement and left a very large estate to your heirs.
If you want to live a more-than-bottom-line lifestyle you have to use a higher rate, but with the risk that your portfolio will be depleted before you die.
What to do, what to do?

Another good place to start is reading on the Guyton/Klinger strategy:
http://schulmerichandassoc.homestead.com/Using_Decision_Rule...

In particular note these items:
"When the Modified Withdrawal Rule is applied to the above case with an initial withdrawal rate of 5 percent (my emphasis), the success rate improves to 100 percent."

"By applying [these three] decision rules, retirees can, on average, withdraw nearly $26,000 more a year, double their total withdrawals, and still achieve a 99 percent success rate."

"[If the market crashes] retirees may intuitively think that, if the need arises, they can act and modify their withdrawals to rescue their portfolios. Now their actions can be made explicit in the form of [these] decision rules"
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It's a big balancing act.

Sure. And the younger you are when you retire, the greater the risk you might be forced to go back to work or come up with some other source of income.

Similarly, you may have to be conservative in the early days, but as you grow older and the risk becomes more manageable, "spend it down" becomes more attractive.

Once you retire, go through a stock market "adjustment" and survive, your confidence in your numbers grows. And you become more comfortable with the risks.

But similarly, some of the expenses are likely to be greater than what you planned for. In my case, the big surprise was the cost increase of health insurance. But having made it to Social Security age and now Medicare, the worries are much reduced.

As always, your mileage may vary. But things can still work out.

If in doubt, work an extra year and build yourself a bit more of a reserve.
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pauleckler writes,

Once you retire, go through a stock market "adjustment" and survive, your confidence in your numbers grows. And you become more comfortable with the risks.

Absolutely!

There have been two 50% declines in the market (2000-2003 and 2007-2009) since I retired in 1994. They're just blips on the long-term chart.

http://www.retireearlyhomepage.com/reallife11.html

intercst
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And the younger you are when you retire, the greater the risk you might be forced to go back to work or come up with some other source of income.

Argh! I try to imagine what kind of job you can get at 60 or 62. For sure it won't be a professional job paying $80K or more -- who'd want to hire somebody who will (re)retire in a few years? And from what I've heard, the job of Walmart Greeter is vastly over-rated.

Once you retire, go through a stock market "adjustment" and survive, your confidence in your numbers grows. And you become more comfortable with the risks.
I second what intercst said. What's worse, for us, is that they say the absolute worst timing for a market collapse in retirement is a collapse right after you retire. And we retired in late 2006, just in time to catch the 2007-2008 decline.
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intercst:
There have been two 50% declines in the market (2000-2003 and 2007-2009) since I retired in 1994. They're just blips on the long-term chart.

Yep. We rode both of those nasty bears down and rode the bull right back up again.

Our lessons for retirement. Have 10 years of living expenses in fixed income. Don't be afraid to moderately adjust the asset allocation to FAVOR stocks when the market looks its worst.
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http://www.retireearlyhomepage.com/reallife11.html

Thanks for this paper & spreadsheet.

I got curious how a simple timing method would fit into the 1994-2010 chart. Conveniently, I already had a spreadsheet with the monthly 10-month SMA data for S&P500, buying when above the 10mSMA and selling when it dropped 3% below the SMA.
Significantly better than the S&P500/FixedIncome after 2001.

On the chart, it fits right in the gap between the upper and lower clusters, but much less spiky. The end value was $282,906. The B&H S&P end value was $176,665.

My computations are too simplistic, but still........
(I didn't account for dividends nor interest earned on cash during the "out" periods. If I get motivated enough, I'll do that, plus figure the 75/25 with fixed income.)
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AlanK:

If one has $1 million in a retirement plan and needs $40,000/ year to live do you really need more than a million since that money will be taxed when it is removed from the retirement account?

Do you plan to withdraw the whole million dollars in ONE YEAR? If not, how much you withdraw from an IRA or other similar account in a given year should only be taxed as income for that year, combined with any other sources of income.

We have paid almost ZERO income tax, state or federal, for three years, even though I DO withdraw sums from my IRA acccount. We live reasonably comfortably on our combined SS income, plus a very small pension I get, some non-IRA dividends, and my IRA withdrawals.

Remember that you pay NO tax within an IRA, no matter how much it makes for you. Again, you only pay when you withdraw the money. (I believe withdrawals from a ROTH are not taxed at all, since the money was taxed before it went in, but I don't have a ROTH, so I'm not sure.)

Also not mentioned is how actively and how skillfully you actually manage your investments.

Seriously.

If you plan to be uninvolved, and to just accept whatever your investments do, without monitoring them or trying to make any changes, then 4 percent may be "safe", though I cannot claim to agree or disagree.

I actively monitor my investments within my IRA. Some basic holdings I keep for a longer time because they pay good dividends and/or are growing in value. However, I also make buys or sells, as my own digging/research suggest I should.

I've taken a lot MORE than 4 percent each year for the 10 years since I retired, and I do just fine. In 2011, for example, YTD, I'm up 13.10 percent, even after withdrawals. (Because I am -- or will be -- more than 70-1/2 this year, I MUST withdraw a minimum percentage from my IRA. However, I've already substantially exceeded that amount as of May, but my IRA is still UP from the start of the year, anyway.)

Again, I think it's in your interest to learn about investing, and to actively follow what your investments are doing, whether or not you actively make changes.

My opinion. This works for me, but I do not necessarily recommend it for anyone else.

Vermonter
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What to do, what to do?

Another good place to start is reading on the Guyton/Klinger strategy:
http://schulmerichandassoc.homestead.com/Using_Decision_Rule...



VERY interesting...

and (to me) a little complicated *..

my SWR strategy so far has been -- spend what you need, try not to over-do it.

when i did a look-back, was amazed to find i've been withdrawing almost exactly what their strategy says.



* and seemed backwards from what i thought the idea was ...namely
Original withdrawal = X% = $Y
next withdrawal = $Y * CPI factor /etc (rather than a % each year
( then they add the 'rules' .. if your portfolio goes down, if re-calculated % is high or low ... )
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0x6a74:

my SWR strategy so far has been -- spend what you need, try not to over-do it.

Bingo!

In my case, I try not to let my "boodle" (IRA) go below a certain level. If I see it doing that, I force myself to hold off pulling out any more until I can "build" it up again!

Vermonter
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I try to imagine what kind of job you can get at 60 or 62.

If you are close to being able to retire, many do not need or want a full $80K. Most prefer part time employment anyway.

Books are full of ideas on how a retiree can make extra income if needed--

1. Convert one of your hobbies into a business. If you make wood carvings or jewelry, sell some.

2. Sell things on ebay (that you buy by spotting the undervalued stuff at yard sales etc)

3. Take a tax preparation course and become a tax preparer during tax season. A dog groomer? A dog walker? Sitter?

4. I know professional salesmen who take up real estate, especially commercial real estate. It takes months or years to close a deal, but can be well worth it.

5. Become a professional investor. Learn to invest your retirement funds profitably.

6. Buy income property and become a landlord.

7. Work part time as a consultant in your previous industry

8. Teach appropriate courses at your jr college or high school adult education program.

etc, etc, etc
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To all the respondents THANK YOU. This was very helpful. I'm newly retired (today was the end of week 1). We have saved what feels like a good cushion beyond our needs and had assumed that the 4% included taxes but a friend vehemently insisted otherwise.
Thanks again
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And then there are those of us who very happily don't work at all, and just plain enjoy being retired! We each had a career we enjoyed, but we're both delighted now not to have to do that any more.

We get up when we want to, and then we do what we want, when we want, IF we want to! (All within budgetary limits, of course.)

Call us lazy, but we've loved it for 10 years now!

Vermonter
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Call us lazy, but we've loved it for 10 years now!

Vermonter, I'm sure you earned the right with a lot of hard work earlier. Now you get to enjoy it.

Some people do like to have something to do. An excuse to get out of the house. Some place to go and be with people, etc, etc.

Part time jobs can fill that role. But so can volunteer work.

And the nice thing about volunteer work is they cannot fire you. It is much less stressful. And not nearly so competitive.
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Paul:

Oh, we DO do some volunteer work and such, and we putter here and there, but WORKING? Really working? Yuck. Not if we can help it. We did that for a lot of years. Having to do what some one else said to do, their way, on their schedule...

Even if you do consulting or work part time, same thing!

True retirement is not for everyone, but It sure works for us.

Vermonter
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HEAR! HEAR!

I'm in my 16th year of deciding what I want to do

Call us lazy, but we've loved it for 10 years now!

Vermonter
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FCorelli:

Good for you!

We love being retired. We're not well off, as I have said, but we pay our bills, and we just plain love the life here that we worked hard to achieve.

We don't mean to be smug. We're also grateful to God for enabling us to be here.

Vermonter
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The original 4% rule comes from something called the Trinity Study, by the way - Trinity University began back-testing various investment portfolios (various percentages in stocks and bonds) several decades ago and came up with your chances of successfully outliving your money based on various withdrawl rates and various portfolio balances.

You can scroll past all the borning text and go right to the charts near the bottom - for instance a 5% withdrawl rate on a portfolio of 75% stocks and 25% bonds has a 98% chance of lasting 30 years...and so on.

http://www.fpanet.org/journal/CurrentIssue/TableofContents/P...

One thing I've started doing recently is trying to push as much money as possible into ROTH accounts so that taxes won't be a big concern going down the road. If I need, say, $40K a year at retirement, and income taxes kick in at (for example) $25K, I'll take $25K a year from my taxable account and $15K a year from my non-taxable account and avoid taxes that way. 8D

Another thing to consider - should we have another stock-market crash before you retire, and should you have considerable funds in a roll-over IRA, _that_ is when you roll that into a Roth, pay taxes on the reduced value of the account, then ride that baby all the way back up knowing you're locked in tax-free. Whooooooooo-doggies! 8D

Things to keep in mind....a stock market crash can actually be a good thing, timed right...

SG
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One thing I've started doing recently is trying to push as much money as possible into ROTH accounts so that taxes won't be a big concern going down the road. If I need, say, $40K a year at retirement, and income taxes kick in at (for example) $25K, I'll take $25K a year from my taxable account and $15K a year from my non-taxable account and avoid taxes that way. 8D


i'm doing something similar --converting a bit of tIRA to Roth every year ..the amount determined by how much Current Tax i'm comfortable with

two other features--
decreasing IRA 'decreases' RMDs (and their taxes)
more left to heirs (my sister who's paying taxes at the highest rate)



Another thing to consider - should we have another stock-market crash before you retire, and should you have considerable funds in a roll-over IRA, _that_ is when you roll that into a Roth, pay taxes on the reduced value of the account, then ride that baby all the way back up knowing you're locked in tax-free. Whooooooooo-doggies! 8D


hmmm..... have to think about that one.
(ive lived through 3 crashes now ... i really don't want to see a fourth <g>)
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SG

Another thing to consider - should we have another stock-market crash before you retire, and should you have considerable funds in a roll-over IRA, _that_ is when you roll that into a Roth, pay taxes on the reduced value of the account, then ride that baby all the way back up knowing you're locked in tax-free. Whooooooooo-doggies!


Darn my feeble brain! Should have thought of this three years ago. I'm poised now to leap at an opportunity which I hope doesn't happen...

Byron
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