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No. of Recommendations: 18
FAQ Revised: May 04, 2004


Questions answered below:
Why are there so many off-topic and political posts on the Retire Early board?
What is the 4% rule?
Does the 4% rule include income taxes?
What's the Retire Early Home Page?
What is FIRE?
What are some commonly used acronyms on this board?
What are some good books on early retirement?
What are some related Motley Fool message boards?
What are some of the best threads on this board?
The Great SWR Debate
How will retiring early effect my Social Security benefits?
Where can I find the Internal Revenue Code (IRC)?
Where can I find the Applicable Federal Rates (AFR)?
What are some commonly used IRS Forms and acronyms pertaining to early retirement.

Why are there so many off-topic and political posts on the Retire Early board?

Most of the early retirement questions have been answered many times. If all we did was discuss Safe Withdrawal Rates (SWR) from a retirement portfolio and early IRA withdrawals, there'd be about 2 posts per day on this board and most of our most knowledgable posters would have left long ago.

What is the 4% rule? (explanation by dory36)

It's simply the maximum withdrawal that one can take from a portfolio every year for 40 years, and know that even in the worst times this country has ever seen, the portfolio would not have run dry. How was this determined? The research tools mentioned later simply take a given portfolio on an assumed retirement on 12/31/1871, and adjust it for actual market conditions with the given (inflation adjusted) withdrawal each year for 40 years. Then, the research tool started over, assuming retirement was 12/31/1872. The 1873, and so forth. The withdrawal rate that would never result in a depleted portfolio is what we call a "maximum 100% safe rate", and that works out to about 4% for a 40 year retirement.

Why not 5%? Simply because historically, a 5% withdrawal would deplete the portfolio in some of the bad times we've seen. And we don't just mean the Great Depression -- in about 25% of the possible retirement years since 1871, the portfolio would have gone bust before 40 years were up.

And why not 3%? Well, if we had decided we wanted a $40,000 annual income in retirement, 3% would require a portfolio of about $1.33 million, when, at least based on all of our history, we'd have been safe retiring with only $1 million in the portfolio. Chances are, that extra 333,333 would take several years of extra work and investing, after we had achieved our financial requirements.

IMPORTANT: This is a much over-simplified description of a lot of research. See for links to this research, and for spreadsheets and other tools which allow you to test your own plans and timeframes against the included historical market performance.

Just a few details: The 4% is adjusted for inflation annually, and there are important assumptions about how the money is invested, including the allocation between stocks and fixed income investments. The research was based on portfolio values as of 12/31 of the retirement year. And it's not exactly 4% -- that's just a rounded off figure based on some typical asset allocations.

And a few more comments...
The question frequently comes up -- can I include my house, car, and collection of Elvis LPs in the value of my portfolio? The answer is, not unless you make the assumption that these assets will behave the same way as the stock market in general. The 4% number comes from looking at stock market behavior, bond rates, and inflation -- research on other assets has not been included in these studies.

More commonly, though, when doing these calculations, people will use a paid-off house to reduce their annual expenses. Since you need $25 in the portfolio for every $1 in annual expenses, cutting any costs will have a big impact in changing the portfolio requirements. ($1 is 4% of $25...)

Does the 4% rule include income taxes?

No. The withdrawal rates from the Retire Early study are pre-tax withdrawals, just as the salary you earn from your employment is pre-tax. If you have $40,000 per year in after tax living expenses, and you pay an average of 20% of your income in taxes, then your pre-tax withdrawal needs to be $50,000 per year.

What's the Retire Early Home Page?

See link,

“The online magazine for people who used to work for a living.”

Created by John Greaney (aka “intercst”) in April 1996, The Retire Early Home Page is a repository for the research he complied as a result of retiring in 1994 at age 38. There are also a number of Excel spreadsheets that you can download for free. New articles are posted at least monthly.

The best summary of intercst's strategy for retiring before age 40 is "Career Advice for Budding Early Retirees", see link:

Several people have asked, "How do you pronounce, 'intercst?'" It's pronounced "Inter Cost." That's the name of a computer program I wrote in the early 1990's to estimate the engineering and construction cost for building oil refineries and chemical plants in foreign locations. (Get it? International Cost.) When I first got on the Web in 1994, you had to limit your user name to 8 letters, so I dropped the "o" to make it fit. Now I'm stuck with an unpronounceable screen name.

What is FIRE? An acronym for Financially Independent -- Retired Early

Commonly Used Acronyms

AFR Applicable Federal Rate (for calculating SEPP withdrawals)

COLA Cost of Living Allowance

DIA Stock Index Mirroring the Dow Jones Industrial Average

FIRE Financially Independent -- Retired Early

IMHO In my honest (or humble) opinion

IRA Individual Retirement Arrangement

IRS Internal Revenue Service

LBYM Living Below Your Means

LTB&H Long-Term Buy & Hold

MMF Money Market Funds

PLR IRS Private Letter Ruling

QQQ Stock index mirroring NASDAQ 100

REHP Retire Early Home Page

RMD Required Minimum Distribution (from IRA at age 70 1/2)

SEPP Substantially Equal Periodic Payment

SPY Stock Index mirroring S&P500

SWR Safe Withdrawal Rate

TCM Tax Court Memorandum

TTJASI Take This Job and Shove It.

YMOYL Book Title: Your Money or Your Life, by Joe Dominguez & Vicki Robin

Books on Early Retirement

The Retire Early Home Page has reviewed several books on the subject, see link:

Related Motley Fool message boards:

Estate Planning and the Fool

Inheritance Strategies

Living Below Your Means (LBYM)

Retired Fools

Retirement Investing

Tax Strategies

Retire Early Home Page Greatest Hits (i.e., best threads to date)

Feasibility of Early Retirement (post #110)

Rent vs. Buy (your home) (post #590)

The "Great SWR Debate"

Beginning in May 2002 and continuing to date the board has been engaged in a contentious debate on the subject of safe withdrawal rates (SWRs) in retirement. Here are a few polls that we've done on the subject:

If you want to acquaint yourself with the full "Great SWR Debate", it starts at about post #67,000 and runs past post #100,000.

How will retiring early effect my Social Security benefits?

Explaination of how your Social Security benefit is calculated, see link:

The Social Security Administration also has a program for your PC which will calculate it for you, if you know all your yearly incomes, see link:

Post #740 explains why high income earners shouldn't worry it.

Internal Revenue Code (IRC)

Internal Revenue Code, Revenue Rulings, Revenue Procedures, etc:

Applicable Federal Rates (AFR)

Current Monthly Rates (AFRs for SEPP are in Table 1),,id=98042,00.html

Historical AFRs (Years 1985 to 2000)

TheBadger has also made several informative and well documented posts on the subject:

General info on PLRs pertaining to 72(t) and "substantially equal periodic payments" SEPP

A study of PLRs pertaining to "reasonable interest rates"

Internal Revenue Service (IRS) Acronyms

1099-R IRS form showing annual retirement distributions

401(k) Corporate tax-deferred retirement plan

403(b) Non-profit organization tax-deferred retirement plan (similar to 401(k))

5329 IRS form used to calculate 10% penalty on early withdrawals

89-25 IRS Notice containing guidelines for avoiding 10% early penalty

§72(t)(1) imposes the 10% penalty.

§72(t)(2) defines the exceptions to the 10% penalty.

§72(t)(4) re-imposes the 10% penalty when you screw up.

§72(q) is the companion to §72(t) for annuities.

§401(a) umbrella code section that creates a multitude of different tax deferred retirement plans.

§401(k) is strictly an employee contributed "CODA" meaning cash or deferred arrangement.

AFR Applicable Federal Rate (of interest)

C.B. Cumulative Bulletin

GCM General Counsel Memorandum

REG. IRS regulation

Rev. Proc. IRS Revenue Procedure

RMD Required Minimum Distribution from IRA/401(k) at age 70 1/2.

TAM Technical Advice Memorandum

end FAQ list
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