This may not be relevant to GnuCash, but I'm a retiree too, and
strategies for retirement spending are certainly interesting to me. I'm
not a financial professional, nor was I one before retirement, but I've
done a lot of reading over the past 10 years and will be happy to
exchange knowledge, which we can each take with a pinch of salt.
I've written some initial thoughts below. If this is too off topic for
the mailing list, feel free to email me off list if you want to talk
more about this. (That's not just for Bruce, but for anyone interested.)
On 2024-10-06 09:56, Bruce Griffis wrote:
So I also misunderstood the 4% rule. I figured I would calculate it as I
can take out 4% of my investments in 2024, then in 2025 take out 4%
based on what I had in my portfolio as of 1/1/2025. And I misunderstood
Maybe you were confused because that's actually how the Required Minimum
Distribution from an IRA works.(*) Each calendar year you must withdraw
a certain fraction of the balance in your IRA at the end of the previous
year. In 2024 you withdraw that fraction of your balance on 2023-12-31,
in 2025 the fraction of your balance on 2024-12-31, and so on. The
"certain fraction" is in the mortality tables in Publication 590-B.
(*) I assume you're in the US.
But that's how much you must withdraw from your IRA, and what you
actually need to spend may well be different. The IRS tables are
designed to have the average person draw their account down to zero
before they die. To accomplish this, the withdrawal amounts are
typically above the 4% level, and the percentages increase as you age.
it. I recalculated based on 4% of what was in investments on the day I
retired, then checked inflation rate (2.5% on August 2024 - I would need
to check again at the end of the year) - and compared it to 4% of what I
have in my portfolio today - and there was over a 2K difference in
calculations. I could have taken out too much.
This sounds like the strategy in many books, such as Jane Bryant Quinn's
excellent /How to Make Your Money Last/. The idea is you look at your
total portfolio (not just IRA) when you retire, and spend no more than
4% in the following year. Each year after that your spending limit is
the same number of dollars, adjusted for the year's inflation, not the
same percentage. If you stick with this plan, conventional wisdom
(backed up by some computer analyses) is that you have a very good
chance of not running out of money before you die.
If the amount you must withdraw from your IRA for your Required Minimum
Distribution exceeds your spending limit for the year, you don't spend
the excess but plow it back into investments. (You can't put it back
into a traditional IRA, nor into a Roth IRA.)
Quinn discusses how you can determine whether the right starting number
is 4%, 4½%, or something else.
But this strategy has a couple of vulnerabilities. For one, what if your
portfolio really tanks one year? Since this strategy does not take
investment performance into account, spending on your regular schedule
could dangerously drain your assets, locking in losses. Then when the
portfolio rises again, the shares you liquidated are gone, so your
assets don't recover as much as they would have if you'd cut back on
spending.
One solution for this is to add "guardrails" to the basic strategy. Do a
google search for "guardrails retirement withdrawal" (without quotes),
or begin at
<https://www.cnbc.com/select/guardrails-approach-retirement-withdrawal-strategy-how-it-works/>.
So, note to self. Each year check what was in investments on date of
retirement. Check inflation rate. Recalculate safe withdrawal amount.
What matters in year N is not what your portfolio was at retirement, but
rather what your spending limit was in year N-1, and the year's
inflation. Your portfolio's _current_ value will be relevant, if you add
a guardrail strategy, but the historical value at retirement isn't part
of the calculations.
Now I need to go back and read up on what to do in years three, four,
five, ... - I only know what to do in years one (4%) and two (4% plus
annual inflation rate).
Suppose you retire with $1,000,000. In year 1, you will spend up to 4%
of your portfolio, which is $40,000. Suppose the year's inflation is 8%.
Then in year 2 you will spend $40,000 + 8%, which is $40,000 + 3200 =
$43,200. In year 3, supposing inflation was 2%, you will spend up to
$43,200 + 2% = $43,200 + 864 = $44,064. And so forth.
If that seems too simple, that's because it is. Especially in the early
years of retirement, if your portfolio has a real crash one year,
robotically sticking to last-year's-spending-plus-inflation can prevent
you from making a full recovery when your investments rise again. That's
where guardrails come in. They do complicate the calculations a bit, but
a basic spreadsheet will take care of that.
