[GNC] To whoever explained the 4% safe withdrawal rule - thank you

[Bruce Griffis]

That is a great explanation! And I really like Jane Bryant Quinn's book. 
It was good reading through that and getting an understanding. I think I 
need to reread it again and ask my wife to read it so we are both on the 
same page. I've tried Wade Pfau's book a few times, but that is too in 
depth for me. I'll take a closer look at guardrails.

I was fortunate enough to work in the computing and networking 
department of a large company. Our group was sold off to a larger 
company that just does IT and had a networking group. That group I was 
in was then sold to a large networking company. So I receive social 
security. My wife receives social security. And I opted for a pension 
rather than a cash buyout from each company, so have three pensions 
coming in. But I need to pay attention to money that was in my 401K that 
I rolled over to an IRA. The 4% rule sounds nice, but it leaves me very 
uncomfortable. My wife has a progressive neurological disease. If I go 
first she will need to be in assisted living with skilled nursing care, 
and that can eat up an IRA very quickly.

I like to think we'll be okay taking out 4% adjusted for inflation, but 
the reality is that if my health fails things will get real expensive 
real quick. If my wife's health fails more than I am able to provide 
care for, the same thing happens. And if both of our health fails, we'll 
need all of that IRA and then some. My wife can't get life insurance or 
long term care insurance, but I carry a life insurance policy on myself 
to help offset costs for my wife if I go first.

I know this is not GnuCash talk. But at the very least I can say that I 
will mark my IRA withdrawals as distribution so I can make sure I stay 
at a set amount and can quickly search transactions to see where I am. I 
think putting in guardrails will be an excellent step in making sure 
we're okay. As would dropping down lower than 4% to make sure a little 
extra money is there when we hit our 80's,


On 10/6/24 14:10, Stan Brown (using GC 4.14) wrote:
> 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.
>