What if we changed our withdrawal rate?

I was listening to the ChooseFI podcast recently and they had a guest on who was discussing some of the details of the study that underpins the concept of the 4% rule.

As you may be aware, the 4% rule is the idea that if you save up 25 times what you expect your annual expenses will be in retirement and invest it into low-cost index funds, there’s about a 98% chance that you won’t ever run out of money if you withdraw 4% of your savings each year. It’s based on a 30-year retirement, which obviously for early retirees is a very short timeframe. But what I hadn’t heard before this episode of the podcast is that with the 4% rule, 50% of possible scenarios would see you triple your savings by the end of 30 years!

Obviously there are many factors and assumptions that add to the variables at play here. It’s assumed you never work or earn another dollar in your life. It’s assumed that you withdraw exactly 4% each year regardless of what the market does. In reality most of us are more flexible than that. If I was planning to retire or had just retired and the stock market suddenly tanked, am I really going to go ahead and withdraw 4% of my savings or would I more likely delay leaving/temporarily re-enter the workforce?

If you have the option to be flexible with your working and spending, you don’t have to wait until you meet the requirements for the 4% rule. You may be able to follow a 5% withdrawal rate. If you have significant expenses you could cut if needed, or skills you could use to earn a lot of money should you choose to, you could even go with a 6% withdrawal rate. As always, remember this is not specific advice for you. Use your own brain and your own experts before making any decisions.

But it’s got me thinking. We have kids so we need a decent amount of security. We’re also already very frugal and our expenses are cut fairly close to the bone as it is so for these reasons there’s no way we’d ever consider a 6% withdrawal rate. But a 5% withdrawal rate may be possible. Our initial calculation about how much money we would need to retire on included expenses like our kids’ education in the Philippines, which obviously is finite. After a certain number of years that expense will just disappear. But our calculation just left it in there and multiplied it by 25.

We also know that we could work in the Philippines (or come back and work in NZ) if it came to it. Mrs R2A is a qualified teacher in the Philippines and I have sufficient work experience that I could find gainful employment if I had to. So we don’t have to play it completely safe and save up 25 times our expenses.

A 5% withdrawal rate means saving up 20 times annual expenses. That’s a 20% reduction in the pile of money required, but it’s also roughly a 20% reduction in the amount of time it would take to save up said money. Maybe slightly smaller than that as compound returns mean our final years of saving will be the most productive. But it could mean our home equity is sufficient to pay for the move before our mortgage is even paid off.

So that’s a possibility we’re thinking about. But how about you? There’s a full spectrum of risk-tolerance out there and some people need the security of a 3% withdrawal rate to make more or less certain that they’ll never ever run out of money. There’s no right or wrong answer necessarily, as long as you’re aware of the trade-offs involved in the path you choose.

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  1. I’m definitely on the cautious side. The 4% rule doesn’t work for us as our spending in retirement won’t go in a straight line. As our kid(s) age life will become much more expensive too. Having kids under 10 isn’t too expensive. I imagine teenage years sees a massive jump. Plus I’d still like to be able to splurge sometimes. Part time work may work for some.

    Definitely all about trade offs

    • It’s definitely gonna come down to that sequence of returns. If we can make it through that first ten years we’ll probably be fine. At the end of the day it will be prudent for us to prepare for all eventualities. For example, global warming could mean living in the Philippines is untenable so we’ll need to have a plan B for how to live in NZ.

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