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ChooseFI | Financial Independence Podcast
Safe Withdrawal Rates, Drawdown Strategies, RMDs and 50 Year FI Timelines
00:57:25
ChooseFI unveils a new feature on the website that allows listeners to have their financial independence questions answered by experts. Featuring in-depth discussions with Karsten Jeske (Big Earn) and Fritz Gilbert, the episode explores the...
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- [00:00]
Brad Barrett
Hello and welcome to Choose a Five. Today on the show we have a really fun episode. This is a new functionality that we've built at Choose A5's website. We talked about this a number of months ago. I had Jonathan back on the show and we talked about wouldn't it be cool if and this is kind of the second wouldn't it be cool if episode, which is this is something that I always dreamed of where we get just an incredible amount of questions from you, listeners, community members and mostly this has been stuck. I've been the choke point on this and now we have a whole group of friends and experts who are here to answer these questions. So for you, if you're listening to this, you have questions on any aspect of fi, any aspect of personal development or health and fitness. We now have people who can answer these. So choose a vi.com feedback. And today we're focusing on four questions that came in that Carsten from Early Retirement now and Fritz from the Retirement Manifesto were kind enough to answer in great detail. So we're talking a lot about safe withdrawal rates, withdrawal strategies required minimum distributions and timelines to FI and timelines of your FI path and how many years you can look at a FI timeline and how do you think about a safe withdrawal rate over not just a 30 year period but a 50 plus year period. I think you're really going to enjoy this episode. And with that, welcome to choose fi. All right, so this is the first of this type of episode that we've ever done. Basically we just added a really amazing functionality at our website. So if you go to choose a vi.com feedback you can ask any type of question you want. So we have already onboarded 11 different experts who are great friends of the show who have stood up and said, yeah, I want to help. I know the FI community has all these questions and people want answers. And what's amazing about our friends are that they're just willing to give their time and expertise. And we've already gotten a whole bunch of questions come in. I'm slowly working through. Jonathan and I are really trying to get them published and get all set. It's of course a learning curve for us. But I, I wanted to do this first episode really to embolden you to get your questions in. So again, choose a buy.com feedback. I think eventually this is going to go into our new member portal. So of course, if you haven't signed up for the choose it by member site right now. What's really great about it. So there's a forum. There's all sorts of conversations going on and the biggest thing is this is where our local groups are hopefully going to migrate eventually too. Where I know many of our local admins are posting their events and you will get an email when your local group is having an event. So you don't have to rely on Facebook, you don't have to wait for the algorithm to show you the event. You're going to get emailed, you're going to be able to RSVP and you can set up your own events. That's what's really awesome about this. We don't want this to be limited, certainly top down both from us at Choose a Pie and and even just limited to the admins of the local group. What's neat is hey, I'm having a hike this weekend. I'd love to have some of my choose of my local members come create an event. Just do it right. Like I know here in Richmond a bunch of us have a walk every Tuesday and Thursday morning and it's just fun. It's a nice little breakup of the week and just a nice fun hour to get out and talk with some friends. So these kind of things are happening all across the world in choose by local communities and we want to see you get involved. So just go to choose a Com and you'll see it's really easy to just sign up. Jonathan made it. So you can sign up now with I think Apple and your Google Google account or you can set a regular email and password. This is the lifeblood of the community. So stand up, get involved and ask your questions. And we are going to start with Karsten. So everyone knows Karsten is also known as Big Earn and and he blogs over@early retirementnow.com he has a 60 plus part series on safe withdrawals. This is really the text for safe withdrawal rates when it comes to the FI community. Carson is a PhD in economics. He's extraordinarily intelligent and well researched and he's just an incredible resource. So we're going to get this started with a question from Mike.
- [04:32]
Jonathan Mendonsa
With today's listener question. We're going to talk about 5.5% safe withdrawal rates. Is that the new safe withdrawal rate? Here's the question we got from Mike. Morning Brad. I'm suspicious of this safe withdrawal article mostly because it's conflicting with Big Earns research so much I wonder if Benjen has posted his work elsewhere for us to dive into. Does this hold up to some degree? This is inside baseball. So Safe withdrawal rate. What are you even talking about? For those of you that have had this concept of a safe withdrawal rate in your mind, you know, as a number or as a thing, this will be an obvious and important question to answer. For those of you that are saying safe withdrawal rate, what is that? Basically we're just saying when you retire, you need to start living on not your income, but now on your retirement, you're going to be living on your savings and maybe your investments, your retirement accounts, et cetera. And you could pick any amount you want, but ideally, the amount that you draw down, you know, when you're paying yourself, it will last your retirement. Well, how long is your retirement going to be? Well, for the purposes of this conversation, typically you're Talking about a 30 year retirement on average. So how much money can I withdraw safely so that I will still have something left at the end of 30 years, that safe withdrawal rate. But you can see we already put two asterisks just in this definition. So to find a common sense starting place is a nuanced conversation and you really need to see what assumptions go into it. That's the heart of this. To see that that number generated by the author increased so dramatically was somewhat baffling. What's behind it? So we reached out to Big Earn to get his take. Does this fly in the face of his own personal research? Are we missing some important context? Should we update our models? Maybe. Let's talk about it. And I'm going to play Big Earn's answer for you right now.
- [06:34]
Carsten (Big ERN)
Hi, this is Carsten and I will answer the question about bill ban's new 5.5% safe withdrawal rate. We are all familiar with a good old 4% rule of thumb. This rule, according to Bill Bangan and the Trinity study and my safe withdrawal rate research, assumes that you have a 30 year horizon. You're okay with asset depletion. You have a balanced portfolio around 50 to 75% equities and the rest in safe US government bonds. And the first year you withdraw 4% of the nest egg. And then subsequently your withdrawals are adjusted in line with inflation. And with those assumptions, you would have run out of money only in the most extreme cases, say 1929, 1964, 65, 60, only about 1.5% of the time. And the other 98.5% of the time, your portfolio would have lasted the entire 30 years. Now Bill Bangen is touring the personal finance world with a proposal that the new safe withdrawal rate is 5.5%. And if true, that would be a massive improvement in retirement finances, right? Because if you have say a million dollar portfolio and you can raise your withdrawals from $40,000 to $55,000 a year, that would be a 37.5% increase in your retirement budget. But I believe that unfortunately this new 5.5% rule is all a big nothing burger. Let's zoom in and understand what Bangan is doing. So Bangan proposes raising the safe withdrawal rate from 4% to 5%.5% in two steps. In step one, he proposes a new asset allocation. So moving away from the broad US Stock index and focusing more on small cap and international stocks. So in particular, Bangan proposes a 55% equity share and that consists of five equal parts of 11% each. So one US large cap stocks, two US mid cap stocks, three US small cap stocks, four US micro cap stocks, so even smaller than small cap stocks and then five international stocks. And then you add 40% US intermediate treasury bonds and 5% T bills. And with this new asset allocation bill, Bangan claims that you can raise your safe withdrawal rate from 4% to 4.7% percent. And this 4.7% fail save was for the cohort in the late 1960s, in fact late 1968, which would have experienced this prolonged economic and financial malaise in the 1970s and early 80s. I'm highly skeptical of this result. Indeed, small cap stocks performed remarkably well between 1920s until about 1980. Especially between the mid-1970s and early 80s there was a fantastic run of returns. But after that the outperformance fizzled. So since about 1980, small cap stocks have not outperformed large cap stocks. And I created a chart which we'll include in the notes with a so called small cap factor is created by two very famous economists, Eugene Pharma and and Ken French. In fact Fama is a Nobel laureate. So these are both highly, very highly influential economists. And what you see in the chart is that small cap stocks outperformed large cap stocks by about 200 percentage points until about 1980. But this investing flavor hasn't worked for the last 45 years. And I don't expect small cap stocks to experience a sudden great rebound again either. My the is that after everyone found out about this profitable stock picking flavor, you no longer have an edge. With small cap stocks the market is efficient. And for that reason I always urge people not to blindly extrapolate these outperformances of some of these exotic stock picking flavors. I've made this point in my Most recent part 62 of my safe withdrawal rate series, which addresses a related issue. This one is about small cap value stocks, which also would have performed fantastically historical simulations. And that's certainly true. But now that everybody knows about this investing flavor, the party is over. So small cap value stocks have performed only about in line with the total market over the last 30 years. And the explanation is the same again. With efficient markets and so many sophisticated investors out there, pension funds, hedge funds, high frequency traders, and so on. It's impossible to outperform the broad index with stock picking strategies that are based on these widely known rules, like small cap or small stocks over big stocks or high book value stocks over low book value stocks. So I would not bet my retirement on doing better with small cap stocks. I'm not saying that small cap stocks will underperform, but they won't outperform anymore either. And of course, in Bangan's defense, though, I stress that having an 11 allocation for non US stocks, I think that's generally a good idea for diversification. But you won't be able to materially raise your withdrawal rate with that alone. So certainly not by 0.7 percentage points. So let me now turn to the second step. Bengen says that out of almost 400 cohorts, he simulated, only that one cohort in late 1968 had this 4.7% fail safe rate, but the rest had an average withdrawal rate of 7%. So he proposes that under normal conditions, retirees would consider a 7% withdrawal rate. And of course, Bangan correctly points out that you should also factor in market conditions such as equity valuations, especially the Shiller Cape, which is now extremely high by historical standards as it's above 30 now as of June 2025. So conditional on today's rich equity valuations, the average historical withdrawal rate would have been closer to 5.5%. So that's how he raises the rate from 4.7% to 5.5%. Wow. Did you notice what Bang did here? Did you see the sleight of hand here? Going to 7% or even 5.5% is no longer a safe withdrawal rate. It's now only an average withdrawal rate. And that average withdrawal rate is only safe on average. So he changes the success criteria. There will be substantial percentage of failures if you use the average rather than the fail safely. So typically when I study the statistical properties and the distributions of withdrawal weights, they are normally skewed in such a way that the average is actually a little bit greater than the median. So therefore, if you Use the arithmetic average historical withdrawal rate, you would have a slightly higher than 50% failure rate. So calling this a new safe withdrawal rate is extremely deceptive because over the next 30 years, you might run out of money with a 50% or even higher chance. So I find this highly problematic, and I'm amazed that not more people have pointed this out yet. But apparently journalists looking for a catchy headline didn't want to question this and they just ran with the story. So, to summarize, I don't buy the new and improved safe withdrawal rate. Even under the most optimistic assumption, where you assume that the small cap style works again as well as it did a century ago, you can go all the way to 5.5%. It's only 4.7%. And even this move from 4 to 4.7% is highly controversial. I would not personally bet my retirement plan on a very uncertain small cap premium that has not worked for the last 45 years. And I would certainly not abandon the idea of targeting a fail safe withdrawal rate. So comparing 100% safe withdrawal rate under the 4% rule with an under 50% safe withdrawal rate of 5.5% is really the finance version of pulling a fast one. And so to wrap this up, the safe withdrawal rate hasn't magically increased to 5.5%. Sorry to be the bearer of bad news. We are back to the 4% rule of thumb for 30 years and likely a little bit less for longer horizons. So good luck with your retirement and thanks for asking that question.
- [15:46]
Brad Barrett
All right, Mike, thank you for sending in that question and a big thanks to Carson for such a detailed response. And yeah, this is of course nuanced and there are differences of opinions. I know we have obviously Bill Bengen saying 5.5%. We have great friend of the show and the FI community, Frank Vasquez, who talks about his risk parity portfolio where he believes there's a high likelihood of a 5% safe withdrawal rate. And I think what Carsten's talking about here is ultimately success rate. Right. And I think it's really, really important how nuanced he got in this answer. And talking about really changing the goalposts, which is what, what he's saying Bengan did here and the safe withdrawal rate versus the average now. So as Carson said, it's a bit deceptive and it really does change the goalposts entirely. So if there is less than a 50% success rate for this 5.5% withdrawal rate, it's not truly safe, clearly. And I think this really gets into even more detail of what do we consider safe? And I think maybe this is an area where those of us in the FI community get a little bit too conservative, frankly. Right?
- [17:01]
Jonathan Mendonsa
We.
- [17:02]
Brad Barrett
We are looking for something close to 100%. And that might mean that if we. If we only have, let's say on paper, a 90% chance of success, we might actually work a couple years extra, multiple years extra, to get it closer to 95, 98, 100%. And that might mean giving up actual years of your life to a job that. That you may not like. And there's a real cost to that, let's be clear. So I think we cannot lose sight of that because that is an actual cost as opposed to. We're just projecting here, right? We're running Monte Carlo simulations. We're trying to figure out, hey, based on the past, what could possibly happen in the future. But it's similar to my mantra of control what you can control. And in this case, you are potentially, or in many cases where people talk about their withdrawal rates and we talk about one more year syndrome. Well, you might be giving up multiple years. Might not just be one more year syndrome. And that's a. There's a real cost to that for a potential eventuality of negativity. And I think that's usually a bad bet because it also doesn't take into account any type of flexibility that you might have, which I know this isn't exactly Carson's favorite thing, but I look at it as a lot of us are really flexible, and we can potentially lower our expenses for a year or two if need be. We can earn a little bit of money. I mean, I'm talking 5, 10, $20,000 in a year. You might just fall backwards into earning that kind of money. Right? It doesn't mean you're going out of your way to earn money, but it might just happen as a natural consequence of your interest or things that you're learning. You never know. Entrepreneurial ventures, right? And this is all not to mention that most of us don't even consider Social Security in our plans. We consider it a big whopping zero. And that's just really silly, frankly. I know at this point I just turned 46, and I can theoretically, I guess, take Social Security in my early 60s. In the cosmic scheme of things, that's not all that far away. And I'm currently really not. Even in fairness, I don't go into great depth on my plans because I am FI and I still do earn a bit of money. So I don't even forecast Social Security, but it was, it's really silly, frankly, because I know there is a very high probability that at least something like 70% of the benefits that I'm anticipating are going to be there. I mean, it would take an absolute catastrophic zombie apocalypse style scenario for it to be zero. So it's really silly that most of us count that as zero. And I think a lot of things go into our calculations, right? I talk about this layer upon layer of conservatism that many of us, most of us in the FI community do build into our projections, which is, oh, I think my annual expenses are 60,000, but you know what, I'm just going to make them 75,000 for my FI number and oh, I'm going to count Social Security as zero. And oh yeah, I'm expecting this bit of money to come in, but you know, I'm just going to count it as zero. And when you build layer upon layer upon layer of that in, well, you get to a point where you are going to be fat fi many times over and you're sadly going to die with millions and millions and millions of dollars. And there was a real cost to that, which was years of your life. So I think this is all tied together inextricably and we need to, we need to really consider it. And I love that's what, you know, my more kind of squishy analysis brings into it. But Carsten's very specific analysis and he's saying, and I know he's done great, great research on this and I know he's had some good natured arguments with Paul Merriman and other people about small cap outperformance. And a lot of people like Mr. Merriman and I guess now Bill Bengan are looking at historical data and saying that small caps outperformed. But as Carsten saying, most of that outperformance, almost all of it was from the 1920s through 1980, which at this point, 1980 was 45 years ago. So Carsten believes it's an efficient market and that a lot of that outperformance is very, very, very unlikely to continue in the future. So we need to really consider that when we look at, oh wow, these numbers on paper for the last hundred years show me that small caps outperformed. But the asterisk is that for the last 45 years they haven't outperformed. So I think it's a big stretch to assume that they are going to outperform magically, that all of a sudden they're going to be these unanticipated little victories in small caps that nobody else is seeing. It just, it kind of defies logic and just how connected the world is now. It seems highly unlikely that to me at least send to Carson, of course, that we're just magically going to find these inefficient areas, let's say, where there's massive outperformance in small caps. So I tend to agree with Carson here. This doesn't really pass the smell test for me. So I think we all need to just take a deep breath and I think it's nice to believe that there are higher save withdrawal rates and there may be. Again, Frank Vasquez is brilliant and has done a lot of work on this and he thinks it's somewhere around 5%. So I think there is room for debate here, clearly. But I personally haven't seen anything that would make me change from that 4% rule of thumb. And I love how Carson used that term because a lot of these are just rules of thumb. We're, we're ultimately trying to put precision on something that of course we can't know the future precisely. And I think for me and for most of us in the FI community who are not PhD level economists, we are just looking at this and saying, okay, before I found fi, I had no idea what my number was. I just simply had no clue. And now I have a North Star. And that's the terminology that I love to use, which is, all right, what do I need to reach financial independence? What do I need to retire at some point? Well, I just take what is my life cost, what are my annual expenses and just multiply by 25. And that is in essence the 4% rule. So the 4% rule of thumb, as, again as we say so really Simply for every $40,000 you spend a year, you need a million dollars to reach FI. So if your life costs 40,000, your FI number of investable assets is $1 million. If your life cost $120,000 a year, well, your fine number is $3 million. And it's really, it's just simple math. And I think for most of us, for the vast majority, this gives us a North Star to shoot for, which really amongst the scaremongering of the traditional financial media, the Susie Orman's of the world, they would lead you to believe you're never going to be able to retire, that these inexplicable things like health insurance are going to cost millions of dollars and you need to have 5 10, $20 million to retire. And most of us just stick our heads in the sand because that seems impossible to us. So I love that this gives us something to shoot for and something really concrete and then we can argue about, hey, do we think by the time when you get to fi, 10 years from now or 15 years from now, we're going to have a whole lot more data and we're going to know a whole lot more. But I think for me right now, I'm still using 4%. But I know Carson in the past has talked about if you want to guarantee, essentially, and he, he wouldn't use these exact words, but as close as possible to guaranteeing, you could do a 3.25% save withdrawal rate. And then again, people like Bengan and Frank vasquez talk about 5% or more, and I think there is room for that. But I personally need, need more data. So I think we'll see how it goes. And we're going to continue to update this. So, Carson, thank you for that. And we're going to actually throw it over to Carson again for another question. This one came in from Rachel.
- [25:10]
Jonathan Mendonsa
All right, everyone, we have a question today about the 4% rule, table stakes. Do you know what the 4% rule is? If you don't, you probably will by the end of this conversation. But take my word for it, it's something that the FI community is very interested in. We got this question from Rachel. She says, I have a question related to the 4% rule and it typically comes with a caveat that funds will last 30ish years. Well, what about those of us looking to retire early in our 30s and 40s? What rules should we be using for 50 plus years? Man, that's not a good question. That's a great question. Let's dig into it. So we sent this over to Big Earn and let me tell you a bigger and was excited to answer it. And I'm going to play that answer for you right now.
- [25:56]
Carsten (Big ERN)
Hi, this is Carsten, and I should mention I'm on a cruise ship in Alaska right now, so please excuse the suboptimal sound quality because I didn't bring all my recording gear from home. So we have all heard about the 4% rule of thumb. It was invented by Bill Bengen and then confirmed by the Trinity study in the 1990s showing that a 4% initial withdrawal amount subsequently adjusted by CPI inflation, would have survived for 30 years in most historical retirement cohorts. And the question is whether we should make adjustments to this 4% rule if the retirement horizon is longer than 30 years. And that's a great question, because in early retirement we can look at much longer horizons. 40, 50, even 60 years. And back in 2016, when I became interested in early retirement, this exact question was on my mind. And I couldn't find a lot of helpful guidance in the personal finance community. So I did a lot of research on safe withdrawal rates myself. So there are two important assumptions in the 4% rule. First, the rule is based on a 30 year retirement. And second, you need to be okay with asset depletion. So if you end your 30 year retirement and you depleted 99% of your portfolio, or even your entire portfolio, that's still considered a success. But if you depleted your portfolio after 30 years, obviously you can't tag on another 30 years of retirement after that. So that asset depletion assumption sometimes gets lost in the discussion in the FHIR community. I've met a lot of people in the FHIR community that didn't know that the 4% rule only assumes asset depletion and will not guarantee preserving your portfolio purchasing power. So how much do we have to reduce our spending if we retire early? So there are two camps in the personal finance scene. One is the overly cautious financial influencers that will tell you that if your retirement horizon is twice as long, you need to accumulate twice as much money as the, say, the 25X recommended for traditional retirement. And two, the other camp is overly optimist. They will note that the typical average or median retirement outcome after 30 years still leaves you with a substantial nest egg. So you cross your fingers that you have enough left to make it through another 30 years. Both of these extreme views are wrong and the truth is somewhere in between. Both views are incorrect because they overlook a crucial concept in finance, the time value of money. So you don't need to set aside as much money for years 31 through 60 as for years one through 30. So camp one is wrong, but you should set aside at least some cash. You cannot just set aside $0 for years 31 through 60. So Camp 2 is incorrect as well. And the only way to know for sure how much you need to set aside for years is 31 onward is to examine the numbers, run simulations, and determine what would have been the historical fail safe. And that's what I do in my safe withdrawal rate series. And you don't have to read all parts because that's currently over 60, because I study the effects of different retirement lengths and asset depletion versus preservation in part two. Of the series and there will be a link in the Notes. So in that post towards the end I provide a table with safe withdrawal rates, stats for different asset allocation assumptions and retirement lengths. And if I take a balanced portfolio with 75% stocks and 25% bonds, which was historically a very robust asset allocation, I find that the 30 year fail safe withdrawal rate is 3.82%. It's not 4% because the 4% rule, even over 30 years is not entirely safe. It's only about 98.5% secure and the few extreme tail events such as 1929 and the 1960s push the fail safe withdrawal rate down to only 3.82%. Then if we extend the horizon to 40 years, the fail safe drops to 3.58, then 3.35% for 50 years and 3.25% for 60 years. So there is a decline in the historical safe withdrawal rates. But the good news is that you don't have to have your retirement budget when extending the horizon by 2x, but it's still a meaningful reduction. So imagine you have a million dollars. Then you would reduce your retirement budget from 38,200 to 32,500 a year to account for an early retirement rather than a traditional one. So it's down about 15%. It's better than 50% but certainly noticeable. And alternatively we can calculate the target size of your net worth. Say you target a $50,000 retirement budget, you would need about $1.3 million, so that would be $50,000 divided by 0.0382 or a 30 year horizon. And you would need $50,000 divided by 0.0325 which is a little over $1.5 million. So instead of 100% larger portfolio like say Suze Orman wants you to target, it's only about 17.5% more for the early retiree. So let me summarize. There's some bad news. All else equal, early retirees need to accumulate some extra money to account for the longer horizon. But there's also some good news. First, even doubling your retirement horizon only requires about a 17.5% larger nest egg, not 100% larger. Nasdaq. That was a real eureka moment when I first started my personal retirement planning journey because I was concerned that I simply couldn't retire at all because I had say a 50 or 60 year horizon. However, the great insight from my research was that even in the historically worst case scenarios such as 1920s, 1960s and 70s, a substantial fail safe withdrawal rate prevailed. So when I retired in 2018 and right out of the gates, I faced some market volatility in 2018. Later, later that year, and then during the 2020 bear market, the 2022 bear market, and the 2024 correction, I slept well at night because I knew that my withdrawal rate would have survived something as bad as the Great Depression. And there is more good news, which I mentioned just on the side as this is not the main topic for today. As early retirees, we may also have some other things going in our favor. So for example, later in retirement I can assume additional cash flows such as a pension and Social Security, which will eventually reduce how much I have to withdraw from my portfolio. And it may not make a massive difference for a very early retiree. But the typical fire enthusiasts, usually they plan to retire say in the 40s or 50s. And when you have these additional cash flows around the corner, maybe starting in your 60s already, you may increase your withdrawal targets again. So I've run some case studies where the bare bones retirement with the longer horizon required a safe withdrawal rate of 3.5%. But then the supplemental cash flows such as pensions and social securities pushed your safe withdrawal rate to above 4% again. So again, this was not the question today, but I wanted to include this insight to end on a more positive note. Don't get discouraged by the slightly lower fire safe withdrawal rates and the historical simulations. With a personalized withdrawal analysis, you will likely find a significantly higher spending rate if you, if you do the math right. So in any case, good luck with your retirement and thanks for asking me that question.
- [33:48]
Brad Barrett
All right, another amazing answer from Carson. And this one I'm going to not really add too much because it stands on its own, but I think this is a really, really important question and I think it's important that we, that we think about this time horizon. And it's really pretty wonderful. And I love actually how Carson's analysis tied into what I said from the first question, which was, hey, most of us aren't even considering Social Security or a pension at all. And as Carson said, when he retired around 2018, his withdrawal rate would have survived even the Great Depression. So it helped him sleep well at night. And even with this much larger timeline of 40 to 50 years or more, he said he would only need a 17.5% larger nest egg. And that's really not that significant at all. So it's this again is another sleep well at night kind of test here. And yet again, most of us aren't considering we probably will have extra money coming in and certainly with Social Security, maybe even some type of pensions or some such. So there's a lot of, a lot of positivity here. Okay. This wasn't just built. Yeah, the Trinity study and the 4% rule really was about 30 years and for most of us we have significantly more than a 30 year time horizon. I know I'm looking at really another 50 years of my life and I think there's a reasonable chance I'll bring in some money. I know for sure I'll have some Social Security barring a zombie apocalypse and I'm going to be okay. And I think for me, looking at that roughly 4% gives me something really specific. And like Carson said, even in a the massive the largest timeline he could come up with, 3.25% is yet again that number. So if you want to be the absolute safest you could possibly be within reason, 3.25% should be that floor. So for anybody out there who's listening to this and is planning on going below that just for whatever conservatism sake, like please rethink that you are giving up something real. You're giving up yours. And I think it's really important to not lose sight of that. Thanks for listening to Choose a Vi and for all your support of our mission here. The absolute best way to support Choose a Pie is when you sign up for your next rewards credit card to use our cards page at choose a buy.com cards. I keep this page constantly updated so it should always be the top resource for you. Thanks for being part of our community and for your support. So okay, we're going to now shift into a couple of questions that our great friend Fritz from the Retirement Manifesto answered and we're going to get started with a question from Pete.
- [36:40]
Jonathan Mendonsa
Hello everyone. Today we have a fascinating question taking a look at the intersection of RMDs and safe withdrawal rate. So this question is coming from Pete and he says I really enjoy the podcast, especially the Q and A segments. I have a question comment regarding the 4% rule in the RMDs. I believe I have a basic understanding of both. If someone has significant money in a tax deferred ira, doesn't the RMD make the 4% rule irrelevant after the RMD age? So the 4% rule as I understand it is a self imposed guideline and the RMD required minimum distributions are mandatory. You have to do this. So if someone is at FI and has a plan to withdraw 4% in perpetuity once the RMDs kick in the 4% rule. Projections are worthless to the extent that they differ from the mandatory RMD amounts. I've never heard this discussed and now I'm uncomfortably recalling Brad's recent comment that if you think you have figured out something that nobody else has, just gonna shake that one off. Either way, I'd sure appreciate your thoughts. Thanks. So Pete, this is a great question and I think that there is a little bit of nuance here that's worth diving into. That's, that's what we do. But I can definitely see a situation in which what you're describing would be correct. So you can just take that and walk away with it. But you know, we are all interested in the nuance of this and for that we went ahead and sent this question over to Fritz from Retirement Manifesto, friend of the show, frequent guest and author of the book Keys to a Successful Retirement. He was thrilled to get us a reply which is filled with lots of nuance. Word of the day and I'm going to go and play that for you right now.
- [38:27]
Fritz Gilbert
Hi, this is Fritz Gilbert with the Retirement Manifesto. Thanks for your question about the 4% safe withdrawal rate versus RMDs or required minimum distributions. I'd like to address it a second here and I'll also write an article about it. But basically you're kind of comparing apples and oranges. The RMD required minimum distribution only applies to those pre taxed accounts. Basically if you have a 401k, it would be your before tax. Obviously the government's trying to force you to pay the taxes on it. So when you get to age 73, or I guess it goes to age 75 in 2033. But let's say in your mid-70s the RMDs kick in and you're forced to take withdrawals from your pre tax accounts and pay the tax on them.
- [39:05]
Carsten (Big ERN)
Makes sense.
- [39:06]
Fritz Gilbert
The problem with your logic Here is the RMDs only apply to the pre tax. So when you're looking at a safe withdrawal rate, on the contrary, you're multiplying it against all of your assets. So that would include your taxable and your Roth accounts. So let's just use a quick hypothetical example. Let's say you have a $2 million account, you've got a million of it in pre tax, you've got a million of it in taxable and Roth $2 million total. Your RMD, let's say it's 4%, would only apply to the million dollars in pre tax. So that would be $40,000. If you look at $40,000 against your $2 million portfolio, you're actually only doing a 2% safe withdrawal rate. So you could use the RMD percentage and multiply it against your entire portfolio. And that's actually a very sound strategy. That's called the safely spend how much can you safely spend in retirement strategy. And according to a study done by the Stanford center on Longevity, they looked at 292 strategies and that was actually the number one performing withdrawal strategy. So you're onto something here. But I would just make sure you know that you would multiply the RMD percentage against your entire portfolio. Second point is, just because you're forced to liquidate that RMD doesn't mean you.
- [40:23]
Carsten (Big ERN)
Have to spend it.
- [40:24]
Fritz Gilbert
You can invest it, you can put it in a taxable account. One important caveat is you cannot put that into a Roth. So one of the big advantages of doing Roth conversions prior to your RMDs kicking in is you can take your first dollar out of that pre tax account and you can put it into a Roth. If you wait until your RMDs kick in, you've got to take your full RMD as a distribution into a taxable account and only then can you take incremental transfers to which would obviously boost your taxes and move those into a Roth. So, but back to the point, the RMD does not say you have to spend the money. You can put it in taxable. So you can still play strategies around should I spend more for my Roth, should I spend more for my taxable, but using that RMD calculation against your entire portfolio. Spot on, great approach. The other caveat I should mention is as part of that study that the Stanford group did, that also assumed, and they recommend delaying Social Security. So once your Social Security kicks in and you take your RMD percentage, you would basically spend only the Social Security and the RMD calculation and that would be it. So it does include your Social Security claiming at age 70. I think that's a relevant point to make. So check out the article, it'll have more details. I appreciate your question. Thanks much.
- [41:45]
Brad Barrett
All right, Pete, this was a really good one. And I laughed out loud when you alluded to my comment, which basically for anybody who didn't hear that, was, yeah, if you think you found something that's absolutely genius that no one else in the world, you know, a hundred plus billion humans that have come before you just magically missed, there's probably a reasonable likelihood that that's not the case. And that's not to say, of course, that there aren't eureka moments in. In human history, et cetera, et cetera. But usually some of us go down rabbit holes and we're like, oh, I figured something of the secrets of the universe, and. And it usually winds up not being the case. So in this case, yeah, as. As Fritz so aptly said, this is really comparing apples to oranges. And I'm glad that he really slowed down on the essential point, which is, you know, RMD is they are required minimum distributions. And those amounts might be more or less than you plan to spend than your annual expenses, but they are really wholly unrelated to what you need to cover for your life. Right. Your actual annual expenses. And therefore, it's not like when you are required to take this distribution from those accounts that you are magically required to spend it all. So, for instance, let's say I'm just making. Making numbers up. Your actual annual expenses are $40,000, but your RMD is $60,000. Well, that doesn't mean somebody from the government is looking over your shoulder and forcing you to spend $60,000. That's not the case at all. It's just that you are required to pull that money out and you are required to that. That is a taxable event. Of course, there's nuance to that, but some of that will be paid in taxes, so you won't net the full amount. But nevertheless, it's not like the amount over your annual expenses you have to spend. You can just stick it back in your bank account or stick it in your taxable brokerage account. So it's really, really important to know that it doesn't take the place of a save withdrawal rate. It ultimately has nothing to do with that, other than that this will be part of the money that you are taking out of those accounts. So a lot of us do some interesting mental accounting, but in the grand scheme of things, money that you need to spend in a year is fungible. Whether you do a bucket strategy like Fritz suggests, or you keep money and, I don't know, all sorts of different cash or different accounts or in real estate or whatever it may be, you can ultimately do what you want. But money is money. And if your life costs $40,000, you need to have $40,000 to spend that year. And no matter how you arrive at that, I think that's up for debate or personal preference based on your portfolio, how you look at money and math and safety and security and all these things. And we can talk about that under separate circumstances. But yeah, in this case, the RMD is really our apples to oranges to the the safe withdrawal rate. But Pete, great question. I love people thinking outside the box. I think that's what's so important. Just regardless of whether we're right or wrong, it fosters the conversation. And you certainly did that here. So I think a lot of people are going to benefit from this. And we're going to move on to another question that Fritz answered, and this one is a question from Matt on dynamic drawdown strategies.
- [45:07]
Jonathan Mendonsa
Hey everyone, Today we're going to be talking about drawdown strategy. We got this question from Matt and he says hi, choose if I I've been diving deep into many of your podcasts, especially related to drawdown strategy, as I'm approaching retirement. Right now I have a $2.5 million portfolio comprised of 90% stocks, mostly US, some international 10% cash in a money market. I'll be 43 next year, which is when I'm considering retirement. I'm considering a dynamic withdrawal strategy where I take 0.25% per month to get to the 3% annual withdrawal and I put that in my money market for months where that withdrawal isn't enough to carry expenses. I dip into the principal in my money market slightly to cover, you know, the difference. When the market, stock market performs better, it would then replenish the cash in the money market. This process feels simple for me, and it seems like it would respond to market changes quickly and would help me preserve the value of my portfolio for the long term. Can you help me think through other pros and cons with this approach? One thing I'll have to figure out is that about 50% of the portfolio is located in a 401k with Vanguard, though it seems like the other half, in my taxable brokerage, would cover me long enough to get to retirement age. And I'm also considering doing some Roth conversions and in the interim. All right, so we've got dynamic withdrawal strategies. We've got all sorts of options on the table. We've, you know, kind of this how can we ultra optimize? When we got this question, we immediately thought of our good friend Fritz Gilbert. He is the author behind the book Keys to a Successful Retirement, as well as the popular blog Retirement Manifesto and a frequent guest on the podcast. So we sent him over this question and he was delighted to answer it, and I am delighted to share that answer with you today.
- [46:56]
Fritz Gilbert
Hey guys, this is Fritz Gilbert from the Retirement Manifesto, weighing in on the question here. In principle, it's a Sound concept. You're basically talking about starting to fund your retirement spending. It's a major change from the accumulation phase. You've done some thinking about it. I've got a couple of suggestions though. I think the first thing that concerns me a bit, you're looking at taking a 0.25% every month, which is a lot of transactions, a lot of decisions every month. What am I going to sell? Not a real clear explanation of your methodology of how you're going to determine what to sell. The math makes sense. 3% withdrawal rate, I think that's fine. But I would suggest you think about a couple of things. One is maybe do either quarterly or semiannually trans transactions and you basically would look at your asset allocation by your major holdings. You could use something like Empower to do that for you and look at which asset class is up the most to determine what you'd like to sell. That's one recommendation. The other thing is your asset allocation. 90% ST as you get into retirement and the sequence of return risk. That's a pretty high allocation. You might want to think about looking for opportunities to start building a bond ladder. And you could use CDs in the near term and maybe some ETFs like the Invesco. They've got some 20, 28, 2029, they've got specific years that hold bonds that mature in that year. So you could start structuring some ladders for, let's say 25 or 50% of that year spending. When those mature, you would move those into your money market fund from that. So that that's something to think about. Maybe try to find some bond exposure in there to minimize your sequence of return risk. And then I guess the other thing is the 10% cash doesn't sound bad. The concern I've got is you say when the market performs better, I would then replenish the cash. I would encourage you to think about setting up some guidelines around asset allocation. Maybe if you get to 91% stocks, you'd automatically liquidate 1%, things like that. That would help you determine when you're going to transact it. I've also got some articles I've written. I've been using the bucket strategy, which is similar to what you're doing. And I'll put those in the show notes so you can look those over as well. I've been doing it for seven years now. I only do an annual sale formally now. What I'll do is once a quarter I'll look at my portfolio. I'LL look at the asset allocations. I'll determine if I want to refill the spending bucket. But realistically, once a year might be sufficient. At a minimum, I'd say probably those semi annually, but once a month is an awful lot of transactions. And then the last thing, about 50% of your portfolios in the 401k, I was similar to that. I got rid of my 401k and moved those into individual accounts so that I could better manage. The online management of 401s can be a little bit burdensome. So think about that and I wouldn't worry. You've got half of it in taxable, so you've got plenty of options. I would also look seriously at maybe doing some Roth conversions if you've got a lot of that in pre tax. And as you're doing that, you're going to incur some pretty hefty tax expenses. So make sure you're building that into your spending as well when you're looking at this 3% and make sure you've got sufficient funding there. So hopefully that helps. Thanks for giving me the opportunity to answer.
- [50:05]
Carsten (Big ERN)
We'll see you.
- [50:07]
Brad Barrett
Okay, so great answer here from Fritz again. And Matt, thank you for the question. And yeah, I guess my take on this is a lot of the things that Fritz alluded to in passing. I always, always, always counsel simplicity. And I know this is what I'm striving for in my life. And Fritz was fairly adamant about this, but I want to be even more adamant, which is set up rules, get your brain out of it. Right? He said something like, if you're doing 90 to 10, and Matt was saying, hey, I might do this when such and such happens. Well, that's all well and good, but we know that we sometimes get lazy, we sometimes get nervous, we sometimes get too overexcited about, oh, this is going to rock and roll, so let me keep it in here and have more stocks. Well, you need to have a plan. And I think this is what we've talked about here on the podcast for years, about an investor policy statement where you just have rules that you set in times when your brain isn't going a million miles an hour, that there's nothing terrible happening, some crazy shock in the market or the opposite, which is things are just booming and you want to. Your natural tendency is to let it ride. Well, what if your plan was, I need 10% in bonds or money market or whatever it is, or 20% or 30%? Well, you're going to very quickly get out of that. And then we get down to timing and stock picking and all of these things that we want to avoid. And I think Fritz talked about this really specifically with Matt's monthly 0.25% per month sale of the annual expenses, or I GUESS he has a 3% withdrawal rate, which, again, based on what we talked about with Carsten in the earlier part of this episode, 3% is just too low. It just simply is. You are going to die with millions of dollars. And that's just the reality. And I just. I don't think that makes sense. I mean, I think 3.25% is the absolute lowest that I could in any way advocate for, based on Carson's research. But realistically, I think for the vast, vast, vast majority of us who are already adding in all these layers of conservatism, 4% is a very, very good number to shoot for. And again, we have a lot of friends and experts who think it can be dramatically higher than that. So to shoot for 3%, it just. It doesn't make sense to me. And then. Yeah, to spread that 3% out over 12 months. Well, if you can set it up that it's automated and you don't have to think about it and you know precisely where it's coming from, that's a different story entirely. Right. But if you're going to have to rely on your brain and your behavior to actually log in and have the, the courage or whatever to sell 12 times a year, I just think that's a bad strategy. I think it. It flies in the face of simplicity. It flies in the face of behavioral economics and, and how we all know our brains mess us up. So I definitely agree with Fritz on this, that I would do this, he said quarterly or, or twice a year. I think he said he even does it just once a year. That makes a whole lot more sense to me personally. But again, if you can do this, that it's automated 12 times a year is perfectly fine. I don't think Matt's going to get in trouble. I don't think anybody else is going to get in trouble with that. But you have to have rules. You can't just fly by the seat of your pants and do this. So another thing Fritz talked about was if you have a 401k that even after you've separated service from that company, you can still leave your 401k there, but you can also roll it to a traditional IRA that you can control at whatever brokerage of your choice. You know, I like personally Vanguard Fidelity And Schwab and it's really, really easily. That's not a taxable event. Of course you have to follow the rules. This has to be done in a certain time period. So please don't screw around with this and just don't put it in, in the ira. You're going to have a real issue then. But to roll it from a 401k to an IRA that you can control and you can put in whatever investment you want, it's really quite, quite easy. Yeah, I know. I did this personally at Fidelity in the last couple of years and it was simple. I basically didn't have to do anything. But again, we always talk about the investing two step, right? This is both for something like this and really more importantly for when we invest money. Hopefully every month or more frequently, whenever you have an investable cash, you transfer the cash over to your brokerage, but then it's just sitting there in cash. You haven't invested it yet. Okay. You have to. Actually the second step of the two step is you have to purchase equities. You have to purchase something like VTI or VO or whatever it may be that you're purchasing. Otherwise the money just sits there in cash. And now, luckily, most of the main brokerages do put you in what equates to a high yield savings. It's not exactly a savings account, but you do wind up getting in most cases a couple percent interest. But that's not what you're looking to do. That's not going to get you wealthy over 30, 40, 50 years. You need to invest this. So please just remember that. And depending on how your 401k to IRA rollover happened, there's a reasonable likelihood that the money will end up in cash in your traditional ira. And you do have to invest it. So that's just something very important. There are times clearly where the assets can just transfer over, but in a lot of cases that I've seen, it would have transferred over as cash. So just keep that in mind. You want to log in after the rollover happens and just see what's sitting there. If it's cash, you need to get invested, it's just really, really important. So. All right, well, this has been a ton of fun and I really appreciate everybody sending in these questions. Again, choose a vi.com feedback. But also, very importantly, when you're at our website, sign up for the member app, the totally free app that Jonathan created. This is really going to become the center of hopefully the FI community and certainly the choose it by community and all of our local groups. So start moving over there. And if you're a choose a via admin, please set up your events there. They get emailed out to all the people that signed up. And we've had a lot of reports that groups are getting people who have just never come out to events before. And we've had really record turnout at a ton of different groups. I know Charlottesville mentioned this. My brother's group in Wisconsin has had great success. These are just two that come to mind just off the top of my head. And yeah, it's really, really something special that Jonathan's building there. So we finally have the home for choose of I that's not beholden to Facebook. So please get in there, make it happen, send me these questions. And we're going to do a lot more of these episodes. I think they're a ton of fun. We have so many of these experts onboarded. So we have Dean Turner, my personal trainer and Dr. Bobby who are doing health. We have Jess from the Finers and Jillian talking about mini retirements, Coast Fi, Slow Fi and a whole lot of other aspects of the journey to Fi. We have Alan and Katie Donegan talking about entrepreneurship and international travel and tax and just Fi in general. We have Sean Molini and Cody Garrett who are just answering questions constantly. They're really, really special. And Chad Carson's answering on real estate. And we just. I keep growing this list of our friends who want to help out and it's really, it really is something special. Obviously, Carson and Fritz, who you heard here today, didn't need to mention them again, but I wanted to. Nevertheless, this is really something special. So again, thank you to everybody for being here. Thank you for being part of the choose of a community. And until next time, thank you for.
- [57:48]
Brad Barrett (newsletter and community outro)
Listening to today's show and for being part of the choose of I community. If you haven't already, the best ways to get involved are first, subscribe to the podcast. So you're listening to this on a podcast player. Just hit subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand and I send it out Tuesday morning. So just head over to choosefi.com subscribe and it's really, really easy to get on the newsletter list right there. And I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox.
- [58:23]
Brad Barrett
So that's the way that I keep.
- [58:25]
Brad Barrett (newsletter and community outro)
A pulse of the community and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, we have choose a vi local groups in 300 plus cities all around the world. So head to choose a vi.com local and you'll find a list of all of Those cities in 20 plus countries all across the world. And if you're just getting started with FI or you have a family member or a friend who you think would be interested, two easy ways choose a Fi episode 100 is kind of our welcome to the Fi community and even though it's a couple years old at this point, it still stands up and it's a really great just starting point to get an understanding of what is financial independence. What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to.
- [59:13]
Brad Barrett
Live a better life?
- [59:15]
Brad Barrett (newsletter and community outro)
And then choose if I created a Financial Independence 101 course that's entirely free. Just head to choosefi.comfi101 and again, thanks for listening.