The Wall Street Journal looked at a few ways to tweak the 4% rule for retirement withdrawals. The article acknowledged that William Bengen has since dialed up the number to 4.7% but has said 5% is just fine. There was also a note about Morningstar adjusting the number every year based on some sort of assessment of current conditions. The last few years their estimate has been in the threes, proving too conservative as markets rocketed higher.
WSJ's ideas included copying the RMD table (that's not how they described it), mapping out non-discretionary spending (medication and groceries for example) and discretionary spending (hobbies and travel). If someone is actually living on 4% and they can attribute 2.5% to non-discretionary then they'd be able to cut back on the discretionary spending when called for like in a serious drawdown.
The comments are worth reading, there was a lot of sentiment that overlaps with what we've looked at before, notably that growth in the portfolio will account for inflation, also that the types of suggestions in the article overcomplicate the task. Our answer to overcomplication has always been to just take 1% out of your balance every quarter. Yes, it requires some flexibility but setting aside some number of months worth of expenses in cash can reduce the need for flexibility.
A related idea we talk less about is the more likely scenario that people will have several different types of accounts; some combo of taxable accounts, traditional IRA, Roths and HSAs. In this scenario, it might make more sense to deplete an entire account and then move on to the next one.
"The book" says to pull from those accounts in the order I put them in above but there are exceptions. The example I always use is buying a car. Assuming you don't want to go into debt for the car, If the car costs $40,000 but it is paid for from a traditional IRA, then accounting for the taxes, it will cost more like $50,000. Pay for the car from the Roth and it will cost $40,000.
Lately, we've been talking about bridge strategies, depleting some piece of money over the course of a few years to get to some financial milestone like maybe starting Social Security or having to take RMDs. I've written more about this lately because I think it's how my wife and I will probably frame out our financial plan as we get older.
I am hesitant to use the word retirement, I can't see choosing to give up my day job but as I get older, I should plan for my income from portfolio management to go down. Most clients are quite a bit older than me so there are some inevitabilities there. We have a pretty good income stream from our Airbnb rental but at some point we might want to dial that down to spend less time on it. Less time would mean less revenue.
Over the next ten years, income from portfolio management plus the stipend from Del E. Webb plus the rental income should exceed our expenses. If everything goes as hoped for with Social Security then we'd both take it in nine years-10 months with the total covering our fixed expenses and then some. If it gets cut by 22% (low probability outcome but not something to ignore either) it wouldn't be a catastrophe but something we'd have to reckon with.
Ten years from now, we might want to sell the rental cabin or sooner or maybe later but for now ten years makes sense to think about. The proceeds from the cabin could be a bridge to delaying RMDs (I mean spending the money, there's no avoiding taking them out of your IRA). We've talked about living in the rental for a couple of years to avoid paying the capital gains tax (I don't believe we'd get out of paying back the recapture). If something goes wrong, we could live there to meet the capital gains burden.
If we did sell what is now the rental cabin, we'd still want to have Prescott house we live in and the Tucson house and split time between the two. Eventually we'd have to sell the Prescott house we now live in. If things go well then maybe that would be when I am 85-90? These proceeds could be a bridge until the end without ever relying on the IRA for covering expenses.
I asked Grok to age me 30 years, like when we might leave Prescott. That's not 90. It said it thinks I'm in my mid-40's to early 50's. I will take that, thankyouverymuch.
Why would I want to never rely on the IRA for expenses? Thinking about all this allowed me to identify a hot button for me which is if I ever need some sort of serious care, that I be able to receive that at home. My wife framed it a little differently, we have a casita at the Tucson house that some sort of care provider could live in which sounds good but would take work for find the right person for that.
If you're still with me, I plugged this narrative, and strategy plus a few more details I'm not sharing here into Copilot to evaluate what I have in mind. There was a lot of back forth with Copilot. I found that letting it start very simply and then adding inputs to bring Copilot to a point where it understood our situation was the way to go. When I finally had all the inputs and details entered and felt like Copilot did understand, I asked it for a qualitative assessment of our plan.
It gave feedback as a well as a simple list of the positives along with ideas of what the vulnerabilities might be. This was good, it was helpful. I then said to spreadsheet it out with base case and worst case scenarios, it also threw in a "conservative" case scenario and a summary.
The spreadsheet got a lot of things wrong. Really a lot. It assumed we sell the Prescott house that we live in when I turn 67, not much older. There were instances where it did assume account balances would compound and others where it didn't to that calculation. It omitted the Del E. Webb stipend for quite a few years, it ignored my base case for taking SS at 70 in all three assumptions.
I did not spend the time trying to correct the spreadsheet errors. That the spreadsheet was so far off surprised me because the qualitative feedback was correct.
Having a qualitative exchange was helpful for me, hopefully it comes across that I've put a lot of time into thinking about our aging strategy, I think that is a crucial part of the process. The more effort you put into your planning, the better your chance for a successful outcome.
If you engage on various socials, threads especially, you might see spammy posts about using AI for financial planning. AI is making progress but not there yet. It would probably take a long time to correct all the spreadsheet errors. A year from now, I'm sure the outputs will be much better. It will happen, but not quite yet. I should note, I did not put any confidential information into AI.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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