Unlocking the Mystery: How AI Legalese Decoder Can Address the Absence of the 4% Rule in Retirement Calculators
- March 4, 2024
- Posted by: legaleseblogger
- Category: Related News
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I recently found myself engrossed in the retirement calculator, eagerly inputting numbers to determine the optimal monthly contribution needed to amass a comfortable 2.5 million dollars for my retirement years. According to the renowned 4% rule, this sum would ideally generate an annual income of 100k for the rest of my life. However, to my surprise, the calculator yielded a much higher figure of 5.5 million dollars required to sustain this annual income.
This discrepancy has left me perplexed and wondering if there are crucial factors that I have overlooked in my retirement planning. Could there be hidden costs or inflation rates that have not been considered?
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The people who made that aren’t going to go to calculator jail, and 4% is more what you’d call guidelines than actual rules in any event.
You’d have to see what the assumptions were on the calculator. Many of these are made by organizations that want you to save more, and saying you need to save more for a given payout is a way to motivate that.
Which retirement calculator are you referring to? That would give readers a point of reference.
Try [https://ficalc.app/](https://ficalc.app/) it is very easy to use and lets you pick from 12 different withdrawal strategies.
There is no reason to not draw down the principal. You are dead in x years. I think thats the assumption. You can certainly incorporate it into your own calculator though
There are many retirement calculators out there, feel free to use other ones if the one you used isn’t meeting your needs.
> The 4% rule would say that would give me 100k a year in perpetuity
I think you misunderstood the “4% rule.” The 4% is a best estimate about how to make sure your retirement funds last over a 30 year period.
I donÔÇÖt know which calculator youÔÇÖre talking about, but tax could be a piece of it.┬á
┬áFor example, if youÔÇÖre paying 22% tax in retirement and the money was saved in a 401k, youÔÇÖd need to draw around $128k to have $100k to spend. $128k is 4% of around $3.2mm, not $2.5mm. ┬á
It could also be adjusting for inflation- projecting $100k/year in future dollars, which would need to be more than $100k.
It really could be any number of variables and assumptions depending on the specific calculator but those are two that came to mind.
It’s not clear which calculator you are using. But generally this type of calculator is much more accurate the a simple rule of thumb. Of course with any calculator the devil is in the details. It’s all about the assumptions. First off what is your success target. Second is what life expectancy are you using? Many calculators look at your current asset mix and model a rate of return based on historical returns. Good calculators do a Monte Carlo simulation of these returns. For a Monte Carlo simulation many financial planner recommend a 70% “success” rate.
Seems like the calculator isn’t accounting for any gains.
At 5.5MM you can pull out 100K a year for 55 years if its earning 0%.
The 4% rule is not a prescription, nor a prediction, and not even really a recommendation on how much you can should withdraw in retirement.
It’s simply the amount, based on historical data from 1929-1992, one could withdraw the initial year (and then adjust for inflation) for 30 years, with Bill Bengen’s specific portfolio mix, and not run out of money. That’s it.
If you have any changing expenses in retirement, you shouldn’t withdraw the amount that 4% (changes in health, e.g.). Same with changing income (including if you start Social Security >1 month after you retire). Same as if you’re okay dying with millions of untouched collars (most years in Bengen’s study resulted in more than the start I believe, and about 1/3rd resulted in *twice* your starting amount). Same as if you think you should withdraw, say $40,000 when you only have $30,000 left (a literal impossibility). In short, no one follows the 4% rule as many people understand it. Once you see it as a limited-scope, ballpark estimate to help pin down your retirement number, *then* it has uses.
There is no “The” retirement calculator. It’s just one heuristic and one opinion
I could be wrong but this is how I’m looking at my retirement numbers. Looking back on the last 30 years, 100K in 1994 is about 200k in todays money. Following that trend, 100k today will be 200k in 30 years.
I made my own calculator in excel charting out my current pay with 3% COLA over the next 35 years. I added in an investment column as well that’s compounding on previous year with a ROI factor too. I then can see what my pay is going to be heading into retirement (essential as I have a pension to factor in), and can calculate what my 4% draw will be in comparison to my pre retirement pay.
Currently, I’m projected to retire making 75% of my pre retirement pay. Over the next couple of years I’m wanting to up that to 90-95% but that will depend on our future childcare costs. Do note that this was figured on the 4% rule. I don’t see a reason to up the draw rate for at least 10 to 15 years into retirement, just based on making decent pay and plan to have no debts in retirement.
The calculator is likely showing the default scenario should the market signigicantly underperform historical averages. Just play with the settings.
Inflation.
To have $100k in todays money value you very well may need $5.5M in 25 years following the 4% rule simply because $100k then would only be $50k in todays dollars.
Or its just doing its own thing…there is no rule that online calculators have to obey any particular guideline.
You say it like thereÔÇÖs some Devine calculator that is supposed to be all telling but what calculator are you referring to?
The question would be, when did you put in the start of your retirement?
The 4% rule is a guideline of how much you can withdraw to make your money last 30 years.
Now if you are putting in retiring at 40-55, then the calculator is going to want you to have significantly more capital to survive.
Also if you are planning to retire earlier than 65, make sure you calculate in high medical costs.
4% rule is about having a retirement rule last until your likely death assuming normal retirement age, that calc is trying to make it last forever.
though honestly, the biggest issue I have with both is that 100k just wonÔÇÖt be the same in 30 years.
$5.5m you can set up a wealth fund that can grow forever if you structure it correctly, never touch the principle, and reinvest a percentage of the returns into it. $2m will take you to the grave in comfort.
The calculator assumes and end of plan and a drawdown of funds over time to that end of plan.
With that said, both calculations seem very conservative.
Yea, some of them have hidden assumptions.
If you want better clarity and flexibility, this [retirement calculator](https://investomatica.com/early-retirement-calculator) is fairly good in those areas.
A big chunk of the online calculators use a percentage of current income to calculate retirement spending. Depending on your savings and spending habits that can be way off reality.
The 4% rule is what is “safe” to spend and never run out of money, while percentage of current income tries to approximate what you will spend. A big difference and both have merit to consider for planning purposes.
Agree with above – there are lots of calculators out there. I used several before I retired. Try FIcalc : [https://ficalc.app](https://ficalc.app)
Bogleheads swear by FIREcalc
I also like the calculators at [https://www.financialmentor.com](https://www.financialmentor.com)
https://www.financialmentor.com/calculator/best-retirement-calculator
Also: [http://www.i-orp.com/Plans/index.html](http://www.i-orp.com/Plans/index.html)
The calculator matters, though most calculators calculate in today’s money, some calculate in inflation adjusted terms. So your 100k now would be 100k*1.032^20 if you are retiring in 20 years.
Others have explained the safe withdrawal rate (swr) so I won’t go into that.
I assume the 4% rule is just saying, no matter what, you can keep your money in something safe and make about 4% interest. That’s naive, because it wouldn’t take into account inflation, so this calculator may be trying to calculate what you need to save to have the same buying power. If my assumption and math is right, it looks like they’re assuming 2.3% annual inflation.
The calculations you need are the ones that assume 4% withdrawal rate to age 70 and then add in SS after that time and your needed withdrawal rate will be less to keep the same standard of living. None of the calculations account for RMD or taxes, that you must calculate yourself.
Calculators are pretty clumsy actually. When you calculate your early retirement you leave out money in your pre-tax retirement accounts until age 59 1/2 when you are allowed to withdraw the money as well. The 4% rule is gross income from all sources of liquidity. If you need to sell your home to gain liquidity hold out moving costs and assume increased income to equal a 2BR apartment in your new area or the cost of a downsized home.
Another way of doing the calculation id when you have saved up assets not including your home of 25 times your needed income it is safe to retire on that income.
Unless youÔÇÖre 60, withdrawing 4% is too aggressive. It was only designed to last someone 30 years. If you want retire earlier than that you need to withdraw less.┬á
Modeling retirement is complex and requires a large number of inputs including savings, estimated spending, estimated inflation rate, estimated spending inflation or deflation rate, the distribution of your savings (tax deferred v/ taxable v/ Roth), other sources of income (rental property and pension plus social security), inheritance, planned sale of assets (i.e., a downsizing), how you plan to allocate your assets (i.e. % mix of stocks and bonds), and of course life expectancy which varies greatly depending on your personal health and age. I’d recommend using a more complex model like the free one from Empower, formerly Personal Capital, that lets you put in all of this information. It then gives you a probability of success. If you are very conservative you can target 95%. Most target 85%. The results rarely, if ever, match the 4% rule since that is highly generic and not tailored to specific situations.
The original creator of the ÔÇ£4% ruleÔÇØ now says it can actually be higher than 4%, maybe 4.5%-4.7%. Others say it should be 3.8%.
https://www.fa-mag.com/news/creator-of-4–rule-says-new-withdrawal-target-is-4-7-71026.html
https://finance.yahoo.com/news/even-inventor-bill-bengen-revisiting-143000007.html
I’m betting inflation. If you want 100k in today’s money every year, that’s potentially 220k in future dollars, which would be about 3% inflation for 26 years.
This sounds like a real vs nominal issue. If you want 100k in todays purchasing power and are going to retire in 20 years you are going to need a little over 200k to have the same purchasing power.
Try this: [https://ficalc.app](https://ficalc.app)
The difference might be due to taxes. Sometimes folks forget the 4% annual drawdown is taxable.
Look for a calculator that lets you control multiple factors. You can have it factor in the important details and get a better answer.
Something to think about is inflation and your own salary growth that the calculators overestimate but matter.
For example, if you want to retire in 30 years, make $100k, and your salary goes up 2% each year, and you plan on wanting 100% of your salary in retirement.
That means you’ll be withdrawing $185k each year at retirement. Using the 4% rule, you’ll want $4.6 million.
Now, let’s assume you want to be retired for 25 years and expect a 3% inflation. That man’s to have an equal purchasing power at the end of those 25 years. You’ll need to withdraw $390k per annum at the end to maintain parity. This means that after a couple of years, you’ll be withdrawing more than your account is earning and by the last 5 years you’ll be withdrawing about $140k from the interest and $150k from the principle.
If, on the other hand, you plan on only the $185k for 25 years, at the end of that time, you’ll have an equivalent purchasing power to $88k per year.
A good example of this is current pensioners. If they retired in 2000 and were planning on living on $100k a year, they’d need to be withdrawing $185k a year now to have the same purchasing power they did upon retirement. If the retirees only planned for $100k a year without increasing, then now their purchasing power is $54k.
Inflation is the reason. 100k now isn’t the same as 100k in 2055. After 30 years at 2.5%, $100k is the equivalent of $211k. To draw $211k annual you need $5.3 million.