25X of what?   25x of what total amount? 

25x of your total net worth? 

25x of your total investments?  Your tax-deferred accounts + Roth + brokerage statement amount?  

Or 25x of your usable after-tax spending amount? 

How much is YOUR money?

Useable amount is real.  Do you base your spending and/or income on the after-tax amount, or do you fixate and dwell on the taxes you have to pay?

So many people calculate their 4% “rule” from their total net worth.  Having a plan to use your entire net worth to fund your life spending plan makes sense in many ways, but it’s not all part of the same calculation for everyone.

I don’t plan on selling my house to pay my bills until much later in the “rest home” chapter of life.

So (very) many people calculate their 4% “rule” from their total investment assets.  This makes a lot of sense.  You have saved X amount, and it will return Y & Z amounts, giving you a total growth(?) of N.

But if you are calculating your 4% from your total net worth and you have large tax-deferred accounts, then some of that “growth” is going to your US uncle and state uncle. 

How much is available for life spending?

To make your usage details even more specific, if you have 1m and you withdraw a safe 40k for 30 years (because your allocation is 50/50) and that 1m is in a tax-deferred account, you will only receive 70-90% of the 40k after taxes for life spending.  (YES, much of the 40k would probably be within your standard deduction as MFJ)

What if you lived a larger life and needed 100k or 150k per year and had to withdraw 4% from a 2.5-4m larger tax-deferred account?  Then you would receive far less in actual after-tax spending amounts.

4% rule and me

So how do I think about the 4% “rule”?  The 4% of what amount rule?  The what needs to be calculate from our asset allocation, tax situation, and future safe withdrawal rate calculation?   I have absolutely no idea how all of this fits, or will fit, together.

I’ve heard multiple podcasts lately say something to the effect of “the 4% rule will not spend your principal but only the growth, leaving you with ‘millions’ when you die.”  I would have to really re–re-read the PDF of Bengen’s analysis (or his new book), but I believe he meant “survive your 30-year retirement with a $1 or more to your name.”  That means your principle was used to fund life.

Also, if I recall correctly, the 4% study looked at terminal balance, not really focusing on when (what year in retirement) your account dropped to zero.  What if many of the “bad sequences” in the 5% scenarios had people running out in years 28, 29, or 30?  I’d take that chance.  The ability to be agile and adjust as the years go by is a powerful tool in your retirement planning.

I can see how we spent below 4% of our (total) invested assets for 6+ years into retirement (my 40s!) and realized the growth in those years set up an entirely new outlook for the current and future of our retirement spending.

Different Perspective

When we had our formal (safety-based) professional retirement plan completed (BEST MONEY I’VE SPENT EVER) at year 10, I learned we could have (should have) spent more in the first 10 years of FIRE.  Of course, it’s always easy to look back and determine what you should have done. 

The lesson we took from the formal retirement plan was to regroup from past successes–saving for decades, the growth for a decade in retirement–and have freedom (future post) to spend some of the growth now.

I wonder if the worst 30-year period’s 4% SWR is nothing more than a baseline for worst case planning for 30 years?

There is no way I want to spend the same in my 50s or 60s as I will in my 80s.  The value of a dollar is worth more now (“a million isn’t what it used to be”) in real terms and in life useability value.  I cannot imagine enjoying a mini-bus ride throughout Morocco the same at 85.

When thinking of a 4% spending (really withdrawing) rate, consider if that percentage/amount is the same real amount I will use the rest of my life?  If no, then why even try to figure out “25x of what?”

Just my random thoughts on how this funding life (cash-flow) is not simple.

Addl:  None of my 4% of what calculations are even considering any possible social security payments, which many planners consider as fixed income in your asset allocation.

*** Nothing in this article is to be construed as financial advice.  I am not a financial planner, nor do I pretend to be.  You should always consult your own professional when seeking advice. This post is not a piece of literary mastery, just a random thought I had.