Despite the fact a large amount of people aren’t saving enough for retirement there also tends to be a minority that save too much. In some cases, it really is on purpose but for others I would wager that they don’t understand some of core assumptions that go into using the 4% rule.
For those who aren’t as familiar with the 4% rule it is a rule of thumb that came out of the Trinity Study which determined a safe withdrawal rate for a 30 year period using historical market returns. By it very design it is a conservative number, but in addition there were several other conservative assumptions underlying those results including:
- You never earn one dime of income from any other source ever again (no part time work, no selling stuff you no longer use, no winning a 50/50 draw that you bought a ticket to support a charity or get a bit of a inheritance from your parents…nothing).
- You never receive any money from government benefits such as Canadian Pension Plan or Old Age Security.
- You never adjust your spending during an economic down turn. If the stock market crashed like 1929 again you would keep spending the same amount.
- You also never adjust your spending downwards despite the fact Statistics Canada proven this does happen with older people.
- And your withdrawals per year increase in lockstep of the Consumer Price Index…regardless if you actually need that much of an increase.
Ok, I get for a study you have to make assumptions, but something else tend not to realize about the results is that extending that 30 year period to a total number of years sampled (ie: infinite time frame)doesn’t really effect the results that much. If you can can handle the 1929 crash at 4% and keep on going along just fine there won’t be much of an adjustment pushing that out over a longer period of time.
So I literally cringe when I hear people planning their retirements with a 3% withdrawal rate, high inflation and assuming no government benefits at all. You are so overkill at that point it is insane to me.
Let’s break down my experience to date with those assumptions:
- Have I ever made money other than my primary job? Um, yes, and likely even last week if I looked into it. Do I plan to do this in the future? Um in my case I’m going to do a lot of writing and hell may even sell a few books while at it. So that assumption doesn’t hold water in reality.
- Have I ever received money from the government? Yes, every month I get money which we put in our kid’s RESP accounts. So granted yes the amount you get might go up or down, but in the end you gain from some tax changes and loss on others every year, but you always get something which is more than nothing.
- Have I ever adjusted my spending in reaction to a given situation? Mmm, let’s recall I had $9000 in renovations to a structural beam in my house and a 10 week premature baby at the same time…did I adjust my spending: OF COURSE I DID! Bloody hell, do I look like an idiot? That’s common sense to stop buying the extras when you are in temporary crunch.
- Have I ever adjusted my spending down over time? Uh, yes, after buying all the major things for my home I really don’t need to keep buying new stuff when the old things are working just fine.
- Have I ever adjusted my spending less than the CPI in a given year? Yep, because the CPI include crap that I no longer pay for like mortgage payments.
So just to recap none of those assumptions hold water in my real life so why the hell would you go MORE conservative than that?!?! Ugh. Therefore in summary, might I suggest those people that are being additionally cautious evaluate why they are doing it? The 4% rule is very conservative by its design so adding to it is like putting up a small fort in front of the great wall of China, it just looks ridiculous and doesn’t do anything (other than keep you working longer, but I don’t understand why that would be appealing).
Actually in my case I’m giving serious consideration to using 4.5% withdrawal rate for my next round of retirement calculations since most of the assumptions don’t apply well to me. I’m willing to take on some additional risk.
So what withdrawal rate do you use? Why did you pick that value?