You Might Be Saving Too Much

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?

13 thoughts on “You Might Be Saving Too Much”

  1. It’s certainly possible to save too much, but it’s rare compared to the number of people who save too little (or spend too much). I agree with some of your points, particularly about adapting spending as necessary. But I disagree with others. For example, the failure rate of the 4% rule does increase as the retirement lasts longer than 30 years. It’s true that people’s spending tends to drop later into retirement, but this is largely because many begin to run out of money; it’s not because of some natural need for less money. My biggest concern is that the 4% rule study is based on a portfolio with zero costs. For a typical Canadian’s portfolio with 2% MERs, I found the equivalent safe withdrawal rate for a 30-year retirement to be 3%. If you have very low fees, your 4.5% starting withdrawal rate may work out for you. But if you’re retiring young and pay non-trivial portfolio fees, the odds that you won’t be able to increase portfolio withdrawals with inflation every year is quite high.

  2. I think I struggle with knowing all of my future costs. If I’m looking to “retire” by 40, then I need to be prepared for future expenses (medical/dental/replacing car/house renos) and other expenses as my daugther (and hopefully other sibling(s)) get older.

    I’ve started to create some spreadsheets tracking my expenses and forawrd looking performance of investments (non-registered, RRSPS, TFSA, Pension/LIRA) and associated taxes. It looks like it works out close to 4% rule (maybe slightly less), and I think my mindset is changing on how much fat I need.

    I think where my conservatism exists is in the expenses I’ve outlined that do leave a fair bit of fat to be trimmed if my projections start to deviate from reality.

  3. Life is about balance. By saving too much money people are giving up valuable life experiences today. We can’t take our money with us to the grave, so we should indulge throughout our entire lives. I think 4.5% would be more accurate for my own withdrawal calculations as well. 🙂

  4. We were saving around 10-11k monthly before I pulled the ER ripcord a few months back. Yeah, it was great to save that much, but what good was it when I miserable in my job and I couldn’t do the things I was passionate about nearly often enough. We couldn’t even remotely spend the money we were piling up so fast – so it rapidly became a no brainer for me to quit working. So now we are able to save around 7k per month on wife’s income + plus our dividends. Now, the only question remaining is when my wife joins me. She seems very happy with the status quo for now – and why not? She loves her job and now comes home to a hubby who is rapidly becoming a fitter specimen, has a great dinner prepared, house tidy, and is generally a much happier person. It’s a total win in her view. When she has had enough of work, we start the second phase of our marriage together.

  5. Well I think the withdrawal rate also must take into consideration the age of retirement and the amount of liquid assets. If you are going to retire before 50, then the conservative 35 to 4% withdrawal fits. If one waits until 60 to retire, go for a higher rate.

  6. My rate is whatever the dividends are paying that come in. Although I did sell a big chunk of the div payers this summer and drew about 10% of the taxable YTD gains at that point to make it through the rest of the year assuming not working.

    I wouldn’t underestimate how age, circumstances and personality can change a person’s outlook. Most people get more conservative and more security conscious as they get older. Most people also assume that how they think at 30 something is how they will think at 60 something but that’s fairly unlikely. There were a lot of fearful posts in the ER community in 08-09 so many of those people want to know they’ll be ok even if that happens again (fear of loss > desire for gains). Most of them didn’t run around buying stuff and did cut back (apart from rebalancing) – but it was a fantastic year for getting great deals on not just stocks but travel, RV’s, vacation properties.

    And some people just like to accumulate lots of money and have it sit there unused so they can count it. My dad is like that – he has a negative WR since he even saves out of his CPP and spends none of his very considerable stash – even if doing so would have made his daily life happier and more fulfilling. He’s 94, so it’s too late now.

  7. I think it would be prudent to be a little to the conservative side. There has been a lot more price inflation for the things the average person actually needs and consumes, then what is declared by the government . Has anyone bought a brick of cheese or a “pound” of bacon lately? (Oops I mean 375 grams now) you literally need 1 and a half or more packs to replace what you would bring home just a few years ago. Also the price is higher for the smaller pack. My worry is the erosion of the level of lifestyle that one is accustomed to if we don’t save a little more or at least invest with higher inflation levels in mind for the future.

  8. OK. Its insane but I just looked up the withdrawal rate on my husbands giant spreadsheet and it shows 0.84% to -0.58%. It also shows that, at age 85, we will leave behind for our 2 children over 6 million dollars using a rate of return of 4.5% with 2.5% inflation (2% in real return)
    My husband is 46 and is looking to retire at 55 when he will qualify for healthcare benefits. He and I lived very frugally up until recently. We have over a million dollar in dividend yielding investments and he will have two db pensions totalling about $40k at age 55. It think we are so used to saving that its a natural thing to do?

  9. @Jacq
    Your Dad’s view is perfectly understandable since he grew up during the Great Depression as did my parents which would leave a mark on him. Especially if he grew up poor as did my parents.

  10. @Piano Mom:
    Yikes, lighten up on the frugality. Enjoy the money more now! You don’t have to leave it all to the kids. And remember you are not guaranteed to live to 85, same goes for 75.

  11. I am still 8-9 years away from ER (target: 48) but I am using a more aggressive calculation (I will probably go more conservative when I’m getting closer) but since the S&P 500 had a CAGR of 11% since 1950, I am using 8% as my average return after retirement. I am planning to stay 100% invested in stock except for 2 years worth of expenses that I will but in a high yield ETF like SPFF (~7% dividend).

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