It’s only impossible if you haven’t really tried to do something about it. It’s all in the mindset. I know you can do that, it’s never too late to where you are supposed to be. Wishing you all the best with your journey 😊
I like the approach for two withdrawal percentages. One for basic needs. The other inflation adjusted. But the asset allocation is confusing. Dividends are mostly tax free (almost) where appreciation is treated as regular income thus taxed at max rate. So investing in SPY or Apple might not be the way to go. Same for TLT. Asset allocation might be to keep assets in cash so the losses would be buying power. Where and what would be a smart allocation for your million dollar nest egg?
So in summary, start with a 3% withdrawal rate, draw extra in good years (how much extra?), no need to reduce withdrawal in bad years, adjust yearly for inflation (assume 2.5% yearly?) and do not run out of money over a 30-40 year span. Is this correct?
That's the basic idea behind the strategy, yes. You select a withdrawal rate to cover your basic expenses (3% was used in the video as that's what the strategy's creator suggested using). Then you select a secondary withdrawal rate to determine the portion of your inflation-adjusted gains (if any) for the prior year to be taken as income in the current year (this rate was set to 10% again per the recommendations of the strategy's creator). Each year you adjust the amount you withdraw for basic expenses (i.e. that first withdrawal rate calculation [3% of initial portfolio]) by inflation (I simply used the CPI to measure inflation in this video, but you could adjust by a static rate [i.e. 2.5% as you suggested] each year if you wanted). Based on the historical returns and volatility of the asset allocations used in this video it can reasonably be assumed that such an approach would be able to sustain such withdrawals over the course of a 30+ year retirement.
Interesting series! I would love to see how asset location (pretax, Roth, brokerage) impacts your withdrawal rate. .. basically incorporate tax impacts of a theoretical tax payer.
I'm glad you've found the series interesting. In regards to your question, technically your withdrawal rate (i.e. the proportion of your nest egg you take out each year via selling of shares and/or withdrawal of dividends) wouldn't change at all regardless of asset location. It's just that the net incoming cash flow (i.e. the amount of money that actually reaches your pocket and can be spent) will be higher if you're utilizing an account that doesn't tax withdrawals (such as a Roth). So definitely an important piece to consider since we obviously care a lot about the amount of money we can actually use from our withdrawals each year, but the withdrawal rate itself is unaffected :)
@@NextLevelLife Fair, I was assuming fixed income in retirement which is most retirees' goal. This would keep as much money working for you in the markets as possible and thus resulting in a variable withdrawal rate which shares similarities to the approach of taking less when the markets are down and more when markets are up.
I do enjoy your content but I have a question. Can you treat a Roth IRA kind of like a brokerage account? I can sell stock within it to realize gains but it is protected within the Roth against taxes as I can’t withdraw it yet?
Sorry. I found this concept one hard to grasp. Is this strategy called the sensible withdrawal rate? Would like to do more research on it to understand the concept.
Yes, it is called the sensible withdrawal strategy. Feel free to check out the creator's website where they explain it in their own words (there's also a handy calculator on the site as well that you could play around with to see how the strategy works): guide.ficalc.app/withdrawal-strategies/sensible-withdrawals/
I like the signposts for your criteria but this video was hard to follow overall. I’ve watched and rewatched and I’m still not sure what the sensible approach is.
I really like the comparative analysis you do in this series (I just almost watch from the TV, so no comments). I like the idea here - would be interested in expanding it to accommodate lifestyle creep by increasing the base withdraw rate if you have been doing well.
An interesting idea! I don't know of many strategies that adjust their base withdrawal rate over time if you're doing well. There are some that increase their withdrawal rates over time by design (such as the 1/N Method and Variable Percentage strategies), and then there are strategies that adjust your withdrawal amounts depending on the performance of your investments (like Michael Kitces' Ratcheting withdrawal strategy or a periodic reset approach), but those aren't necessarily done in an effort to specifically accommodate for lifestyle creep. Still they may be worth looking into as they do at least share some similarities to your proposed scenario :)
It definitely does help give you a little more wiggle room relative to the vanilla 4% rule in certain scenarios considering the potential for higher withdrawals in good times under this approach :)
An interesting method, but it seems like it's trying to force additional income that is generated through portfolio gains to be used in the single year where the gains are made. Doesn't this make this method's total income more volatile than is necessary? For example, just as a hypothetical, if in the first year your stocks gain a Real ROI of 100%, and all subsequent years, your investments only keep up with inflation afterwards, then won't you take an income of $130,000 in the first year, and all subsequent years will be just back to $30,900, $31,800, etc.? That doesn't seem to make sense after your portfolio just doubled (after inflation) in the first year. Wouldn't it make more sense to base your Income (Extra) on the aggregate Real ROI (total ROI of current portfolio vs starting portfolio) rather than the Real ROI of the single year? Am I not understanding the calculations correctly?
It does tend to create some additional income volatility by forcing the additional income in the year that the gains are generated. That is very true! Granted this volatility is exclusively to the upside in those years, but some people would certainly prefer something that's either a little more spread out so that their income wouldn't immediately crater back down to the range that it was at prior to the gains or increases the base of your withdrawal calculations to account for the higher value of your nest egg (after it doubled in value). And there are approaches that tackle that aspect of it in that way! In the end, it all comes down to personal preference :)
It's by taking 1 + the return of the investment and dividing that by 1 + the rate of inflation. Investopedia has a good article explaining the calculation here: www.investopedia.com/terms/i/inflation_adjusted_return.asp#:~:text=The%20inflation%2Dadjusted%20return%20is,removing%20the%20effects%20of%20inflation.
You could! Though depending on the length of your drawdown period and the specifics of your investment returns/volatility over that time its possible that you could find yourself living on quite the shoestring budget down the road (assuming of course you didn't make any adjustments over the years, which may or may not be realistic) :)
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I find myself here again, even though I have no job, no income, no savings, and no job history. Will it pay off? Only if I stop being a layabout.
With all those valuable life skills you could probably get hired immediately by McDonald’s or Taco Bell.
Are you 12?
@@josemv25 28
It’s only impossible if you haven’t really tried to do something about it. It’s all in the mindset. I know you can do that, it’s never too late to where you are supposed to be. Wishing you all the best with your journey 😊
If you don't mind me asking why don't you have any work history? I'm wishing you all the best
4 % rule may not work for a 2022/2023 retirement. Many (supposed) experts are suggesting a 2.3 to 3.5 percent rate depending on other factors.
There appears to be a typo in your "Moderate" - it shows all bonds. I'm presuming the 60% is supposed to be Total US Stock Market.
Thanks for bringing this to my attention! Yes, it is supposed to be 60% for the Total US Stock Market and 40% for the Total US Bond fund.
I like the approach for two withdrawal percentages. One for basic needs. The other inflation adjusted. But the asset allocation is confusing. Dividends are mostly tax free (almost) where appreciation is treated as regular income thus taxed at max rate. So investing in SPY or Apple might not be the way to go. Same for TLT. Asset allocation might be to keep assets in cash so the losses would be buying power. Where and what would be a smart allocation for your million dollar nest egg?
So in summary, start with a 3% withdrawal rate, draw extra in good years (how much extra?), no need to reduce withdrawal in bad years, adjust yearly for inflation (assume 2.5% yearly?) and do not run out of money over a 30-40 year span. Is this correct?
That's the basic idea behind the strategy, yes.
You select a withdrawal rate to cover your basic expenses (3% was used in the video as that's what the strategy's creator suggested using). Then you select a secondary withdrawal rate to determine the portion of your inflation-adjusted gains (if any) for the prior year to be taken as income in the current year (this rate was set to 10% again per the recommendations of the strategy's creator). Each year you adjust the amount you withdraw for basic expenses (i.e. that first withdrawal rate calculation [3% of initial portfolio]) by inflation (I simply used the CPI to measure inflation in this video, but you could adjust by a static rate [i.e. 2.5% as you suggested] each year if you wanted).
Based on the historical returns and volatility of the asset allocations used in this video it can reasonably be assumed that such an approach would be able to sustain such withdrawals over the course of a 30+ year retirement.
Great content as always! Very informative and I hope it can reach a lot of viewers and people who are willing to do good with money. 💜
Interesting series! I would love to see how asset location (pretax, Roth, brokerage) impacts your withdrawal rate. .. basically incorporate tax impacts of a theoretical tax payer.
I'm glad you've found the series interesting.
In regards to your question, technically your withdrawal rate (i.e. the proportion of your nest egg you take out each year via selling of shares and/or withdrawal of dividends) wouldn't change at all regardless of asset location. It's just that the net incoming cash flow (i.e. the amount of money that actually reaches your pocket and can be spent) will be higher if you're utilizing an account that doesn't tax withdrawals (such as a Roth).
So definitely an important piece to consider since we obviously care a lot about the amount of money we can actually use from our withdrawals each year, but the withdrawal rate itself is unaffected :)
@@NextLevelLife Fair, I was assuming fixed income in retirement which is most retirees' goal. This would keep as much money working for you in the markets as possible and thus resulting in a variable withdrawal rate which shares similarities to the approach of taking less when the markets are down and more when markets are up.
Purchase grassland, cattle and tools. All else is smoke and mirrors.
Dividend investing is best . Because you never sell the assets.
And live off the passive income
And if you do it right, you can beat inflation with dividend growth. 100% agree.
I agree!! You just keep earning and growing.. A good passive income that lets you earn doing nothing 😊
I do enjoy your content but I have a question. Can you treat a Roth IRA kind of like a brokerage account? I can sell stock within it to realize gains but it is protected within the Roth against taxes as I can’t withdraw it yet?
Sorry. I found this concept one hard to grasp. Is this strategy called the sensible withdrawal rate? Would like to do more research on it to understand the concept.
Yes, it is called the sensible withdrawal strategy. Feel free to check out the creator's website where they explain it in their own words (there's also a handy calculator on the site as well that you could play around with to see how the strategy works): guide.ficalc.app/withdrawal-strategies/sensible-withdrawals/
@@NextLevelLife thanks for that man. It was helpful 👍
I like the signposts for your criteria but this video was hard to follow overall.
I’ve watched and rewatched and I’m still not sure what the sensible approach is.
I really like the comparative analysis you do in this series (I just almost watch from the TV, so no comments). I like the idea here - would be interested in expanding it to accommodate lifestyle creep by increasing the base withdraw rate if you have been doing well.
An interesting idea! I don't know of many strategies that adjust their base withdrawal rate over time if you're doing well. There are some that increase their withdrawal rates over time by design (such as the 1/N Method and Variable Percentage strategies), and then there are strategies that adjust your withdrawal amounts depending on the performance of your investments (like Michael Kitces' Ratcheting withdrawal strategy or a periodic reset approach), but those aren't necessarily done in an effort to specifically accommodate for lifestyle creep.
Still they may be worth looking into as they do at least share some similarities to your proposed scenario :)
3% versus 4% withdrawal rate is the key to the sensible approach
It definitely does help give you a little more wiggle room relative to the vanilla 4% rule in certain scenarios considering the potential for higher withdrawals in good times under this approach :)
An interesting method, but it seems like it's trying to force additional income that is generated through portfolio gains to be used in the single year where the gains are made. Doesn't this make this method's total income more volatile than is necessary? For example, just as a hypothetical, if in the first year your stocks gain a Real ROI of 100%, and all subsequent years, your investments only keep up with inflation afterwards, then won't you take an income of $130,000 in the first year, and all subsequent years will be just back to $30,900, $31,800, etc.? That doesn't seem to make sense after your portfolio just doubled (after inflation) in the first year. Wouldn't it make more sense to base your Income (Extra) on the aggregate Real ROI (total ROI of current portfolio vs starting portfolio) rather than the Real ROI of the single year? Am I not understanding the calculations correctly?
It does tend to create some additional income volatility by forcing the additional income in the year that the gains are generated. That is very true! Granted this volatility is exclusively to the upside in those years, but some people would certainly prefer something that's either a little more spread out so that their income wouldn't immediately crater back down to the range that it was at prior to the gains or increases the base of your withdrawal calculations to account for the higher value of your nest egg (after it doubled in value). And there are approaches that tackle that aspect of it in that way! In the end, it all comes down to personal preference :)
I’m not seeing how the real ROI calculation is working to get those percentages
It's by taking 1 + the return of the investment and dividing that by 1 + the rate of inflation.
Investopedia has a good article explaining the calculation here: www.investopedia.com/terms/i/inflation_adjusted_return.asp#:~:text=The%20inflation%2Dadjusted%20return%20is,removing%20the%20effects%20of%20inflation.
For fixed percentage you could go for 6 percent, not 4
You could! Though depending on the length of your drawdown period and the specifics of your investment returns/volatility over that time its possible that you could find yourself living on quite the shoestring budget down the road (assuming of course you didn't make any adjustments over the years, which may or may not be realistic) :)
4% rule leaves most with multiple more in their portfolio at the end of retirement and yet a lot of people think they need to take 3% or 2%.