So here’s a little factoid. I had never heard of William Bengen or the 4% rule before I retired. How could I possibly have calculated whether I had enough money to retire if I had never heard of The Rule?
Well, the spreadsheet that I provided in my last post was the starting point for the spreadsheet that I designed for myself 20 years ago. As I lusted more and more for retirement, I added columns and tweaked the spreadsheet until it became an extremely complicated CPA’s work of art, a lay-person’s nightmare.
First, I separated my asset base between those held in retirement accounts and non-retirement accounts. For my retirement accounts I assumed a higher rate of return than in my taxable accounts, since I would be holding more of my taxable accounts in cash and bonds. (I would need the liquidity in the early years to get me through the first 15 years before I could touch my retirement accounts. I would be much more sensitive to market moves over those years if I were relying heavily on equities in the short-term.) Since the retirement accounts were going to live for 15 more years untouched, and would then be needed to fund the next three decades, I would put the more aggressive portion of my allocation there.
Later, I decided to add a column showing what I thought our Social Security benefits would be if we started taking them at age 70. (I only figured on one-half of the SSA’s benefit statement amount, to be conservative.)
Later on, I tweaked it again to show another column with the decline in expenses after my mortgage was paid off. I incorporated lower tax rates for the early years when my taxable income is low (the income I generate off my assets barely exceeds my itemized deductions.) I increased the tax rate for the years when I would be drawing out of my retirement accounts, as that would shoot me into a higher tax bracket.
I played with the inputs, changing up the growth rates, inflation assumptions, and life expectancy. I was trying to get the spreadsheet to deliver us to age 100, even though it’s unlikely Doug and I will both live to be that old.
After several years watching the spreadsheet only get me as far as 80 or 90, I realized I would be willing to tap into my home equity at that point (or earlier) if I needed to, so I added a column to track the inflation adjusted value of my home in case I wanted to pull some equity out in with a reverse mortgage or by downsizing—varying the amount pulled out to prevent the 100-year old nest egg from turning negative.
I added a column for unusual expenses like a new car a from time to time. I made customization after customization. I played with the spreadsheet more and more frequently as the desire to retire became stronger and stronger. I was determined to figure out ways to make an early retirement work. The spreadsheet is now 12 columns wide after all my special customizations.
Many, many years ago, the retirement spreadsheet said I could retire if I could average 8% returns each year, a few years later, with more saved, it would have worked at 7%. But I didn’t feel comfortable assuming I could achieve either of those. I felt comfortable assuming a 5% rate for my taxable assets (which are less weighted toward equities), and 6.5% for my retirement assets (which hold a higher allocation of equities.) While I am an optimist, before I retired, I wanted to get my assumptions down to a conservative earnings rate, a substantial inflation rate, and a long, long life for both of us. Worst case, we would die with a little money.
When I was ready to leave my job, I felt I had been adequately conservative in my planning. I didn’t ask myself, “How much do I need to retire?” I asked myself, “With what I have accumulated right now, what does the spreadsheet allow my budget to be without turning the last cell negative?” and “Can I be happy living on that?” When the answer was yes, I retired.
A few years ago, I decided to write a post about this whole process. By that time though, I had heard of William Bengen and his findings, so I went back to my original retirement-spreadsheet and laughed. My first year’s budgeted withdrawal rate was 3% of my nest egg, give or take a few 100ths of a percent. So I trashed that post in favor of a post explaining the short-cut. While some might think it was a waste of time to have spent all that time and energy creating my own road map, I felt comforted.
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