Retirement planning

[quesyrah]

I heard on a podcast recently that if you withdraw 4% from your 401K annually in retirement then you’ll never touch the principal and you’ll never run out of money.


Incredibly stupid question coming…

Is the principal the amount in your 401K when you retire?

[fortnightlily]

Yes, the principal is the balance. They're talking about principal vs interest. So if your investment grows 4% a year and you withdraw 4% a year and that's enough to cover your annual expenses, you're just living off the interest and never touching the principal.

This is true for any investment, not just those in retirement accounts. It's the logic behind the FIRE movement where if you have 25x your annual spending invested and only need to withdraw 4% to live on you can theoretically retire any time. Fidelity has a more conservative definition of Financial Independence at 33x and 3%.

One thing to keep in mind is that traditional 401ks and IRAs have minimum required distributions after a certain age and that dying with a ton of money left in your retirement accounts can have big tax implications for non-spouse beneficiaries vs money left in a brokerage account.

[quesyrah]

Thank you for explaining it.

I’m not trying to have a ton of money left after we die, but I am very concerned with making sure DH and I are in a good position financially in case we end up needing memory care.

I think I have a bit of trauma from what I dealt with in the last 2 years of my parents lives. They were in a very good financial
position so that was the one easy part of it all.

So if we can live on 4% (DH also has a nice pension and we will be mortgage free) then we should be in good shape should one or both of us need a nursing home.

[fortnightlily]

Mar 28, 2024 21:11:36 GMT -5 quesyrah said:

Thank you for explaining it.

I’m not trying to have a ton of money left after we die, but I am very concerned with making sure DH and I are in a good position financially in case we end up needing memory care.

I think I have a bit of trauma from what I dealt with in the last 2 years of my parents lives. They were in a very good financial
position so that was the one easy part of it all.

So if we can live on 4% (DH also has a nice pension and we will be mortgage free) then we should be in good shape should one or both of us need a nursing home.

Gotcha. I've been doing similar calculations, and I had to remind myself to include what we'd make from selling the house, which should cover a couple of years at a memory care or nursing facility.

[quesyrah]

Mar 29, 2024 10:42:13 GMT -5 fortnightlily said:

Mar 28, 2024 21:11:36 GMT -5 quesyrah said:

Thank you for explaining it.

I’m not trying to have a ton of money left after we die, but I am very concerned with making sure DH and I are in a good position financially in case we end up needing memory care.

I think I have a bit of trauma from what I dealt with in the last 2 years of my parents lives. They were in a very good financial
position so that was the one easy part of it all.

So if we can live on 4% (DH also has a nice pension and we will be mortgage free) then we should be in good shape should one or both of us need a nursing home.

Gotcha. I've been doing similar calculations, and I had to remind myself to include what we'd make from selling the house, which should cover a couple of years at a memory care or nursing facility.

For sure. When we (or the kids) sell the house it’s going to be more than enough. We’re behind on retirement so we’ll probably have to rely on the house proceeds.

My parent’s bill was $16,000/month and I’m assuming prices will go up so I just want to make sure that we’re good.

[bee20]

Adding to fortnightlily's response, 4% withdrawal rate is generally good for most retirees.

It covers 30 years of retirement and assumes "failure" is running out of money before 30 years, it doesn't guarantee to keep the same inflation adjusted principal. This is totally fine for most people, which is why it's the common advice, but it doesn't mean your balance will never go down.

The 3% number she referenced is "guaranteed" so much as it has always worked for investments in the United States to never dip below your original principal/balance. So people who are more conservative might pick the 3% number when planning their retirement spending.

Whichever number you choose, it's more likely you'll end up with more money than you retired with. On average, the market does better than this but of course when you're retiring you have to plan for the less likely but worst outcomes.

So with your pension, house, and spending 4%, you should be in really good shape by the time you need end of life care. If you're unlucky and we see another event like the great depression, you might run out of your cash savings, but you'd still have your pension and house, so that seems pretty reasonable to me.

[quesyrah]

Mar 29, 2024 14:51:17 GMT -5 bee20 said:

Adding to fortnightlily's response, 4% withdrawal rate is generally good for most retirees.

It covers 30 years of retirement and assumes "failure" is running out of money before 30 years, it doesn't guarantee to keep the same inflation adjusted principal. This is totally fine for most people, which is why it's the common advice, but it doesn't mean your balance will never go down.

The 3% number she referenced is "guaranteed" so much as it has always worked for investments in the United States to never dip below your original principal/balance. So people who are more conservative might pick the 3% number when planning their retirement spending.

Whichever number you choose, it's more likely you'll end up with more money than you retired with. On average, the market does better than this but of course when you're retiring you have to plan for the less likely but worst outcomes.

So with your pension, house, and spending 4%, you should be in really good shape by the time you need end of life care. If you're unlucky and we see another event like the great depression, you might run out of your cash savings, but you'd still have your pension and house, so that seems pretty reasonable to me.

Thank you! I truly appreciate your knowledge.