Common cost-cutting measures to avoid
When it comes to saving money, keep your eye on the big pictureâand donât fall for these tricks.
The post Common cost-cutting measures to avoid appeared first on Discover Bank – Banking Topics Blog.
When it comes to saving money, keep your eye on the big pictureâand donât fall for these tricks.
The post Common cost-cutting measures to avoid appeared first on Discover Bank – Banking Topics Blog.
When it comes to saving money, keep your eye on the big pictureâand donât fall for these tricks.
The post Common cost-cutting measures to avoid appeared first on Discover Bank – Banking Topics Blog.
Last week, I wrote about the problem with retirement spending: How much should you spend during retirement? If you spend too much, you run the risk of depleting your savings. But if you spend too little, you’re sacrificing the opportunity to make the most of your money, to “drink life to the lees”.
One of the guiding principles in retirement planning is that there’s a “safe withdrawal rate”, a pace at which you can access your investments so that your nest egg will last for thirty years (or longer).
For simplicity’s sake, a lot of folks talk about the “four-percent rule”: Generally speaking, it’s safe to withdraw 4% from your investment portfolio every year without risk of running out of money. (This “rule” manifests itself here at Get Rich Slowly when I say that you’ve reached Financial Independence once you’ve saved 25x your annual spending — 33x your annual spending if you want to be cautious.)
Today, I want to take a closer look at the four-percent rule for safe withdrawals — then explore why the theory behind it doesn’t always mesh well with the reality of our daily lives.
Last August, William Bengen (who first proposed the 4% rule in a 1994 article), participated in an “ask me anything” discussion at the financial independence subreddit.
Here’s the top question and answer from that thread (with additional formatting for readability):
Question
Is the 4% rule still relevant in today’s economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?Answer
The “4% rule” is actually the “4.5% rule” — I modified it some years ago on the basis of new research.The 4.5% is the percentage you could “safely” withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you “throw away” the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year’s inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950.
Now, on to your specific question. I find that the state of the “economy” had little bearing on safe withdrawal rates. Two things count:
- If you encounter a major bear market early in retirement, and/or
- If you experience high inflation during retirement.
Both factors drive the safe withdrawal rate down.
My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%!
However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970’s, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things.
In my opinion, inflation is the retiree’s worst enemy. As your “time horizon” increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006…
If you plan to live forever, 4% should do it.
That’s some helpful information, and it comes directly from a man who has been researching this subject for 25 years. Obviously, it’s no guarantee that a four-percent withdrawal rate will hold up in the future, but it’s enough for me to continue suggesting that you’re financially independent once your savings reaches 25 times your annual spending.
But here’s the catch — and the reason I’m writing this article: From my experience, spending in early retirement is not a level thing. It fluctuates from year to year. Sometimes it fluctuates wildly.
Table of Contents What is the VA Loan Limit? How to Apply for a VA Home Loan? What is the Median Home Price? What are the VA Appraisal Fees? Do I need Flood Insurance? How do I learn about Property Taxes? What is the Population? What are the major cities? About Prairie County Veteran Information […]
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HO HO HO!
Just like that, the holiday season is upon us!
This year, I intend to do most of my Christmas shopping during a three-week tour of Europe with my cousins. We’re deliberately visiting as many Christmas markets as possible, so I hope to find a variety of interesting and unusual gifts for my family and friends. (They need to be small, though. I don’t have much space to carry things home.)
While I’m buying new (and possibly expensive) gifts this year, that’s not normally my style. I’m a fan of keeping Christmas frugal.
Being a frugal shopper doesn’t mean you can’t give thoughtful gifts though. In fact, my experience has shown that it’s often more fun and rewarding to impose limits on gift-giving. These limits breed creativity and inspiration. “Christmas on a budget” doesn’t have to mean “Christmas without fun”.
This article contains some smart ways to save money on Christmas gifts while celebrating the season. (These tips are great for Christmas, for Hanukkah, for Kwanzaa, for Festivus, or for whatever feast you celebrate this time of year.)
It’s an amazing frugal Christmas savings spectacular!
I have this idea in my head that kids become mercenaries at Christmas, demanding the newest, most popular toys. I’m not sure how I’ve arrived at this notion because that’s certainly not how my brothers and I were when we were younger. Sure, we wanted cool stuff, but we never made demands.
In fact, Dad used to tell the story of how ashamed he was one Christmas when he and Mom were going through a particularly rough patch. They were always poor and struggling with money, but this year was especially bad. They couldn’t afford Christmas presents for us three boys. Rather than cry about it, we went through the toys we already had, wrapped them up, and gave them to each other.
I have only a dim memory of this myself, but Dad used to talk about it often.
This bit of personal family history reminds me of Unplug the Christmas Machine by Jo Robinson and Jean Coppock Staeheli. This book urges readers to escape the commercialism of the holiday season, to make it a “joyful, stress-free” time for the family. In a chapter entitled “The Four Things Children Really Want for Christmas”, the authors write:
One concern voiced by most parents is that of shielding their children from the excesses of holiday commercialism. While adults can mute the TV when the ads get annoying, children are defenseless against the onslaught of ads. As early as the age of four or five, they can lose the ability to be delighted by the sights and sounds of Christmas, only to gain a two-month-long obsession with brand-name toys. Suddenly, all they seem to care about is how many presents they will be getting and how many days are left until they unwrap them.
Many parents find it a challenge to create a simple value-centered Christmas in the midst of all the commercial pressure. But the task is made much easier when parents keep in mind the four things that children really want for Christmas.
Robinson and Staeheli argue that children don’t really want clothes and toys and games. The four things they actually want are:
Because I don’t have kids, I don’t have first-hand experience with their expectations around the holidays. Other folks in the GRS community do, though. A reader named PB, for instance, emailed some similar thoughts. She writes:
We keep our children’s expectations realistic by following an old tradition â that Santa fills the stockings and only the stockings â nothing under the tree. This limits the size and quantity of gifts. Plus, because they’re all relatively sure what they can and cannot wheedle out of parents for tree presents, their expectations are kept in check.
We buy one new outfit for each, usually a special piece of clothing that they really want, and spent only about $100 per child. I also shop all year long and get some real bargains.
We also emphasize doing a lot of things with our church â food delivery to the elderly, singing at nursing homes, and service to others. Our ongoing tradition is a big Christmas eve dinner with lots of friends and then the midnight service, where we all play an instrument or sing in the choir. This is what the kids talk about â not about what they receive.
It seems that the key to keeping kids happy at Christmas is to manage their expectations. But what about exchanging gifts with other adults?
One of the biggest hurdles to homeownership is coming up with the down payment. Even if you are able to afford the mortgage payments, the lump-sum amount that comprises the down payment can make homeownership seem like a pipe dream, especially for low-to-middle income households looking to settle down in more luxurious communities. Fortunately, borrowers… View Article
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The student loan process asks a lot from incoming college students. Before they even leave the comfort of their childhood home or take a single college class, theyâre expected to make one of the biggest financial decisions of their life. Choose wrongly, and they could end up paying thousands or even tens of thousands more
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The Federal Housing Administration has broadened the parameters for its COVID-19 loss mitigation options while suspending others, and is also adding incentive payments for servicers. The relief previously only available to people with pandemic hardships has been opened up to all borrowers with imminent defaults, including non-occupants. Due to this expansion, the administration and Department … [Read more…]
The Employment Cost Index (ECI) is an economic report that was never on our radar as a top tier market mover in the past. Then in early 2022, Fed Chair Powell began to point it out as one of the most important indicators of potential wage pressures. He’s gone on to mention it several more times throughout the past 13 months. It has thus become a consistent and obvious market mover. Today’s release is the latest example with a modest beat (1.0 vs 1.1) producing an instant rally with the highest single minute of volume in more than 2 weeks. In fact, the only other reports with more of a volume response in January have been NFP and CPI. The chart above doesn’t exactly mean that ECI is the second or 3rd most important market mover after CPI. But it does mean that this is officially one of the most tradeable flashpoints because it’s not extraordinarily nuanced data. In other words, the headline is the meat, and it’s easy to understand. That lends itself to an obvious, quick, directional trading response. Other reports may cause more movement over the course of several minutes as the nuances are digested and balanced. Later this morning, we’ll add Chicago PMI and Consumer Confidence to the econ data round-up. Neither are quite on par with ECI, but both are capable of catching the market’s attention.