Quote:
Originally Posted by scfr
Not necessarily.
If your property tax plus the upkeep on your home totals 2% of the home's value annually, on a $2.5 mill home you will need to spend $50,000 per year just to maintain it.
If you have only $2.5 mill in financial assets and you follow the 4% withdrawal rule, maintaining your home will suck up 50% of the money you have to spend annually. Surely that is not acceptable, is it?
So the value (and therefore the cost) of your home at retirement relative to your financial assets will really affect your lifestyle.
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This is a misuse of the 4% rule, IMO. The 4% rule is based on expenses. If a person has 25X their annual expenses in liquid investments, they are financially independant (or real close to it) for 40 years.
The 4% rule is NOT based on net worth. it is based on liquid assets which can be withdrawn by selling them. The withdraw covers costs. I might spend 2% per year on travel, 1% on healthcare and 1% on living (food, taxes, utilities). You might spend 2% on crack cocaine, 1% on drug rehab and 1% on utilities, taxes, and living.
How the 4% gets chopped up does not matter. 4% is a guideline used to suggest when you have enough to retire. It is not withdrawing 4% of net worth, it is withdrawing 4% of liquid assets (investments). How the 4% get spent does not change the 4% rule. There are not guidelines for what percent of the withdraw should be used for taxes, health care, body hygiene, cars or travel- because that is unique to each individual.
If you established a guideline for 4%, then found out I was withdrawing 3% at age 45 and someone else was withdrawing 5% at age 45, the ratios you established based on 4% would be misguided at best.
I might plan on living a long time and need to use 3% to prevent me from running out of money. The 5% might be used by someone which is expecting to die younger, gets a pension at an older age, or has a higher SS benefit. Or maybe that person is taking more risk in the market and can afford the higher income now.