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2% swr
Old 11-19-2008, 08:49 PM   #1
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2% swr

Awhile back, I proposed an SWR of as low as 2% for these reasons:

If the market fell 50% just after retirement (never hoped/thought/dreamt it would really happen), you would still be at a 4% withdrawal of the reduced principal
You could live off dividends and never sell, assuming dividend payouts were not slashed since the dividend rate is around 2% (problem could be that companies reduce dividends as the yield is now higher and earnings are lower)
For really long retirements of 40 - 50 years, 4% may not be safe enough

At the market peak (just 1 short year ago), I was awfully close to the 2%, though I was too chicken to retire. Now, it is somewhere in the 4% range.

If I did retire now, am I at a 2% or 4% SWR? I guess it is now 4%, but if a bull market ultimately follows this bear, it could get back to the 2%.

I can still live off the dividends, so does the change in principal actually matter?

PS: I have not been on this site awhile or thought about ER, since with everything going on, it seems like a tease. But I have stayed the course, and am hoping that the market anticipates, often overreacts, and that this may be a bit of a reverse bubble (term I heard in the media).

One thing I have decided, when this is all over and there is a recovery, I have to get closer to something like 60/40 equity ratio (from 90/10 now).
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Old 11-19-2008, 10:12 PM   #2
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As I’ve joked in the past, it’s best to retire right before a big crash. That way, you get to retire based on your fat pre-crash savings and keep your prior sweet 4% SWR, too! Now that we’ve suffered these declines without your having retired, though, it’s too late! You will have to lock in the current SWR.

On the other hand, no, maybe it’s better to retire right after a huge crash. After all, if you can make it on 4% after losing your shirt, in a bizarre way you are safer than ever and things can only get better.

Actually, the past does not matter. It’s done and gone, and the future depends on it only weakly. Unless “this time it’s different,” future market returns may be higher. But you cannot guarantee the latter, so discount it.

So the best answer is that you are at 4% now, but you can hope that things will be better some time in the future.

Be careful when you say “I can live off dividends.” That may not be enough to cope with inflation in the long term. Run some Firecalc simulations.

Best of luck. Almost all of us feel your pain.
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Old 11-20-2008, 01:25 AM   #3
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I think there's a lot of merit to a 2 percent SWR if you have a large enough nestegg to support the lifestyle you expect in retirement. Obviously, most retirees don't have the luxury of a 2% SWR, but if you can live with it, it sure does take a load off your portfolio in terms of required performance. As for myself, I've deliberately chosen to work a few additional years to pad my nestegg. I did so because I am, by nature, quite risk averse; thus I feel I need a larger nestegg than others might feel comfortable with. Actually, I'm shooting for a 2% SWR and if my nestegg spins off more than that, I'll consider it gravy. Grep, however, makes a good point -- inflation can definitely wreck havoc on a conservative asset allocation. So, ya gotta be willing to accept a little more risk if inflation heats.
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Old 11-20-2008, 11:56 AM   #4
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2% SWR sounds like too much work!

If you base your 4% on FireCalc, in my opinion you are still a 2% SWR but hitting one of the bad scenarios. It's not fair to use today's portfolio value (market down 50%) and let FireCalc start with that value at a market peak in 1929 and then say you won't survive the Great Depression. You've already taken most of the hit. It would be fair if you only used starting points in FireCalc where the market was already down 50% and calculated safe/fail with just those cases. Not too many of those, so it wouldn't mean a whole lot.
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Old 11-20-2008, 12:26 PM   #5
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firewhen,

I think you are making some sense. Your portfolio is likely to do better AFTER a major correction versus AFTER a major bull market period.

4% from today's portfolio value is more secure than 4% from the value of a year ago (maybe 100% higher than today).
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Old 11-20-2008, 06:17 PM   #6
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2% SWR sounds like too much work!
And is also unnecessary.

Starting with a 60/40 portfolio, your 2% withdrawal rate would increase to only 2.9% after a 50% decline in stocks. Meanwhile your 60/40 portfolio would yield about 4.7% (before rebalancing and using today's yields) or about 4.3% after rebalancing. After an 80% decline in stocks your WR would still be less than your portfolio income at 3.8%.

Sounds unnecessarily conservative to me . . . but a great situation if you can swing it.
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Old 11-20-2008, 06:53 PM   #7
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When I ER'd in early 07, my WR was 3.x. At the portfolio peak in June 08, it was slightly below 2 and now it's back to 3.x.

Still the drop has been unnerving and I'm glad I had the cushion.
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Old 11-20-2008, 07:09 PM   #8
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When I ER'd in early 07, my WR was 3.x. At the portfolio peak in June 08, it was slightly below 2 and now it's back to 3.x.

Still the drop has been unnerving and I'm glad I had the cushion.
People probably focus a bit too much on "The NUMBER".

I'd be willing to bet that the income provided by your portfolio more than covers your expenses. If that's the case, why should you be unnerved?
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Old 11-20-2008, 07:27 PM   #9
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To put things in perspective, if your investments only keep pace with inflation, a 2% SWR will last you about 50 years.
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Old 11-20-2008, 07:43 PM   #10
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I'd personally never retire with anything close to a 100% equity portfolio. I would have said that last year too. I know it sounds easy to say this now, but I would have said this last year: If the only way you can retire safely with the withdrawal rate you need mandates 100% equity investments, then you really should keep working and increase your portfolio size.

the traditional 60/40 is the highest stock allocation I see myself using upon retirement, but I suspect I'll probably go more with a 40-50% range. Anything much over a 25% drop in my portfolio if i were retired would scare me insane. I realize that mathematically and in theory, the 100% equity approach would allow for an earlier retirement if the future = the past. But I don't have that kind of guts;..... didn't last year, and nothing has changed this year.
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Old 11-20-2008, 07:55 PM   #11
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the traditional 60/40 is the highest stock allocation I see myself using upon retirement, but I suspect I'll probably go more with a 40-50% range. Anything much over a 25% drop in my portfolio if i were retired would scare me insane.
Just checking, but you do realize that the S&P *is* down 50% in the past year, and bonds are also down. So a 50/50 mix *would* be down over 25%.

Nothing wrong with a 50/50 mix if that is what you want - what SWR were you considering?

-ERD50
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Old 11-20-2008, 08:08 PM   #12
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If that's the case, why should you be unnerved?
Bad turn of phrase, I guess. I'm not all that concerned, just glad for the bounce before the drop. Without it, I would be concerned.
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Old 11-20-2008, 08:12 PM   #13
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Interesting discussion...

I know there's no way, I will be comfortable pulling the plug with SWR 4% or more unless I can somewhat easily cut back to 2/3 or less of income needed. I guess, I wear feathers too!

However, I was wondering whether any one of your enlightened people actually did or at least considered/analyzed starting retirement with allocation containing a higher fixed portion then one desired long term?

For example, let's say you're retiring in your 40is and are worried about two things: supporting long retirement and bad timing for the retirement start date. In this case, even though you would like to have a long term allocation of 65/35 (stock/bond), you will be starting with 50/50 to soften the blow of a potential bear market early on. In this case, you can simply spend-down fixed income funds until the desired allocation is reached. Any thoughts? pitfalls?

As always, the actual allocation can be anything based on individual preferences and need.
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Old 11-20-2008, 08:35 PM   #14
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You never dreamed the market could fall 50%?

Really?

It did it only about 6 years ago.
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Old 11-20-2008, 09:09 PM   #15
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My plan has been based on a CD pool that is enough to fund a bare bones retirement. My traveling and luxuries are to be funded with stock market returns -- that includes dividends so it is not likely to totally go away even if the principle falls. It somewhat steps away from all that SWR discussion but doesn't quite go over to a total "buckets of money" plan.
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Old 11-21-2008, 02:13 AM   #16
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For example, let's say you're retiring in your 40is and are worried about two things: supporting long retirement and bad timing for the retirement start date. In this case, even though you would like to have a long term allocation of 65/35 (stock/bond), you will be starting with 50/50 to soften the blow of a potential bear market early on. In this case, you can simply spend-down fixed income funds until the desired allocation is reached. Any thoughts? pitfalls?
The obvious pitfall of starting with a 50/50 rather than 65/35 AA (in order to soften the blow of a potential bear market early on) is that if in your case there is a nice bull market early on, you would soften that benefit.

Unfortunately, you don't know what the future will be and you can't have it both ways......
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Old 11-21-2008, 09:53 AM   #17
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Just checking, but you do realize that the S&P *is* down 50% in the past year, and bonds are also down. So a 50/50 mix *would* be down over 25%.

Nothing wrong with a 50/50 mix if that is what you want - what SWR were you considering?

-ERD50
Actually both treasuries and short term bonds are up for the year. Heck, Vanguard total bond market index is up. I'm guessing you're in TIPS, maybe?

Anyway, the portfolios I model tend to advocate short term bonds for the bond portion due to a good risk vs. reward ratio.
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Old 11-21-2008, 10:28 AM   #18
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Actually both treasuries and short term bonds are up for the year. Heck, Vanguard total bond market index is up. I'm guessing you're in TIPS, maybe?

Anyway, the portfolios I model tend to advocate short term bonds for the bond portion due to a good risk vs. reward ratio.
OK, some of the more conservative bond funds may be up a bit - but that doesn't really change the situation that much. Even with a 50/50 AA, you are still going to be very, very close to a 25% drop in portfolio, esp with withdrawals that you would be making in retirement. And you said this would "scare you insane".

So my question is - do you just accept that you would be scared (nearly) insane in this case, or is there another plan? More conservative AA (inflation risk), or save an added 25% more cushion before retiring (maybe the right thing to do, but many risks there also)?

I've seen a huge drop in my portfolio from the peak - not so bad from my retirement date. Well, actually, I have not calculated that in a while - maybe I won't! It might be in depressing range, but def not insane range.

-ERD50

PS - I do not own any TIPS
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Old 11-21-2008, 10:39 AM   #19
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Interesting discussion...

I know there's no way, I will be comfortable pulling the plug with SWR 4% or more unless I can somewhat easily cut back to 2/3 or less of income needed. I guess, I wear feathers too!

However, I was wondering whether any one of your enlightened people actually did or at least considered/analyzed starting retirement with allocation containing a higher fixed portion then one desired long term?

For example, let's say you're retiring in your 40is and are worried about two things: supporting long retirement and bad timing for the retirement start date. In this case, even though you would like to have a long term allocation of 65/35 (stock/bond), you will be starting with 50/50 to soften the blow of a potential bear market early on. In this case, you can simply spend-down fixed income funds until the desired allocation is reached. Any thoughts? pitfalls?

As always, the actual allocation can be anything based on individual preferences and need.
I have considered this approach and will probably do something like that. Almost like a "temporary bucket" approach. For example, I might have a long term goal of 70/30 stocks/bonds (I'll hopefully be a young ER). Say, $700,000 stocks, $300,000 bonds. But then I would save an extra $150,000 in bonds/cash on top of that (call it a "spend down bucket" if you like), bringing the total portfolio up to $1,150,000 and an effective stock/bond mix of 61/39.

Let's assume I can get 2% dividend yield on the stocks ($700,000 worth) and 5% interest on the cash/bonds ($450,000 worth), that would generate $36,500 a year. 4% on the $1,150,000 would be $45,000 a year, so I would have to withdraw $9500 in the first year from my $150,000 "spend down bucket". A bit of quick math shows the $9500 a year will last around 12-14 years depending on inflation and increases in dividend yields on the equity portion.

The hope would be that 12-14 years out the $1,000,000 equity/bond portion would grow sufficiently large to support the 4% SWR.

This is just a quick sketch of what I'm currently thinking of doing. The basic point is to set aside a large lump sum to spend down while you leave the portfolio alone to grow (other than taking interest and dividends from it).
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Old 11-21-2008, 01:25 PM   #20
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If we use Mark To Market accounting, the number we need to use for NW is the current one.
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