2% swr

[firewhen]

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).

 

[Grep]

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.

 

[Geoffrey]

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.

 

[Animorph]

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.

 

[FUEGO]

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).

 

[Gone4Good]

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.

 

[kumquat]

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.

 

[Gone4Good]

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?

 

[TromboneAl]

To put things in perspective, if your investments only keep pace with inflation, a 2% SWR will last you about 50 years.

 

[slazenger]

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.

 

[ERD50]

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

 

[kumquat]

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.

 

[lucija]

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.

 

[saluki9]

You never dreamed the market could fall 50%?

Really?

It did it only about 6 years ago.

 

[2B]

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.

 

[youbet]

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......

 

[slazenger]

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.

 

[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.

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

 

[FUEGO]

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).

 

[Meadbh]

If we use Mark To Market accounting, the number we need to use for NW is the current one.

 

[youbet]

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.

.

Since your plan is to harvest bond interest and stock dividends as you go along, you might not get the growth you're expecting. The bond portion wouldn't grow at all unless interest rates fall. The equities growth without divident reinvestment might likely be v-e-r-y slow, perhaps no more than inflation.

I'd think that plan through a bit......

 

[FIRE'd@51]

The bond portion wouldn't grow at all unless interest rates fall.

The Vanguard LT Investment Grade Corporate bond fund (VWESX) is yielding more than 7%. So, in a 3% inflation world, you could withdraw 4%, and reinvest 3%, and pretty much keep the inflation-adjusted value of your bonds constant over time, which would allow you to grow your withdrawal rate with inflation. Of course, if inflation exceeds 3%, all bets would be off.

 

[FUEGO]

Since your plan is to harvest bond interest and stock dividends as you go along, you might not get the growth you're expecting. The bond portion wouldn't grow at all unless interest rates fall. The equities growth without divident reinvestment might likely be v-e-r-y slow, perhaps no more than inflation.

I'd think that plan through a bit......

I've thought it through a bit more than what I posted. What I posted was just done quick and dirty. We were having a huge thanksgiving feast here at w*rk and that is probably the only "bonus" I'll be getting this year so pardon the loose math! I was in a hurry to eat...

But the basic premise is to set aside a lump sum sufficient to compliment the dividends and interest that your portfolio produces and consume this "bucket" for the first decade or so. Then start living off your permanent portfolio once the set aside bucket is depleted. In practice, this would look similar to starting with something like a 60/40 portfolio and moving 1% a year to equities (by consuming the fixed income disproportionately on average). By year ten you would be at a 70/30 long term target.

I know someone here before has posted a research paper that studied different withdrawal methods (stocks first, fixed income first, stick with target allocation, etc). The author may have been Moshe Milevsky et al IIRC. I think it was something from the Journal of Financial Planning. Can't seem to find the thread on it though. The conclusion was that the "withdraw from bonds first" was the strategy that had the best success as defined in the research paper. "Withdraw from bonds first" really means shift your asset allocation to 100% equities over time. No surprise that this results in long term increases in wealth vs. the other withdrawal schemes.

I'm essentially advocating a "consume fixed income first" strategy coupled with consuming dividends. Just that you limit your consumption of fixed income once you reach your permanent target allocation and then begin the traditional consumption of equities and fixed income.

 

[slazenger]

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".

It changes the only point against me that you had as I saw it. That was all I was addressing. The "total bond market" fund is not the more conservative ones, it's the average bond market. The more conservative bonds are short term bonds which are up a good 3.5%, or heck US treasuries.

Regarding the "scaring insane" and the rest of your post, the point of my post was to say that 100% stock, or anything close to it in retirement, I think is an insane approach. Also, I feel like you read the comment literally, when I meant it figuratively. A 25% annual drop on a 50/50 portfolio like I envision would stress me quite a bit. But so far, that's still a hypothetical based on the way I would have invested. The optimist in me believes it will remain that way.

I am going to save at least a 25% extra cushion before I retire. I'd also think I'd be insane to retire with "just enough". Gotta leave some margin for error, right?

PS - I do not own any TIPS

I only asked because you were (originally) under the impression bonds were down this year. I was wondering why you thought that? I know TIPS are down. So are junk bonds. But the ones probably most investors use are up. Given the drop in interest rates since Jan 08, that's not really that surprising.

 

[youbet]

I'm essentially advocating a "consume fixed income first" strategy coupled with consuming dividends. Just that you limit your consumption of fixed income once you reach your permanent target allocation and then begin the traditional consumption of equities and fixed income.

You may want to consider more of a "wait and see" approach. If you get lucky and during your first few yrs of ER equities take off fabulously and the equity percentage of your portfolio is skyrocketing through the roof while your fixed portion is shrinking because of higher interest rates, I'd hate to see you selling fixed and holding equities.

It's good to hypoethesize withdrawal strategies, dream about fictional "bucket" scenarios and all that. But when push comes to shove, you may want to enter ER with a sensible AA and make decisions based on what is actually happening at the time.......