4.5% is the updated SWR according to Bill Bengen

[Major Tom]

4.5%? Oh no!! Better ramp up my lifestyle.

My thoughts too. I'd be living high on the hog if I were withdrawing 4.5%!

 

[dallas27]

Isn't this old news? Its always been 4.5. %, i remember reading that in his study when i first learned about it. Obviously the finance sales are going to round down to juice their AUM.

 

[FlaGator]

I also found it interesting that he bases this on tax-advantaged portfolio:

I don't know about the rest of you, but I don't have anything close to a majority of my retirement funds in a tax-advantaged account. Wish I did, but even with maxing out 401ks, etc. it wasn't close and I couldn't FIRE just with those amounts. So assuming everything is coming from tax-advantaged seems like a weird assumption. Seems like there would be a bigger tax hit if that was your source of income during retirement. Think the number would be different if it all came from a regular investment account? It seems so to me since you've already paid some taxes on the funds already during your w*rking life.

+1
Not enough of a quant to calculate it, but has to be more than the published number.

Logic says it would be different if the money was coming from post-tax accounts due to preferential dividend and capital gains treatment plus the untaxed draw from principal. My guess is there are not enough of us in that boat to justify the research and analysis

 

[alaska55]

I find it difficult to believe a 75/25 portfolio begun in 2000 and adjusted for inflation is doing “Well”. I am assuming he meant 3-5 year treasuries when he said 75/25 stock intermediate term treasuries. Of course he also does not define what he means by stocks — other than to call them common stocks, but the S&P500/ ST bonds which was being floated in the years after this study as sure to last 30 years with a 4% withdrawal was down to 491 thousand at the end of 2015. A inflation adjusted 60%+ portfolio decline. I cannot imagine a 4.5% withdrawal having a chance of success there.
Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update

I guess if you pick your own allocation you can make it look bad. Well here's my 60/40 total stock market and total bond market, which over on bolgehead's forums if pretty common. It does just fine thank you. Why would you pick ST treasuries?
https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults

 

[audreyh1]

I don't worry about the year 2000 scenario as I am living it, having retired during 1999. In spite of two nasty bear markets, at this point our net worth is ahead of inflation by a nice margin (knock on wood). But admittedly we haven't been drawing and spending anywhere close to 4.5% percent inflation adjusted.

 

[alaska55]

In fact anything between 60/40 and 40/60 at a 5% would do just fine. No option for inflation adjustment is given.

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults

 

[mathjak107]

the term safe withdrawal rate means it was stress tested by being inflation adjusted yearly as inflation actually unfolded .

don't forget over 30 years the 1965/1966 group did not do badly if you look at the averages for markets . rates and inflation .

but it was the sequence of that inflation that did them in the first 15 years . it wasn't so much market and bond returns that killed them . it was the sequence of inflation that made them the worst group .

 

[mathjak107]

Let's assume he meant the Total Stock Market index.

The portfolio you linked to uses the S&P500 and a 6 month commercial paper for the equity/bond portion. Choose a different asset and you'll get a different result. Besides, the S&P500 returned almost 12% in 2016 and commercial paper rates rose during the year, so that portfolio is on its way up.

Interestingly, lower down on the same page that you referenced, a guy shows the performance of a VBINX based portfolio w/constant 3% inflation & it is doing pretty well considering what we've been through over the last 16 years.

again , constant inflation will give you totally different skewed results . it is like trying to use average returns when spending down .

milevsky demonstrated how there can be as much as a 15 year difference in how long the money lasts using averages vs actual sequences

 

[mathjak107]

at 4% , 90% of all the rolling 30 year periods since 1926 left you with more than you started with . 67% left you with 2x what you started with and 50% left you with 3x what you started with .

 

[marko]

at 4% , 90% of all the rolling 30 year periods since 1926 left you with more than you started with . 67% left you with 2x what you started with and 50% left you with 3x what you started with .

Great news, but at what point does that curve flatten or turn around? 4.5%? 5%? 8? Where does one end up with 25% of starting portfolio?

I'm guessing it's a close shave (do people still use that term?) where 4% produces the above and 5% means failure. No?

 

[mathjak107]

the trinity study dealt with the success rates . ideally you want 90% or above.

here is a chart

 

[Running_Man]

Actually for someone with a low spending requirement, I think it is better to have more in tax advantaged accounts even if they are not Roth. The money is only taxed as you take it out. If you take it out at near poverty levels, you are really not going to pay much if any tax.

Example you have 1.2 million in a 401K and 500k in after tax account. A married couple pulling a taxable $20,000 out of the 401K and taking $15,000 in dividends and capital gains from the after tax account is going to pay $0 in federal tax.

I ran this as a $20,000 taxable 401K or IRA distribution, $7,000 in qualified dividends from the taxable account and $8,000 in long term capital gains from the taxable account. I used 2016 tax software.

$35,000 to live on, $0 tax due.

Probably can bump up a bit more on the figures and still be $0 tax.

Yes! I agree! To get to where you would be paying more tax than working you must be declaring over 93K in income. With 15% tax for a married couple to $73,000 no Social Security tax and 20K as standard deduction and personal exemptions. For an RMD to reach that level at age 75 the portfolio would need to be at 2.1 million and more likely than not to earn more money than is being withdrawn. It is an effective tax rate of 11.8% on 93K of income which is only 4 percent more than what Social Security tax would have been alone when working. And this is not even taking into consideration ROTH withdrawals.

Now I suppose if one is also getting SS then that creates tax on SS of 25% up to 85% of the value of the SS payouts, which for a successful couple could run up to 60K of SS benefit but 24K of Fed Tax on $153,000 of income and an untaxed portfolio of 2.1 million hardly seems onerous 15.6% Federal tax on total income-- less than twice the rate a single worker pays making the minimum wage in SS and Fed taxes.

 

[Independent]

That is why I favor some prudent ratcheting up of withdrawals/spending as one avoids the burly bear.

If someone retired 5 years ago with $1 million and a 4% WR and they now have $1.5 million then I see no reason why they cannot prudently ratchet up to 4% of $1.5 million.... it is just as prudent as someone with $1.5 million who is just now retiring starting with a 4% WR.

I agree that good early results show that you didn't get one of those bad scenarios where you get hit by an early bear. Some increase seems reasonable.

But, I'm not sure about using the whole amount. That initial $40,000 from a $1 million portfolio assumed I was okay with knowing that 5% of historic starting years didn't survive 30 years. I went out on a limb a little.

Now that I'm taking $40,000 from a $1.5 million portfolio, that's a 2.7% withdrawal rate. 100% of historic starting years survive at that rate.

Upping my withdrawals to $60,000 means going back to the 5% probability of failure. Maybe it makes more sense to go to a number that's above $40,000, but below $60,000, that has a historic survival rate of 100%. i.e. use some of the good results to raise the withdrawals, and the rest to improve the chance of success.

 

[flyingaway]

If you are in the 25% or above tax brackets, you will be better off to put (max) money in tax-advantaged accounts. I am not sure how much benefits in the 15% tax bracket. For me, if I will be in the 15% tax bracket, I will reduce my contributions to the tax-advantaged accounts.
Everything depends on the in-rate and out-rate (tax), so it is difficult to optimize everything when the future is known, and there are many factors to consider (Roth conversion, social security, and Obama care, etc.) I just want to get my main directions right and don't care about the details.

 

[Lsbcal]

Thanks to the OP for the Bengen link. Am on vacation right now or I would check the 4.5% SWR using VPW. Perhaps someone could do that VPW check?

For us the retirement account scenario is pretty realistic. A high percentage of our money fits this. But luckily we don't need to go up to even 4% to have a good life.

 

[walkinwood]

again , constant inflation will give you totally different skewed results . it is like trying to use average returns when spending down .

milevsky demonstrated how there can be as much as a 15 year difference in how long the money lasts using averages vs actual sequences

I agree with you.

In the 2000-2015 time period, a 3% constant inflation could very well produce worse results than using actual values. I haven't done the calculations though. See CPI numbers below.

https://www.minneapolisfed.org/comm...consumer-price-index-and-inflation-rates-1913

 

[dixonge]

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 with no early bear market or *heavy* inflation, your SWR can be SEVEN percent

Wow.

 

[samclem]

So with no early bear market or *heavy* inflation, your SWR can be SEVEN percent

Wow.

Your safe withdrawal rate would have been seven percent, and given those rosy provisos. And that's in the best performing economy in the world (of over 200 countries), over its most productive span.

Nobody knows the SWR going forward, and folks who think this is a science or who need this 1/2% additional WR to avoid disaster are maybe cutting things a little thin.

Yes, all we've got is history and best guesses, but remaining flexible and being able to cut spending if required might be pretty important. Is anybody really going to pick a WR and blindly adjust for inflation every year without looking at what is happening to the balance? It seems highly unlikely (and ill advised). For those agree, I think they'll be much happier with some variant of a "percent of year-end portfolio balance" withdrawal method (and use Bob Clyatt's "95% rule," VPW, or another smoothing technique if the volatility seems too much).

 

[marko]

So does all of this imlpy that FireCalc--and others--are overly conservative? Seems that most of us end up with about a 4% (or less) SWR.

 

[mathjak107]

not really , since this is based on it being in some form of retirement account only .

 

[pb4uski]

That's the mystery to me.... why would there be a difference in SWR if the money was in a tax-deferred account vs a taxable or tax-free account?.... IOW, it shouldn't matter whether you use the withdrawals to pay taxes or buy martinis.... money is fungible.

 

[pjm-7]

I've been keeping my SWR closer to 3 percent. I should revise the budget for next year and let loose (just a bit). Any other Colorado folks want to help me expand my withdrawal rate, if even just for coffee?

 

[marko]

not really , since this is based on it being in some form of retirement account only .

But most calculators don't make the distinction. Someone unaware of the differences might underspend.. With 80% of my portfolio in pretax, I THOUGHT I was overspending but now I might not be.

 

[mathjak107]

exactly the problem , calculators do not make the distinction .

but then again statistically the calculators do not consider most of us will not last 30 years either life expectancy wise .

when you combine that statistic with the success rate stats you actually are higher on a statistical basis .

 

[rodi]

I'm too cheap to increase my WR to a higher percentage.... I worry about the ACA cliff - which could be very painful... $1 too much and we have a huge tax bill.