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4.5% is the updated SWR according to Bill Bengen
08-22-2017, 01:14 PM
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#1
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Confused about dryer sheets
Join Date: Aug 2016
Location: Los Angeles
Posts: 3
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4.5% is the updated SWR according to Bill Bengen
Reading an interesting Reddit AMA (ask me anything) thread from Mr. Bengen who first proposed the 4% SWR in 1994, according to his paper, "Determining Withdrawal Rates Using Historical Data".
What stuck out to me the most was his reply re: SWR:
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, but I know Reddit frowns on self-promotion, so that is the last I will have to say about that. If you plan to live forever, 4% should do it.
If anyone is interesting in reading the AMA thread, link is here
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08-22-2017, 01:34 PM
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#2
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Moderator
Join Date: Dec 2007
Location: Eastern WV Panhandle
Posts: 25,340
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__________________
When I was a kid I wanted to be older. This is not what I expected.
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08-22-2017, 02:07 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Jul 2006
Location: Denver
Posts: 3,519
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Thanks for the link & welcome to the group.
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08-22-2017, 02:30 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Mar 2008
Location: Atlanta Suburb
Posts: 1,499
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Welcome to the forum.
4.5% I can't even get above 3%. If he is correct, our heirs are really going to be happy.
FN
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08-22-2017, 03:10 PM
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#5
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Thinks s/he gets paid by the post
Join Date: May 2005
Location: Portland
Posts: 1,713
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4.5% Book me up into First Class!
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08-22-2017, 03:18 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2012
Location: Seattle
Posts: 6,023
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He is probably right. Almost everyone on er.org is going to kick the bucket with their children fighting over several million dollars and who gets the old couch.
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08-22-2017, 03:45 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2007
Location: New Orleans
Posts: 47,500
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4.5%? Oh no!! Better ramp up my lifestyle.
Welcome to the Early Retirement forum, sickman.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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08-22-2017, 03:49 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Dec 2009
Location: Alberta/Ontario/ Arizona
Posts: 3,393
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Quote:
Originally Posted by Fermion
He is probably right. Almost everyone on er.org is going to kick the bucket with their children fighting over several million dollars and who gets the old couch.
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Agree.
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08-22-2017, 05:26 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 1,743
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So our 5% WR is not that high after all....
I think we will ramp up spending when SS comes online.
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08-22-2017, 05:53 PM
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#10
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Recycles dryer sheets
Join Date: Oct 2009
Posts: 246
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Quote:
Originally Posted by Fermion
He is probably right. Almost everyone on er.org is going to kick the bucket with their children fighting over several million dollars and who gets the old couch.
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+1
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08-22-2017, 05:58 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2011
Posts: 8,418
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NOW they tell me!!
__________________
Living well is the best revenge!
Retired @ 52 in 2005
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08-22-2017, 06:19 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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Quote:
Originally Posted by Fermion
He is probably right. Almost everyone on er.org is going to kick the bucket with their children fighting over several million dollars and who gets the old couch.
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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.
While I like the idea, my kids are less enthusaistic. (Just kidding).
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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08-22-2017, 06:44 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 2,844
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Quote:
Originally Posted by sickman
Reading an interesting Reddit AMA (ask me anything) thread from Mr. Bengen who first proposed the 4% SWR in 1994, according to his paper, "Determining Withdrawal Rates Using Historical Data".
What stuck out to me the most was his reply re: SWR:
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, but I know Reddit frowns on self-promotion, so that is the last I will have to say about that. If you plan to live forever, 4% should do it.
If anyone is interesting in reading the AMA thread, link is here
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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
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08-22-2017, 06:45 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Syracuse
Posts: 3,502
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4.5% was what my FIDO guy recommended and what was mentioned in the Random Walk Down Wallstreet book and what I based my first 4 years of withdrawals on. (though I didn't actually hit it.)
I like the 7% figure even better.
__________________
“No, not rich. I am a poor man with money, which is not the same thing"
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08-22-2017, 07:50 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Apr 2005
Location: Midwest
Posts: 2,969
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Quote:
Originally Posted by Running_Man
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
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Thanks for mentioning it. I have been biting my tongue all this time because this is such a buzzkill.
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08-22-2017, 08:01 PM
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#16
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Full time employment: Posting here.
Join Date: Aug 2008
Location: The 850
Posts: 980
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Originally Posted by Running_Man View Post
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
Quote:
Originally Posted by razztazz
Thanks for mentioning it. I have been biting my tongue all this time because this is such a buzzkill.
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Happy to buy you two a beer the next time you come to the Panhandle as I p!$$ away my 4.5% WR
__________________
Stay at home slacker dad 2015-August 2024. With the last kid gone, now actually retired
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08-22-2017, 08:19 PM
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#17
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Recycles dryer sheets
Join Date: Apr 2016
Location: Bay Area
Posts: 188
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I also found it interesting that he bases this on tax-advantaged portfolio:
Quote:
Originally Posted by sickman
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.
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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.
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08-22-2017, 08:26 PM
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#18
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Full time employment: Posting here.
Join Date: May 2014
Posts: 986
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I just found a new safety net, I have over-saved by 0.5% SWR.
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08-22-2017, 08:30 PM
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#19
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Moderator Emeritus
Join Date: Apr 2011
Location: Conroe, Texas
Posts: 18,731
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Quote:
Originally Posted by JohnnyBGoode
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.
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Yes after taking a couple of years of RMD's, I am biting my tongue when I pay my income taxes.
__________________
*********Go Yankees!*********
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08-22-2017, 08:32 PM
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#20
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Thinks s/he gets paid by the post
Join Date: Apr 2005
Location: Midwest
Posts: 2,969
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Quote:
Originally Posted by JohnnyBGoode
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.
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Same here. Hearing the ubiquitous invoking of "tax-advantaged retirement accounts" is like watching Star Trek. It seems like real people going about their business but none of it applies to the world I live in
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