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4.5% is the updated SWR according to Bill Bengen
Old 08-22-2017, 01:14 PM   #1
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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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Old 08-22-2017, 01:34 PM   #2
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How about an introduction in this thread? Hi, I am... - Early Retirement & Financial Independence Community
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Old 08-22-2017, 02:07 PM   #3
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Thanks for the link & welcome to the group.
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Old 08-22-2017, 02:30 PM   #4
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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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Old 08-22-2017, 03:10 PM   #5
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4.5% Book me up into First Class!
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Old 08-22-2017, 03:18 PM   #6
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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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Old 08-22-2017, 03:45 PM   #7
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4.5%? Oh no!! Better ramp up my lifestyle.

Welcome to the Early Retirement forum, sickman.
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Old 08-22-2017, 03:49 PM   #8
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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.
Agree.
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Old 08-22-2017, 05:26 PM   #9
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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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Old 08-22-2017, 05:53 PM   #10
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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.
+1
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Old 08-22-2017, 05:58 PM   #11
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NOW they tell me!!
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Old 08-22-2017, 06:19 PM   #12
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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.
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).
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Old 08-22-2017, 06:44 PM   #13
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Originally Posted by sickman View Post
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
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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Old 08-22-2017, 06:45 PM   #14
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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.
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Old 08-22-2017, 07:50 PM   #15
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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.
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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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Old 08-22-2017, 08:01 PM   #16
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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

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Thanks for mentioning it. I have been biting my tongue all this time because this is such a buzzkill.
Happy to buy you two a beer the next time you come to the Panhandle as I p!$$ away my 4.5% WR
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Old 08-22-2017, 08:19 PM   #17
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I also found it interesting that he bases this on tax-advantaged portfolio:

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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.
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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Old 08-22-2017, 08:26 PM   #18
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I just found a new safety net, I have over-saved by 0.5% SWR.
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Old 08-22-2017, 08:30 PM   #19
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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.
Yes after taking a couple of years of RMD's, I am biting my tongue when I pay my income taxes.
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Old 08-22-2017, 08:32 PM   #20
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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.

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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