4% is now considered too high

[verygoodthings]

Yes, I think this is true. I did some research on this exact issue a few years ago and posted the results here.

Basically, if your portfolio is suffering severely 5 or 10 years into your withdrawal period, you need to do something to slow the bleeding. Work part time, reduce your withdrawals, etc.

I personally plan on having a significant portion of my withdrawal be a variable amount based on portfolio value each year, and the rest of my withdrawal would be inflation indexed. Empirically, this will let me pull out around 4% starting out, and there is a 95% chance my withdrawals won't decrease below about 3% in the first 10 years or so. By year 10, I am virtually guaranteed to meet or exceed the 4% SWR.

In practice, this would look like the following: 2% withdrawal indexed to inflation each year plus a 2% withdrawal that is 2% of the actual portfolio balance each year. The former part of the withdrawal dampens the volatility of the latter part of the withdrawal (in good years and bad). Over time, odds are very good that my withdrawal will grow. If, say, I had a million bucks in my portfolio, and I needed $25000 as my absolute bare bones living expenses, then I could take $40,000 a year per my 2%/2% strategy and have a very good chance (95%+) my withdrawals would never dip below $28,000-30,000.

The advantage of this method (the hybrid method I call it) is two fold: you don't annually increasing amounts blindly as your portfolio craters and you get to enjoy spending more in the vast majority of scenarios where your portfolio appreciates over the decades. I think the hybrid method more closely approximates what you will want to do anyway: conserve money when you get poorer and spend more when you get richer.

This is all assuming that the past is prologue for the future.

This is a good post. And this is what most people do. All of this 4% rule nonsense, people may understand it as explained to them by their advisors year 1, but they just spend according to portfolio value down the line.

 

[Danmar]

This is a good post. And this is what most people do. All of this 4% rule nonsense, people may understand it as explained to them by their advisors year 1, but they just spend according to portfolio value down the line.

Yes I think you are right. Who in their right mind would ignore portfolio results when planning their upcoming spending levels?

 

[FIRE'd@51]

Personally, I never considered 4% safe. The way I look at it, a one in twenty chance of running out of money is too risky - there are no do-overs here. My preference is to start with a SWR that FIRECALC says never failed, and keep my fingers crossed. In the meantime, I would be trying to opportunistically re-position my portfolio into one where the withdrawal rate can be supported from interest and dividends.

 

[youbet]

Isn't it the case that the vast majority of the failures are because of poor market performance early on?

Earlier versions of FireCalc provided a chart which showed which trial periods failed and named them by their initial year. If I recall correctly, most failure trial periods beginning with years of high inflation did the worst.

Because we've been in a period of low inflation, I think many are overlooking that threat. For example, we all took a beating from the recent recession, but generally portfolios have recovered. There is no recovery form periods of high inflation. Once prices go up, there is seldom offsetting deflation to bring them back down.

As food, energy, etc., increase in price, don't look for a "recovery" bringing them back down to where you can afford them based on a non-inflation adjusted withdrawal rate.

 

[verygoodthings]

Another good resource I came across with the SWR was in the Bogleheads Guide to Retirement. There is a section specifically on early retirement, and it modifies the SWR by age group. The earliest retirement (I believe was around 40 years old) called for 3.0% initial withdraw, inflation indexed. Just a different spin on this typical rule. And may apply to some of us here of a younger age group.

Here is another opinion that I find respectable, I'm copying from a post written by a "Mike" on Raddrs Early Retirement forum:

"If you include data from all centuries and countries, the SWR is near zero. The 4% data set was for a country that was in the process of morphing into the world's preeminent super power. Meanwhile, the Japanese and German SWR for the same period was about zero. Much of the war ravaged rest of the world was not much better off.

Canada, Australia, New Zealand and the US were some of the few places that 4% was even close for the period."

 

[verygoodthings]

Personally, I never considered 4% safe. The way I look at it, a one in twenty chance of running out of money is too risky - there are no do-overs here. My preference is to start with a SWR that FIRECALC says never failed, and keep my fingers crossed. In the meantime, I would be trying to opportunistically re-position my portfolio into one where the withdrawal rate can be supported from interest and dividends.

Something to keep in mind in that cases of portfolio failure under the condition of a "reasonable" withdrawal rate (like 3%, maybe 4%) are that the situation would probably be serious world trouble. The entire economy breaking down is essentially what those heavy negative return scenarios would look like in the real world. You will not be the only person in trouble.

You mention a 5% chance of failure being too high to cope with. I can agree with you in concept, but I would also say that there is probably a serious chance (5% may be even low!) that the world could enter into a destructive World War III type scenario. Being investors in a state of retirement, one of the most serious risks posed to any of our portfolios are not Monte Carlo simulations, but the general state of the world economies.

Another spin on all of this is that in your higher withdrawal scenarios, 6% and such, you can run into portfolio failure that is entirely your fault. Everyone else in the world can be doing generally alright, and you are bankrupt , scary scenario.

 

[Cacuzza]

4% Withdrawal "Rule"

Hi,

My first post! And on one of my favorite topics--money.

I recently took the retirement course offered for federal employees nearing retirement. This business of how much to withdraw annually from the TSP (an IRA-like account) came up. They are still talking about a 4% rate of withdrawal, *but* that was keyed to the idea of replacing buying power lost to inflation.

The basic rate of withdrawal would actually be 3% with an additional 1% to cover inflation and cost of living increases. For the past two years, there has been no coast-of-living increase (COLA) for Social Security recipients and federal employees due to there being no increase in the cost of living. I will pause for those of you who have just returned from the grocery store to finish rolling on the floor with laughter and pick yourselves up.

"Theoretically" this means that, if you can make do with a 3% withdrawal, that's all you need. There's a lot of variants, based on personal situations, but just because people tell you 4% doesn't necessarily mean you need to take 4%

As a final note, people seem to point out the problems of the underlying value of the securities in your account sinking. I know, from some relatives's experiences, that this can become a problem, particularly if there are required withdrawal amounts. There is, however, some growth due to dividend and interest re-investment, as well as the long-term tendency of stocks to increase in value.

Cacuzza

 

[Nords]

Something to keep in mind in that cases of portfolio failure under the condition of a "reasonable" withdrawal rate (like 3%, maybe 4%) are that the situation would probably be serious world trouble.

VGT, you appear to have built up a good head of steam on these subjects and you seem eager to share your knowledge. Perhaps you'd like to put up an introductory post in the "Hi, I am..." section of the board.

It's also worth considering that among the board's 38,000+ threads, 766,000+ posts, and 13,000-some members, some of these topics may have been pretty thoroughly addressed during the last eight or nine years. Much of that is summarized in the board's "Early Retirement FAQs" archive. We've talked about Dimson & Marsh's "Triumph of the Optimists" and Bernstein's "Calculator from Hell" a few times over the years.

http://www.early-retirement.org/for...reading-list-with-a-military-twist-46732.html
http://www.early-retirement.org/for...uality-discussions-you-should-read-33198.html
http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html
http://www.early-retirement.org/forums/f47/william-bernsteins-books-and-website-info-30505.html

You can also search the board's threads for keywords like "Otar":
Early Retirement & Financial Independence Community - Search Results

 

[Marc1962]

My preference is to start with a SWR that FIRECALC says never failed, and keep my fingers crossed. In the meantime, I would be trying to opportunistically re-position my portfolio into one where the withdrawal rate can be supported from interest and dividends.

Prior to reading this Vanguard white paper - https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf - I perceived dividend income to be especially desirable and intended to invest accordingly. The article explains why qualified dividends are inferior to long-term capital gains after taxes and generally makes a strong case for welcoming opportunities to withdraw by liquidating equities.

 

[swampwiz]

I'm planning on a SWR of 8-10%.

 

[GregLee]

They are still talking about a 4% rate of withdrawal, *but* that was keyed to the idea of replacing buying power lost to inflation.

So 4% is an appropriate rate if what matters is continued wealth (rather than continued life), and we assume that a retiree is immortal. Well, it doesn't quite make 100% sense, but what would? I've noticed here, and in reading people's responses to the difficulties of a cancer diagnosis, that we just don't know very well how to cope with the uncertainty of our death. The parallel is this: you can increase the chance that you can have plenty of money through your elder years by depriving yourself and forgoing spending, but you can't know for sure that your strategy will work. When you catch a case of cancer, you can typically increase your chance of living for the next decade by taking chemotherapy poisons which have unpleasant side effects, but no one can tell you for sure whether the pain of the treatment will pay off for you. In fact, in both cases, no one can even tell you for sure what your chances will be --- it's all guess-work.

Life can be so difficult.

 

[haha]

Prior to reading this Vanguard white paper - https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf - I perceived dividend income to be especially desirable and intended to invest accordingly. The article explains why qualified dividends are inferior to long-term capital gains after taxes and generally makes a strong case for welcoming opportunities to withdraw by liquidating equities.

I doubt that anyone on the board has been living solely from his portfolio longer than I have. Whatever may be better in theory (and this is debatable anyway), if a collection of high quality stocks with growing dividends can fund your retirement you are much more secure than hoping that you can liquidate shares when you need to.

That's about all I will say on the topic, other than long term success speaks a lot louder than anything one might read.

Ha

 

[Katsmeow]

It's also worth considering that among the board's 38,000+ threads, 766,000+ posts, and 13,000-some members, some of these topics may have been pretty thoroughly addressed during the last eight or nine years. Much of that is summarized in the board's "Early Retirement FAQs" archive. We've talked about Dimson & Marsh's "Triumph of the Optimists" and Bernstein's "Calculator from Hell" a few times over the years.

http://www.early-retirement.org/for...reading-list-with-a-military-twist-46732.html
http://www.early-retirement.org/for...uality-discussions-you-should-read-33198.html
http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html
http://www.early-retirement.org/forums/f47/william-bernsteins-books-and-website-info-30505.html

You can also search the board's threads for keywords like "Otar":
Early Retirement & Financial Independence Community - Search Results

I always enjoy seeing links to threads that I might have missed in the past so appreciate the post. At times, particularly when I'm looking for factual information or a general background that is enough. In fact, I confess that before I ever posted here I actually went back and skimmed through every thread in the Fire and Money forum (to be clear, if the thread didn't look interesting from the subject I didn't always read it). That took me a very long time to do it. And I learned a lot.

Even so, at times I want to actually post about a topic and talk about my thoughts on it and go back and forth with others. For that purpose, reading those old threads does nothing much for me. In fact, they are tantalizing. I so much want to leap in and talk and then I see that, oh, that thread was from 4 years ago.

So, for us newer people, as annoying and tedious as it may be for the long time members, we are probably going to discuss some topics that have been discussed before simply because we haven't discussed them.

 

[kyounge1956]

I'm planning on a SWR of 8-10%.

For how long?

 

[obgyn65]

Before joining this community a few months ago, I did not know what SWR meant. Still, I was considering withdrawing 4% of my savings every year in ER, just by modeling normal returns for my portfolio and time horizon = 2060 (age 95).

Personally, I never considered 4% safe.

 

[donheff]

Prior to reading this Vanguard white paper - https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf - I perceived dividend income to be especially desirable and intended to invest accordingly. The article explains why qualified dividends are inferior to long-term capital gains after taxes and generally makes a strong case for welcoming opportunities to withdraw by liquidating equities.

Interesting. I hadn't read that paper but it tracks well with my withdrawal strategy based on various conversations I followed here. Even though I was following the procedure outlined it had not dawned on me that withdrawals involving more dividends in taxable accounts result in greater taxes (while dividends are at 15%) than equal withdrawals more highly tilted toward CGs. It is obvious once you think about it.

 

[verygoodthings]

VGT, you appear to have built up a good head of steam on these subjects and you seem eager to share your knowledge. Perhaps you'd like to put up an introductory post in the "Hi, I am..." section of the board.

It's also worth considering that among the board's 38,000+ threads, 766,000+ posts, and 13,000-some members, some of these topics may have been pretty thoroughly addressed during the last eight or nine years. Much of that is summarized in the board's "Early Retirement FAQs" archive. We've talked about Dimson & Marsh's "Triumph of the Optimists" and Bernstein's "Calculator from Hell" a few times over the years.

http://www.early-retirement.org/for...reading-list-with-a-military-twist-46732.html
http://www.early-retirement.org/for...uality-discussions-you-should-read-33198.html
http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html
http://www.early-retirement.org/forums/f47/william-bernsteins-books-and-website-info-30505.html

You can also search the board's threads for keywords like "Otar":
Early Retirement & Financial Independence Community - Search Results

If you are suggesting that for the general health of the board it is better for people to just search and read rather than contribute to the current conversation (What this thread is), I have to disagree with you. The reason forums grow is because members join, and take place in the current discussions.

If I had revived a thread from the dead, this could be another story. I think my forum etiquette is fine.

I appreciate the links though, and rest assured, I do continue to browse the archives. Contributing to an active discussion is sort of what a forum is all about though, don't lose sight of that.

You could pretty much respond to any post anywhere on this forum with the attitude that: "There are 766,000 posts on this forum, use the search function, let's stop creating new content".

 

[FIRE'd@51]

Prior to reading this Vanguard white paper - https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf - I perceived dividend income to be especially desirable and intended to invest accordingly. The article explains why qualified dividends are inferior to long-term capital gains after taxes and generally makes a strong case for welcoming opportunities to withdraw by liquidating equities.

Of course, as the example points out, if you have held the stocks long enough that nearly the entire sales price is a LT capital gain, the tax difference is minimal. Furthermore, to implement this strategy in an optimal way (from a tax efficiency standpoint), seems to me would require selling your underperformers (possibly even losers) and holding on to your outperformers, which, at the least, is a debatable investment strategy. Many successful value investors would argue that you should do just the opposite. Finally, for those investors in the two lowest brackets (roughly 90K AGI for a couple with no dependents filing jointly and taking the standard deduction), the federal tax on either LT capital gains or qualified dividends is zero, so for them it's a moot point.

A somewhat more abstract point, but IMO a very real one, is that, when you sell shares for consumption, your relative ownership of the enterprise declines, so over time you own less of America. I feel better (and I could be totally wrong) keeping my relative share of "the equity pot" roughly constant, because over time I believe that this will keep my relative standard of living constant.

 

[Marc1962]

Of course, as the example points out, if you have held the stocks long enough that nearly the entire sales price is a LT capital gain, the tax difference is minimal. Furthermore, to implement this strategy in an optimal way (from a tax efficiency standpoint), seems to me would require selling your underperformers (possibly even losers) and holding on to your outperformers, which, at the least, is a debatable investment strategy. Many successful value investors would argue that you should do just the opposite. Finally, for those investors in the two lowest brackets (roughly 90K AGI for a couple with no dependents filing jointly and taking the standard deduction), the federal tax on either LT capital gains or qualified dividends is zero, so for them it's a moot point.

Excellent clarification. My personal takeaway from the white paper is not that dividends are bad but instead that I should not allow dividend yield to become my highest investment priority. The white paper just puts dividends in the mix of "total return" and generally supports the Vanguard/Boglehead three-fund portfolio style of investing.

A somewhat more abstract point, but IMO a very real one, is that, when you sell shares for consumption, your relative ownership of the enterprise declines, so over time you own less of America. I feel better (and I could be totally wrong) keeping my relative share of "the equity pot" roughly constant, because over time I believe that this will keep my relative standard of living constant.

On the other hand, if we chase dividend yield, mostly we will own companies with slower-than-average long term growth prospects, so our relative shares of U.S. (or world) equity will diminish as we spend the dividends. I think of the total return strategy as a middle way that encourages us to consider both growth and dividend yield in tandem as we select our investments.

 

[REWahoo]

I think my forum etiquette is fine.

In response to the above, I think your very first words on the forum are accurate and very fitting:

Ok the above is incorrect.

Your introduction here was the equivalent of a total stranger walking into a room full of people, some who have know each others for years, and jumping into a conversation with "you are incorrect". That isn't what many of us consider to be proper forum etiquette.

Wouldn't it help break the ice if that group of people had some frame of reference regarding the individual speaking to them? That's why our forum asks that you start out your membership here by introducing yourself.

Now might be a good time to do that, so we can put this all behind us and get on with the important business of FIRE.

 

[Midpack]

I'm planning on a SWR of 8-10%.

Unless you're 75-80 years old, wouldn't it be more accurate to say I'm planning on a WR of 8-10%?

 

[NW-Bound]

...not that dividends are bad but instead that I should not allow dividend yield to become my highest investment priority...

Yes! I have a few friends who told me of this and that stock that they just bought that sported excellent dividends, and also said it had extremely low P/E.

But it is past dividend, and past year's P/E, I try to remind them. What is this year's expected P/E or dividend, do we know? Of course they have no answer, although they have been hurt like that in the past. Quite often, the market already factored a grim prospect into the stock low price, which then makes it look like a "value stock", which it is not.

 

[haha]

Yes! I have a few friends who told me of this and that stock that they just bought that sported excellent dividends, and also said it had extremely low P/E.

But it is past dividend, and past year's P/E, I try to remind them. What is this year's expected P/E or dividend, do we know? Of course they have no answer, although they have been hurt like that in the past. Quite often, the market already factored a grim prospect into the stock low price, which then makes it look like a "value stock", which it is not.

I would definitely always buy a stock that has gone way up, that way you will know that "the market" has blessed your choice.

 

[NW-Bound]

Surely you jest!

Seriously, I have tried to stay away from stocks that are at the bottom of the bargain bins. The few times I dabbled in those, I was burned bad. Like a stock that later went bankrupt because of pending asbestos lawsuits that I did not know about but everybody else did.

But can I brag about a successful bargain hunt now? At the bottom of early 2009, I bought some shares of an established and very old electronic company whose products are well known to any electrical or electronic engineer. The company was running out of cash, and got delisted off Nasdaq. Bleak, bleak, bleak... I have traded this company before, but never making nor losing much money. This time, I watched it closely, and after seeing them making a recovery and its management did not sell but even buy more of the stocks, I took a small gamble.

This position is now the 3rd largest in my portfolio, because it has a gain of 400%. Nice! Its P/E was negative, is now positive, and for the current year is expected to be in the single digit. Nice! I am not selling yet, even though it is still paying no dividend.

Of course I am now kicking myself for not loading up more...

 

[Nords]

In fact, I confess that before I ever posted here I actually went back and skimmed through every thread in the Fire and Money forum (to be clear, if the thread didn't look interesting from the subject I didn't always read it). That took me a very long time to do it. And I learned a lot.
I so much want to leap in and talk and then I see that, oh, that thread was from 4 years ago.
So, for us newer people, as annoying and tedious as it may be for the long time members, we are probably going to discuss some topics that have been discussed before simply because we haven't discussed them.

If you are suggesting that for the general health of the board it is better for people to just search and read rather than contribute to the current conversation (What this thread is), I have to disagree with you. The reason forums grow is because members join, and take place in the current discussions.
If I had revived a thread from the dead, this could be another story. I think my forum etiquette is fine.
I appreciate the links though, and rest assured, I do continue to browse the archives. Contributing to an active discussion is sort of what a forum is all about though, don't lose sight of that.

Actually, VGT, I'm suggesting that you do as you did-- take the time to introduce yourself and then rejoin the conversation. Thank you. REWahoo said it better than me, but IMO your first few posts on this board have come across as lecturing the membership on concepts with which I think we can all say (and enjoy the benefits of some hard-earned pride) we're fairly familiar.

Katsmeow's approach is, as noted, lengthy & painful. However there's a middle ground of skimming through a few dozen posts and familiarizing yourself with the conversation in the room before taking another poster to task. There's a certain amount of shared background and common knowledge among a board's longer members that's not always explicitly mentioned in each post.

I think my record speaks for itself in tolerating the rediscovering enjoyed by new members. After all, I've seen a lot of it. I usually lurk on those threads unless there's a point that hasn't been brought up yet or a factual misconception or an urban legend. "Sharing your personal experience" and "contributing info that you've not seen posted here before" sound good from any posters, new or old. "Admonishing" and "beating a dead horse"... not so much.

This board has a long history of enthusiastic trolls and salespeople who think we're all rich people ripe for targeting by their agenda. I realize that you may be neither, but it just so happens that you've chosen exactly the same approach in your first few posts. The trend was not encouraging.

I've put a lot of time and personal effort into this discussion board and I think it's a pretty good source of info, fact-checking, and thoughtful assessment. When you've made a similar contribution here then you can feel free to criticize my attitude. But thanks for taking the time to tell me what a forum is all about, and I'll try not to lose sight of that.

Interesting. I hadn't read that paper but it tracks well with my withdrawal strategy based on various conversations I followed here. Even though I was following the procedure outlined it had not dawned on me that withdrawals involving more dividends in taxable accounts result in greater taxes (while dividends are at 15%) than equal withdrawals more highly tilted toward CGs. It is obvious once you think about it.

I think there's a benefit to a tax-efficient asset allocation, and I think there's also a benefit to the fiscal discipline enforced on a corporation (and its reputation) by having to pay dividends. Dividends also proffer a level of honesty in corporate accounting that's all too easily circumvented by growth stocks.

I think both have a place in a diversified portfolio, and I sure hope that portfolio's not overweighted in Vanguard's Growth fund.