4% SWR - revisited

[obgyn65]

I often agree with your posts, Ha, but this time I have to disagree with your statement below. I find some of the retirement calculators very helpful - and I am also convinced they are also useful to many people who, like me, are not financially savvy. Maybe you worked in finance in the past, hence your view on this, which I respect.

Quote:

Originally Posted by haha (...) I think all these "studies" and calculators are not very helpful.

[MichaelB]

Quote:

Originally Posted by obgyn65 I often agree with your posts, Ha, but this time I have to disagree with your statement below. I find some of the retirement calculators very helpful - and I am also convinced they are also useful to many people who, like me, are not financially savvy. Maybe you worked in finance in the past, hence your view on this, which I respect.

Online calculators can be dangerous to people not financially savvy because they may not know how to interpret the results and lead to a sense of security that is not well founded. All tools, financial and otherwise, require knowledgeable users.

[obgyn65]

I guess it depends on the type of calculator we are talking about. For example, I would agree that very basic calculators like this one Retirement Planning and Savings Plans - Retirement Calculator - Money Magazine - CNNMoney may be misleading since they are far too basic.

However, I find this calculator quite detailed and useful Merrill Edge| See Where You Stand

I agree all tools require some previous financial knowledge.

Quote:

Originally Posted by MichaelB Online calculators can be dangerous to people not financially savvy because they may not know how to interpret the results and lead to a sense of security that is not well founded. All tools, financial and otherwise, require knowledgeable users.

[chinaco]

Like the old days when navigating... constant rechecking and adjustments are needed.

If one is careful and diligent.. they might be lucky and only wind up 50 or a 100 miles off.

[nun]

This is the early retirement thread so people on here should be planning to fund the initial work free years without SS. Conventional planners will be using a 4% SWR which amounts to a very conservative approach as when SS starts the WR will drop lower that 4%.

I've always planned to have my savings actually grow in retirement, using a 4% rate of return and a 2% initial WR as half of my expenses are covered by rental income. Once SS starts I won't need to withdraw anything from savings.

[Surfdaddy]

Quote:

Originally Posted by Nords The third article of Bernstein's five-article series: http://www.early-retirement.org/foru...les-32828.html

Thanks Nords for finding that! It's the one I remembered...

[Chuckanut]

Quote:

Originally Posted by nun This is the early retirement thread so people on here should be planning to fund the initial work free years without SS. Conventional planners will be using a 4% SWR which amounts to a very conservative approach as when SS starts the WR will drop lower that 4%. I've always planned to have my savings actually grow in retirement, using a 4% rate of return and a 2% initial WR as half of my expenses are covered by rental income. Once SS starts I won't need to withdraw anything from savings.

Interesting. I will take 4% for about four years. That money is already sitting in MM funds and insured CD's. After I get full SS at 66, I can reduce the withdrawal to 2%, assuming my investments earned enough to cover the earlier 4% withdrawal rate. Even if the investments earn 0% before SS kicks in, I can still reduce my withdrawal rate to 3%.

[Nords]

Followup:
After reading this thread, the other thread (http://www.early-retirement.org/foru...ees-58220.html), and Prof Pfau's study, I did some more digging around. I also ran across his blog, which has more interesting thoughts about retirement planning: Pensions, Retirement Planning, and Economics Blog

I blogged about Pfau's "maximum utility" of the ER portfolio withdrawal rate here:
Is the 4% withdrawal rate really safe? | Military Retirement & Financial Independence

... and received the following:

Quote:

From: Wade <e-mail address in Japan> Date: Thu, Nov 17, 2011 at 8:36 PM Subject: [Military Retirement & Financial Independence] Contact me To: Nords Comment: I enjoyed your article about the 4% rule, with my now becoming increasingly non-intuitive message that the 4% rule might fail but maybe that is okay afterall. You got it. Thanks! Your life sounds really awesome. I love Hawaii! Best wishes, Wade Pfau Time: Thursday November 17, 2011 at 8:36 pm

I'm going to have to find his retirement-planning spreadsheet and dig into that, too.

And then I'm going to write it all up into more blog posts!

At this point I could add several chapters and a couple appendices to the 2nd edition of the book...

[donheff]

Quote:

Originally Posted by Nords I blogged about Pfau's "maximum utility" of the ER portfolio withdrawal rate here: Is the 4% withdrawal rate really safe? | Military Retirement & Financial Independence

I agree with Pfau - well written and organized post.

Edit: I have Pfau's blog in my RSS feed and noticed that he is complementing you there:

Quote:

Just this week, Doug Nordman wrote what I thought was an excellent article combining these themes about how the 4% rule may fail but also how that may not always be so terrible at his Military Retirement and Financial Independence blog.

Looks like he may tap your post for his next article. Mutual stroking is always good motivation to keep working on the next edition.

[Nords]

Quote:

Originally Posted by donheff Looks like he may tap your post for his next article. Mutual stroking is always good motivation to keep working on the next edition.

The real challenge with the second edition is selling enough of the first edition...

[ratto]

According to this WSJ article (How to Tap Your Retirement Accounts - WSJ.com):

"If future years see a continuation of the slow economic growth and deep market troughs of the recent past, the largest initial withdrawal a retiree could take from a balanced portfolio of stocks and bonds without running out of money for 35 years would be 2.52%, according to researchers at Ball State University in Muncie, Ind."

"Mr. MacDonald's accounts are structured so that his withdrawals go into a three-year reserve fund, so "it gives us three years' breathing time for the market to go back up," he says. Now that he and his wife are in their late 60s, "the possibility that [our savings] won't make 30 years doesn't bother me nearly as much." "

A combination of lower SWR (even bleaker 1.8%) and 3-year reserve fund might be a more pessimistic but safer bet.

[REWahoo]

Quote:

Originally Posted by ratto A combination of lower SWR (even bleaker 1.8%) and 3-year reserve fund might be a more pessimistic but safer bet.

I don't think this lower SWR will be a big issue for all the "I have to keep working until I'm 80" types.

[clifp]

Quote:

Originally Posted by REWahoo I don't think this lower SWR will be a big issue for all the "I have to keep working until I'm 80" types.

I guess it is symptom of our current national mood, but I really don't get the "I'll have to keep working until I am dead attitude. "

It is worth remembering that hundreds of millions of American have retired sometime in their 60s over the last 50 years and for the most part had comfortable retirements. The vast majority with less resources than most of us have, and the vast vast majority with less calculations.

From one of the trustee of the Social Security fund discussing this years COLA increase on the PBS Newshour.

Quote:

ROBERT REISCHAUER: Well about two-thirds of recipient units rely on Social Security for over half of their income. And about 35 percent rely on it for 90 percent or more for their income, so a very significant fraction of elderly in America are critically dependent on their Social Security checks.

As Nord's blog points out as long as you got a bare bones income stream (and for many people SS fits that bill) it isn't the worse thing if you can't sustain your withdrawal rate, people do adjust.

We understandably spend a lot of time discussing portfolio income but just isn't that a big a factor for many retirees.

Quote:

ROBERT REISCHAUER: Well, the interesting fact is that family income among families with 65-year-old household heads has gone up a little under 4 percent, 3.9 percent since 2007, when we had the peak of economic activity. On the other hand, the median income -- this is all adjusted for inflation -- the median income of under 65-year-old families has gone down by about 6 percent. And, of course, the answer to that is rather simple. It's that the elderly are less affected by job loss. MARGARET WARNER: Even though, say, their retirement accounts or savings accounts aren't kicking up as much income? ROBERT REISCHAUER: They aren't. But they don't receive a huge amount of their income from assets, only about 11 percent overall. Many have pensions from government or private sector kicking in, and those haven't been reduced significantly.

11% of income from investments is pretty small, and as the 401K generation retires I expect to see this number raise but I doubt it will be more than double in the next decade.

I think 2% numbers that are being talked about are much to conservative because the often forget about the social security as a back stop to financial troubles. It is possible that I'll manage to blow through all my money (especially if I keep giving money to start ups) in the next 15 year at which point all I'll have left is Social Security. Still at age 66 and 10 months my SS check is $1900/month which is pretty respectable considering I only contributed to the system for 20 years. I am sure most board members have at least this much coming from SS. Assuming I still owned my house could I survive on $1900? it would be tough in Hawaii but doable with quite a few cut backs. More likely is to have SS represent 1/2 my income which would be a comfortable retirement. At age 67 I don't need plan for a 30 year retirement, 20 or 25 is sufficient and a $350-400,000 portfolio has a reasonable chance of success.

At some point you have to allow a bit of optimism. If you are planning on living to 100, not collecting social security, while assuming 0% interest rates and a flat market, than yes 2% maybe the right withdrawal rate. But in this scenario I think you really need to love your job.

[REWahoo]

Quote:

Originally Posted by clifp It is worth remembering that hundreds of millions of American have retired sometime in their 60s over the last 50 years and for the most part had comfortable retirements. The vast majority with less resources than most of us have, and the vast vast majority all but three with less calculations.

FIFY...

[W2R]

Quote:

as long as you got a bare bones income stream (and for many people SS fits that bill) it isn't the worse thing if you can't sustain your withdrawal rate, people do adjust. We understandably spend a lot of time discussing portfolio income but just isn't that a big a factor for many retirees.

That's true. I think probably the average U.S. retiree has very meager income, often SS only. Any SS fixes that affect retirees, such as change in CPI index, could be devastating for these folks. But SWR probably doesn't matter much to them.