4% Withdrawal - Golden No More (New York Times)

[SumDay]

I know this has been discussed ad nauseum on here, but we always have new folk coming through, so I thought I'd post this:

http://www.nytimes.com/2013/05/15/business/retirementspecial/the-4-rule-for-retirement-withdrawals-may-be-outdated.html

That percentage was calculated at a time when portfolios were earning about 8 percent. Not so anymore. Today portfolios generally earn much less, about 3.5 percent to 4 percent, and stocks are high-priced, which is linked historically to below-average future performance. Many financial advisers are rejecting the 4 percent rule as out of touch with present realities.

 

[timwalsh300]

I don't understand the quote about a portfolio earning 8% back then, and earning only 4% today. When the Trinity study was published in 1988, a 60/40 portfolio had a 30-year trailing real return of 3.73% according to Vanguard. In the 30 years ending in 2011 the same portfolio had a real return of 7.22%.

Whenever this comes up, someone points out that 4% withdrawal was the absolute worst case during a long period of stagnant stock prices coupled with skyrocketing inflation. I still haven't seen a good explanation as to why the future looks substantially worse than that.

Tim

 

[ziggy29]

While it's entirely possible that "this time it's different", all the piling on against the 4% theory smells like the "Death of Equities." And if one believes in the power of being a contrarian, this might be a good sign for it.

 

[W2R]

The last half of the article seems to be pushing annuities, to some extent.

Personally, I have been perfectly happy living on 2% because part of that happiness is the bliss of additional security due to overkill. We are each different and that's just the way my psyche is put together.

If 2% turns out not to be overkill, then I will still be doing better than I would have at 4%. I might not be quite as blissful but my cupboards will not be bare.

 

[ziggy29]

The last half of the article seems to be pushing annuities, to some extent.

Yep -- let's buy an income stream while the price of income streams has never been higher! "Buy high" works really well in investing....

 

[W2R]

Yep -- let's buy an income stream while the price of income streams has never been higher! "Buy high" works really well in investing....

Exactly! I'm sure not standing in line for an annuity right now, anyway. But from their point of view, they need to increase sales somehow.

 

[gardenfun]

this article is part of a special Retirement section in the Times today. Some interesting articles about lifestyle: going for an advanced degree, adopting kids (yikes!), cheap travel, etc.

 

[urn2bfree]

The problem is not low returns of equities..it is the historic lows in fixed income vehicles now. 40% in fixed now instead of supplying ballast to steady the portfolio is producing negative returns and pulling portfolios down towards failure.
I am not saying I buy this gloom and doom scenario- but bonds are at historic lows. The 4% rule while back tested on the worst case scenario we have yet seen is not tested against the scenario of low yields we ARE seeing right now.
Of course the 4% rule is too rigid anyway with it's blind withdrawl of ever increasing amounts regardless of needs or returns...no sane retiree would do that. Strategies which alter withdrawls according to some basic rules during booms and bust years allow for even higher peak withdrawls without failure, so 4% as a starting point is still probably ok.

 

[Packman]

I also wonder how they get that "stocks are high priced". Last I read, P/E's are about average over the history of the market. And the rule of averages says that they would be high priced half of the time, and low priced the other half of the time.

 

[ejman]

The problem is not low returns of equities..it is the historic lows in fixed income vehicles now. 40% in fixed now instead of supplying ballast to steady the portfolio is producing negative returns and pulling portfolios down towards failure.
I am not saying I buy this gloom and doom scenario- but bonds are at historic lows. The 4% rule while back tested on the worst case scenario we have yet seen is not tested against the scenario of low yields we ARE seeing right now.
Of course the 4% rule is too rigid anyway with it's blind withdrawl of ever increasing amounts regardless of needs or returns...no sane retiree would do that. Strategies which alter withdrawls according to some basic rules during booms and bust years allow for even higher peak withdrawls without failure, so 4% as a starting point is still probably ok.

It seems to me that interest rates are roughly in the same ballpark as the 1950's which was a very good time for the 4% rule. There was a huge climb in rates from that low point to the high in the early 1980's. Since I lived thru that period I can assure you that the world did not end.

 

[clifp]

this article is part of a special Retirement section in the Times today. Some interesting articles about lifestyle: going for an advanced degree, adopting kids (yikes!), cheap travel, etc.

I found the 4% rule article to be pretty shallow. However there were several articles that were interesting, the one about how other countries handle retirement saving was very good. Also there was an article with some additional details about the proposal about limited the size of retirement saving. I am sure the President proposal is dead so many not important.
Finally a decent article on risk.

Anyway worth checking out the NY Times retirement section special.

 

[Huston55]

I also wonder how they get that "stocks are high priced". Last I read, P/E's are about average over the history of the market. And the rule of averages says that they would be high priced half of the time, and low priced the other half of the time.

Actually, the S&P 500 PE is high now: 24 vs ~16 (mean & median) historically.

Shiller PE Ratio - multpl

It's also currently in the neighborhood it was in before almost every sustained drop during the past 100 yrs. I'm not arguing against equities; I'm 60/35/5 and plan to stay close to that for the foreseeable future. But, regarding the Schiller PE ratio withdrawal rate rule, we are in the high PE/lower SWR territory right now, and I think that should inform our SWRs.

Here's a good reference article with informative data plots regarding PE10 and SWR.
Another Look at Safe Withdrawal Rates and PE Ratios

 

[foxfirev5]

I have no intension of using any kind of SWR % to determine my withdrawals from tax deferred plans. Rather than that I will maximize the withdrawals to fill out at least the 15% tax bracket. My plan is to provide flexibility and minimize taxes.
This is due to the fact that I plowed every available dollar into retirement funds while having a much more modest amount in taxable. Wish I had done it a little different but I'm making the adjustment over the next two years.

 

[Huston55]

Yep, not a very deep article.

Michael Finke, a professor in the department of personal financial planning at Texas Tech University in Lubbock, is a co-author of a paper critical of the rule, “The 4 Percent Rule Is Not Safe in a Low-Yield World.” He says Mr. Bengen’s rule doesn’t acknowledge the new economic reality of prolonged low returns. “There haven’t been any historical periods that look like today,” Mr. Finke said. “We’ve never had an extended period where rates of returns on bonds have been so low and valuation on stocks so high.”

I'm not sure this is true. A quick search shows the mid 1960s as just such a time (low Moody's AAA Corp Bond returns & Schiller PE10 at 20-25). I think the point is that this is the time (1969 being the worst year IIRC) when it was the worst time to retire SWR-wise. In other words, this is the very condition that established the limit of the "4%" ( actually 4.5%) rule.

 

[MichaelB]

Yep, not a very deep article.

Michael Finke, a professor in the department of personal financial planning at Texas Tech University in Lubbock, is a co-author of a paper critical of the rule, “The 4 Percent Rule Is Not Safe in a Low-Yield World.” He says Mr. Bengen’s rule doesn’t acknowledge the new economic reality of prolonged low returns. “There haven’t been any historical periods that look like today,” Mr. Finke said. “We’ve never had an extended period where rates of returns on bonds have been so low and valuation on stocks so high.”

I'm not sure this is true. A quick search shows the mid 1960s as just such a time (low Moody's AAA Corp Bond returns & Schiller PE10 at 20-25). I think the point is that this is the time (1969 being the worst year IIRC) when it was the worst time to retire SWR-wise. In other words, this is the very condition that established the limit of the "4%" ( actually 4.5%) rule.

I'm quite sure it isn't correct (the bolded part) because I spent a couple of hours yesterday looking at Shiller data from 1900 to 2012. Many decades of negative real interest rates, and at least twice, S&P PE much higher than current levels.

Higher valuations imply lower future returns. That does not mean they are too low to sustain 30 years of withdrawals, which is what these articles imply. The risk to portfolio sustainability is, and continues to be, high volatility.

 

[nun]

I'm quite sure it isn't correct, because I spent a couple of hours yesterday looking at Shiller data from 1900 to 2012. Many decades of negative real interest rates, and at least twice, S&P PE much higher than current levels.

Higher valuations imply lower future returns. That does not mean they are too low to sustain 30 years of withdrawals, which is what these articles imply. The risk to portfolio sustainability is, and continues to be, high volatility.

All the models are obviously based on historical data, so people need to be wary of projecting the results into the future. Who's to know what interest rates or P/E ratios will be 10, 20 or 30 years in the future so how can any retiree know what a SWR will be. Volatility and uncertainty were the old reasons for pooling retirement income requirements in DB plans and annuities and I believe that people are realizing that some form of retirement income insurance should be in their portfolio. Combine that with a withdrawal rate that equals the return on your short term bonds or CDs and you'll probably be ok.

 

[samclem]

Combine that with a withdrawal rate that equals the return on your short term bonds or CDs and you'll probably be ok.

A 1.5% withdrawal rate? Or should the WR equal real return on these assets ( 0%)? I guess it's back to cheese sandwiches and water for dessert.

That's a bit too conservative for me. The equities in a standard portfolio mix provide dividend return and growth in share price that are important in environments such as the one we are now in.

 

[Independent]

Retirees wanting more certainty in the future might consider investing in a deferred income annuity, Mr. Finke said. Deferred income annuities pay a yearly income that kicks in later in life — usually starting about age 80 or 85.

Or .... they could defer SS payments. Funny how rarely that option gets mentioned.

 

[nun]

A 1.5% withdrawal rate? Or should the WR equal real return on these assets ( 0%)? I guess it's back to cheese sandwiches and water for dessert.

That's a bit too conservative for me. The equities in a standard portfolio mix provide dividend return and growth in share price that are important in environments such as the one we are now in.

2% or 1% WR would be difficult for most retirees, but if you don't know how the equity or bond markets are going to perform in the future I think those are the numbers you have to shoot for to be safe. If you have dividends and capital gains from equities you might be able to withdraw more, but you can't be certain of that. The usual SWRs are based on too many assumptions about the future for me to place any trust in them for planning my retirement.

 

[photoguy]

When I think about SWR, I see a floor of around 2 to 2.5 percent and it doesn't make much sense to go lower than that. At 2%, you can have a guaranteed 100% success rate for 50 years, safe from everything except collapse of the US government (just invest in inflation protected US bonds).

 

[Midpack]

Of course the 4% rule is too rigid anyway with it's blind withdrawl of ever increasing amounts regardless of needs or returns...no sane retiree would do that. Strategies which alter withdrawls according to some basic rules during booms and bust years allow for even higher peak withdrawls without failure, so 4% as a starting point is still probably ok.

No sane person would, but none of the well known authors/articles recommend blind withdrawals either, in fact they encourage modulating withdrawals over the course of a long retirement as real returns unfold.

And of course there's always % of remaining portfolio withdrawal, which allows one to better control end of plan portfolio residual (for those who don't want to leave a large estate like us) with a much lower chance of running out entirely (aka failure) - though it requires more spending of smoothing during retirement to avoid radical changes from one year to the next. % of remaining portofolio, at least in the first 1/2 or so is making more and more sense to me thanks to other ER.org member experiences I've read over past years.

 

[Huston55]

No sane person would, but none of the well known authors/articles recommend blind withdrawals either, in fact they encourage modulating withdrawals over the course of a long retirement as real returns unfold.

And of course there's always % of remaining portfolio withdrawal, which allows one to better control end of plan portfolio residual (for those who don't want to leave a large estate like us) with a much lower chance of running out entirely (aka failure) - though it requires more spending of smoothing during retirement to avoid radical changes from one year to the next. % of remaining portofolio, at least in the first 1/2 or so is making more and more sense to me thanks to other ER.org member experiences I've read over past years.

+1

I just read the Guyton article in the thread you started on 2/20/13 and find it very interesting. I'm attracted by: (1) the high probabilities of portfolio success over 40 yrs and, (2) the increased portfolio NPV (max utility of portfolio). I'm also encouraged that their analysis showed only a couple of instances, in 40 yrs, where income reductions would be required, and those are 10% (absolutely manageable).

I plan to study this more for possible incorporation into our plans.

 

[obgyn65]

I would agree with this. When I started to read this website a couple of years ago, my predicted SWR was 4%. Now it is down to 3-3.5%. I guess my SWR may change again slightly in the next couple of years.

so 4% as a starting point is still probably ok.

 

[Surewhitey]

We just look for dividend payers of 4%+ to take care of us... No bonds here. Cds for emergency fund of 2 years for the bad days coming.

 

[nun]

We just look for dividend payers of 4%+ to take care of us... No bonds here. Cds for emergency fund of 2 years for the bad days coming.

That might well work, but your income is going to be subject to the volatility of the market and if there's a big fall in equities you'll have to hope your CDs can provide your income until the market recovers.

I have a fundamental issue with the use of a phrase like "safe withdrawal rate" when it refers to a particular percentage and depends on the past performance of volatile investments. For me a SWR is one that is never greater than the difference between the return of the portfolio and inflation.