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

[samclem]

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 used of a phrase like "safe withdrawal rate" when it depends on the past performance of volatile investments.

I don't follow your reasoning on this. Surewhitey's plan isn't affected by market volatility at all--it depends only on the companies continuing to pay their dividends at approximately the same $/share as they pay now (or more). Equity prices could drop 50% and it wouldn't affect the dividend payments one bit.

But dividends do depend on continued general economic health. If the economy as a whole takes a dive and companies don't make profits, then there won't be dividends (for long). But if the economy is in the tank, then the same situation will affect rental real estate, corporate bonds, and lots of other things (including some things that insurance/annuity companies invest in. If their investments lose money for a long time, they won't be paying out the promised returns, and the "reinsurance" they use wont work well for a general calamity affecting many companies).

 

[nun]

I don't follow your reasoning on this. Surewhitey's plan isn't affected by market volatility at all--it depends only on the companies continuing to pay their dividends at approximately the same $/share as they pay now (or more). Equity prices could drop 50% and it wouldn't affect the dividend payments one bit.

Granted, I could have been more careful in describing the potential for falling dividends.

 

[Surewhitey]

If the drop happens, I'll cash out some cds for stock...

 

[Midpack]

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.

No need to take issue if you understand the origins and meaning of SWR.

http://www.early-retirement.org/forums/f28/what-does-swr-really-mean-and-not-66729.html#post1321132

 

[mickeyd]

4% SWR is a great place to start if you have no clue as to where you are going, like age in bonds. Most of us that post here know the inherent dangers of blindly following a general rule and are smart enough to make common sense adjustments as needed.

 

[Original Wally]

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.

My situation and stategy exactly.

My WD is based on a 6% portfolio over time (Inflation 3%). Too high? Perhaps. The thing is, my projections are just that - PROJECTIONS. They are absolutely subject to change. I will not blindly take $50,000 because my spreadsheet sez to - it will all be moderated by actual results. A bad investment year means tighten the belt. A great year means we can RETURN to the schedule - not go hog wild. We are 3 1/2 years downstream and doing just fine. Blindly following a plan is not the most brilliant strategy - kind of like the stories we heard when GPS units first came out" "Turn Here" caused some folks to turn right into a river. D'Oh. You have to keep your eyes open and your head screwed on straight.

Perhaps i will lower my 6% return in time. Perhaps not. If it is too LOW I will probably just leave it as is and recognize that we are building a little mad money....

your mileage can and will vary.


PS - my WD rate for this year is about 2%. I built a spreadsheet based on an inflow of cash that rises at 2.5% a year, inflation is projected at 3% (Yes, that is a disconnect for now) and a portfolio return of 6%. Due to the 2.5% income rise each year, eventually the draw exceeds the income and the portfolio balance declines. It is projected to reach zero in my 90th year of age. At that time i would suffer a decline in income of about 25%. My pension and Social Security will still provide 75% of my income. So it is not a disaster. We also have LTC policies (CalPERS) and zero debt. If the sky falls in, there are going to be many many many folks in the same boat. I plan to live well, sleep fine and enjoy the years that God gives me.

 

[haha]

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

There are many straightforward sensible ideas which essentially go nowhere on this board.

Regarding SS at 70, I read endless complex demonstrations why other ages are better. But how about this? Will you own any long maturity fixed income? It has been demonstrated that for income, SPIAs dominate long term bonds. And postponing SS dominates SPIAs. A>B and B>C implies A>C. This does not address those situations that I do not understand involving government and foreign pensions.

Case closed.

Ha

 

[martyb]

I will begin retirement with a 4% WD rate, and will probably stay close to that for about the first 4 years, until a 2nd pension kicks in, then most likely reduce to a lesser withdrawal amount. Would it be a bad idea after the first 4 years to re-establish a new baseline SWR of say...3% & then start all over again? This assumes I would want to do the baseline thing in one year, then for all subsequent years, increase by the inflation number of the previous year? Just wondering....

 

[nun]

No need to take issue if you understand the origins and meaning of SWR.

http://www.early-retirement.org/forums/f28/what-does-swr-really-mean-and-not-66729.html#post1321132

I take issue with the "safe" part and the use of historical data. The need for adjustments with actual portfolio performance is not well communicated in the SWR acronym and many people don't get past that.

 

[Midpack]

I take issue with the "safe" part and the use of historical data. The need for adjustments with actual portfolio performance is not well communicated in the SWR acronym and many people don't get past that.

Indeed, but that's not the fault of the originators of SWR methodology. Would it have been better had they not published their findings at all?

 

[nun]

Indeed, but that's not the fault of the originators of SWR methodology. Would it have been better had they not published their findings at all?

My criticism isn't for people using Monte Carlo methods to see how a portfolio would have done over the years, it's the reporting of those results without equal emphasis on the caveats of the research. That sin is committed by many journalists in popular articles and also in many articles on financial websites. I have no idea how FAs explain "SWR" to their clients, but I imagine there is some confusion there too.

 

[ziggy29]

My criticism isn't for people using Monte Carlo methods to see how a portfolio would have done over the years, it's the reporting of those results without equal emphasis on the caveats of the research. That sin is committed by many journalists in popular articles and also in many articles on financial websites. I have no idea how FAs explain "SWR" to their clients, but I imagine there is some confusion there too.

Maybe, but the problem is there is **** no**** bulletproof SWR using future results. For all we know the market will tank 99% next year. Or we have a 30-40 year run of weak investment performance we've never seen before in US equities, combined with a sustained period of high inflation. If people don't see the difference between saying something is safe "if the future is like the past" (which is what Monte Carlo tries to do, more or less) and "something is safe, period", that's a problem with their understanding of what the tools are supposed to do, not the tool itself.

About all the "tool" can do -- or financial planners that use them -- is make sure the investors are adequately educated about the *context* of SWR (i.e. it refers to comparisons to past history). Then people who feel comfortable taking the risk that the future will resemble the past can choose to take close to 4%, or those who believe in the pessimistic "it's different this time" paradigm can choose to take a lot less.

 

[Huston55]

I take issue with the "safe" part and the use of historical data. The need for adjustments with actual portfolio performance is not well communicated in the SWR acronym and many people don't get past that.

I understand your "issue" but, don't share it. And, with all due respect, I also don't find it consistent with how most of us live our lives.

I'm an engineer, like many on this forum. Virtually everything we encounter in our lives today is designed by engineers using some "laws" (physics) but, lots more judgment based on empirical data. Mix that together with a "safety factor" (there's one or more in every design), and you get the products you use every day for almost everything in your life.

So, I find it inconsistent (and frankly not practical) to insist on absolute certainty when it comes to SWR.

I think the reasonable and practical approach is to understand the basis, be able to apply it to your situation (use your own safety factors), and then act accordingly, as opposed to carrying on that the SWR is not perfect.

As I tell my scientist friends: "Perfect is the enemy of good enough."

 

[RISP]

For me a SWR is one that is never greater than the difference between the return of the portfolio and inflation.

nun, what is your SWR in a year when your portfolio did not show any positive return, and there was inflation? Is it negative?

 

[nun]

nun, what is your SWR in a year when your portfolio did not show any positive return, and there was inflation? Is it negative?

Well for me it would be zero as I have pension, SS and rent that will cover my expenses. Most people would spend cash, but the WR from the equities/bond portion would be zero. It might be a touch semantic as money would still be coming out of the overall portfolio.

 

[ziggy29]

Well for me it would be zero as I have pension, SS and rent that will cover my expenses. Most people would spend cash, but the WR from the equities/bond portion would be zero. It might be a touch semantic as money would still be coming out of the overall portfolio.

See, that changes things for you. You can afford to be extremely conservative in your approach to tapping your portfolio. An increasing number of younger folks looking to retire early do not have the good fortune of a large pension. They need to consider taking larger bites out each year.

 

[RISP]

Well for me it would be zero as I have pension, SS and rent that will cover my expenses. Most people would spend cash, but the WR from the equities/bond portion would be zero. It might be a touch semantic as money would still be coming out of the overall portfolio.

I agree with your last sentence.
Of course you are free to define "SWR" however you want. As you surely know, the generally accepted definition is something along the lines of "The quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure" [quoted from Safe Withdrawal Rates - Bogleheads].

 

[ERD50]

Well for me it would be zero as I have pension, SS and rent that will cover my expenses. Most people would spend cash, but the WR from the equities/bond portion would be zero. It might be a touch semantic as money would still be coming out of the overall portfolio.

It's not semantics at all. Cash is part of the portfolio.

Now, if you spend only pension/SS or other income, your portfolio WD is zero, but not if you spend cash. A WD is a WD, whether from equities or fixed (maybe as part of re balancing), from dividends, interest, or cash.

-ERD50

 

[samclem]

See, that changes things for you. You can afford to be extremely conservative in your approach to tapping your portfolio.

It changes the way things appear for the retiree, I'm not sure it changes the situation much. If the economy is in the tank and bonds, equities, and tax receipts aren't keeping up with inflation, then the entities providing that pension, SS, etc will be eating into their own reserves. If it goes on long enough, something has to give, just like if it were in an individual's own account. The retiree could pretend that everything is fine and he/she won't be irritated by seeing those pesky declining account balances, but pulling down the windowshades won't stop the tornado from hitting your house.
There are some advantages to the pooled risk and institutional backing of DBs and pensions, and there are some advantages to having control over the "pot" and the rate at which it is drawn down when things aren't going well. IMO, having a mix (diversification . . . as we preach in other areas) provides some flexibility and complementary characteristics that are potentially very important.

 

[ziggy29]

There are some advantages to the pooled risk and institutional backing of DBs and pensions, and there are some advantages to having control over the "pot" and the rate at which it is drawn down when things aren't going well. IMO, having a mix (diversification . . . as we preach in other areas) provides some flexibility and complementary characteristics that are potentially very important.

Agreed, which is why I have long advocated for a FERS-style retirement as a good model for the rest of us in terms of the "three legged stool" of providing for retirement. The only problem is that we'd have to get past the problem with DB pension plans being nearly worthless when it's hard to keep a job for more than 10 years...

 

[samclem]

The only problem is that we'd have to get past the problem with DB pension plans being nearly worthless when it's hard to keep a job for more than 10 years...

That's one reason I wonder if a resurgence in DB plan offerings would be such a wonderful thing. There's lots of talk of how great things used to be with the wonderful DB plans, but they never covered most people and the US economy has changed. Many workers will want to stick with DC plans for the right reasons ("If I get canned or hate this place I'll take the dough and scoot") and the "wrong" reasons ("Woo-hoo! Free matching funds! When I leave this place in a year I can spend that money like I did the last time!"). And any "efficiencies" employers get by using DB plans likely come from money saved when workers leave/get laid off/downsized before getting fully vested. That doesn't seem like such a good thing to me.

 

[nun]

See, that changes things for you. You can afford to be extremely conservative in your approach to tapping your portfolio. An increasing number of younger folks looking to retire early do not have the good fortune of a large pension. They need to consider taking larger bites out each year.

I'm lucky to have a pension, but it will only be $5k a year and there's no COLA. My ability to fund retirement post 66 from none portfolio sources will come from having the small pension, rental income and two SS checks. I will have to use my portfolio until 66 and my WR should be 2.5%. My goal is to generate that from dividends, interest and gains and reinvest any excess. If my returns in any year are negative I can increase my rental income, go back to work, economize or spend cash from the portfolio. I will try to minimize the spending from the portfolio in down years.

I really wish that Prudent Withdrawal Rate was used rather than Safe Withdrawal Rate as I think many retirees believe that "4% SWR" blindly applied to the portfolio will see them ok, if they have ever even heard of SWR.

 

[Midpack]

I really wish that Prudent Withdrawal Rate was used rather than Safe Withdrawal Rate as I think many retirees believe that "4% SWR" blindly applied to the portfolio will see them ok, if they have ever even heard of SWR.

Semantics, but you could write William Bengen, the Trinity Study team and the many others that coined the term to define:

"The quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure; failure being defined as a 95% probability of depletion to zero at any time within the specified period. Initial methods utilized historical data to statically determine what would have been safe given the actual results that past portfolios would have generated with the variables given.

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."

If they had chosen to call it PWR, I have no doubt we'd have posts criticizing the choice of the word "prudent"...

 

[nun]

Semantics, but you could write William Bengen, the Trinity Study team and the many others that coined the term

..........

If they had chosen to call it PWR, I have no doubt we'd have posts criticizing the choice of the word "prudent"...

Not semantics as "Prudent" is very different from "Safe". As long as the Trinity et al Safe WR is used for historical portfolios I'm ok with it, but when applying it to the future it seems a bit ridiculous to me as there's an air of certainly in using a term like Safe and one thing I know for sure is that I don't know what will happen in the future. Yes the caveats are there and we all know them, but the headline use of "SWR" often omits them and leads people to an incomplete understanding. Prudent gets across the uncertainty of future returns and allows for the possibility of failure without needing the caveats, Safe is just too definite an adjective for such an uncertain subject as future retirement income.

 

[haha]

It's not semantics at all. Cash is part of the portfolio.

-ERD50

Apparently, he is speaking of some other type of cash that has nothing to do with portfolio. At least on Tuesdays.

Ha