A more optimistic look at SWRs

[unclemick]

Who suggested otherwise? So do all the credible SWR studies, for example:

Ah yes unclemick's unified general theory of chickenheartedness. Math - don do no stinking math! I check the belly button quiver and vary percent of portfolio accordingly.

Of course that falls in the range of 2-6% of prior years ending portfolio value. Also now old enough to play the cheap SOB card - all expenses covered by non-cola pension and early SS if the throttle is really pulled back.

heh heh heh - trained to party by living 30 yrs in New Orleans. Always trying to land between frugle and you can't take it with you. 19 years and counting.

 

[donheff]

Actually I started in my 40s.......But, you are missing the point....The percentage may be increasing, but the amounts may not be.

Not missing the point -- I said "if everything works out well..." In that case, the amounts will be way up.

 

[Midpack]

Not FireCalc. As well as most of the other SWR Calculators.

However, I agree with you that it is foolish to NOT have a Variable Withdrawal Plan, although many have suggested otherwise.

"If you tell FIRECalc how much you have, and how much you'll be taking out each year, FIRECalc will show you how such a combination would have fared for the duration of your retirement, in every year for which we have market data." They repeatedly state their results are based on past history only, that no one can predict the future and they don't try, and leave it to the user to decide what's safe.

Where does FIRECALC make any recommendation whatsoever regarding withdrawals? As for "most other SWR calculators", my post said "credible SWR studies."

 

[Cut-Throat]

"If you tell FIRECalc how much you have, and how much you'll be taking out each year, FIRECalc will show you how such a combination would have fared for the duration of your retirement, in every year for which we have market data." They repeatedly state their results are based on past history only, that no one can predict the future and they don't try, and leave it to the user to decide what's safe.

Where does FIRECALC make any recommendation whatsoever regarding withdrawals? As for "most other SWR calculators", my post said "credible SWR studies."

OK, you win.....Everyone out there now, that is credible is recommending a Variable Withdrawal Method and No one is recommending a Starting SWR that is inflation adjusted every year for 30 years. The last time I ran FireCalc you inputed an amount you wanted to withdraw and it Inflation adjusted it every year for the time period specified. I have not run it in 5 years, so maybe it's different.

I just agree with the Variable Withdrawals. I guess the 'New' SWR is Variable now.

 

[haha]

The rules on Firecalc and any of these other calculators that I have looked at (which I admit are quite few, as I think it is an invalid approach) very clearly state that the starting draw is adjusted every year for inflation, not for remaining balance.

But after some years of dicey market experiences, people like to make up their own rules, without consciously repudiating the original basis of the plan.

Constant inflation adjusted draw vs a variable remaining balance adjusted draw just trades a varying asset balance but a constant real withdrawal against a more stable asset balance with a varying annual draw.

There is no magic here, if you look at it clearly. I think if there is considerable cushion, most would opt for letting their income vary- but that has nothing to do with these calculators.

It is quite similar to the trade with varying durations in fixed income assets. Long duration, steadier income but more asset value fluctuation. Shorter duration, very unstable income but more stable balances.

Ha

 

[growing_older]

This concern describes us. We are hoping to pull the plug in our mid 30's. So we have to have a safe withdrawal rate adequate to get us through two 30 year periods (although the second thirty year period will likely see us getting some level of SS income).

Be careful about those assumptions. Retiring in your mid-30's puts you at risk of being under 40 quarters of SS earnings history, which would mean zero benefits. If you do manage to work enough quarters to qualify, you will still have many years of zeros when they figure PIA based on 35-years of work history, so expect a very low benefit amount.

 

[samclem]

The rules on Fireclac and any of these other calculators that I have looked at (which I admit are quite few, as I think it is an invalid approach) very clearly state that your starting draw is adjusted every year for inflation, not for remaining balance.

You might want to take another look at FIRECalc. For a few years now FIRECalc has offered the option to instead take a % of each year's remaining portfolio. The outputs are different (since you can never go totally broke by doing this, but your spending power can erode if you take too much). I agree that this is a much more realistic way of planning to do withdrawals.

 

[ERD50]

Also, I am a big proponent of Variable withdrawals in retirement. IOW - taking 4% of remaining portfolio with no inflation adjustment. This will protect you from Market downturns. In reality, this is what most retirees do anyway....I doubt that anyone here would take an inflation adjusted 4% into the teeth of a severe bear market. Would this mean that you might have to severely curtail your spending?....Yes....That is why I also maintain that your SWR initially should be twice of what you need, otherwise don't retire..

There has to be some flexibility in your budget to cut back if necessary. (e.g. Vacations, Entertainment, Dining out). I came up with a formula for having 'Enough' $$$ to retire. (The constant of '2' is there to cut expenses by 50%, if need be)...

No right or wrong, but I see things differently.

I'm not taking 4% now (DW is still earning some $), but I did not cut my spending when the market tanked in 2008. I really would have regretted it if I had. The market recovered, but I can't recover a year of fretting over this $ and that penny, no 'Vacations, Entertainment, Dining out', etc.

DW would have told me to go back to work to maintain our lifestyle (which isn't a lot of conspicuous consumption, but we do want to enjoy ourselves), and she'd be right, as she often is when it comes to the important stuff.

Rather than have my spending drop in half, I'd rather take a middle ground of something like 3% WR, and stick to it through the bumps. If there is a long term downward trend, I'll re-evaluate, but I really don't want to adjust my spending in response to the typical 2-3 year cycles we often see.


-ERD50

 

[haha]

You might want to take another look at FIRECalc. For a few years now FIRECalc has offered the option to instead take a % of each year's remaining portfolio. The outputs are different (since you can never go totally broke by doing this, but your spending power can erode if you take too much). I agree that this is a much more realistic way of planning to do withdrawals.

Thanks, I haven't used it recently. In any case, the principles are the same, and I believe accurately stated.

Ha

 

[ERD50]

The rules on Fireclac and any of these other calculators that I have looked at (which I admit are quite few, as I think it is an invalid approach) very clearly state that your starting draw is adjusted every year for inflation, not for remaining balance.

But after some years of dicey market experiences, people like to make up their own rules, without repudiating the original basis of the plan.

Constant inflation adjusted draw vs a variable remaining balance adjusted draw just trades a varying asset balance but a constant real withdrawal against a more stable asset balance with a varying annual draw.

Ha

In addition to what samclem posted, I guess I don't look at FIRECALC as promoting an inflation adjusted WR, I look at it as just 'if you do this, this is what you would have experienced historically'. Once you have that number, you can investigate more.

For me, the value of that is that it takes the historical interaction of inflation and returns into account. I think that's important.

Invalid? I'm curious why you say that. OTOH, I wouldn't try to make the case that they are valid, as we can't know that the future will resemble the past. But anything we do has to have some basis in something. Even if one says that if you spend a fixed % you never run out, that's true, but that fixed % might end up tiny. In retrospect, they may have wished their initial WR was lower?

I know you mention dividend paying stocks from time to time. I guess you are saying that if you only spend the dividends, you have a reasonable history of dividends keeping up with inflation, and the capital is your cushion? Sounds reasonable to me, though I'm not sure personally how to go about selecting those stocks. Many of the past 'Blue Chip' companies that were seen as paying dividends 'forever' are gone or shadows of their former selves. I dunno, it still seems like either method relies on some history, I have trouble seeing either as valid or invalid.

-ERD50

 

[haha]

In addition to what samclem posted, I guess I don't look at FIRECALC as promoting an inflation adjusted WR, I look at it as just 'if you do this, this is what you would have experienced historically'. Once you have that number, you can investigate more.

For me, the value of that is that it takes the historical interaction of inflation and returns into account. I think that's important.

Invalid? I'm curious why you say that. OTOH, I wouldn't try to make the case that they are valid, as we can't know that the future will resemble the past. But anything we do has to have some basis in something. Even if one says that if you spend a fixed % you never run out, that's true, but that fixed % might end up tiny. In retrospect, they may have wished their initial WR was lower?

I know you mention dividend paying stocks from time to time. I guess you are saying that if you only spend the dividends, you have a reasonable history of dividends keeping up with inflation, and the capital is your cushion? Sounds reasonable to me, though I'm not sure personally how to go about selecting those stocks. Many of the past 'Blue Chip' companies that were seen as paying dividends 'forever' are gone or shadows of their former selves. I dunno, it still seems like either method relies on some history, I have trouble seeing either as valid or invalid.

-ERD50

Good points.Trying to live on capital at a time of low interest rates is very difficult, no matter how you approach it.

I just happen to feel more comfortable, and I am more experienced, with choosing stocks, and planning to try an preserve the real value of the capital. I'll soon be celebrating my 30th year of self financed retirement, (other than 17 months of SS) the first 10 with children, and of course with a nice trimming from a divorce. Once an old horse knows a way to the barn, it's hard to get him to try an alternate one.

After all, this is the time honored approach of well off people, before the era of 401 -Ks, financial planners, and mass investing.

Ha

 

[Nords]

It is really nothing new. He just points out that the SWR literature is based on historical worst case scenarios, not historical averages. Thus, even if we face a low "new normal" for the coming decades there is no reason to assume we are on track for a new worst case scenario.
As I said, no new data but a more optimistic perspective than some of the 2-3% SWR proponents put forward.

I think it's worth noting that almost all SWR studies are still trying to figure out how to account for:
1. Social Security
2. Variable withdrawal systems like Bob Clyatt's 4%/95% system. Yeah, I know the 4% SWR system rises over time because of the inflation bump, but I'm referring to reducing withdrawals after a bad year.
3. Having a SPIA at the start of ER or adding one during ER. (In addition to SS.)
4. The anecdotal tendency for spending to decline with age. Of course this is complicated by late-in-life medical expenses-- or by starting to fly first class after age 70.

A rigid lockstep 4% SWR will fail once in a while, but the above factors give enough wiggle room to allow the portfolio to recover.

There have always been problems, and there always will be. Until we learn to see into the future, there will always be uncertainty. Is it any different now?

OMG, the more I read the more problems I see, and the more uncertain I am! Is this a problem too? I'm not sure! It must be getting worse!!

 

[ejman]

I think it's worth noting that almost all SWR studies are still trying to figure out how to account for:
1. Social Security
2. Variable withdrawal systems like Bob Clyatt's 4%/95% system. Yeah, I know the 4% SWR system rises over time because of the inflation bump, but I'm referring to reducing withdrawals after a bad year.
3. Having a SPIA at the start of ER or adding one during ER. (In addition to SS.)
4. The anecdotal tendency for spending to decline with age. Of course this is complicated by late-in-life medical expenses-- or by starting to fly first class after age 70.

A rigid lockstep 4% SWR will fail once in a while, but the above factors give enough wiggle room to allow the portfolio to recover.


OMG, the more I read the more problems I see, and the more uncertain I am! Is this a problem too? I'm not sure! It must be getting worse!!

In addition to the factors that you mentioned I can't imagine many Early Retirees continuing to spend that fixed amount blindly while their portfolio goes to zero. I know from personal experience that 2008-2009 while I didn't HAVE to reduce expenses I was a bit more careful and maybe subconsciously (or not) my expenses were a bit lower in those years. I would venture to say that most people that ER do so because they have a pretty good handle on their finances. We'll adjust to most situations if at all within the realm of possibility.

My bad I should have read your number 2 more carefully. Sorry.

 

[Onward]

Every era finds its own way to rephrase the most dangerous of all statements, "This time it's different."

Our era's version is "New Normal." And Bill Gross is our Howard Ruff.

 

[donheff]

The discussion almost seems to be over whether SWR calculators and studies are useless if they only address fixed, inflation adjusted withdrawals. But I don't think it much matters whether Firecalc does that or offers a % of remaining portfolio withdrawal calculation. What matters is that the approach is transparent so you can get useful information. To me the value of SWR studies and calculators is that they give you scenarios of what could happen in the future if you do X and/or what would have happened had you done X at various points in the past. It enables you to put a downturn in perspective. Sure, few would blindly follow an inflation adjusted fixed SWR in the face of a devastating downturn. But who would blindly spend a variable rate based on a fixed percentage of remaining portfolio? After a few years spending $80K how many of us would suddenly blow $120K after a 50% runnup? I know I put most of the extra $40K away in a rainy day fund so when the inevitable downturn arrives I can spend $70 or $75K or even the full $80K with inflation adjustment instead of $40K.

 

[MichaelB]

OMG, the more I read the more problems I see, and the more uncertain I am! Is this a problem too? I'm not sure! It must be getting worse!!

Probably.

The thread began as a discussion on future returns, uncertainty, and the recent popular view that 4% withdrawal was too optimistic. Calculators cannot address this. I think 4% over 30 years is achievable for most people, and if things take a turn for the worse, people will find a way to adjust.

 

[Danmar]

i ran Firecalc a few times a few years ago. Haven't since then. Do you think given all the uncertainties that we fixate too much on Firecalc? I think it is a good starting pount but I suspect most of us have moved in to more flexible, personal withdrawal plans?

 

[teejayevans]

Do y'all really take a fix amount every year? I plan on using it as a guideline, but imagine my wd will be 4.5% 1 year, maybe 7% the next because of a big purchase, 3% the next, etc
If I had to live on a rigid fix budget I don't think I would retire?
TJ

 

[donheff]

Do y'all really take a fix amount every year? I plan on using it as a guideline, but imagine my wd will be 4.5% 1 year, maybe 7% the next because of a big purchase, 3% the next, etc
If I had to live on a rigid fix budget I don't think I would retire?
TJ

I have been taking a fixed 3.5% but spending less than 3%. The excess goes into a fund (that is not including when calculating the following year's 3.5% withdrawal). That fund is earmarked for extra spending in a bad downturn if 3.5% of current portfolio is insufficient or in any year in which I want to splurge. As time goes by I plan to evaluate how things are going and adjust as needed. In case of a prolonged downturn that exhausts the "mad money" fund I am tracking what Guyton rules would say my spending should be based on my starting point. That could be a let down escape path if things get extremely bad. I don't treat any of this as gospel. As with most, I expect to roll with the punches.

Disclosure: I have a good pension to cover essentials so whatever approach I take involves a lot less stress than would be the case if I was relying primarily on a portfolio for expenses.

 

[REWahoo]

Do y'all really take a fix amount every year?

Definitely not.

Our withdrawals have varied every year, from a high of 9.8% (yikes!) in year two down to what looks to be 3.7% this year. The average over seven years - most of those living 100% off our portfolio prior to SS kicking in - is 6.1%.

DW will get a small pension starting next year and I'm projecting our withdrawal rate will dip to under 3.5%.

EDIT: All the withdrawal percentages above are based off the initial value of our portfolio on the day I retired. FWIW, after seven years of withdrawals, the portfolio amount is now 95% of the initial value.

 

[Lsbcal]

Do y'all really take a fix amount every year? ...

Over the last 5 years withdrawals have averaged 5.4%. Had to partially support DS through college. Now he is out and we've begun SS. So basics needs will now be 2% of portfolio and might withdraw up to 3.6% total when we include discretionary fun items (things and vacations).

After 9 years our portfolio is now 94% of the initial inflation adjusted starting value.

 

[FUEGO]

Be careful about those assumptions. Retiring in your mid-30's puts you at risk of being under 40 quarters of SS earnings history, which would mean zero benefits. If you do manage to work enough quarters to qualify, you will still have many years of zeros when they figure PIA based on 35-years of work history, so expect a very low benefit amount.

We have well over 10 years of credits due t lots of work for both of us during high school and college, and we should have 10-12 years of post college higher income earnings histories on the SS record if we ER in the next few years.

I did an analysis of what we would see from SS based on retiring in different years (based on current law). Right now I would get $9700/yr at age 67 (full retirement age) and DW would get $9300. If we wait 4 years to ER, I get $12,600/yr and DW gets $11,600/yr at full retirement age.

I doubt we will actually see those full amounts when we hit age 67, but we'll probably get some or most of those amounts even with pretty harsh changes in the SS laws to make the program solvent long term.

The SS PIA formula benefits low income earners much more than high income earners. And since we will have earnings histories for only part of the 35 years that go into the average earnings formula, we will look like low income earners to the SS PIA formula. We will have 15 years of zeros for income, and another 10 or so years of lowish income, combined with 10 years of mid to high income (but nowhere near the $100,000+ SS max income each year)

PIA Formula:
(a) 90 percent of the first $767 of his/her average indexed monthly earnings, plus (b) 32 percent of his/her average indexed monthly earnings over $767 and through $4,624, plus (c) 15 percent of his/her average indexed monthly earnings over $4,624.Since we have used up the 90 percent PIA bracket, we only get our potential SS payouts increased by 32 percent for each additional dollar we earn and pay SS tax on. Definitely not worth working real extra hard just to top off what we may theoretically possibly maybe get from SS in another 3+ decades.

 

[W2R]

Do y'all really take a fix amount every year?

Yes, I withdraw 3.5% every year but I don't end up spending all of it. During my first full year of retirement (2010) I spent 2.5%. During my second year I spent 1.9%. This year I am on track to spend perhaps a little less, depending on how the rest of the year goes.

I just return the excess at the end of the year.

(Before someone else points it out, I should mention that I am well aware that I can't take it with me. When I claim SS this disparity will get even more ridiculous. So, I am working on spending more. Who knows? Maybe I'll end up with a new house or something.)

 

[rescueme]

(Before someone else points it out, I should mention that I am well aware that I can't take it with me. When I claim SS this disparity will get even more ridiculous. So, I am working on spending more. Who knows? Maybe I'll end up with a new house or something.)

OTOH, you don't have to buy lottery tickets to "whish and hope" you have enough money to prepare for/be in retirement.

 

[Mulligan]

Yes, I withdraw 3.5% every year but I don't end up spending all of it. During my first full year of retirement (2010) I spent 2.5%. During my second year I spent 1.9%. This year I am on track to spend perhaps a little less, depending on how the rest of the year goes.

I just return the excess at the end of the year.

(Before someone else points it out, I should mention that I am well aware that I can't take it with me. When I claim SS this disparity will get even more ridiculous. So, I am working on spending more. Who knows? Maybe I'll end up with a new house or something.)

Its all about ones perspective. Some here may say you should spend more, but who knows, your daughter may be quite satisfied with your 1.9% draw down rate.