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Age and safe withdrawl rate
Old 04-29-2007, 03:56 PM   #1
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Age and safe withdrawl rate

At what age is a 4% withdrawl rate considered safe? For example, if you are 55 should you withdrawl less than 4%? On the other hand , if you are 68 is 4% too meager of a withdrawl? Thanks for your time. DS
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Re: Age and safe withdrawl rate
Old 04-29-2007, 04:57 PM   #2
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Re: Age and safe withdrawl rate

Quote:
Originally Posted by DMS
At what age is a 4% withdrawl rate considered safe? For example, if you are 55 should you withdrawl less than 4%? On the other hand , if you are 68 is 4% too meager of a withdrawl? Thanks for your time. DS
Welcome to the board, DMS. The 4% rule is not age-specific as I undersand it; rather is uses how long a retirement period you anticipate (the two are not always directly related since it depends on your risk profile, anticipated time until a known but delayed windfall, etc.). It's based on return less inflation, plus the probability of certain occurrences based on historic sequences of how the market has behaved.

However, the more years of exposure you have to anomalous market behavior (even if it averages out over time) so the likelihood of a failed scenario (run out of money) may be a bit higher (as is the likelihood of much better than average results) as duration increases.

If you look at FIRECalc you can play around with the numbers. In the default case, the success rate is 94.3% for a 30 year payout, and 87.9% for a 45 year duration, so there are some differences but less than you might guess. Of course, shorter retirement periods permit higher withdrawals.

If I recall, when you start getting out over 35 years of retirement, the SWR and success rates start to become "asymptotic" -- the success rates for 40 versus 50 years are 90% and 85%, for example.

Bottom line: 4% is a SWR which works for typical retirement durations, and does vary with the duration of retirement, but not in a linear or intuitive fashion, and possible not as much as one might guess.
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Re: Age and safe withdrawl rate
Old 04-29-2007, 05:00 PM   #3
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Re: Age and safe withdrawl rate

Unfortunately, I'm your first reply. 4% is somewhat a myth. You need to consider your spending plan through retirement. If you're 55 you need to read Bernicke's article and also Guyton. Do a search and you'll find links or send a PM.

You can spend more than 4% safely if you are (a) "older" (b) willing to accept a slightly higher risk and (c) will to accept spending reductions if things don't go well.

If you are 35 and going into ER, I'd suggest being conservative and the 4% "rule" is probably the edge of your universe. If you are 65, I'd ask what are you saving your money for. My experience and other data say you won't as much in a few years as you're spending now.

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Re: Age and safe withdrawl rate
Old 04-29-2007, 05:06 PM   #4
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Re: Age and safe withdrawl rate

Quote:
Originally Posted by Rich_in_Tampa
If you look at FIRECalc you can play around with the numbers. In the default case, the success rate is 94.3% for a 30 year payout, and 87.9% for a 45 year duration, so there are some differences but less than you might guess. Of course, shorter retirement periods permit higher withdrawals.

Bottom line: 4% is a SWR which works for typical retirement durations, and does vary with the duration of retirement, but not in a linear or intuitive fashion, and possible not as much as one might guess.
I missed being first. Be aware that on FIRECalc if you go over 30 years you miss out on the early 1970s which were worse than the Depression for retirees. Also, don't over analyze things and remember past performance does not indicate future performance. We may go int GDII (on steroids) in 2010 or hit DOW 35000 in 2010 followed by DOW 100000 in 2015. You have to "buy your ticket and take your chances."
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Re: Age and safe withdrawl rate
Old 04-29-2007, 05:36 PM   #5
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Re: Age and safe withdrawl rate

I ah game play a lot with ORP, optimal retirement planner. Unfortunately - on that one 'you' have to plug in a return number.

Firecalc is still my favorite.

4% at age 49 was way too low - cause I ER'd in the 90's. So now - will the pendulum swing the 'other way' going forward. We only have history to help guestimate.

Firecalc - and be ready to indulge in a little Bear Bryant if required.

That's my vote.

heh heh heh
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Re: Age and safe withdrawl rate
Old 04-29-2007, 08:52 PM   #6
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Re: Age and safe withdrawl rate

Financial Counseling and Planning, Volume 10(1), 1999

Sustainable Withdrawal Rates From Your Retirement Portfolio - Philip L. Cooley,1 Carl M. Hubbard2 and Daniel T. Walz3

Summary
This paper reports the effects of withdrawal rates, nominal and real, on success rates of retirement
portfolios of stocks and bonds. The financial market returns used in calculating terminal values of portfolios are monthly returns to large company stocks, high grade corporate bonds, and 30-day U. S. Treasury bills reported by Ibbotson Associates for January 1926 through December 1997. The analysis is repeated for the January 1946 through December 1997 post-war period. The findings are similar to those reported in Cooley, et al., (1998). Monthly variations in stock and bond market returns plus monthly withdrawals appear to reduce portfolio success rates for higher (8% +) withdrawal rates. As Cooley, et al., (1998) concluded, investors who expect long payout periods should choose an asset allocation that is at least 50% common stock and a lower withdrawal rate. Conversely, a higher withdrawal rate appears to be sustainable for shorter payout periods, such as 15 or 20 years, provided the portfolio has a substantial percentage of stocks. Investors who plan to inflation adjust withdrawals should choose lower withdrawal rates and invest at least 50% of the portfolio in stocks. Finally, the lower withdrawal rates of 3% and 4% recommended by some analysts appear to be excessively conservative for portfolios with at least 50% stock, unless the investor wishes to leave a substantial portion of the initial retirement portfolio to his/her heirs. Since the choice of a withdrawal rate involves individual preference for current consumption, uncertainty of life expectancy, and variable financial needs, there is no single globally optimal withdrawal
rate. Each investor must determine the appropriate balance of the risk of running out of funds versus a higher, more enjoyable standard of living early in retirement. Most authors tend to favor a more conservative approach that virtually guarantees a substantial positive terminal value of the retirement portfolio. Such an approach exchanges post-retirement quality of life for end of life financial security. Some retirees may prefer not to make that tradeoff. In the final analysis the choice of a portfolio withdrawal rate, within a reasonable range, requires very personal choices that perhaps are beyond the scope of financial analysis.


50©1999, Association for Financial Counseling and Planning Education. All rights of reproduction in any form reserved.

References
Bengen, W. P. (1994). Determining withdrawal rates using
historical data. Journal of Financial Planning, 7(1),
171-180.
Bengen, W. P. (1996). Asset allocation for a lifetime.
Journal of Financial Planning, 9(3), 58-67.
Bengen, W. P. (1997). Conserving client portfolio during
retirement, part III. Journal of Financial Planning,
10(5), 84-97.
Bierwirth, L. (1994). Investing for retirement: using the
past to model the future. Journal of Financial Planning,
7(1), 14-24.
Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998).
Retirement spending: choosing a sustainable withdrawal
rate. Journal of the American Association of Individual
Investors, 20(2), 16-21.
Ferguson, T. W. (1996). Endow yourself. Forbes, 157(12),
186-187.
Ho, K., Milevsky, M. & C. Robinson. (1994). Asset
allocation, life expectancy, and shortfall. Financial
Services Review., 3(2), 109-126.
Ibbotson Associates (1996). Stocks, bonds, bills, and
inflation yearbook. Ibbotson Associates, Chicago, IL.
Ibbotson Associates (1998). Stocks, bonds, bills, and
inflation yearbook (CD-ROM Version). Ibbotson
Associates, Chicago, IL.
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Re: Age and safe withdrawl rate
Old 04-29-2007, 09:13 PM   #7
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Re: Age and safe withdrawl rate

Note that the studies did not include investing costs, nor lower return international histories.
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Re: Age and safe withdrawl rate
Old 04-30-2007, 07:22 AM   #8
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Re: Age and safe withdrawl rate

go to www.scholar.google.com and search under "Sustainable Withdrawal Rates From Your Retirement Portfolio ". The complete paper is a reprise of the earlier Trinity study plus a short synopsis of other studies up to 1999.

The 4% is age based, in that its related to life expectancy. A married 55 year old has a joint life expectancy of about 35 years, a married 68 year old about 25 years.

Based on past U.S. market averages before costs, drawing an initial 4% + annual inflation over 25 years was practical using a 50/50 stock, bond mix. For a 35 year inflation adjusted withdrawal the retiree needed either a lower starting draw rate or a much higher stock allocation.

But at some point (probably anything over 75% stock) you are just betting on a long shot, as you are now too dependent on irregular capital gains to pay regular living expenses.


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Re: Age and safe withdrawl rate
Old 04-30-2007, 07:34 AM   #9
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Re: Age and safe withdrawl rate

Single, age 63/64, going into 14th year of ER - not getting any younger.

5% variable - uncoupled from inflation.

In the shadows, my penciled up 'hard times' budget covered by pension, early SS, current yield of portfolio - to be used if the Great Depression returns.

Meanwhile - party up cause the clock is ticking!

heh heh heh - no heirs to speak of either. :
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Re: Age and safe withdrawl rate
Old 04-30-2007, 08:06 AM   #10
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Re: Age and safe withdrawl rate

Cash flow is good during deflation. And maybe those heirs just haven't found you yet.
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Re: Age and safe withdrawl rate
Old 04-30-2007, 08:16 AM   #11
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Re: Age and safe withdrawl rate

Quote:
Originally Posted by unclemick2


heh heh heh - no heirs to speak of either. :
Daddy? Is that you Daddy? Mom once said she knew a wise old man from New Orleans that loved Bear Bryant and the New Orleans Saints.
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Re: Age and safe withdrawl rate
Old 04-30-2007, 08:57 AM   #12
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Re: Age and safe withdrawl rate

DNA? What DNA?

heh heh heh - should I go back and edit, protest, deny - or just admit I walked into that one?

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Re: Age and safe withdrawl rate
Old 04-30-2007, 10:54 AM   #13
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Re: Age and safe withdrawl rate

Quote:
Originally Posted by DMS
At what age is a 4% withdrawl rate considered safe? For example, if you are 55 should you withdrawl less than 4%? On the other hand , if you are 68 is 4% too meager of a withdrawl? Thanks for your time. DS
I am 30+ years from normal retirement and shooting for an ER in about 20 years.

For planning purposes, for me, any retirement prior to age of 59 uses a 3% SWR. Once I hit 59.5, I use a 4% SWR.

Lower withdraw rate factors in:

1) need for more healthcare costs
2) longer retirement
3) need for more money in taxable accounts
4) access to money with a penalty in tax favored accounts (such as 401k)

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Re: Age and safe withdrawl rate
Old 04-30-2007, 11:31 AM   #14
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Re: Age and safe withdrawl rate

We just discovered some family from a sister we didn't know my wifes grandfather had. Plus there was a second marrige we never knew about. Its an interesting trail we're tracking down. And it all started because we want to get a headstone on her great grandfathers unmarked grave.
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Re: Age and safe withdrawl rate
Old 04-30-2007, 01:12 PM   #15
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Re: Age and safe withdrawl rate

To add (a very little) to what has been said...

The 4 percent safe withdrawal rate is based on a review of historical market conditions over a fixed 30 year span. If your retirement lasts longer than 30 years the safe withdrwal rate is less. If your retirement is shorter the safe rate is more.

Also note that if you are willing to accept a lower than 100 percent success rate (meaning that you could go broke in depression or 70's staglation-like markets) that you could take out significantly more than 4 percent per year.

The longevity versus withdrawal rate has been studied (ad nauseum) based on historical data. The rates change somewhat depending on your asset allocation and your definition on what constitutes the rate of inflation. However based on the historical data there is an "optimal" asset allocation for any retirement span.

here is a link to get you started on the data behind these studies:

http://www.retireearlyhomepage.com/restud1.html

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Re: Age and safe withdrawl rate
Old 04-30-2007, 01:16 PM   #16
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Re: Age and safe withdrawl rate

Quote:
Originally Posted by Masterblaster
To add (a very little) to what has been said...

The 4 percent safe withdrawal rate is based on a review of historical market conditions. If your retirement lasts longer than 30 years the safe withdrwal rate is less. If your retirement is shorter the safe rate is more.

This has been studied (ad nauseum) based on historical data.

And most calculators are using Monte Carlo, which only uses "past market performance". So the 4% is based on past market performance and a 60-40 portfolio according to the trinity study.

I have done some reading, and some individuals have done "reverse" market analysis (what if market returns came in REVERSE order of what they occured in... many of the studies (and even FIREcalc) would give 90%+ success rates and the reverse studies fail close to 50% of the time.

One of the issues the reverse studies show is the 2000-2002 bear would be at beginning and wreak havoc on many plans, especially aggressive ones.
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Re: Age and safe withdrawl rate
Old 04-30-2007, 01:45 PM   #17
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Re: Age and safe withdrawl rate

To get back to basics, what do we mean by safe? We might mean that uncertainty and risk/volatility will play a very small part in the success of our retirement. If that is what we mean, I think no liquidating plan is "safe". The post by jIMOh above gives one example of the unsafeness of liquidating plans based on probabilites and distributions pulled from history.

It may well work, but there is more faith involved than is commonly reckoned.

Ha
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Re: Age and safe withdrawl rate
Old 04-30-2007, 04:12 PM   #18
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Re: Age and safe withdrawl rate

The weakness of the assorted studies - no investing costs, complicated rules from limited samples, past U.S. history only, not dollar weighting returns - finally made me choose a simple model

Average developed world real growth rate was about 2%
Savers tended to make a bit above average, for about 3%
Spenders tended to make less than average, for about 1%
And that tends to be taxed on nominal return, leaving 0%
Equal part stock, intíl stock, real estate, bond, intíl bond

At 0%, youíre just dividing money over life expectancy,
using your life expectancy as a discounting mechanism.
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Re: Age and safe withdrawl rate
Old 05-01-2007, 11:16 AM   #19
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Re: Age and safe withdrawl rate

I didn't understand the last post ?

Anyway here's some more fun and interesting charts to help you decide on how much to take out of your stash every year.

The first chart shows withdrawal rate versus success rate (meaning that you don't ever go broke) based on the now infamous Trinity study.

The second chart shows the "optimal" stock-bond allocation given your retirement timeframe. This chart was based on the Berstein (et. al.) analysis. Note that the "optimal" stock-bond allocation does not agree too closely with the rule of thumb where your stock allocation is 100 minus your age (or 110, 120 minus your age).
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File Type: jpg Stock_allocation.jpg (20.9 KB, 39 views)
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Re: Age and safe withdrawl rate
Old 05-01-2007, 11:23 AM   #20
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Re: Age and safe withdrawl rate

Quote:
Originally Posted by Masterblaster
The second chart shows the "optimal" stock-bond allocation given your retirement timeframe. This chart was based on the Berstein (et. al.) analysis.
I think too many people assume that their payout period is 30-40 years, forgetting that joint spouse life expectancy is usually higher.

Or maybe the spouse making the assumptions is the one who dies first.
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