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Another article on SWR: Morningstar
Old 08-01-2013, 08:16 AM   #1
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Another article on SWR: Morningstar

I saw an article on the Morningstar web site and figured to share it. While it does not say anything new, I like that it emphasizes the power of being flexible.
Is 3% the New 4%?
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Old 08-01-2013, 12:17 PM   #2
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Agreed, nothing new here, but some good basic common sense that needed to be said, imho. Well written, albeit a bit short.

I like this quote, I suspect numerous people miss that point...

Bengen created the 4% rule as a floor, not as a ceiling.
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Old 08-01-2013, 12:36 PM   #3
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Excellent article.
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Old 08-01-2013, 12:44 PM   #4
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There is always the Guyton article that has withdrawl rates up to 6.2%. Paul Merriman had in a recent book the suggestion of withdrawing 6%. In both cases there were triggers that would reduce the withdrawl amount if the portfolio becomes too depleted.

The Merriman method was a very simple 6% every year. It gave a nice initial withdrawl that could be continued if all went "normal." If things didn't go so well, the dollar amount could drop to 50% of the original inflation adjusted dollars over a 30 year plan. He cautioned that is should only be used if you could live on half of the starting withdrawl.

The dovetails nicely into the Bernicke paper.
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Old 08-01-2013, 12:55 PM   #5
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Compare with Henry Heebler's simplified auto-pilot method.
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Old 08-01-2013, 05:35 PM   #6
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Agree this is a good article.

I've always planned to be flexible - the article makes an excellent point that being willing to cut expenses (reduce withdrawals) in the early years if the market is down can make a huge impact on long term success. We were fortunate to have significant money in a short term bond fund when I retired, so all of our expenses came from that until our portfolio recovered back to its 2007 high water mark last year.
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Old 08-01-2013, 09:38 PM   #7
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As Siamond stated, it's always good to be reminded that the studies which originally concluded that 4% was deemed a safe withdrawal rate over a 30 year period concluded that 4% was a "worst case" scenario, not an average or likely scenario.

So perhaps now the worst case is really 3%. Should we really be spending our money down based on worst case? As long as we don't blindly take out the same amount each year, adjusting for inflation, without any regard to what's going on in the stock market, I still think 4% will be fine. And if our equity exposure is down in the 50-60% range, we should be able to draw down the fixed income for enough years for the equities to recover anyway. I think many of us just fret too much about spending 4% just in case the world implodes.
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Old 08-02-2013, 06:53 AM   #8
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Noob question, but is the SWR designed to preserve the principal, so that you still have a big nest egg left after 30 years, or is it designed to spend it all down to zero by the 30 year mark? I have gotten conflicting impressions about that.
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Old 08-02-2013, 07:04 AM   #9
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Noob question, but is the SWR designed to preserve the principal, so that you still have a big nest egg left after 30 years, or is it designed to spend it all down to zero by the 30 year mark? I have gotten conflicting impressions about that.
None of the above.

The concept is to allow you to draw the maximum % from your portfolio and have it not go to zero during the specified time period. It could leave you with $1, millions, or anywhere in between - but not zero. Thus the "S" in WR...
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Old 08-02-2013, 07:31 AM   #10
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None of the above.

The concept is to allow you to draw the maximum % from your portfolio and have it not go to zero during the specified time period. It could leave you with $1, millions, or anywhere in between - but not zero. Thus the "S" in WR...
"Have it not go to zero." Okay, so SWR is not designed to preserve the principal intact. That's interesting; I had misunderstood that. I thought it was designed to keep the principal pretty much intact. But from what you're saying, it's designed to leave you with at least a dollar -- that's worst case, of course, and hopefully it would be more, since a dollar isn't going to do me much good.
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Old 08-02-2013, 07:32 AM   #11
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Noob question, but is the SWR designed to preserve the principal, so that you still have a big nest egg left after 30 years, or is it designed to spend it all down to zero by the 30 year mark? I have gotten conflicting impressions about that.
Depends on the SWR method you use, and how you define 'safe'. Some are designed to protect the principal, some are designed to optimize your withdrawals, some are designed to avoid catastrophic failures in worst scenarios, etc. Choosing the right one depends on your personal goals...
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Old 08-02-2013, 07:44 AM   #12
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Depends on the SWR method you use, and how you define 'safe'. Some are designed to protect the principal, some are designed to optimize your withdrawals, some are designed to avoid catastrophic failures in worst scenarios, etc. Choosing the right one depends on your personal goals...
I see. That would explain why I've gotten different impressions. For instance, the first guy I read who talked about this (Clyatt, same guy who pointed me to this forum) talked about how it was okay to increase the percentage in later years, if you don't have descendants you want to leave an inheritance to. That advice wouldn't make sense, if the method was designed to keep you just from going to zero.

I'm going to have to start paying more attention to the aims of the different models. I suppose I was naively assuming that "SWR" was something that had an agreed upon definition. If they all have different starting premises or intentions, no wonder there is so much inconsistency in the results.
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Old 08-02-2013, 07:49 AM   #13
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... and hopefully it would be more, since a dollar isn't going to do me much good.
You think where you're going you'll need more?
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Old 08-02-2013, 08:14 AM   #14
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You think where you're going you'll need more?
Exactly what I was thinking. "You can't take it with you".
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Old 08-02-2013, 10:15 AM   #15
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IIRC, Clyatts method is designed to keep the original purchaser power intact. The standard SWR is based on not running out of money ($0).
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Old 08-02-2013, 10:22 AM   #16
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SWR is a somewhat generic term, so it means different things to different people. Some interpret the S to mean "safe". Others interpret it to mean "Safer".

And, as others have stated, some of us want to leave an estate to our heirs or charity, others want to try and spend every penny. Firecalc does allow you to model leaving a certain amount of estate intact. I suppose you could enter the initial principal amount as your desired amount, but I would imagine that would greatly reduce the annual spend that you would be allowed.
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Old 08-02-2013, 11:36 AM   #17
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You think where you're going you'll need more?
Well, it's designed to last 30 years, right? What if I'm still alive and have a dollar? I'm screwed, baby.

Not that I'm going to worry about it. I always figure I'll croak before these optimistic projections of longevity. That's one thing I liked about the article, although it's a little dark -- the reminder that most of us ain't gonna live long enough to worry about it.

That's actually my "worst case scenario" -- I spend all this time fussing about what the SWR is going to be, so that I'll be okay when I'm 90 years old, and I watch my spending carefully ... and then I die at 70.

Doh.
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Old 08-02-2013, 11:43 AM   #18
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I did not understand the Sports Illustrated quote.

Regardless, if my dividends run 4% (so far, better than that), I figure 4% is OK, and the principle is still there. If they go less, I spend less. I plan on less.
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Old 08-02-2013, 02:53 PM   #19
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talked about how it was okay to increase the percentage in later years, if you don't have descendants you want to leave an inheritance to. That advice wouldn't make sense, if the method was designed to keep you just from going to zero.
No. In most cases the portfolio value in the later years is very large -- even "huge". It's only a small portion of all possible outcomes where the portfolio is in danger of dropping to zero. But that's the one we focus on, because that's the one we want to avoid.

In the more likely case, the portfolio has grown so large after 20-30 years that you could easily double your withdrawal and still be quite safe.

Take a look at this spreadsheet: https://www.dropbox.com/s/cwprtn6y8o...yton_rules.xls

Ignore the G-K stuff and just look at the "Standard SWR" case on the right-hand side. Look at the "portfolio value" chart. The start date of 1972 is one of the worst possible start dates, because you immediately get hit by a bear market. In that case, you couldn't increase your withdrawal. In 30 years, 2002, you are still taking 4%.

But now change the start date to 1975. In 2002 the portfolio has grown by 10, to just over $1,000,000, and your withdrawal is 1.4%. You could double your draw and still be well below 4%.
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Old 08-02-2013, 03:09 PM   #20
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Well, it's designed to last 30 years, right? What if I'm still alive and have a dollar? I'm screwed, baby.

Not that I'm going to worry about it. I always figure I'll croak before these optimistic projections of longevity. That's one thing I liked about the article, although it's a little dark -- the reminder that most of us ain't gonna live long enough to worry about it.

That's actually my "worst case scenario" -- I spend all this time fussing about what the SWR is going to be, so that I'll be okay when I'm 90 years old, and I watch my spending carefully ... and then I die at 70.

Doh.
You are making this harder than it needs to be. All of these retirement calculators are estimates and by their nature they have to be. As you stated about passing at 70 but what if it is 90? What the retirement calculators do is give you reasonable estimates of how long your money will last based upon future market returns, how much money you have, and how much you are going to take out each year. If you look at Firecalc or FIDO (the two best in my opinion) they will make estimates of what will happen to your portfolio over the time specified. There is no attempt by the calculators to take your money down to 0 or any other number and in fact they can't because who knows what the market will do over the next 30 years? I don't even know what it is going to do from day to day much less 30 years out. The objective of the calculators is to give you an estimated failure or success rate of your money seeing you through a given time period depending upon the factors I mentioned above.

Also, take into account the 4% rule. What most of what you read is taking out 4% the first year of retirement and then each succeeding year increase that dollar amount by what the inflation rate was. The other 4% guideline is taking out 4% of your portfolio each year without inflation adjustments. Whatever dough you have you can take 4% of that amount. This is what Bob Clyatt addresses in his book. Other independent studies have concluded that one will never run out of money using this latter method. The former works well for those who retire in their mid-60's while that latter works best for early retirees who have 40 or more years of retirement ahead of them assuming they live a normal life span.
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