Another article on SWR: Morningstar

[hiker88]

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%?

 

[siamond]

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.

 

[Onward]

Excellent article.

 

[2B]

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.

 

[ronin]

Compare with Henry Heebler's simplified auto-pilot method.

 

[MBAustin]

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.

 

[Ready]

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.

 

[ER Eddie]

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.

 

[REWahoo]

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...

 

[ER Eddie]

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.

 

[siamond]

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...

 

[ER Eddie]

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.

 

[REWahoo]

... 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?

 

[bo_knows]

You think where you're going you'll need more?

Exactly what I was thinking. "You can't take it with you".

 

[Lagniappe]

IIRC, Clyatts method is designed to keep the original purchaser power intact. The standard SWR is based on not running out of money ($0).

 

[Ready]

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.

 

[ER Eddie]

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.

 

[Ed_The_Gypsy]

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.

 

[rayvt]

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/cwprtn6y8ouyajj/SPY_Withdraw_by_Guyton_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%.

 

[Brooks Saddle]

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.

 

[rayvt]

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

.

Yes, obviously. Reducing a non-zero amount by 4% will always be greater than zero. It doesn't take a "study" to conclude that -- it's simple math. Does this call for a "duh"?

You never run out of money, but your annual draw will swing wildly. Which is not quite what people are looking for.

 

[engr]

who knows what will work on withdrawal percentage

All we can do is take the best educated guess that we can when deciding on a withdrawal rate. For me, being conservative, I try to stay atop the new articles on SWR but ultimately I have to make the final decision and live with it. Academic articles I give more weight to than something in Money magazine where someone could be trolling for your money. Being conservative I use the Constant Spending Plan (CSP) option in Firecalc and 35 years. Recently I wonder if I'm shooting myself in the foot by not using the Bernickne's model. It seems more in line with what will eventually happen and we would like to spend more in travel while we have the opportunity. I also hate the idea of using the CSP model and having more money available later than in Bernickne's model only to be forced to possibly give it to a nursing home later where they bleed you dry. Of course it allows you to enter one. For me moderation and flexibility are essential to success.

 

[ER Eddie]

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.

Thanks, that helps. So, even though some SWR rates define "success" as ending up with at least a dollar, in the more likely scenario, the principal will be preserved and perhaps even increased. Makes sense.

You are making this harder than it needs to be.

Am I? It doesn't seem that complicated. I'm just trying to understand some of the basics. Some of my earlier remarks were jokes/cracks, not really serious. You might be "hearing" me sound more serious than I actually am.

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.

I would be in the latter camp. I actually plan on a 2% to 3% WR, so I suppose I should sleep easy.

 

[ERD50]

I did not understand the Sports Illustrated quote. ...

Me neither. Or at least, I didn't understand how it related to the subject.

Well, I finally read the article, and I didn't like it at all. It just doesn't fit my POV, and I think it is potentially dangerous.

1. Be Flexible OK, sounds good in theory, but how's that work in practice? I hope to put more time into the G-K models that are floating around here, but from what I can tell so far, being 'flexible' means being ready to cut your spending about in half for quite a few years just to squeak out a few more years from the portfolio. Do you think the average reader thinks in terms of cutting spending in half for years when they hear the phrase "it's prudent to tighten one's belt"? Or are they thinking 'we won't go out to dinner as much'?

2. Choose a Lower Success Percentage I choose 100% for the simple reason that the future may be worse than the past. Why would I choose a rate that I know has failed in the past? They talk about 80%, and again, just 'cut back if the markets perform poorly'. I'd be interested to see what kind of cuts it would take for an initial 80% success rate WR to get back to success.

3. Choose a Shorter Time Horizon And what if you are the 1 in 8 that makes it to 95? How are you gonna get by? Sure, discretionary costs will drop, but maybe you need to hire help for all sorts of things. And he sure glosses over the LE for females, and the combined LE for couples with "but it is always distinctly a minority possibility". How about a number? Lotsa hand-waving here.

I really don't want either of us to be a financial burden on our kids. I feel I should have worked longer/harder, saved more or spent less rather than take an almost 1 in 5 chance that I will run out.

Plan for a long retirement | Vanguard

To my view, any one of these are potentially dangerous over-simplifications. Couple 2 or 3 together, and the situation multiplies. It's irresponsible IMO, but it is just what some people want to hear.

-ERD50

 

[ERD50]

Thanks, that helps. So, even though some SWR rates define "success" as ending up with at least a dollar, in the more likely scenario, the principal will be preserved and perhaps even increased. Makes sense. ...

I'd like to add to that. It seems that 4% rate is often referred to as an 'SWR'. But recall that it has failed 5% of the time in the historical 30 year periods. And some of those failures occurred in ~ year 23. Going out 30 years would have taken a portfolio from a positive $750,000 to a negative $300,739. It takes a lower rate, ~3.59% to hit 100% success.

But yes, any 'success' ends up above zero (by definition in FIRECalc), with many of the periods maintaining and increasing in buying power.

-ERD50