Another Study Challenging the 4% SWIP Rule

[chinaco]

I guess professionals need to publish.

With all of the unknown variables that can affect the value of securities (in a portfolio).... I think it is unrealistic for anyone to believe that they make a plan for 30 to 40 years into the future and think there will not need to be some sort of adjustments... whether they find they can spend more or need to spend less... say 10, 15 or 20 years into it.

[Independent]

Quote:

Originally Posted by Nords What we need is a good financial analysis of variable withdrawal schemes.

I worked on a simple one, and think I posted a little bit here.

My thought was that any variable scheme has to allow you to decrease your withdrawal rates.
But, any "successful" retirement withdrawal pattern maintains at least some minimum withdrawal in every year.

Putting those two sentences together, a withdrawal scheme that could be analyzed has to have some ability to go down to some floor, but must insist that you never go below the floor.

The traditional 4% Trinity scheme essentially says that your floor is 4% of the original assets, because it has no downside flexibility.

IIRC, I came up with something like "the maximum of 6% of current balance or 3% of initial balance" has a survival rate of about the same as a 4% level.

Of course, starting at 6% means 50% more spending in the first year than a 4% rate, but it justifies that by allowing for spending that would go down 25% below the 4% rate if the portfolio balance dropped.

Using such a scheme means sitting down at the beginning and saying "How low would I be willing to go?" That's probably a good exercise. I felt more comfortable with that approach than saying 95% of prior year, because the 95% rule has no bottom.

[JmfromTx]

I used Otar as my guide (3% max, taking less) but I think it really boils down to common sense. If you have saved enough to voluntarily retire early, hopefully you are smart enough to go with the flow and hunker down if you need to and spend less if the situation arises. I left myself a lot of hunker room and won't hesitate to use it if I need too.

[obgyn65]

I don't.

Quote:

Originally Posted by haha Does anyone still think that these "studies" prove anything? Ha

[arebelspy]

Quote:

Originally Posted by Independent IIRC, I came up with something like "the maximum of 6% of current balance or 3% of initial balance" has a survival rate of about the same as a 4% level.

I'd love to see links to any posts you have made on this, especially regarding your methodology. I'm curious what similar rule would correspond to a 3% SWR.

[DblDoc]

Quote:

Originally Posted by haha Does anyone still think that these "studies" prove anything? In the last couple days we have heard that 7% is good, and that 2.53% (2.53!) may be too much. Ha

Prove? No. But hand grenade wise (as Uncle Mick would say) it gives you a ballpark figure to work from. Pick a reasonable number, understand the limitations, build in a cushion and be flexible. There is no 100% success plan to be found. Stop seeking it.

DD

[Moemg]

If I had not used a variable withdrawal rate during the meltdown my rate would have been as high as 7% . I use a straight 3.5% of my yearly portfolio value and so for it has worked out fine . I also have a lot of padding in my budget .

[rescueme]

As I have posted before, one who retires before all "income sources" are available (e.g. SS, pensions, etc.) may have (as I do) a WR of over 4% in the early years of retirement.

As for myself? At age 70 (when all my DW/my retirement income sources come "on-line") and our combined WD rate drops to around 2.5%, the question remains of why would we adhere to a 4% rate (and live a life we don't want), that results in a 1% (or less) WD rate at age 70?

These "studies" make little sense IRL, IMHO...

They only make sense (possibly) who retire, and on "day 1" are drawing SS, a pension (if there is one), and not doing an "SS combo" as DW/me are doing.

These types of articles don't apply for most folks; but of course, that's only my opinion...

[REWahoo]

Quote:

Originally Posted by Moemg If I had not used a variable withdrawal rate during the meltdown by rate would have been as high as 7% . I use a straight 3.5% of my yearly portfolio value and so for it has worked out fine . I also have a lot of padding in my budget .

Remember that the textbook measurement of WR is based the value of your portfolio the day you began to withdraw from it, not the current or mid-market-meltdown value.

That said, I'm in no way advocating ignoring the harsh reality of a diminished portfolio and the prudent reaction to pull back on spending.

[Moemg]

Quote:

Originally Posted by REWahoo Remember that the textbook measurement of WR is based the value of your portfolio the day you began to withdraw from it, not the current or mid-market-meltdown value. That said, I'm in no way advocating ignoring the harsh reality of a diminished portfolio and the prudent reaction to pull back on spending.

I use the Percentage of Portfolio value from Jan.1 every year instead of the Percentage of the intial portfolio with inflation adjustments . It does cause you to tighten the belt in lean years .
How to Ensure Your Retirement Portfolio Will Last | FiGuide

[arebelspy]

Quote:

Originally Posted by Moemg I use the Percentage of Portfolio value from Jan.1 every year instead of the Percentage of the intial portfolio with inflation adjustments . It does cause you to tighten the belt in lean years . How to Ensure Your Retirement Portfolio Will Last | FiGuide

Have you looked at how this would compare to a flat percent WR based on initial portfolio? Obviously you withdrew less in 09 than you would have, but in the long run, might they not even out?

[DblDoc]

Quote:

Originally Posted by arebelspy Have you looked at how this would compare to a flat percent WR based on initial portfolio? Obviously you withdrew less in 09 than you would have, but in the long run, might they not even out?

That would ignore inflation and would be pretty painful after a decade or two.

DD

[youbet]

Here's the most worthwhile statement in the study:

Quote:

In the extreme, the portfolio might sustain consumption for only 20 years, or might last 35 years and accumulate a substantial estate

.

Many folks have trouble accepting not being "in control" and having large amounts of potential variation in the outcomes of their FIRE plans. Even with the best efforts to be flexible in spending, to choose effective AA's for the times, etc., we're likely to experience a wild ride and huge variations in outcomes. Only actually living the next decade or two or three will reveal how things work out.

I fully expect my plan (prudent by most measures) to possibly leave a fortune unspent at my death or perhaps fail and leave me penniless. There will likely be conditions out of my control and against which there will be no defense. So I try to enjoy life with spending guided by a prudent plan and try not to focus on the extreme possibilities.

[haha]

Quote:

Originally Posted by DblDoc There is no 100% success plan to be found. Stop seeking it. DD

Where did you get the idea that I am seeking "it", or anything else for that matter?

[arebelspy]

Quote:

Originally Posted by arebelspy Have you looked at how this would compare to a flat percent WR based on initial portfolio? Obviously you withdrew less in 09 than you would have, but in the long run, might they not even out?

Quote:

Originally Posted by DblDoc That would ignore inflation and would be pretty painful after a decade or two. DD

lol. I thought it was a given we're talking inflation adjusted amounts. Assume we're not being pedantic, and I'm still curious about the answer to the question.

[Moemg]

Quote:

Originally Posted by arebelspy Have you looked at how this would compare to a flat percent WR based on initial portfolio? Obviously you withdrew less in 09 than you would have, but in the long run, might they not even out?

I'm not really sure . All I know is that I am comfortable with this method and so far it's working .

[Nords]

Quote:

Originally Posted by rescueme As I have posted before, one who retires before all "income sources" are available (e.g. SS, pensions, etc.) may have (as I do) a WR of over 4% in the early years of retirement. These types of articles don't apply for most folks; but of course, that's only my opinion...

That's a good point-- the study doesn't provide for the portfolio boost of Social Security coming a few years into the withdrawal phase. You can get away with a lot of risky behavior 4% SWRs if you have a deferred annuity riding to the rescue.

[youbet]

Quote:

Originally Posted by Nords That's a good point-- the study doesn't provide for the portfolio boost of Social Security coming a few years into the withdrawal phase. You can get away with a lot of risky behavior 4% SWRs if you have a deferred annuity riding to the rescue.

The concept of spending rates vs. withdrawal rates is widely misunderstood............. The authors were pretty clear that they're talking about withdrawal rates.

[DblDoc]

Quote:

Originally Posted by haha Where did you get the idea that I am seeking "it", or anything else for that matter?

Sorry. It was that was not directed at you Ha. It just seems so much time and energy is wasted on devoted to this issue. We are now taking it to 2 decimal places. Sheesh.

DD

[haha]

Quote:

Originally Posted by DblDoc Sorry. It was that was not directed at you Ha. It just seems so much time and energy is wasted on devoted to this issue. We are now taking it to 2 decimal places. Sheesh. DD

I agree; it really cannot be done with any precision.

Ha