Another wrinkle to SWR i was unaware of....

[urn2bfree]

I was surprised to run across this article by Michael Kitces wherein he points out how incredibly conservative the 4.5% SWR actually is even in a low return environment.

if the current environment for today's retirees will result in a "new record low" safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000! On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!

And this:

in point of fact, the safe withdrawal rate actually has a 96% probability of leaving more than 100% of the original starting principal!

The article is here:
http://www.kitces.com/blog/archives...-Safe-Withdrawal-Rates-REALLY-Based-Upon.html

 

[Dwhit]

That's a nice perspective to hear about. I think I will be shooting for a SWR of 4.6% when I FIRE in a few months. It's all a bit of a crap shoot, but I am hoping I can monitor and adjust as things go along.

 

[haha]

This guy clearly knows how to sell his books. Unsure if he knows much beyond happy-talk.

Ha

 

[urn2bfree]

This guy clearly knows how to sell his books. Unsure if he knows much beyond happy-talk.

Ha

Do you have a specific criticism of his math? Or some other specific thing you can cite showing he does not "know much?"

While I knew SWR was based on a worst case scenario, I had not been completely aware that as he pointed out

the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio!

15 years of LESS THAN 1% real returns? I understand pessimism and caution...but I have a hard time envisioning an America that has a worse 15 year period than that, and it not becoming something so much different and worse and stressful that I would want to add the stress of working at my current job to the mix. I think I would be happy to be free in such an environment, even if I have to cut back on my budget which has ample room for belt tightening.

Also, I have never bought or read one of Kitces' books. Nor was I aware he had any. So, if his blog articles are his marketing strategy to sell his books, he may want to find a new strategy.

 

[FIRE'd@51]

I don't understand his result (first chart) that a just-under 4.5% SWR survived for the 30-year period beginning in 1966. This is at odds with Firecalc in which a 4% SWR failed. What am I missing?

 

[W2R]

Interesting paper; thank you!

Do you have a specific criticism of his math?

Personally, I have a problem with the mathematical aspects of ALL the SWR papers and calculations because of the limited length of historical data upon which they are based, not to mention changes that have occurred over the time period encompassed by the historical data. Those who are valiantly trying to determine an SWR for us are essentially shooting at a moving target at twilight, IMO.

However, these data and the SWR papers based on them do give us a ballpark idea of what might be "safe", it seems to me, and that is really all we have available to us. The stakes are high, and the consequences of a failed outcome are just not acceptable to me. However, if one is flexible and keeps their base withdrawal rate below what is recommended, I think the probability of a failed outcome is lessened.

 

[haha]

Do you have a specific criticism of his math? Or some other specific thing you can cite showing he does not "know much?"

While I knew SWR was based on a worst case scenario, I had not been completely aware that as he pointed out
15 years of LESS THAN 1% real returns? I understand pessimism and caution...but I have a hard time envisioning an America that has a worse 15 year period than that, and it not becoming something so much different and worse and stressful that I would want to add the stress of working at my current job to the mix. I think I would be happy to be free in such an environment, even if I have to cut back on my budget which has ample room for belt tightening.

Also, I have never bought or read one of Kitces' books. Nor was I aware he had any. So, if his blog articles are his marketing strategy to sell his books, he may want to find a new strategy.

The same thing that Fired@51 said is what I thought of. My criticism was straight off the top of my head. Math per se will rarely have anything to do with portfolio survival, it's how you choose and look at the history and the assumptions that you make. And most important, what actually happens in the world.

When plenty of sober people, William Bernstein for one, are coming out with articles suggesting much lower WR than 4%, and this guy comes out with his very optimistic slant-I guess one can believe whatever he wants since none of us can have a pipeline to the eventual truth, but I tend to think of marketing rather than superior insight or better data.

However, we all are free to make of whatever whatever we wish, so you and I can both he happy entertaining very different ideas. They won't necessarily both work out, but they may.

As you said, you have plenty surplus, and you are really fed up at work. You should be a survivor no matter what.

However, I have zero problem imagining a worse period for retirees that what he is citing. But these are not things that I like to discuss at length. Our opinions are generally decided by factors other than external observations or intellectualizing.

Ha

 

[walkinwood]

Reading the article, the information that stood out most for me is that average returns over the time period mean little. It all depends on sequence of returns.

As Ha points out there are optimistic and pessimistic opinions of the future out there (and I don't doubt Kitces sobriety) - take your pick.

Firecalc takes an expense ration into account (.18% iirc) and that may make the difference or they're looking at different portfolios.

 

[photoguy]

I don't understand his result (first chart) that a just-under 4.5% SWR survived for the 30-year period beginning in 1966. This is at odds with Firecalc in which a 4% SWR failed. What am I missing?

I believe it is due to differences in data and/or assumptions about the exact composition of the portfolio. The trinity study and others definitely show failures at 4% which is consistent with firecalc.

As Kitces notes:

Given slight discrepancies between the source data used for the analysis and the Bengen research, this should be viewed as yielding results substantively identical to the Bengen research

(I think bengen also got failures at 4%).

and

Thus, the basis for a safe withdrawal rate of approximately 4.5% (it appears to be about 4% to 4.5%, depending on exactly what data inputs are used)

From http://www.kitces.com/assets/pdfs/Kitces_Report_May_2008.pdf

The paper also has some SWR computed by PE10.

 

[Onward]

(I think bengen also got failures at 4%).

As I recall, Bengen chose 4%, or slightly higher, as the highest WR at which the portfolio never failed during the time period he tested.

Haven't gone back and looked at his paper, though.

 

[mickeyd]

Nice link to an interesting article. Thanks for that.

What we are all going to actually do is try to stretch out our stash to last as long as possible without being inconvenienced too much. At least that's my plan.

 

[veremchuka]

And I have read articles that say 4% is too high but hey if you like 4.6% then you'll just love Dave Ramsey - he says 6% is ok!

As stated the order of returns means as much or more than anything else.

I guess my 0% WR, so far anyway until RMD kicks in, is working to ensure that I don't run out of money.

 

[dtbach]

I guess everyone can read study after study and still be uncertain what SWR will really work. Of course, none of us will know until 30 years from now.

So I think I like this study! But I keep saying I will take 4.5% but haven't yet. I'm presently I'm at 3.6% and am perfectly happy. I'll probably just stay at this rate but now perhaps once in a while will grab a percent or 2 to do something special, like marry off a child or take a dream vacation.

And if in 10 years the market has done well, the SWR can be re-evaluated.

 

[walkinwood]

...

I guess my 0% WR, so far anyway until RMD kicks in, is working to ensure that I don't run out of money.

Do you live on just dividends?
In that case, isn't it more correct to say that you're living on a variable SWR that depends on your dividends for the year?

 

[ER Eddie]

Thanks for posting. It's a nice corrective to the more pessimistic projections.

Reminds me of Goldilocks and the Three Bears. We're trying to find the soup that tastes just right. Seems like we keep coming back to 4%, give or take half a percentage point.

 

[Svensk Anga]

Sure, 4 or 4.5% worked out for the 1966 retiree, but it must not have been comfortable. They had the 1973-74 bear market 7 years in (too long out of the workforce to have marketable skills?), the severe late-70's inflation, and rising interest rates suppressing the NAV of their bonds. It worked out okay because of the bull market that started in 1982. Think anyone who started with a 4% withdrawal rate plus inflation adjustments could have stuck with the program into the 1980's?

 

[dtbach]

Sure, 4 or 4.5% worked out for the 1966 retiree, but it must not have been comfortable. They had the 1973-74 bear market 7 years in (too long out of the workforce to have marketable skills?), the severe late-70's inflation, and rising interest rates suppressing the NAV of their bonds. It worked out okay because of the bull market that started in 1982. Think anyone who started with a 4% withdrawal rate plus inflation adjustments could have stuck with the program into the 1980's?

It may not have been comfortable but apparently it worked. But of course most folks would have reduced the withdrawal rate and/or done some part time work during the worst of it. And of course from 1982 on things would turn out pretty good. One should probably go into ER with the thought that you could get by on lets say 2%. So start with a 4% rate and then if things get bad you can always take a bit less until the sun comes out again.

 

[audreyh1]

It may not have been comfortable but apparently it worked. But of course most folks would have reduced the withdrawal rate and/or done some part time work during the worst of it. And of course from 1982 on things would turn out pretty good. One should probably go into ER with the thought that you could get by on lets say 2%. So start with a 4% rate and then if things get bad you can always take a bit less until the sun comes out again.

Yep - pretty much what it comes down to! Flexibility in spending is probably the key to a successful early retirement if you are challenged with a run of "bad" years.

 

[veremchuka]

Do you live on just dividends?
In that case, isn't it more correct to say that you're living on a variable SWR that depends on your dividends for the year?

No I live on my pension and SS and I bank a good chunk each month to boot. I just LBMM. They are not huge but it's more than I need. I did take a distribution of $21k to help payoff the mortgage a couple of years ago but that was the one and only withdrawal of any investments that are 90% of the nest egg and tax deferred. Oh Uncle sam will get me in a decade!

 

[Dwhit]

The role of pensions and SWR s are not usually included in SWR calculations,are they?

However, I am counting on SS, otherwise I would probably plan on something lower than 4.6%. The 4.6% was based on Firecalc with SS runs. This gets me in the 96% success category.

 

[audreyh1]

The role of pensions and SWR s are not usually included in SWR calculations,are they?

However, I am counting on SS, otherwise I would probably plan on something lower than 4.6%. The 4.6% was based on Firecalc with SS runs. This gets me in the 96% success category.

Studies that discuss SWR make it clear that the income you need from your portfolio is after subtracting pension and SS income from your expected annual need. Firecalc simply lets you model having SS and pension income among many other things.

 

[Koolau]

Said it before and I'll probably say it again. I've never used the SWR concept to "live by" (actually, slavishly pulling X.YZ% out of the port each year). Rather, I used it as a planning tool BEFORE retirement to see when I had enough to pull the trigger. I always assumed that once I had enough to comfortably live on about 4% or a little less, that I'd play the actual withdrawals by ear as events unfolded. That's what I've done in ER.

If your success in ER DEPENDS upon being able to (slavishly) pull a given amount (in the 4% range) out of your port (or else you starve or live in the street), I'd rethink the whole process. Too many variables, not enough data and heaven only knows the future. Keep telling yourself over and over, "IT'S ONLY A TOOL. IT'S ONLY A TOOL..." Of course, YMMV.

 

[tuixiu]

When I run firecalc I put in SS of 70% of what my statements say it will be, then aim for a 95% success rate. I don't believe it won't be there, but I'm not certain it will be what they project it will.

 

[mickeyd]

Said it before and I'll probably say it again. I've never used the SWR concept to "live by" (actually, slavishly pulling X.YZ% out of the port each year). Rather, I used it as a planning tool BEFORE retirement to see when I had enough to pull the trigger. I always assumed that once I had enough to comfortably live on about 4% or a little less, that I'd play the actual withdrawals by ear as events unfolded. That's what I've done in ER.

If your success in ER DEPENDS upon being able to (slavishly) pull a given amount (in the 4% range) out of your port (or else you starve or live in the street), I'd rethink the whole process. Too many variables, not enough data and heaven only knows the future. Keep telling yourself over and over, "IT'S ONLY A TOOL. IT'S ONLY A TOOL..." Of course, YMMV.

Well said Koolau. I think this is what everyone does/will do in retirement also weather they admit it or not. KISS.

 

[deserat]

Yep - pretty much what it comes down to! Flexibility in spending is probably the key to a successful early retirement if you are challenged with a run of "bad" years.

The problem is the models assume static behavior on the part of the human, when in fact, the human behavior is dynamic and iterative.....one can narrow in on a percentage amount that is a 'guideline.' It looks as though we have a fairly tight range to work with based on the models and tweaking. However, to assume there is only one number and the money spender will not change their consumption and/or withdrawal rate is naive.

As a previous poster said....it's just a TOOL. YMMV.