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Anyone withdrawing more than 4%....?
Old 07-29-2007, 01:49 AM   #1
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Anyone withdrawing more than 4%....?

Hi gang,

My wife and I are both in our early 50's and semi-retired (we both work about 20 hours per week).

As we start to think about eventually leaving the workforce entirely, I was explaining to my wife about the 4% withdrawl methodology and FireCalc.

And while I understand the thinking behind FireCalc, it seems well....rather meager. For example, $1,000,000 nest egg generating just $40,000 per year to live on. (Didn't say it was wrong....just kind of meager in my mind.)

So here is my question --

Is anyone withdrawing MORE than 4% (perhaps along the lines of Guyton and others who go out to 5-6%, using specific drawdown rules)?

How has it been doing for you? Any advice you can pass along?

Thanks in advance for any help you can provide!
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Old 07-29-2007, 06:38 AM   #2
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It is NOT just 4%. 4% initially INCREASED by CPI/INFLATION each year after that. If you spreadsheet (EXCEL) such a withdrawal rate (and can live off off it; ie., it covers your annual expenses) you should be able to live forever. Just look when you run out of money on the same spreadsheet by increasing the withdrawal rate (plus assumed inflation rate) and you WILL run out of money quicker. That said it still depends on what you want to do, after all, it is your money. Personally LESS than 4% works for my situations/expenses.
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Old 07-29-2007, 07:03 AM   #3
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The sacred cow in the form of the 4% SWR is based on a 95% successful 30 year survival based on all market conditions since around 1877. It is indexed for CPI so your theoretical purchasing power is supposedly protected.

Now if you read all the mutual fund ads there is always a part that says "Past performance is no guarantee of future performance." The same applies for the 4% SWR. The biggest variable is the market performance in the years just after retirement. The 5% failures all mark major bear markets. I'm sure as the data develops the years 2000 and 2001 will be very bad times to have started retirement.

I'm a believer in Bernicke and Guyton. I have seen my elderly parents and in-laws reduce their cost of living substantially as they aged. I also believe that in retirement I could cut spending if things really did do poorly in the market.

My plan is for two portfolios. One will be set up for basic living expenses which will take credit for SS. It will be run for a 100% survival rate for 40 years through FIRECalc -- live to 95. The balance of the portfolio will be Bernicke based and invested aggressively. If the market tanks, my fun money will disappear sooner than planned but I don't really expect to be doing that much traveling past age 80 anyway. By that time, my four personal data points had two dead and two with serious dementia and/or physical limitations.

IMHO -- Some people's rigid following of 4% or less spending plans are either depriving themselves of enjoyment now or worked way to long before ER-ing.
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Old 07-29-2007, 08:54 AM   #4
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Actually the FIRECalc 4% WR is only 94.3% successful, or 6 failed cycles in 106 past years tested. To pass all the 106 years, the SWR is only 3.59%. And even at 3.59%, there is no guarantee of future success.

Another way to look at this 3.59% SWR: For simplicity, assume 0% inflation, your total withdrawal would be 35,900 x 30 or 1,077,000. Meaning that your 1,000,000 portfolio generates a cummulative return of 77,000 in 30 years.

I'm still 3+ years away from retiring, but I plan to withdraw much more than 4% until I reach 62. Then my withdrawal rate would drop to about 4.5% and stay constant until end of life. Of course, that's only what the plan look like on paper now.

I also believe in Bernike, that people tend to spend less as they get older, partly because they want less, partly because they become better informed consumers. So it's entirely possible that their personal inflation rate is lower than the prevalent CPI (2% instead of 3%, for example).
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Old 07-29-2007, 10:04 AM   #5
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tkp....yes; like you, in our early-mid fifties and in our first year of retirement..we're actually drawing slightly more than 5%. part of me believes that in 9 years with s.s. for both of us, we probably won't need to draw anything at that point. secondly, a high percentage of our current expenses are in travel/entertainment which can be adjusted as necessary. i do think 4% is the best 'guideline' out there however....
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Old 07-29-2007, 01:03 PM   #6
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Thanks so far for the replys. This is very helpful for me.

Anyone else.........?
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Old 07-29-2007, 01:16 PM   #7
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I intend to in hopefully a couple of years.
1) the 4% rule takes no other income sources into account, so + SS, + pension, + possible inheritence will increase the number. What will be there in the future you decide.
2) Bernicke's less spending IMO is real and I factor it into my numbers.
3) The 4% is based on 75/25 for S&P/Fixed income. My basic research indicates that with the new domestic/international ETF's and greater ability to diversify, the 'pure' SWR can increase 0.5% to 1.0% or so.
4) by monitoring and having some flexibility, taking a PT job or reducing expenses will do wonders. All/most of the models do not incorporate this/any flexibility and hence are rather strict.

My number is about 45 yrs old and 5.5% WR. 3 yrs to go.

job
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Old 07-29-2007, 01:32 PM   #8
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Something nobody has mentioned is something that used to be called POPR (Pay Out Period Reset).

The reason that the 4% (or 3.59% or whatever) seems so meager at first is that it has to be that low to provide for the absolute worst case scenarios, which are usually retiring right before the beginning of a really bad economic period such as the Great Depression.

However, the much more likely scenario is that you won't retire into that worst case scenario, so after a few years, you may find that after you've taken your 4% plus inflation withdrawals, that your portfolio has still grown.

At that point, you can simply pretend that you're just starting out your retirement, and begin taking 4% of your larger portfolio. You can take even more if you're willing to plan on a shorter life expectancy as well.

You can do this every year if you want.

2Cor521.
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Old 07-29-2007, 01:36 PM   #9
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My DW and I are in our late 50's. I have been retired for 6 1/2 years and DW has been retired for 5 years. Helpful info- we have been married for 5 years. We have averaged a 5.6% withdrawal rate since retirement and have together about $7500 a year in pensions. Our financial net worth is 23.7% higher now than it was 5 years ago.
We will be taking SS at 62. We spend most (45% or $50,000 a year) of our money on travelling and will probably cut back travelling some or a lot when we reach 65 depending on health.
We both firmly believe our expenses will go down as we age mostly due to decreased travel but also due to aging. We each have older siblings who can't get out much for many reasons and thus can't spend much money.
Our plan is to sit in our rocking chairs with our grandkids on our laps and show them the pictures we have taken on our travels.

We both believe in "Dying Broke", and mostly follow Bob Brinkers advice.
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Old 07-29-2007, 01:42 PM   #10
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Originally Posted by SecondCor521 View Post
However, the much more likely scenario is that you won't retire into that worst case scenario, so after a few years, you may find that after you've taken your 4% plus inflation withdrawals, that your portfolio has still grown.

At that point, you can simply pretend that you're just starting out your retirement, and begin taking 4% of your larger portfolio. You can take even more if you're willing to plan on a shorter life expectancy as well.

You can do this every year if you want.

2Cor521.
While you can do this, it is just a way of getting more spending money by accepting more risk. Imagine that you could live forever, and every year if your assets had increased you re-started at 4% of the new total, providing this gave a higher withdrawal than your previous year plus CPI. If on the other hand your assets had stayed the same or decreased, you used the previous years number plus CPI.

Sooner or later you would be busted. (This ignores other income sources, the possible ability to radically decrease your spending etc.

Humans have an impressive ability to rationalize away objections to a course of action they want to follow. IMO, this too needs to be guarded against.

Ha
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Old 07-29-2007, 01:53 PM   #11
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Originally Posted by haha View Post
While you can do this, it is just a way of getting more spending money by accepting more risk. Imagine that you could live forever, and every year if your assets had increased you re-started at 4% of the new total, providing this gave a higher withdrawal than your previous year plus CPI. If on the other hand your assets had stayed the same or decreased, you used the previous years number plus CPI.

Sooner or later you would be busted.

Ha
If one accepts the premise that the future will be no worse than the worst of the past, resetting one's withdrawals to 4% of the new total would never be unsafe (by definition), so your last statement would not be true. You would, however, end up with a lower average ending balance at death. I don't know if this premise is true or not but I am willing to accept it as an operating assumption.

If one doesn't accept the premise, then I'm not sure how one plans and I'm also not sure why one would use the 4% number.

2Cor521
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Old 07-29-2007, 02:01 PM   #12
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taking 5 - 6% this year because we've had 20%+ for the last year and a half. I invested a large lump sum in the beginning of '06, which turned out to be a great time to lump sum invest.

Plus, since I'm only 25, I'm sure I'll start another business or something and eventually begin getting an income again.
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Old 07-29-2007, 02:05 PM   #13
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If one accepts the premise that the future will be no worse than the worst of the past, resetting one's withdrawals to 4% of the new total would never be unsafe (by definition), so your last statement would not be true.
2Cor521
Well, since there have been very few independent 40 or 50 year trips,and since I set up a mental experiment of an infinite number of trips, I think the idea that the future can never be worst than the past is just an example of the rationalization that I make in my last point.

Did god promise that the 125 years or so that are in the database comprise all the possibilities that that big randomizer in the sky can produce?

As for why one would use the 4% figure, I really don't know the answer to that either!

Ha
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Old 07-29-2007, 02:16 PM   #14
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Ha,

So what do you use for your planning, and why?

It seems you might like Monte Carlo simulations.

2Cor521
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Old 07-29-2007, 02:52 PM   #15
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I don't have an alternative that I would put out there. Absent pensions or indexed annuities long retirements are risky, period. I don't say they can't succeed. Many have and many more will.

My goal for myself is to keep in mind as many of the risks as I am able, and to counter them as best I can. I also want to admit to myself what I am really like, and know how I would likely behave in various perhaps uncommon but definitely not impossible sequences.

Instructive for me was to set a $1mm floor below which I was unwilling to go, and then run FireCalc. The floor would differ for different people, but I imagine that very few who have clawed their way into a $2mm asset position would feel good or perhaps even be able to keep to the program if those assets fell well below $1mm. Some running FireCalc might not realize that a 100% survival only means that running the database never caused assets to fall low enough that the next year's payout could not be made.

Ben Graham stressed the margin of safety. A margin of safety is a somewhat fuzzy concept that everyone needs ot work out for him/herself.

Ha
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Old 07-29-2007, 03:13 PM   #16
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2Cor521, I think Ha's premise was that someone that constantly readjusts to take 4% of their currently portfolio out may just end up rationalizing away the bad times and end up taking out a CPI adjusted amount of last year's balance when times are bad and a straight 4% of current value when times are good.

They were far too light on the subject, but Boglehead's said 4% of starting balance and adjust for inflation _or_ 5% of each year's current value. (so you get more in the fat years and lean it up in the bad years).

Oh, and thanks all for the info on this thread. It's been very helpful to think about... especially the laddered drawdown as you age. On the one hand, it makes sense that I won't travel as much or spend as much when I'm 70. On the other hand, I would think I might have other, higher expenses then (medical for instance).

Establishing a floor (self-funding a "pension" with $x) and then a "spend it" faster ceiling with $y does seem intuitive and attractive.
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Old 07-29-2007, 03:21 PM   #17
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I think a dividend based retirement is fairly safe, as long as you stick to top quality,
growing companies, and monitor them every quarter or year for signs of possible trouble
(increasing debt loads, management changes, etc). It is pretty easy to get a portfolio
set up with a 3% yield (3.5% now that REITs have dropped back to a reasonable
level) that can be expected to grow faster than inflation.Of course there is still some
risk involved, but I feel pretty comfortable with it, even with 100% in equities. Drops
in portfolio value become pretty much irrelevant when you can live on the dividends.
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Old 07-29-2007, 03:38 PM   #18
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I think a dividend based retirement is fairly safe, as long as you stick to top quality, growing companies, and monitor them every quarter or year for signs of possible trouble
(increasing debt loads, management changes, etc).
I agree with this idea. This is a lot like living off a store or other small business that you continue to operate, except that it should be more secure and easier to manage.

I prefer less than 100% allocation to this, because I want to money devoted to low or no yielding equities that I hope may pay off big; and I want some in short term AAA fixed to allow me to do time arbitrage and look for the occasional strong buying opportunity in the equity markets. So in my case, dividends do not completely cover what I want to withdraw.

I am not completely sure, but I don't think I have ever had a down year after withdrawals in over 20 years of retirement. Still, these have been 20 good years and I have had a lot of luck. Also if I got too old or infrim to think well I would be out of luck quick. I have couple of great sons, but they do not have money minds.

Ha
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Old 07-29-2007, 04:01 PM   #19
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With respect to the above discussion of resetting the 4% withdrawal rate each year based on the growth/decline of the portfolio:

Let's assume that the future will be no worse than the past. With a 75/25 equity/fixed mix and a 4% withdrawal rate there is a 5% chance of failure over a 30-year horizon. Alternatively, the success rate is 95%. This means after N resets (assuming fixed 30-year horizons), the probability of success (not running out of money) would be

(0.95)^N

N=5 => a success rate of 77%

N=10 => a success rate of 60%

N=13 => a success rate of 51%

I think this illustrates that resetting to 4% of the current portfolio every year does indeed increase the risk of failure, and that increase is larger than one might think. Intuitively, what one is doing is "searching" for that "bad time" to start one's retirement cycle.

I would feel safer (again assuming that the past is prologue) after a substantial increase in the portfolio, using a withdrawal rate which Firecalc says is 100% safe (e.g. 3.59% or lower) which will allow for greater dollar withdrawals without increasing the risk of failure.
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Old 07-29-2007, 05:07 PM   #20
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Also if I got too old or infirm to think well I would be out of luck quick. I have couple of great sons, but they do not have money minds.

Ha
This is one of my biggest long-term concerns. If I am lucky enough to live long
enough to become mentally infirm, I will probably need to switch to index funds
and hire some legal / financial firm to administer it. My friends are all around my
age, I have no kids, and I just don't think my dogs are up to the task.
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