Article on safe withdrawal rates

[haha]

Quote:

Originally Posted by ejman But come to think of it, assuming a rate of return just enough to cover inflation (i.e. 0% real return) a portfolio will last 25 years to depletion assuming 4% withdrawals so, yeah on first blush it makes sense that a 1% real return will be fine for 30 years.

This may be tripped up by volatility and other aspects of nasty reality, but even it things proceed exactly this way, it might feel like it felt to cash poor aristocrats of the Old South, as they sold their French furniture, fine horses, silver and lace and other aspects of their lives to get something to eat, and some fuel to keep warm. Might be OK for some, for for me, suck, suck, suck!

NW is very outfront about how much being well off means to him psychically, I am the same way. Although I have not often talked about it, people who have read any of my posts likely could predict this about me. Others perhaps are different, but I suspect that anyone who has saved strenously and studied and invested carefully over a period of years, would be more than a little disturbed by a drawdown like you describe.

Ha

[mathjak107]

Quote:

Originally Posted by ejman mathjak107, Thank you for an interesting post as well as the link for some perspective that I had not fully considered before. I thought I really understood what the 4% rule was all about but had not really appreciated the low return needed for the 4% rule to hold going into our (probably) low return "new normal" future. I've also subscribed to the thought that the 4% rule has worked in the US because we have had such an exceptional past compared to other countries. I'm going to have to noodle this one for a bit to see if it still makes sense to me after futzing with it but again, thank you. But come to think of it, assuming a rate of return just enough to cover inflation (i.e. 0% real return) a portfolio will last 25 years to depletion assuming 4% withdrawals so, yeah on first blush it makes sense that a 1% real return will be fine for 30 years.

Your welcome. i too was floored by it but again its not the 1% that makes

the magic its the fact that more and more data research is showing that

15 years seems to be the flipping point time and time again after crappy returns.

even ray lucias buckets is based on a 15 year time frame before you hit

your stock bucket because we never had a 15 year period where there

wasnt at least some point we were higher.

we dont realize how low 4% really is in dollars drawn vs say 6% SO THE 60/40 MIX can really with stand quite a bit of damage and still hold true.

could it fail us at some point? sure it could.

but it puts the odds in your favor and when dealing with the unknown you want every bit of odds in your favor.

i love learning stuff like this because it reminds me how little i understand and how smart some of these guys who research this stuff really are.

[ejman]

Quote:

Originally Posted by haha This may be tripped up by volatility and other aspects of nasty reality, but even it things proceed exactly this way, it might feel like it felt to cash poor aristocrats of the Old South, as they sold their French furniture, fine horses, silver and lace and other aspects of their lives to get something to eat, and some fuel to keep warm. Might be OK for some, for for me, suck, suck, suck! NW is very outfront about how much being well off means to him psychically, I am the same way. Although I have not often talked about it, people who have read any of my posts likely could predict this about me. Others perhaps are different, but I suspect that anyone who has saved strenously and studied and invested carefully over a period of years, would be more than a little disturbed by a drawdown like you describe. Ha

I fully agree with you (and NW) and feel the same way. That increasing Net Worth line since I retired 10 years ago is mighty comforting. Nonetheless, from the stories I've heard from my grandpas who came from the other side of the pond at a time of great upheaval I feel that although such type of things would most definitely suck as you say and it's not something I wish for nonetheless, for most people life is what they make of it. I most certainly don't wish to be the subject of such a test but who knows?

[Nords]

Thanks to http://raddr-pages.com/forums/viewto...1208&hilit=Y2K , here's my favorite hapless Y2K ER blithely spending his way down the death spiral:

Quote:

Originally Posted by raddr I've finally gotten around to calculating the ... year end balance of the portfolio of a hypothetical investor who retired at the end of 1999 with a 75:25 mix of S&P500 stocks and 6 mo. commercial paper. This was the type of portfolio that was being touted as "100% safe" on some investment boards based on historical backtesting at the time. The following numbers assume a 0.2%/yr. expense ratio, 4%/yr. withdrawal, and are stated in constant (real) dollar amounts:

Quote:

Originally Posted by raddr Okay, here it is, the 2011 update: As you can see, the poor retiree's real net worth has dropped nearly two-thirds (from $1000 to $367) in only 11 years and he is now withdrawing about 11% of his portfolio per year which is a recipe for disaster, even if the market heads up big-time from here. It looks to me like his portfolio very likely will fail in the next decade and is virtually certain to fail in the 30-year time frame which was touted as "100% safe" by many respectable market gurus and financial planners just a decade ago. One interesting item to me is the essentially zero nominal return of T-bills which equates to a real return of -3.4% over the last year. Prior to the banking bust in 2008 the returns on cash were roughly in line with inflation but no more as the Fed tries to pump up the banks and entice investors back into financial assets and housing. This is creates an additional drag on an already severely stressed portfolio.

As many researchers have suggested lately, maybe it's the sequence of returns during those first 5-10 years of retirement that's the most important.

But, doom & gloom notwithstanding, the entire 4% SWR system runs against human psychology and American reality. It's very hard to blissfully raise your spending by the rate of inflation when the stock market was down a few percent last year, let alone years like 2008-09. It's not very realistic to ignore all Social Security benefits. However I'll agree that it's human psychology to ignore a 95% success rate to obsess over a 5% failure rate.

So use the 4% rule as an indicator that you're 95% of the way there. Then instead of trying to blindly follow it (and arguing about it on discussion boards) do something different. Annuitize 25% of your portfolio. Use a variable portfolio withdrawal system like Bob Clyatt's 4%/95%. Live off your dividends, no matter how sucky that may be some years. Or just freeze your spending during bad years and only raise it during good ones.

[mathjak107]

i saw that chart before but its really not accurate in my feeble mind. it uses t-bills instead of bonds.
bonds blew away stocks this decade and really ran with the ball .

my long term treasuries i had actually caused my version of the permanent portfolio to be up in 2008 -2009 actually un-doing the stock damage i had..

t-bills did squat and really offered no benefit in that chart other then they are not stocks.they didnt hurt but they didnt help either.

i dont think many retirees only use t-bills and stocks.

i understand the correlation between stocks and corporate bonds are not opposite and so the author used t-bills but i think its not really representative of a y2ker.

[ejman]

Quote:

Originally Posted by mathjak107 Your welcome. i too was floored by it but again its not the 1% that makes the magic its the fact that more and more data research is showing that 15 years seems to be the flipping point time and time again after crappy returns. even ray lucias buckets is based on a 15 year time frame before you hit your stock bucket because we never had a 15 year period where there wasnt at least some point we were higher. we dont realize how low 4% really is in dollars drawn vs say 6% SO THE 60/40 MIX can really with stand quite a bit of damage and still hold true. could it fail us at some point? sure it could. but it puts the odds in your favor and when dealing with the unknown you want every bit of odds in your favor. i love learning stuff like this because it reminds me how little i understand and how smart some of these guys who research this stuff really are.

Yes, sequence of returns has a tremendous impact. I suspect that the Great Depression immediately followed by the stagflation of the late 60's to the 70's would have been the kiss of death for most retirement plans. I'm not sure such sequence of events is even economically possibly as going directly from deflation to inflation might be pushing it a bit but who knows?

[JoeWras]

Quote:

Originally Posted by ejman Yes, sequence of returns has a tremendous impact. I suspect that the Great Depression immediately followed by the stagflation of the late 60's to the 70's would have been the kiss of death for most retirement plans. I'm not sure such sequence of events is even economically possibly as going directly from deflation to inflation might be pushing it a bit but who knows?

What about Japan? Anyone look at scenarios using their numbers for say a 1990 retiree?

[mathjak107]

look at those who retired in the mid 1960's . they had 20 years of crappy stock market returns then went right into double digit inflation.

they jumped from a 4% withdrawal to a 10% withdrawal almost over night just to pay bills..

the 4% swr covered them too.

[mathjak107]

Quote:

Originally Posted by JoeWras What about Japan? Anyone look at scenarios using their numbers for say a 1990 retiree?

to be fair we would need to really base it on their own worst case scenerios and not ours. only then would we be able to find their own swr.

[JoeWras]

Quote:

Originally Posted by Nords Thanks to Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update , here's my favorite hapless Y2K ER blithely spending his way down the death spiral: As many researchers have suggested lately, maybe it's the sequence of returns during those first 5-10 years of retirement that's the most important. But, doom & gloom notwithstanding, the entire 4% SWR system runs against human psychology and American reality. It's very hard to blissfully raise your spending by the rate of inflation when the stock market was down a few percent last year, let alone years like 2008-09. It's not very realistic to ignore all Social Security benefits. However I'll agree that it's human psychology to ignore a 95% success rate to obsess over a 5% failure rate. So use the 4% rule as an indicator that you're 95% of the way there. Then instead of trying to blindly follow it (and arguing about it on discussion boards) do something different. Annuitize 25% of your portfolio. Use a variable portfolio withdrawal system like Bob Clyatt's 4%/95%. Live off your dividends, no matter how sucky that may be some years. Or just freeze your spending during bad years and only raise it during good ones.

Thanks for the chart and the commentary. Very nice.

Unfortunately for me, the psychology of this and my reaction is to it is to consider w*rking a few more years. And of course the danger there is is w*rking until I'm dead trying to achieve 99.9% on firecalc.

[ejman]

Quote:

Originally Posted by JoeWras What about Japan? Anyone look at scenarios using their numbers for say a 1990 retiree?

Wade Pfau wrote this article on safe withdrawal rates in other countries:
An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?

The safe withdrawal rate for Japan (table 3) was 0.47%!!!!

Note that the only safe conclusion from this depressive study is: work until you die!

[ejman]

Quote:

Originally Posted by Nords Thanks to Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update , here's my favorite hapless Y2K ER blithely spending his way down the death spiral: As many researchers have suggested lately, maybe it's the sequence of returns during those first 5-10 years of retirement that's the most important. But, doom & gloom notwithstanding, the entire 4% SWR system runs against human psychology and American reality. It's very hard to blissfully raise your spending by the rate of inflation when the stock market was down a few percent last year, let alone years like 2008-09. It's not very realistic to ignore all Social Security benefits. However I'll agree that it's human psychology to ignore a 95% success rate to obsess over a 5% failure rate. So use the 4% rule as an indicator that you're 95% of the way there. Then instead of trying to blindly follow it (and arguing about it on discussion boards) do something different. Annuitize 25% of your portfolio. Use a variable portfolio withdrawal system like Bob Clyatt's 4%/95%. Live off your dividends, no matter how sucky that may be some years. Or just freeze your spending during bad years and only raise it during good ones.

Very sensible and probably what most of us actually do. (except for the annuity bit haven't done that yet)

[Major Tom]

Quote:

Originally Posted by Dwhit Do most FIRE 'ers use a set withdrawal rate, or do you tend to vary each year depending on how your savings grow for the year?

I've only been ER'ed for 18 months and am living off a 2.5% WR as calculated from the starting value of my portfolio. As I'm relatively young (48) and hope to be around for several more decades, the plan is to keep the withdrawal amounts the same for the next few years, without even a cost-of-living raise. I'll re-evaluate in a few years and maybe give myself a modest raise if I'm feeling confident.

I'd rather be conservative in the early years of retirement than run out of money when I'm older. Besides, the biggest luxury to me is not travel, fine restaurants, or other pricey consumer goods, but being able to roll out of bed whenever I want and have the entire day to myself, every day.

As I get older, and closer to being able to claim SS, I'll probably feel more cavalier about rewarding myself with a bigger income. The trick will be to do it soon enough so that I can splurge it on fun things before I'm too old to enjoy such frivolity

[JoeWras]

Quote:

Originally Posted by ejman Wade Pfau wrote this article on safe withdrawal rates in other countries: An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule? The safe withdrawal rate for Japan (table 3) was 0.47%!!!!

Thanks for digging that up! This was the perspective I was looking for.

Japan came to mind as a worst case, and the study supports it, although the study also includes WWII.

The other thing from the study is that an SWR of 3% seems to be more in line with global perspective taken into account. Most of the countries that fell below 3% were smack in the middle of WWI and/or II. The USA and Canada really ruin the curve for this century long look back, since they relatively prospered during the wars.

[samclem]

Quote:

Originally Posted by JoeWras Unfortunately for me, the psychology of this and my reaction is to it is to consider w*rking a few more years. And of course the danger there is is w*rking until I'm dead trying to achieve 99.9% on firecalc.

Sometimes I think I'm in this boat, too. Still, I know that being able to flex my annual withdrawals will buy me a LOT more long-term safety (including some defense against that black swan that is outside the present historical data set) than piling up a few more thousands of dollars in the nestegg. A "fixed" 4% WR (or even 3%) with inflation adjustments is a risky thing, it seems to me. And as Nords points out, it's just not the way people will really behave if their spending plan provides any room to cut spending in the face of unplanned market adversity.

[Nords]

Quote:

Originally Posted by samclem Sometimes I think I'm in this boat, too.

"But... but... but just one more year!"

You'll know when the time is right.

For me, the most recent incidence of having the point driven home (with a five-pound sledge) was the Facebook photos of the USNA '82 reunion. At least that's who they claim was in the photos, but every one of them was filled with a bunch of geezers.

[steelyman]

Quote:

Originally Posted by Nords For me, the most recent incidence of having the point driven home (with a five-pound sledge) was the Facebook photos of the USNA '82 reunion. At least that's who they claim was in the photos, but every one of them was filled with a bunch of geezers.

Wow, that's rude.

[Major Tom]

Quote:

Originally Posted by steelyman Wow, that's rude.

I thought it was quite funny. Wikipedia says,

"Geezer is a term for a man. It can carry either the connotation of age and eccentricity or, in the UK, that of self-education such as craftiness or stylishness."

Doesn't sound too rude to me.

[Nords]

Quote:

Originally Posted by steelyman Wow, that's rude.

I'm sorry, are you a member of USNA '82 also?

If I'd been at the reunion, I would've been in the photos with my fellow geezers...

[steelyman]

Quote:

Originally Posted by Nords I'm sorry, are you a member of USNA '82 also? If I'd been at the reunion, I would've been in the photos with my fellow geezers...

No, I was until recently an academic, not military. But I admire, respect, and am grateful for those who did/do serve.

Not the end of the world, but I learned a long time ago that words are important.