Article on safe withdrawal rates

[audreyh1]

For the folks that retired around 2000, do you have additional sources of income to support your portfolio ?

No

 

[ejman]

For the folks that retired around 2000, do you have additional sources of income to support your portfolio ?

Retired in 2002, no additional sources of income but starting SS in a couple of months at age 62+ 2 months.

 

[mathjak107]

For the folks that retired around 2000, do you have additional sources of income to support your portfolio ?

The returns from Mathjak do not take into account the impact of SWR drawdown, correct ?

I think this can be modeled with firecalc. 1MM start value, use 11yrs, and set it to provide spreadsheet data under the investigate tab, then look at sheet results the last line starts in 2000 showing portfolio value. With 4% SWR it looks close to what raddrs table shows. I agree with using longer dated bond yields instead of cash. At the current time though I wouldn't expect much support from bonds going forward.

as long as 2000 saw at least .86% real return a year as an average the first 15 years the 4% swr is safe. it saw better then that for sure with bonds according to the chart.

my own looks like a 3% real return assuming 2% inflation over that time frame.

as kitces pointed out the swr of 4% really does not take much to keep it going its such a conservative number.

for the most part the changes from market action is perceived more in whats left over when you die as opposed to messing with the income.

thats why if anything its critized for being to conservative and leaving to much ,money on the table usually.

 

[mathjak107]

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!

so now the question is if thats the swr for a retiree in japan how is it that in real life the older population is spending so much that they account for a full 40% of all consumer spending in japan..

i think sometimes all these studies in swr end up not reflecting what the real world actually sees happening .

think about if our swr was .47% and that was our real number. how little would seniors be accounting for total spending here? not much.

i want to say they are doomed to fail anyway if they spend it so what the heck lets spend it is their attitude but somehow i dont think thats a retirees instinct.

well you brains figure out how a country with almost zero swr is being supported by it seniors because i cant. .

Megatrends: The World's Aging Population

 

[nun]

I'm surprised that SPIAs haven't been mentioned yet as part of a SWR strategy. The only truly SWR is 0% or at least one that sees your principal grow by the rate of inflation each year

 

[nun]

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!

However, Pfau ignores that in other countries SPIAs and pensions are still the usual way to get retirement income. Of course the poor returns would be an issue for the insurance companies who guaranteed the income, but you'd expect that their resources would allow them to survive multiple bad years.

 

[audreyh1]

so now the question is if thats the swr for a retiree in japan how is it that in real life the older population is spending so much that they account for a full 40% of all consumer spending in japan..

i think sometimes all these studies in swr end up not reflecting what the real world actually sees happening .

think about if our swr was .47% and that was our real number. how little would seniors be accounting for total spending here? not much.

i want to say they are doomed to fail anyway if they spend it so what the heck lets spend it is their attitude but somehow i dont think thats a retirees instinct.

well you brains figure out how a country with almost zero swr is being supported by it seniors because i cant. .

Megatrends: The World's Aging Population

Simple - their investment universe is NOT limited to Japan.

I think in that "what if" scenario it was an unreasonable assumption that someone would limit their investments to their country of residence.

 

[EvrClrx311]

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!

What I find interesting is that in Japan a 4% WR gives you a 37.5% failure over 30 years periods while a 5% WR only raises that to 40% failure.

If you're gonna take out 4%... might as well go for 5%

(to me, this points out that there were 'unlucky' years that need to be avoided... clearly not something an investor can control)

 

[samclem]

as long as 2000 saw at least .86% real return a year as an average the first 15 years the 4% swr is safe.

Unstated final clause: "If historical US equity performance after previous periods of underperformance is still a useful guide." I can see, though, how just living through a period of very poor performance folks might take little comfort in that. The little voice will be screaming "what if it really is different this time? After all, the last decade has been fairly 'different.' "

Have a plan that allows flexibility in spending. Then recognize when it needs to be implemented.

 

[mathjak107]

Simple - their investment universe is NOT limited to Japan.

I think in that "what if" scenario it was an unreasonable assumption that someone would limit their investments to their country of residence.

Yes thats a big wrong assumption. especially if your own country is doing poorly.

 

[ejman]

What I find interesting is that in Japan a 4% WR gives you a 37.5% failure over 30 years periods while a 5% WR only raises that to 40% failure.

If you're gonna take out 4%... might as well go for 5%

(to me, this points out that there were 'unlucky' years that need to be avoided... clearly not something an investor can control)

Indeed. For Japan the unlucky period includes having a couple of atomic bombs dropped on you.

 

[samclem]

Indeed. For Japan the unlucky period includes having a couple of atomic bombs dropped on you.

Well, it's not like the "bad luck" started there. Ask the Chinese, the Koreans, or the residents of Oahu if there is more to the story.

 

[ejman]

Well, it's not like the "bad luck" started there. Ask the Chinese, the Koreans, or the residents of Oahu if there is more to the story.

My comment was meant in the context that war and mayhem are not good for the early retiree living of his investments. (this is the ER forum right?) It was certainly not meant as any sort of endorsement of the Japanese policies prior or during WWII and I'm sorry you interpreted my comment in that fashion. As my son likes to say "relax"

 

[samclem]

My comment was meant in the context that war and mayhem are not good for the early retiree living of his investments. (this is the ER forum right?) It was certainly not meant as any sort of endorsement of the Japanese policies prior or during WWII and I'm sorry you interpreted my comment in that fashion. As my son likes to say "relax"

What some see as "bad luck" others see as another in a string of events that are not "luck" but the result of clear cause and effect. That's all--and maybe there are lessons for us in that.

 

[mathjak107]

there is one thing in kitces calculations as far as the minimum return you need to get over a 15 year period to have the 4% rule survive i dont follow.

he says we need to get 1% real return on our portfolio and figured bonds at zero real return because the 10 year is at around 2% and inflation is at 2% .

so he points out its just equities runnng with the ball and they need the 1%

but as inflation rises that real return of zero on that bond is now negative so it should be increasing the demand on the equities portion to have to produce more than 1% real return on equities to compensate for negative real return on bonds.

4% inflation could have that bond at -50% real return . that would take almost 2% real return over 15 years not 1% to bring the portfolio back in line..

considering we have not had a 1% real return on the s&p 500 for 12 years that is a tall order .


am i missing something here ?

What Returns Are Safe Withdrawal Rates REALLY Based Upon? - kitces.com | Nerd's Eye View

 

[pb4uski]

I was once curious and modeled the implicit rates of return needed to support a 4% WR over 30 years and 40 years assuming inflation was 3%. The result was 4.05% (1.05% real return) for a 30 year time horizon and 5.42% (2.42% real return) for a 40 year time horizon.

Different inflation rates don't make a huge difference. For the 30 year time horizon inflation rates of 0-5% resulted in required real rates of return of 0.93-1.22%. For the 40 year time horizon inflation rates of 0-5% resulted in required real rates of return of 2.52-2.35%.

The historical investment return for a 60/40 mix of stocks and bonds from 1926-2011 was 8.6% so I figured even if there really is a new normal that I was probably safe considering my WR is lower than 4% and there is some flexibility in my expenses.

 

[mathjak107]

exactley my thinking. the swr rate is safe because with the higher stock allocation its not the rate that takes a hit its the pile of money in most cases thats left over that does.

 

[audreyh1]

considering we have not had a 1% real return on the s&p 500 for 12 years that is a tall order .

am i missing something here ?

What Returns Are Safe Withdrawal Rates REALLY Based Upon? - kitces.com | Nerd's Eye View

I think after a long period of low real returns on equities, it might be reasonable to expect a better real return going forward. But maybe not on the S&P500. Might need to diversify a bit more......

Note that in the above GMO 7 year forecast "US Bonds" are US Govt Bonds, and there is no forecast for US Corporate bonds which will probably do better (not being so oversold).

Bogle is predicting 4.5% real return on equities, so that would take care of the whole portfolio if you held at least 50% equities.

 

[rbmrtn]

I think part of his assumptions are based on using PE10, and when PE10 is historically low going forward should produce good market returns, a period of weak performance tends to lead to a period of good returns.

Also in his report in the OP, from May 08, he conclude with this:

"However, it is important to bear in mind that
although the data in this newsletter reveals that in
some environments the safe withdrawal rate should
be 0.5% or even 1% higher than it is now (producing
real dollar spending that is 10% to 20% higher) – we
are not yet in one of those environments! Given
today’s high valuation measures, a great deal of
conservatism in today’s safe withdrawal rates should
still reign supreme. Nonetheless, at some point in the
future, this research suggests that a standard
withdrawal rate approach in the 4% to 4.5% range
may be far too conservative, representing an
unnecessary restriction on the spending of retirees!"

So he is saying at some point in the future increasing withdrawals maybe supported.

 

[Finance Dave]

Not FIREd yet, but my plan is to have a nestegg slightly larger than I really need...I calculated what FIREcalc said and added about 10%...will *ork until we get there.

I will separate my annual spending needs into two categories, wants and needs. First year we'll spend on both, as budgeted. At end of first year, will evaluate portfolio performance. If it did better than planned, we have more "fun" the following year. If not as well as planned, we skip a vacation or reduce hobbies.

Easy peasy.

 

[RobLJ]

I was responding to mathjak107,
Sure, market history can certainly be used as an artifact to see how withdrawal rates would be affected in the "new retirement funding" of IRA/401(k);s of the current time, but if you're not in the market to accumulate or depend on it for retirement income, it makes little sense to consider it. Those who retired in the mid-60's (the point of time under discussion) were not necessarily concerned with safe withdrawl rates nor widely invested in the market.

This doesn't make much sense--so do we only begin analysis at the 80's or 90's to test? I agree that the future may not look like the past, but beginning with a particular portfolio level and testing it from the 30's or 50's makes a lot more sense than starting in the 80's. I may have misunderstood your point however.
And if your point is the future will not resemble the past, you are correct but the more pasts included in the model the more likely one will gain some useful information. Again, I suspect I'm misinterpreting your point.

 

[mathjak107]

i too would want as many actual points that happened in history as a guide for building my plan.

like building a storm rated home. you at least start with what was so at least you stand a chance of surviving that much.

tomorrow sandy here in long island will become the next worst case and may be the reference for 100 years of construction going forward.

the past may not happen ever again but it will help rule out whats not a reasonable assumption.

 

[WestLake]

Those who were retired in the 1960s and 70s didn't have cable TV, internet, cell phone, security monitoring bills et al nor fancy electronic toys and a cornucopia of exotic items in the grocery stores.

Color TVs were expensive, however.

 

[rmark]

'i too would want as many actual points that happened in history as a guide for building my plan.'

IIRC, the book 'Triumph of the Optimists' has returns and std. deviations for 15 countries over 100 years, 1900-2000. By that standard, US 1926-2000 data is about 5% of the available years. And generally the best years.

 

[marko]

'i too would want as many actual points that happened in history as a guide for building my plan.'

IIRC, the book 'Triumph of the Optimists' has returns and std. deviations for 15 countries over 100 years, 1900-2000. By that standard, US 1926-2000 data is about 5% of the available years. And generally the best years.

Most of you math weenies are out of my league, but isn't comparing economies of the 1920's almost like comparing it to 1000 years ago? As things have evolved, even the 1950's are from the dark ages when trying to form comparisons.

It's an entirely different world/economy/measurements/planet isn't it?