Dr. Pfau looks at the 4% rule in an interview

[Original Wally]

\Per Koolao: ***My "real" plan is to play it by ear and keep my spending flexible by - if need be - exercising any number of back-ups.***

Yup. I have a great spreadsheet (don't we all) that projects our portfolio to age 90 (as a target "zero" balance). But, it is completely flexible from year to year. We are almost 59 so this is a very long term projection. We have a good pension and SS. Our draw down plan anticipates that we will be more likely to travel, spend "wildly" (not likely) and so forth in the next 15 years (60-75) than in the subsequent 15 years (75-90). I fully anticipate slowing down as we age. We also have a good "long term care" policy in place. Over the years, when w*rking, we constantly made adjustments when wages changed. Or disappeared for a while. We have had "austerity" budgets before and could do it again. We try to not live in fear of the future, but enjoy today with an eye towards the future.

My base assumptions are COLA raises at 1.5% for Social Security,
COLA from pension at 2.5% (not sure WHY I set up the diff between SS and Pension.)
A desire to have an increased annual Cash Flow of 2.5% per year (since SS is less than that, the diff resultes in an ever increasing draw from portfolio).

I assume the portfolio will earn inflation + 3%

The numbers in the spreadsheet seem to work. NOW if only reality does as well.

 

[gardenfun]

thank you, Katsmeow, for the explanation.

I guess I just get tired of hearing "run out of money" when in most cases you will have something left. I suppose it's just the media's way of using somewhat emotional terms to attract readers, feeding off their fears with yet another story about how boomers can't retire, etc. etc.

I wish there were more news stories about successful FIRE-ers. But then again, I like having the "secret" with the folks on this and other forums.

 

[ERD50]

I hope this isn't a stupid question, but when I look at the Trinity Study results, and various FIREcalc results, I see very high probabilities that a person using a SWR will end up with more than their starting principal after 30 years. Am I interpreting that correctly?

...

I just don't get the "running out of money" issue.

Hope I haven't confused things further--thanks!!

In addition to what Katsmeow posted, if you are more visual, just look at the graph from a default (4% WR, 30 year time-span) FIRECALC run.

There are too many lines to get anything more than a rough idea, but we know that 5% of the time-spans ran to zero or below (the failures), and maybe a third to a half ended up with less than they started (in buying power), so about a half to two-thirds end up with more than they started. Sometimes much more!

edit/add - that results page also shows the min/max/avg. In a case like this, 'average' really isn't very useful, other than to say "well, would you look at that!", but the portfolios on average ended up at 1.76X their starting points in buying power, and would be a higher $ figure due to inflation. So, "well, would you look at that!".

It simply due to the fact that the economic cycles varied for each time period that was run, so the results vary.

-ERD50

 

[RonBoyd]

Me? Since my portfolio is up by .05% -- just in the past month, I have concluded that I am an investing genius and should be a Billionaire very soon. Therefore, I am not going to be all that concerned about SWR... based on my current burn-rate.

Of course, some sparkly thing might catch my eye in the next 40 years so I am not guaranteeing anything.

 

[enjoyinglife102]

I don't think enough focus is placed on the inflation variable when these SWR are discussed and it is an enormous driver of projected needs. To me, the aggregate number is useless as what's important is what each individual experiences. A previous thread had numerous people sharing that their personal inflation rate was significantly lower for many years than the "standard" number used of 3 or 4%. OTOH, if somebody is actually experiencing a higher rate, they better be prepared for that as well. Using the aggregate number out of convenience simply generates information that is wrong and sadly the result of that is people may hold back from living they life they want.

 

[clifp]

Yes, thanks. Not much detail there. The lack of COLA on most of these makes the calculations a bit trickier.



Very true. My Mom is set well financially, but really has little interest in anything fancy. That's fine, she's not depriving herself, she just doesn't feel the need.

I push in little ways when I think she really would benefit. When I helped her shop for a TV, I nudged her to the next largest size as I thought she would appreciate it over the long run. When it comes to safety, I push pretty hard. Really no reason to skimp on things like keeping the car safe and well maintained, or replacing a rug that she almost trips/slips over.

-ERD50

I think that is true for most older folks. Heck even at 53, I am pretty sure that my Tesla, will be the only expensive toy I buy this decade.

My mom is also doing well financially. She is much happier, and safer since moving into a retirement home 18 months ago. I've been so impressed with her facility that I will probably move into one sometime in my 70s.

The one thing that I know I will be spending money on as I grow older will be services. At most assisted living centers it costs at least $300/month for medicine management. Putting the daily pills in a container and making sure the senior takes it. In my mom's case between her macular degeneration, and her failing memory this is a necessity. We found a "retired" nurse this is the one of the youngest residence, and we pay her $500 /month to do this, plus accompany her to doctor visits where her training has proved invaluable and generally check up on mom. The next thing is to hire somebody to help her shower a couple of times a week, she just isn't very stable on her feet.

Even for those planning staying in their home, will need help with gardening, painting, and anything involving a ladder as they age.

As the population ages demand for these service is going to increase which is why I am still not comfortable having my withdrawal rate exceed my income from dividends, a bit of interest, and now some rents.

 

[obgyn65]

These are the withdrawal rates I can remember from the last time I had a look at my spreadsheet a few weeks ago. Using deferred annuities before the age of 50 and using SPIAs after 70 or 75 years old makes a big difference in my case.

As I continue to work part time or locum tenens, my WR may be closer to 2% than 3.5%.

I guess I will have to update my signature on an annual basis.

But I'm a little surprised it would drop the WR to 2%, and is that many years out, or near in? Also, (looking at your sig), I wouldn't call a 3.5%% WR on on all fixed portfolio 'low' (2%, yes). So I'm a little confused by this. Maybe a generic example with round numbers would be illustrative, if that isn't too much work?

TIA- ERD50

 

[ERhoosier]

Can't find a reference to explain right now, but I've contemplated SWR a bit differently. One could start yr 1 with 4% WD, then perhaps every 6mo take out 2% of the portfolio. Basically you would never set your "income" at an inflation-adjusted level (e.g. 4% of initial portfolio), but allow it to float along with portfolio's value. This could allow you to enjoy fruits of "good years" while you still can (i.e. avoid waking up at 95 with a HUGE unspent portfolio). HOWEVER you would need to trim your spending during "bad years" when portfolio was down. Some would not see this as ideal RE scenario, but as was said most all of us have altered spending habits during w#rking years as our employment & expense situations changed.

 

[traineeinvestor]

Since the money may have to last for 50+ years and we have no SS etc to fall back on, I am uncomfortable with any plan that calls for a reduction of principal. Current plan is to live off a little less than the mostly dividends and rents we will collect on our investments.

I would be even more uncomfortable with any plan that assumed we would spend down to anywhere close to our last dollar over a given number of years. I would lose so much sleep worrying that I might live longer and not have any money to support ourselves.

 

[mickeyd]

I have been reading Wade's work and his blog for the last year or so and think that he is really a smart guy who communicates very well. However, his idea about ditching bonds for a fixed annuity would not work at all for someone like me and DW who have 3 pensions and two SS income streams each month.

It would be too much guaranteed income. I prefer to manage my 60/40 asset allocation of index funds on my own and retain the flexibility.

 

[audreyh1]

Can't find a reference to explain right now, but I've contemplated SWR a bit differently. One could start yr 1 with 4% WD, then perhaps every 6mo take out 2% of the portfolio. Basically you would never set your "income" at an inflation-adjusted level (e.g. 4% of initial portfolio), but allow it to float along with portfolio's value. This could allow you to enjoy fruits of "good years" while you still can (i.e. avoid waking up at 95 with a HUGE unspent portfolio). HOWEVER you would need to trim your spending during "bad years" when portfolio was down. Some would not see this as ideal RE scenario, but as was said most all of us have altered spending habits during w#rking years as our employment & expense situations changed.

This is what we do, although being young retirees we use 3.33% as our withdrawal percent. After a good year, we get a raise. After a bad one, we get a cut. But the after-tax income doesn't vary as much as one might think, because taxes tend to be higher in good years. Also, we don't spend everything we withdraw each year, therefore we build a cushion to help weather the bad years.

 

[urn2bfree]

I have always assumed that the 4% SWR was based on the idea that your portfolio is likely to grow by the approximately same rate as inflation...so if you take out about the amount of inflation, the portfolio replaces it. Given that this would work in perpetuity the arbitrary notion that it only works for 30 years is based on the idea that there are few studies that really back test it for longer times...but in principle it should hold forever. Sequence of returns -in the beginning especially- is the main threat to these calculations working out because any big drops in value reduce the principle too much in the beginning to ever allow the natural,inflation effects to make up enough. I think in the event of a series of bad years, one would be wise to start over with a new 4% value.
I also like the adjusted SWR rules that Guyton and Klinger are known for...they involve adjustment down when returns are negative, capping the inflation increases at 6%, increasing withdrawals after very good years. This predicts success with much higher initial SWR.
http://cornerstonewealthadvisors.com/files/08-06_WebsiteArticle.pdf

 

[Original Wally]

Since the money may have to last for 50+ years and we have no SS etc to fall back on, I am uncomfortable with any plan that calls for a reduction of principal.

Each situation is unique. DW and I, on the other hand, have pension income (combined w/ SS Disabiity) that is already greater than my net p*ychecks were (I was deferring $40k plus for the last 5 years of w*rk)

So **for us** the transition was actlally painless... more cash, less w*rk. Plus the $600k portfolio.

 

[walkinwood]

This is what we do, although being young retirees we use 3.33% as our withdrawal percent. After a good year, we get a raise. After a bad one, we get a cut. But the after-tax income doesn't vary as much as one might think, because taxes tend to be higher in good years. Also, we don't spend everything we withdraw each year, therefore we build a cushion to help weather the bad years.

+1
We planned to use 4%. Reality has been below 3.5% except for 2011 when we had a lot of selling/moving/rental costs.
In our case, taxes have been quite constant since we are doing IRA->ROTH transfers till the top of the 15% bracket.

 

[audreyh1]

+1
We planned to use 4%. Reality has been below 3.5% except for 2011 when we had a lot of selling/moving/rental costs.
In our case, taxes have been quite constant since we are doing IRA->ROTH transfers till the top of the 15% bracket.

Most of my portfolio is taxable which is why I get the high variation in taxes year after year.

 

[traineeinvestor]

Each situation is unique. DW and I, on the other hand, have pension income (combined w/ SS Disabiity) that is already greater than my net p*ychecks were (I was deferring $40k plus for the last 5 years of w*rk)

So **for us** the transition was actlally painless... more cash, less w*rk. Plus the $600k portfolio.

That would certainly make a big difference. If I had guaranteed joint life time cash flows (especially ones that were inflation adjusted), I would have been comfortable FIREing on less and would have done so earlier.

I took a look at buying an annuity but the pricing for what is called an annuity out here was just awful - I could buy a portfolio of shares with similar initial income and at least the possibility of future increases as the dividends rise + have access to my capital which seemed a much better deal for me. I'll revisit when I get older.

 

[bondi688]

traineeinvestor
Which country are you a citizen of, and can you qualify for retirement benefits from her? Do you not pretty much has to rely on yourself, if your only citizenship is tied to HK ? I have the impression that there is not really a pension system for residents there, as a result of the laissez-faire approach to governance.

 

[mathjak107]

i found the update data interesting.

Trinity study update - Bogleheads

 

[rayvt]

I have been reading Wade's work and his blog for the last year or so and think that he is really a smart guy who communicates very well. However, his idea about ditching bonds for a fixed annuity would not work at all for someone like me and DW who have 3 pensions and two SS income streams each month.

It would be too much guaranteed income. I prefer to manage my 60/40 asset allocation of index funds on my own and retain the flexibility.

Milevsky interprets Wade somehat differently. He says that 1/3 of your nest-egg should be in annuity-like things. Compute the PV of pension, SS, annuities, and other guaranteed income streams, add that amount to the value of your portfolio (401K, IRAs, bonds, stocks, etc), and divide that by 3. (Note that this is for computation only -- he's not suggesting that you consider the PVs as part of your portfolio for asset allocation purposes.)

If the PVs total less than 1/3 of this, buy enough SPIA to make up the difference.

Annuity Analytics: How Much to Allocate to Annuities?

If your guaranteed income stream is close to your bare-bones living expenses, then you can breathe easy about a 4% or perhaps even 5%-6% SWR.

 

[nun]

Since the money may have to last for 50+ years and we have no SS etc to fall back on, I am uncomfortable with any plan that calls for a reduction of principal. Current plan is to live off a little less than the mostly dividends and rents we will collect on our investments.

I would be even more uncomfortable with any plan that assumed we would spend down to anywhere close to our last dollar over a given number of years. I would lose so much sleep worrying that I might live longer and not have any money to support ourselves.

+1. LBYM is the mantra when you're working, why does it go out of the window when you retire? My plan is to live off rent, SS and some of the income my portfolio produces. I expect my portfolio to increase in retirement. People will say I'm leaving a lot on the table, but I don't need to spend money on useless cr@p and I'll be able to live just the same as I do now as a wage earner. My estate will go to my nieces so they'll be comfortable. One of them will probably spend it all, the other two will save it like I've done and pass it on to their children. Doing that for a few generations is a way for families to become wealthy. All this 4% rule stuff and spending down of principal is a conspiracy to keep future generations beholden to "The Man". If we truly value financial independence why not pass some of it on to our heirs.

 

[audreyh1]

+1. LBYM is the mantra when you're working, why does it go out of the window when you retire? My plan is to live off rent, SS and some of the income my portfolio produces. I expect my portfolio to increase in retirement. People will say I'm leaving a lot on the table, but I don't need to spend money on useless cr@p and I'll be able to live just the same as I do now as a wage earner. My estate will go to my nieces so they'll be comfortable. One of them will probably spend it all, the other two will save it like I've done and pass it on to their children. Doing that for a few generations is a way for families to become wealthy. All this 4% rule stuff and spending down of principal is a conspiracy to keep future generations beholden to "The Man". If we truly value financial independence why not pass some of it on to our heirs.

What do you mean LBYM goes out the window when you retire? We spend way more now in retirement then while we were working and saving, but we are still LBYM. We are done saving - we did that while working. Another important reason - we now have TIME to enjoy spending the money, and our health is good now. So, IMO this is the time to make the most of what we saved.

We don't feel the great need to pass it along to future generations. What is left over we will pass along to relatives and charities, but we also gift to them now while we are living.

And we aren't accumulating "stuff" either. Most of our spending on ourselves goes towards experiences, not things.

 

[nun]

What do you mean LBYM goes out the window when you retire? We spend way more now in retirement then while we were working and saving, but we are still LBYM. We are done saving - we did that while working. Another important reason - we now have TIME to enjoy spending the money, and our health is good now. So, IMO this is the time to make the most of what we saved.

We don't feel the great need to pass it along to future generations. What is left over we will pass along to relatives and charities, but we also gift to them now while we are living.

And we aren't accumulating "stuff" either. Most of our spending on ourselves goes towards experiences, not things.

My definition of LBYM in retirement is that you don't spend principal. Given the dependence on your portfolio to produce income, rather than a job, it seems foolish to eat into it.

 

[RonBoyd]

+1. LBYM is the mantra when you're working, why does it go out of the window when you retire?

There are those, of course, who did all that saving mostly (if not, purely) for selfish reasons -- YOLO, You can't take it with you, "Laissez les bons temps rouler," life looks different now, etc. Shaking your finger at them doesn't make them wrong.

but I don't need to spend money on useless cr@p...

Yeah, like travel, a higher quality (safer) automobile, charity, "kicking back," and all that "crap,"

Doing that for a few generations is a way for families to become wealthy... If we truly value financial independence why not pass some of it on to our heirs.

Unless your name is Rockefeller, or some such, that wealth is only going to last a generation or two (Oh! yeah, even then) -- easy come easy go. Making it on your own didn't teach you that? Look around.

 

[Midpack]

Milevsky interprets Wade somehat differently. He says that 1/3 of your nest-egg should be in annuity-like things. Compute the PV of pension, SS, annuities, and other guaranteed income streams, add that amount to the value of your portfolio (401K, IRAs, bonds, stocks, etc), and divide that by 3. (Note that this is for computation only -- he's not suggesting that you consider the PVs as part of your portfolio for asset allocation purposes.)

If the PVs total less than 1/3 of this, buy enough SPIA to make up the difference.

Annuity Analytics: How Much to Allocate to Annuities?

If your guaranteed income stream is close to your bare-bones living expenses, then you can breathe easy about a 4% or perhaps even 5%-6% SWR.

Milevsky is a very bright guy, I've read several of his articles. But for those who want to put some of their portfolio into an annuity, investing 1/3rd seems arbitrary. Otar's methodology makes more sense to me (he has fans & not here). How much you annuitize should be governed more by meeting your floor or basic income needs through pensions/annuities. That could be less than 1/3rd or much, much more. YMMV

 

[nun]

There are those, of course, who did all that saving mostly (if not, purely) for selfish reasons -- YOLO, You can't take it with you, "Laissez les bons temps rouler," life looks different now, etc. Shaking your finger at them doesn't make them wrong.

They are definitely not wrong.....I just don't see a reason to change my philosophy post retirement. I saved before retirement and I'll save after was well.

Yeah, like travel, a higher quality (safer) automobile, charity, "kicking back," and all that "crap,"

I do and will do a lot of traveling, but usually on my bike. A year ago I rode half way around Iceland, drove the rest and stayed in hostels. It was inexpensive and amazing. I give to local charities. I don't see the need for a BMW when a Honda gets me safely where I need to go...that's when I don't go on my bike.

Unless your name is Rockefeller, or some such, that wealth is only going to last a generation or two (Oh! yeah, even then) -- easy come easy go. Making it on your own didn't teach you that? Look around.

You obviously don't know my nieces, one will spend it and two will save it and add to it. This is my plan. I imagine it won't be one that many will follow, but I have removed all worry about running out of money and expect my estate to provide for me and form the foundation of a financial independence for my nieces.