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

[mathjak107]

interesting interview with researcher dr wade pfau.

he is concerned the 4% rule may be a little to optomistic going forward.

Interview with Dr. Wade Pfau 01.26.2013 | financialsafari

 

[obgyn65]

I think many of us here share the same view. I am looking at 3.5% WR without the use of annuities in my model, and about 2% with deferred annuities bought in my mid 40s + SPIAs at a much later stage in life.

he is concerned the 4% rule may be a little to optomistic going forward.

Interview with Dr. Wade Pfau 01.26.2013 | financialsafari

 

[Midpack]

He and others have been examining/challenging the classic 4% SWR notion for several years. Food for thought...

2012: http://www.early-retirement.org/forums/f28/wade-pfau-looks-at-4-wr-finds-it-unsafe-61573.html

2011: New Research Challenges 4% Withdrawal Rule

Remember:

a) the 4% rule provided a 95% chance of success over 30 yrs with a typical AA, so 4% is/was "worst case" in a sense (IOW you could withdraw more than 4% without depleting the portfolio 95% of the time), and
b) I don't know anyone who would blindly follow the 4% for 30 years regardless of sequence of returns during retirement.
c) most people have at least some floor income (Soc Sec), some have lots (Soc Sec, pensions, annuities, retiree HC).
​

Not advocating for or against anything, we all have our own plan A, B, C, D, etc.

 

[Tyro]

What happened to the recently posted Retirement investing requires optimism - MarketWatch?

(Yes, I realize the OP is referring to SWR while the above is referring to investing, but I don't think there is any denying that they are interrelated.)

 

[nun]

I think many of us here share the same view. I am looking at 3.5% WR without the use of annuities in my model, and about 2% with deferred annuities bought in my mid 40s + SPIAs at a much later stage in life.

Dr. Pfau's analysis is worthwhile, but he comes to conclusions that seem pretty obvious to me. As a long time TIAA-CREF investor I've always held that SPIAs have a place in a retirement portfolio. As I've said before I'm planning for 0% withdrawal from my stocks and bonds portfolio. My post 66 retirement expenses will be covered by various SS, rental income and TIAA-Traditional Annuity. The idea of having your basic income requirements covered by "guaranteed" income sources does not get nearly enough attention in the financial press/advisor world.

 

[jkern]

I'm too conservative to use 4% SWR. My comfort level starts at 3% and I become confident at 2.5%.

 

[ERD50]

I think many of us here share the same view. I am looking at 3.5% WR without the use of annuities in my model, and about 2% with deferred annuities bought in my mid 40s + SPIAs at a much later stage in life.

I'm curious about the reduction from 3.5% WR to 2% with those changes.

With annuities, you are getting some of your principal back, effectively trading off some of your 'end-of-life' nest egg for current income (and I think that concept makes tons of sense for many/most of us). I will look into that when I'm older, IMO too many variables and too long a time frame for me to want to commit now, in my late 50's.

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

 

[AndrewJackson]

I think 4% is too high. That is if you view your swr from a financial indpendance standpoint (aka living off interest/dividends and preserving principal adjustin for inflation. I think a good real return after inflation would be 3%. If you want to safe, use 2%.

 

[Midpack]

I'm too conservative to use 4% SWR. My comfort level starts at 3% and I become confident at 2.5%.

http://www.early-retirement.org/forums/f28/whats-the-highest-swr-youre-comfortable-with-48616.html

 

[nun]

With annuities, you are getting some of your principal back, effectively trading off some of your 'end-of-life' nest egg for current income (and I think that concept makes tons of sense for many/most of us). I will look into that when I'm older, IMO too many variables and too long a time frame for me to want to commit now, in my late 50's.

Yes, the annuity pays you principal as well as some return that will give the annuity company a nice profit according to life expectancy tables. What you get is the guaranteed income for life. the danger with SPIAs is that few have a COLA so the buying power of that income is eroded by inflation, so it's good to keep some money in investments that you hope will outpace inflation.

 

[Katsmeow]

I think 4% is too high. That is if you view your swr from a financial indpendance standpoint (aka living off interest/dividends and preserving principal adjustin for inflation. I think a good real return after inflation would be 3%. If you want to safe, use 2%.

The 4% "rule" has never been based upon the idea of living of interest and dividends and preserving principal. The 4% rule has always been based the idea of being willing to deplete principal.

I'm not saying you can't set it up the way you talk about it -- just that doing that way isn't what the researchers mean when they talk about a 4% rule.

 

[CoolChange]

I'm too conservative to use 4% SWR. My comfort level starts at 3% and I become confident at 2.5%.

I am even more conservative/frightened: A quick back of the envelope calculation tells me that my SWR would be 2.5% with no change in my current lifestyle: Simple tastes, low cost of living state, etc.

However, I still suffer from one more year syndrome for the same reasons that drive most financial activity: Fear and greed.

• Fear that I have missed something in my planning, the future will not look like the past, I will never be able to pull a similar salary again, etc.
• Greed: Wanting a better lifestyle than I current have with more travel, better wine, etc.

 

[HFWR]

• Greed: Wanting a better lifestyle than I current have with more wine, better travel, etc.

FIFY...

Since my FIRE date is still somewhere in the future, though hopefully not too far, and I'm 58.5yo, I'm pretty much sticking with 4%, but not without an eye on the markets. I'm hopeful I'll have some left for my son to inherit, but I'm not going to eat Little Friskies so my son can have an inheritance...

 

[dtbach]

I plan to use 4%, maybe even 5 or 6% now and then. I will have both SS and a Navy Pension that will cover the basics for life, so why not enjoy life now? I plan to do this from present (60yo) to late 70's. By then I won't be doing much travel, dining out etc.

I feel this way because my 90 year old parents never spent much of anything (didn't travel, eat out, go to shows, etc) and now bitch because they don't know what to do with all the cash coming in from annuities, dividends, pensions, SS and so on. But they always make a point about how much I'm going to inherit. That's nice but I've achieved FI with it. Will just be a bonus for me, but makes me angry that they didn't enjoy themselves a bit more when they could have.

I feel bad for them, and am not about to follow in their path.

 

[Grigori]

I'm looking at 3.5% withdrawals after pulling the plug at age 58 (this summer or later). The small pensions and social security kicking in at 65 or 70 will be icing on the cake. Any inheritance is icing too.

There's are few carrots dangling out there each year we wait - $8,000 in company stock vesting each year, and another $2,400 a year in pension. They might pay for some extra trips and hobbies.

My biggest comfort is that we can be flexible. We can sell the house and move into a mobile home. We can watch the portfolio and adjust each year. I can take a few contracts. All worth it to have a worth it life.

 

[RonBoyd]

... but makes me angry that they didn't enjoy themselves a bit more when they could have.

Yeah, I am slowly beginning to wake up to the wisdom behind the Cajun expression "Laissez les bons temps rouler."

(And it will more difficult to ignore next week.)

 

[mathjak107]

I'm curious about the reduction from 3.5% WR to 2% with those changes.

With annuities, you are getting some of your principal back, effectively trading off some of your 'end-of-life' nest egg for current income (and I think that concept makes tons of sense for many/most of us). I will look into that when I'm older, IMO too many variables and too long a time frame for me to want to commit now, in my late 50's.

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

I SAW THIS , THEY DISCUSS LOWER WITHDRAWALS

Trinity study update - Bogleheads

 

[haha]

Will just be a bonus for me, but makes me angry that they didn't enjoy themselves a bit more when they could have.

Children of LBYM parents commonly say this. Not the parents though, they are not angry. They are living life as they wish.

Perhaps these older people are not very much attracted to consumerism? It's the religion of our age, and even on these LBYM boards, certain categories of consumerism are very popular (cruises, home remodeling, motorhomes, etc.)

Some people would pay money just to never have to think about any of these things, so why would they pay money to participate in these activities?

Ha

 

[haha]

What happened to the recently posted Retirement investing requires optimism - MarketWatch?

That is so yesterday!

 

[ERD50]

I SAW THIS , THEY DISCUSS LOWER WITHDRAWALS

Trinity study update - Bogleheads

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

Children of LBYM parents commonly say this. Not the parents though, they are not angry. They are living life as they wish.

Perhaps these older people are not very much attracted to consumerism?

Ha

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

 

[Koolau]

It's funny how that 30 year survival seems to creep. When I was 58 and ER'd, I figured I'd need the money to last to 88 (58 + 30 = 88). No problem. None of our parents lived that long. Now... at 65, I'm still thinking, "hmmmm... 65 plus 30 equals 95. Too early to exceed the 4% (or more like 3%, heh, heh)."

When I'm 70, I can just see myself calculating "hmmm... 70 plus 30 equals 100." So, I can see why folks find it difficult to open the spending gates freely - even if the stats are with us. Most of us "plan" with the 4% rule, but some of us just go with our gut when the time comes. As someone once accurately "accused" me. "You plan with a micrometer and execute with a chain saw." Touche.

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

Of course, YMMV.

 

[gardenfun]

The 4% "rule" has never been based upon the idea of living of interest and dividends and preserving principal. The 4% rule has always been based the idea of being willing to deplete principal.

I'm not saying you can't set it up the way you talk about it -- just that doing that way isn't what the researchers mean when they talk about a 4% rule.

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?

When I see things in the media about "making sure you don't run out of money in your 80's" I get confused. I thought the 4% (or lower) withdrawal rates are "designed" to keep the principal there and have it grow over time?

Hence the balancing act of eating well throughout retirement but also leaving money for the offspring.

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

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

 

[Katsmeow]

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?

When I see things in the media about "making sure you don't run out of money in your 80's" I get confused. I thought the 4% (or lower) withdrawal rates are "designed" to keep the principal there and have it grow over time?

Hence the balancing act of eating well throughout retirement but also leaving money for the offspring.

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

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

The classic 4% withdrawal is that you take 4% in Year 1 of your starting portfolio. So, let's say the portfolio is $1 million. You take out $40,000 leaving $960,000. That $960,000 is invested and maybe at the end of the year it is now $1 million, but it might be $1.1 million or maybe $800,000 depending on how your investments did.

Regardless of where it is at the end of the year - in year 2 you withdraw $40,000 adjusted by inflation. Let's say inflation was 3% then in year 2 you withdraw $41,2000 regardless of where your starting balance is.

And you continue on each year.

Most of the time when people do this you do indeed end up with a substantial portfolio at the end of 30 years.

However success for this method occurs if the portfolio does not go to zero before the end of the 30 years. So some of the successes will end up being with portfolios where all or part of the starting portfolio is consumed.

So - someone who ends 30 year with $1 in the portfolio (or $0 for that matter) has succeeded. But someone who hits 0 in year 29 failed.

Note that in the real world - most people aren't going to do it that way. If you retire and your portfolio has a 30% crop in one year most people will reduce spending the next year to at least some extent for example.

Some people do want to have a minimum amount of portfolio left at the end of their plan so they plan for that - for them it isn't successful unless the ending portfolio is at least $X.

 

[haha]

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

Yes; I agree it is part of an adult child's duty to try to keep these preventable accidents from happening.

It can be tricky. I went out to see my parents in an unusally snowly winter. There was no safe way to get from the house to the sidewalk leading to the street. Old wooden stairs did not shed snow, and parents could not keep them cleared and would not spend the money to have help. This affected both of them, and renters for flats above first floor. These were mostly residents and fellows at nearby hospitals; all my parents needed was for one of them to be rendered quadriplegic in preventable fall.

So I just had it handled, after getting an authorization from Dad's lawyer that the bill would be paid.

It was awful though, I had to leave early to go back west because my father was so angry. I just hope that I can escape this idiocy as I get up there. People who are trying to help do not deserve grief.

Older people need to understand that they are no longer fully in charge. Our laws and attitudes just make this impossible for the younger generation. Used to be an old farmer could die unmolested, but I don't know how that mght happen today.

Young people can make equally stupid decisions, or stupidly avoid making decisions. But society still mainly figures that is up to them, if they want to behave like idiots, they can do so. Even this is not without it's problems. How many times can a young man walk away from a good job because he wants to go wandering, with no real thought about what happens if he cannot take up where he left off when he wants to return? Eventually he may become just another taker, and the economy loses one more maker.

Ha

 

[foxfirev5]

I plan to use the whole SWR calculation as a moving target. When I look at my annual ss statement showing my earnings over the last 40 years I see wild swings in income over the years. However our standard of living didn't vary with the swings in income. Just a steady increase in net worth and a little bit better lifestyle. The big thing that these calculations ignore is that you need to adapt and adjust. Set too low and you miss out on a lot. Set too high and keep going you'll go broke. Stay flexible, use your head and you'll be fine.