Greater than 4% Withdrawal Rate

[Gone4Good]

Why so low? A balanced fund such as Wellington with a 60/40 have returned 8.5% since its inception That is about 5% over inflation.

You're quoting Wellington's total return, which includes capital appreciation. My comment referred to yield, which excludes capital appreciation.

 

[haha]

I confess, I have that bias. Most people wouldn't call a clearly stated negative opinion on a publication "a grudge". Guyton is a public figure, creating publications for the pubic to read. If someone wants to critique it, including me, I can't see why he shouldn't. If this is a grudge, you must have lived in a very protected environment.

BTW, if you read the article you would see that he is not talking about a 4% SWR, but a way of arriving at something higher.

As for as what I would suggest, I have never made any suggestions, but I have made many observations right and wrong. They are all here. I don't advocate anything for anyone. I make choices for my own investing; I am overjoyed that I have no responsibility for anyone else.

I am dispassionate about what others do because I wouldn't want anyone to modify their preferences on account of anything that I say. It might well be and in fact frequently will be wrong.

Ha

 

[DRiP Guy]

I confess, I have that bias. Most people wouldn't call a clearly stated negative opinion on a publication "a grudge". Guyton is a public figure, creating publications for the pubic to read. If someone wants to critique it, including me, I can't see why he shouldn't. If this is a grudge, you must have lived in a very protected environment.

BTW, if you read the article you would see that he is not talking about a 4% SWR, but a way of arriving at something higher.

As for as what I would suggest, I have never made any suggestions, but I have made many observations right and wrong. They are all here. I don't advocate anything for anyone. I make choices for my own investing; I am overjoyed that I have no responsibility for anyone else.

I am dispassionate about what others do because I wouldn't want anyone to modify their preferences on account of anything that I say. It might well be and in fact frequently will be wrong.

Ha

Thanks for the feedback. I gladly retract my disparaging term "grudge". And I agree that he is both open to critique, and that he is trying to come up with maximal SWR (and attract readers), not working from some 4% gold standard. As someone who is fretting a bit over how to really be assured I will have enough if I pull the trigger soon, I am lapping up the various historical methods, theories, calculators, etc, in order to try to get the best 'feel' for what can be sustained, so forgive my eagerness/rudeness. I am, however, still very much interested in how you (or others) determine what rate of withdrawal they feel can be sustained. If your own posts have covered that, I am not going to ask that you restate it here - I know this topic has gotten a lot of heated play long before my own very recent interest, so some are justifiably weary of the topic.

Cheers!

 

[Rich_by_the_Bay]

As someone who is fretting a bit over how to really be assured I will have enough if I pull the trigger soon, I am lapping up the various historical methods, theories, calculators, etc, in order to try to get the best 'feel' for what can be sustained, so forgive my eagerness/rudeness.

I know where you are coming from and I feel your pain, but gotta tell you that after more than a year of studying and reading this stuff here and elsewhere, you probably won't get much closer to the rainbow than you are now.

4% is a sound, conservative figure and works well as a planning tool. In the real world, my sense is that people scatter their decisions around that figure, but flex both their expenses and income generously. If you are getting ahead after a few years, you bump it up. The opposite occurs, you tighten your belt. But the 4% SWR (or its cousin, the 20-25x annual expense as a savings goal) are rules of thumb worth being aware of.

You may be overthinking this. I know I did, but now I am glad to have it as a benchmark, a sanity check.

 

[DRiP Guy]

4% is a sound, conservative figure and works well as a planning tool.

You may be overthinking this. I know I did, but now I am glad to have it as a benchmark, a sanity check.

Thanks!

 

[Running_Man]

I have come to accept from everything I have seen to plan on a 4% withdrawl rate. If you begin ER with a 1 million dollar portfolio - earn 15% - lets say it was a very good year and spent 40,000 your balance would now be $1,110,000.00 It would appear to me you could recalculate your starting point and now take out $44,400 in year 2 and increase for inflation for time immortal and still have the same implied safety rate you did at the begining when you took out $40,000. Only now it would be equivalent to a 4.3% withdrawl rate or so of your original plan.

What I am saying is that your original withdrawl of 4% for inflation may have a 95% or better chance of success but the immediate change in your portfolio in year one automatically will change your success or failure rate.

Likewise if you wanted to risk 5% you could take the 50,000 out the first year and recalculate your risk at the end of the year. However a portfolio loss of 15% would reduce your portfolio to $800,000 and now a 95% safety rate is only $32,000.00 and would require a cut in expenditure of 36% versus 16% if you were planning on the 4% withdrawl. These early down years would be a killer if you were actually counting on more than 4% if the portfolio heads up via historical standards 5% will be OK. It just does not seem prudent mathmatically to me.

 

[Rich_by_the_Bay]

I have come to accept from everything I have seen to plan on a 4% withdrawl rate. If you begin ER with a 1 million dollar portfolio - earn 15% - lets say it was a very good year and spent 40,000 your balance would now be $1,110,000.00 It would appear to me you could recalculate your starting point and now take out $44,400 in year 2 and increase for inflation for time immortal and still have the same implied safety rate you did at the begining when you took out $40,000.

That's fine, but to retain your success rate long term, you'd also need to decrease your withdrawals to 4% of a lower denominator when the market is down. If you just cherry pick the up years to reset your thermostat, you will lower your success rate.

So, back to basics: 4% adjusted by inflation forever, or 4% in good years and bad. Refinements such as ESRBobs 95% rule can be added, and at least for me, 4.25% seems a good number for an acceptable if slightly greater risk of failure.

 

[FIRE'd@51]

That's fine, but to retain your success rate long term, you'd also need to decrease your withdrawals to 4% of a lower denominator when the market is down. If you just cherry pick the up years to reset your thermostat, you will lower your success rate.

Why? Your portfolio doesn't know which year you actually retired. If you are relying on FIRECALC, it seems to me that you could take 4% (or whatever success rate you choose to get the confidence level you want) and base it upon the highest value the portfolio obtained during your retiirement.

 

[Rich_by_the_Bay]

Why? Your portfolio doesn't know which year you actually retired.

I believe there is an averaging effect at play. Year one's 4% +- inflation in future years will be under 4% of total assets some years and higher in other years. The point of the analysis is that through good years and bad, that number yields a high success rate overall.

If you simply escalate your withdrawal rate every time investments are up, and fail to balance that with lower withdrawals when they are down, the model doesn't apply. Think about what might happen if you reset upward when stocks are up 15% to $1,015,000; next year they are down 10% to $913,500 but you are still withdrawing 4% of the higher 15% increased balance or $40,600 -- that's a 4.4% withdrawal during the down year. It gets worse if you have a great year (reset the number) followed by a few down years while you still use the good year's withdrawal rate.

I think you might be able to reset it every 5 years or so if things have grown nicely, but I would not do so indiscriminately, and I'd be prepared to lower it if you hit a bad stretch - beginning to approach the fixed "percent of assets" system if you go that route.

At least that's my understanding. Maybe Dory can set me straight if I am incorrect.

 

[FIRE'd@51]

I believe there is an averaging effect at play. Year one's 4% +- inflation in future years will be under 4% of total assets some years and higher in other years. The point of the analysis is that through good years and bad, that number yields a high success rate overall.

If you simply escalate your withdrawal rate every time investments are up, and fail to balance that with lower withdrawals when they are down, the model doesn't apply. Think about what might happen if you reset upward when stocks are up 15% to $1,015,000; next year they are down 10% to $913,500 but you are still withdrawing 4% of the higher 15% increased balance or $40,600 -- that's a 4.4% withdrawal during the down year. It gets worse if you have a great year (reset the number) followed by a few down years while you still use the good year's withdrawal rate.

I think you might be able to reset it every 5 years or so if things have grown nicely, but I would not do so indiscriminately, and I'd be prepared to lower it if you hit a bad stretch - beginning to approach the fixed "percent of assets" system if you go that route.

At least that's my understanding. Maybe Dory can set me straight if I am incorrect.

Suppose I ER'd at the end of 2002. Over the past 4 years my portfolio is up 50% and is today equal to your portfolio in value. You run FIRECALC and decide to ER today with a 4% SWR. Why shouldn't we both go forward with the same dollar withdrawal if we believe 4% is the "right" SWR, since our portfolios are equal in value today?

 

[REWahoo]

Rich, FIRED, check out this post from Dory on the "Best of..." board. I think it will answer your questions:

http://early-retirement.org/forums/index.php?topic=5572.msg99243#msg99243

 

[ESRBob]

Rich,
I think you're right. You could probably reset in 5 years, but you can't cherry-pick the good years since those years of under-withdrawing are needed to support the inflation-adjusting in the bad years, too, as I understand the model.

By switching to the 'withdraw a percent of portfolio value each year' approach, you're essentially resetting every year, and in exchange letting the inflation-adjustment piece go away. I just was never comfortable with the machinery of that set-and-inflate method, or with the previous poster's valid question about resetting yourself to Year 1 after a good year etc. That is what led me to this other approach, which, btw, is generally used by foundations making grants who want to keep making them in perpetuity (which is where the theoretical and empirical foundations for the approach come from). Turns out the annual re-setting of distributions does very good things for portfolio survivability, too (measured in terms of real portfolio value). Soften the downturns with a low-volatility portfolio, some part-time income and the 95% Rule and you've got something which should work well for ERs over the several-decade time frames we need these things to work for.

The other nice thing about this approach is, should you want or need to spend additional sums one year, just do it. The next year, your new safe withdrawal is just 4% +/- of that new lower portfolio value. You don't have to worry about stashing the money aside, pretending you didn't really spend it, paying it back to the portfolio or anything. It's very easy and straightforward to cheat and forgive -- you aren't borrowing from the future or endangering your model, since the model is fresh every year with a new safe withdrawal amount based on a new portfolio value, and a historically supported promise of sustaining that in real terms into the future (since we all need to know we can count on these withdrawals going forward to support a target lifestyle).

In that way it's both flexible and self-policing, which somehow appeals to me.

 

[sgeeeee]

Rich,
I think you're right. You could probably reset in 5 years, but you can't cherry-pick the good years since those years of under-withdrawing are needed to support the inflation-adjusting in the bad years, too, as I understand the model.

. . .

Well. . . No. The 4% rule is based on a worst case analysis of history along with an assumption that the future will never be worse than the worst case in the past.

If the assumption is true, then you can always adjust upward if the market is good to you. The calculation does not require good years needing to support future bad years.

On the other hand, there are plenty of other marginal assumptions. Do any of you know exactly when you are going to die? The 4% rule is based on 30 year retirements. Assume for a minute that you know you will die in 30 years. If after year 1 in retirement, your portfolio is worth more (after inflation) than in year 0, you could run FIRECalc with a 29 year retirement interval and come up with a higher SWR. This is a legitimate application of FIRECalc provide you believe the underlying assumption and know that your are really going to die 30 years from your initial run. If the market is down in your first year, the FIRECalc comuptation gives you a lower SWR, but you can ignore it if you believe that the future will not be worse than the past.

But what if you live 35 more years? What if some of your investments are in something other than S&P500 and bond index funds? What if your expense ratio is greater than 0.18%? What if your personal inflation rate is greater than CPI?

There are plenty of reasons to be conservative about increasing your SWR.

 

[donheff]

Suppose I ER'd at the end of 2002. Over the past 4 years my portfolio is up 50% and is today equal to your portfolio in value. You run FIRECALC and decide to ER today with a 4% SWR. Why shouldn't we both go forward with the same dollar withdrawal if we believe 4% is the "right" SWR, since our portfolios are equal in value today?

This aspect of the concept is what always troubles me. I understand running a 4% solution against all historical precedents to get an historical failure rate based on AA and withdrawal. That is a prediction based on a point in time (today). If the predictive model is valid it should not be necessary to second guess yourself in year 2 if the market goes down - say 10%. You have already calculated that even in periods of initial bear market you have X% chance of failure. By that reasoning, If I calculate my 4% SWR in 2006 but don't actually need to withdraw any money until a year later. I could pull both the 2006 4% plus the 2007 4.03% (total 8.03% of initial value) in 2007 and still face my predicted 2006 success rate.

Thus it seems statistically valid to calculate your SWR on a portfolio high point - and even take out a buch of extra mad money from the intervening years during which you "could have been ERd" . Intuitively we are not comfortable with this because we conclude we have more information about the market at the later date than the earlier, i.e we already know we are starting on a downturn so we are on one of the model scenarios that is more likely to fail. True, but historically we can also expect that the market cycle will turn up in time to save us if the model is valid.

Since I wouldn't act on this line of reasoning, I guess I implicitly accept that SWR should vary to some degree based on an estimate of whether the market is over or under valued. I can't figure that out to my satisfaction so I will start out low and adjust a little downward if the first few years happen to turn bad.

 

[Rich_by_the_Bay]

Rich, FIRED, check out this post from Dory on the "Best of..." board. I think it will answer your questions:
http://early-retirement.org/forums/index.php?topic=5572.msg99243#msg99243

Yup, stated much better than I could have. I fully understand that you can up the ante after you have experienced a good sustained run, without loss of safety. That is like dealing a new hand.

The problem I was concerned about comes with a prospective strategy to increase withdrawals during sporadic "good years" and fail to decrease them during sporadic bad years.

Raise withdrawals after a run up of several years? Sure. OTOH, if I did that and then hit a prolonged bad stretch I would probaby tighten the belt, too. I think you are well advised to either adjust it for inflation forever, or to balance increases with comparable decreases (i.e. a variation of the fixed percent of assets withdrawal strategy).

 

[tryan]

Here's another angle ... rather than "fretting" over the nth decmail place of your SWR, think about the probability that some external force will end your retirement.

"FIRE killers" come in many forms: divorce, health crisis to you OR and family member, uninsurable catastrophic event (flood, war/terrorism), being hit by the beer-truck/lightning/meteor ..... Add these risks together (divorce rate is 50%!) and I dare say a SWR success rate in excess of 80-90% is simply a waste of time.

So while you're fretting over 4 or 4.5% SWR ... DW/DH is screwing the lawn-boy/maid, Mr. Cancer has a little surprise waiting for you, and Abul moved in next door . (Not wishing any of this on any of us ... just making a point )

 

[Cb]

A few years ago on a Motley Fool thread about doing a Portfolio Reset after a few good years, a poster pointed out that if one looks at <100% success rates, ER failures tend to occur when one retires at the start of a bad run (like 1929, 1967, etc).

The poster pointed out that if you were to use frequent resets in your early retirement, you'd were essentially systematically hunting for that rough patch.

Then again, if you were resetting up & down frequently you're essentially drawing a nearly fixed % of portfolio, and foregoing a steady standard of living.

Cb

 

[Running_Man]

That's fine, but to retain your success rate long term, you'd also need to decrease your withdrawals to 4% of a lower denominator when the market is down. If you just cherry pick the up years to reset your thermostat, you will lower your success rate.

What I am saying is that if you select 4% and stick with it your odds are constantly changing, only that change is not being recognized by the retiree - because in the head of the retiree they are 95% "safe" with 4% when in actuality it is a constantly changing safety result based on the most recent experience. Any time you reset to a 95% safety rate you go to a 4% withdrawl of your present balance for 30 years- up or down. That is optimizing your safety rate not your return. If you do not reset in the bad years than your safety may be in the 80% range - but that does not mean because you never reset from the 1st year your portfolio risk is still 95% safe. You may well only be 80% safe.

As for the risks by divorce and disease - well be careful where you place your deposits

 

[Rich_by_the_Bay]

A few years ago on a Motley Fool thread about doing a Portfolio Reset after a few good years, a poster pointed out that if one looks at <100% success rates, ER failures tend to occur when one retires at the start of a bad run (like 1929, 1967, etc).

That's a scarey scenario. My antidote will be to work part time initially, leaving my full retirement date flexible until I see how the nest egg is doing, and hitting FIRE with a bunch of cash to last a good while, if necessary.

 

[cute fuzzy bunny]

We had a lengthy and sometimes unproductive thread regarding the 'reset' situation and 'altered state SWRs'.

Does have some good stuff in it:

http://early-retirement.org/forums/index.php?topic=667.0

By the way, every ER I know has gone through the month/quarter/year long process of satisfying their inner scaredy cat about retiring early. I went through all the calculators and all the numbers and in the end felt better about throwing out everything I'd been programmed was "the right way". No job, no income, no structure.

Takes a little getting used to.

For what its worth, my financial picture has improved year on year since 2000, utilizing the "invest wisely and at low expenses, dont pay the tax man a penny more than you have to, spend less when my investments are sucking, spend more when things are going well, minimize expenses but enjoy your life" withdrawal method.

 

[retire@40]

That's a scarey scenario. My antidote will be to work part time initially, leaving my full retirement date flexible until I see how the nest egg is doing, and hitting FIRE with a bunch of cash to last a good while, if necessary.

My approach has been to build up a large enough portfolio, take my foot off the work accelerator and coast at part-time.

By working part-time, if I can keep earning just enough to live on while my portfolio keeps growing to my anticipated FIRE level, I would have accomplished the goal of FIRE while keeping the security of my own business that I could ratchet up if the portfolio didn't perform as anticipated. And, in the meanwhile I've reduced my stress level, semi-retired, and started enjoying life more while I'm still young.

Using this approach, it's a comfort to know that you can reduce your earnings by as much as 4% of whatever your portfolio value is at any given point should you decide to start your withdrawal phase. Right now, my 4% SWR would give me about 70% of my current budget, so I would just need to make up the remaining 30% with some earnings from work.

 

[WRBT]

I still don't understand how resetting on good years can in any way impact your initial chance of success that's based on a certain withdrawal rate.

Jane retires in 2005 with 1,000,000 and decides on a 4% withdrawal rate (40,000) that gives 95% chance of success. What a great year, Jane's portfolio in 2006 is now 1,200,000. Jane resets and decides to take 4% from her new stash so now she's living large with 48,000 withdrawal. 4% rate, 95% chance of success.

Joe retireds in 2006 with 1,200,000 and decides on a 4% withdrawal rate. 95% chance of success.

Is Joe's chance of succcess any different from Jane's? They are both have the same sized stash and the same withdrawal rate. If their chances of success are the same (95%) starting in year 2006 then Jane's cherry picking her good year didn't matter.

 

[Cut-Throat]

You are correct!

 

[Cb]

I still don't understand how resetting on good years can in any way impact your initial chance of success that's based on a certain withdrawal rate.

Jane retires in 2005 with 1,000,000 and decides on a 4% withdrawal rate (40,000) that gives 95% chance of success. What a great year, Jane's portfolio in 2006 is now 1,200,000. Jane resets and decides to take 4% from her new stash so now she's living large with 48,000 withdrawal. 4% rate, 95% chance of success.

Joe retireds in 2006 with 1,200,000 and decides on a 4% withdrawal rate. 95% chance of success.

Is Joe's chance of succcess any different from Jane's? They are both have the same sized stash and the same withdrawal rate. If their chances of success are the same (95%) starting in year 2006 then Jane's cherry picking her good year didn't matter.

If you're ER'ing with at a 95% "success rate", you've got a pretty slim chance (~1 in 20) of having picked the worst year or two that leads to a busted ER. A few years later, with a little growth, you've grown away from the 95% rate, perhaps up to 100% and it's smooth sailing.

But if you reset after every up year, you're right back up to that 1 in 20 chance, again and again...do that 10 or 20 times and there's a mighty good chance you'll find that troublesome patch.

Cb

 

[donheff]

What I am saying is that if you select 4% and stick with it your odds are constantly changing, only that change is not being recognized by the retiree -

Yeah, that is the reality. If you retire on x% SWR and the market falls the following year, all of the Firecalc scenarios that involved first year increases are out of the picture. Lets say that is 50% of the scenarios. Your 95% safe estimate would now drop to 90% or whatever. You have more info now than you had when you started. The problem with adjusting to the market is to figure out how much of an adjustment. Thus the Guyton rules, etc. A simple approach might be to set a rate against current portfolio (e.g. 4% or 5%) and always withdraw that = 100% success rate. If the initial rate allows you to LBYM you can invest the excess in a separate fund to smooth out the bumps in the down years. If the down years just keep coming - well, you would have been toast anyway.