In defense of 4% withdrawal strategy.

[obgyn65]

Interesting comment. Have you noticed, like me, that the SWR can be changed by about 1% with the use of annuities ?

If I only felt comfortable with a 2% SWR and didn't have a pension covering essentials I would look carefully at annuities for at least my essential expenses. You should be able to cover them with a substantially smaller portion of your portfolio than would be dedicated to them at 2% or 3%.

 

[ziggy29]

Interesting comment. Have you noticed, like me, that the SWR can be changed by about 1% with the use of annuities ?

To the extent an SPIA can increase the SWR, it's largely because investing in an annuity has a 100% chance of completely depleting your investment in it when you (and your spouse if applicable) become worm food. You may increase your income, but you also have guaranteed that portion of your portfolio will be gone when you die (and incur missed opportunity costs with that investment while you are alive). That might not be an issue for some folks, but could be for others.

 

[Midpack]

You have to hand it to Yahoo to be "fair and balanced". I noticed the article from OP was last week. Now this week, they have put this article in their financial section. The article goes into the 4% rule and is suggesting it is not viable, now. I know everyone's situation is unique, but the articles defiantly contrast each other.

The old rule of thumb that allowed retirees to withdraw 4 percent of their savings per year should be thrown out the window in today's low-yield world, a study released in January found. Using the traditional 4 percent withdrawal rate, portfolios will run dry at a higher rate than ever before, found researchers Michael Finke, Certified Financial Planner professional; Wade D. Pfau, Certified Financial Analyst; and David Blanchett, CFA and CFP. Based on the real yields offered on five-year Treasury Inflation Protected Securities as of January 2013, the failure rate for retirement account withdrawals, or when they run out of money, using a 4 percent per year schedule is as high as 57 percent.

The original study that arrived at the 4 percent withdrawal rate was done by William Bengen and was based on a real return on bonds of 2.6 percent. The asset-allocation mix necessary to successfully draw down a portfolio in Bengen's study required that a portfolio devote at least 50 percent to stocks.

The study released this year used a 50-50 allocation between stocks and bonds and concluded that under current market conditions, "Even a 3 percent withdrawal rate has a more than 20 percent failure rate for all asset allocations," according to the paper, "The 4 percent rule is not safe in a low-yield world."

Retiring on CDs Not Viable - Yahoo! Finance

Happens here often, but you're mixing methodologies between:

• 4% SWR (4% first year and inflation adjusted increases thereafter) like Bengen & others and
• % of remaining portfolio.

I am sure you (and many others) know what you mean, but for other readers the statement in blue above is most likely false. If you withdraw 4% of your portfolio per year (% of remaining portfolio), the odds of failure are remote even in "today's low yield world." You meant 4% SWR, an inflation adjusted approach. FWIW...

 

[RobLJ]

I have other input, but you took someone to task for suggesting people shouldn't like they had to spend it just because they had it. I understood your answer, but you keep ducking my question.

The bottom line is that over the course of the history we have available, 4% has always worked for a 30-year period. But that's only as good as people feel confident that it will continue to work, because if they don't feel confident about it, they can't easily take 4% and feel peace of mind which (I hope you'd agree) is important to a good quality of life.

It's probably unsafe as a long-term WR, but we're planning on taking 5-5.5% for the 5 year period after ER until I qualify for SS, then reduce the withdrawal rate back to 4.5-5 until DW takes SS. At that point, we can cut back to 4% WR although that could be a total portfolio percentage rather than plus inflation, if necessary. We plan to downsize and move but travel in that 10-15 year period while we are still able, as Buff. Bill indicates. We have two children but don't aim to leave them anything, assuming at least one of us lives into our 90s, as I suspect will be the case. I'm fairly comfortable with 4% WR plus inflation as a safe benchmark; one can always reduce withdrawals for several years by taking a flat percentage or take other measures, as most people would do, if disaster strikes. Calculating the withdrawal based on life expectancy tables is another possible adjustment if the need arises.

 

[ziggy29]

I think it is unlikely that we'll ever see consensus with regard to any major issues, for the rest of our lives.

It seems like every 70-80 years, something happens in a way that "repeats history" and resets tumultuous times.

I'm thinking about the 1850s and the 1930s in particular, both very divisive times in terms of belief about the direction of things.

But both of these times, the latter in particular, events happened to bring a nation together in a (mostly) consensus way. The first 25 years after WW2, though certainly not without some hiccups, was largely like that. Even the two sides that disagreed did so to a *much* less degree than today.

Unfortunately, in our history this has usually only come in the aftermath of war. I certainly hope there's another way.

 

[bUU]

Perhaps 9/11 was that event, but instead of resetting tumult, it had its own effect.

 

[explanade]

Is anyone spending more in their first ER years with the plans to taper back (esp. when Social Security kicks in)?

The logic would be that when you're younger and healthier, you could do more with the money?

 

[marko]

.

Under my current $$$ plan, I'm good for age 90.
Don't use SWR, but it works out to about 4% w/ $5,000 estate.
Gives a cushion of five years.

Will join Hemlock Society @ age 87.

Hemlock Society?
My plan is to spend it all. Then join the "Welfare Society".

 

[padlin00]

Is anyone spending more in their first ER years with the plans to taper back (esp. when Social Security kicks in)?

The logic would be that when you're younger and healthier, you could do more with the money?

If one wants to spend $70k a year with $1.2M in assets, 4% won't do it. Instead one could divide the assets into 2 piles, one portion to cover expected SS in the pre SS years, the other portion for long term 4% withdrawals, or whatever rate you deem to use. The pre SS years are well over 4% when the portfolio is viewed as a whole.
If one were to start with say, $2M, then the $70k is less then 4% irregardless of SS.

 

[Z3Dreamer]

That is exactly my plan. In between 4% and 5% in the pre-SS years, being careful to keep MAGI under the ACA limits. Then 2% to 3% after that. Maybe that is too conservative.

 

[heeyy_joe]

That is exactly my plan. In between 4% and 5% in the pre-SS years, being careful to keep MAGI under the ACA limits. Then 2% to 3% after that. Maybe that is too conservative.

Good plan.

 

[Katsmeow]

Is anyone spending more in their first ER years with the plans to taper back (esp. when Social Security kicks in)?

The logic would be that when you're younger and healthier, you could do more with the money?

Yes, although not for that reason. DH is retired and he is on SS actually. I've been semi-retired for 3 years. We had some higher spending during the past 3 years related to selling our really large house and buying a downsized house.

Also, we still have a couple of kids at home, one in college and the other in late high school. If I was to completely ER, we would have very high withdrawals for about the next 3 years at which point I would be eligible for SS and our expenses would be going down at that point.

In our plan we anticipate that our portfolio 3 years from now will be smaller than our current portfolio. Basically if the portfolio then is at least 60% of our current portfolio we would be fine at that point as our withdrawal rates would plummet.

 

[Jack_Pine]

It's probably unsafe as a long-term WR, but we're planning on taking 5-5.5% for the 5 year period after ER until I qualify for SS, then reduce the withdrawal rate back to 4.5-5 until DW takes SS. At that point, we can cut back to 4% WR although that could be a total portfolio percentage rather than plus inflation, if necessary. We plan to downsize and move but travel in that 10-15 year period while we are still able, as Buff. Bill indicates. We have two children but don't aim to leave them anything, assuming at least one of us lives into our 90s, as I suspect will be the case. I'm fairly comfortable with 4% WR plus inflation as a safe benchmark; one can always reduce withdrawals for several years by taking a flat percentage or take other measures, as most people would do, if disaster strikes. Calculating the withdrawal based on life expectancy tables is another possible adjustment if the need arises.

I have not worked out the percentages but that is similar to our plan. DW will have small pension/ss/medicare when we ER. I will have to fund health care/life style for 4 years until I am 65.

So we will have a larger draw at the get go and then reduce it.

The biggest vulnerability is that first 4 years. We would have to adjust lifestyle if the market went south.

We also don't need to leave any inheritance. I know you have to plan for one to cover contingencies but I hate when some calculators have it growing to 4-5 mil at the end. Waste of money but I really struggle with how to balance that against risk.

 

[Jack_Pine]

Is anyone spending more in their first ER years with the plans to taper back (esp. when Social Security kicks in)?

The logic would be that when you're younger and healthier, you could do more with the money?

That's how I run my plans. Especially with the fidelity model. I think
I-ORP assumes that. Even past SS I think you will spend more discretionary dollars as you are more active.

 

[jebmke]

Is anyone spending more in their first ER years with the plans to taper back (esp. when Social Security kicks in)?

The logic would be that when you're younger and healthier, you could do more with the money?

I plan to defer SS until I am 70. At that time, I also have to start drawing from my IRA so my spending is going to jump considerably due to higher taxes.

 

[Jack_Pine]

I plan to defer SS until I am 70. At that time, I also have to start drawing from my IRA so my spending is going to jump considerably due to higher taxes.

Presume you do not need it sooner Good for you.

 

[Huston55]

I have not worked out the percentages but that is similar to our plan. DW will have small pension/ss/medicare when we ER. I will have to fund health care/life style for 4 years until I am 65.

So we will have a larger draw at the get go and then reduce it.

The biggest vulnerability is that first 4 years. We would have to adjust lifestyle if the market went south.

We also don't need to leave any inheritance. I know you have to plan for one to cover contingencies but I hate when some calculators have it growing to 4-5 mil at the end. Waste of money but I really struggle with how to balance that against risk.

Very similar here; small pension, SS, Tricare followed by Medicare. I seem to remember from other threads this (higher earlier withdrawals, lower later/post SS withdrawals) being a common pattern.

 

[Independent]

For those of you unsure of a 4% withdrawl strategy, here is an article for you.


David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. Here is a USNEWS and World report article:

Why 4 Percent Annual Withdrawals are Still Safe - Yahoo! Finance

Here are a few reasons a 4 percent withdrawal rate could still work for you:

-Safe withdrawal rates are based on the absolute worst case scenario.
-What are the chances you will live to 95?
-You can adjust your spending.
-Look at your budget closely, and there are many things that can be cut.
-Social Security will still serve as a solid foundation.
-Low expected returns won't last forever.

As for me, I think I will stick with a 3% plan until interest rates come back to historical norms.

What does "4% withdrawal strategy" mean?

To me, it means spend 4% of your assets in year one, then increase the dollar amount with inflation, in every year, without exception. That's what Firecalc tests.

If your plan includes the red, then it's not a pure 4% rule. It's some sort of flexible spending plan.

 

[W2R]

Is anyone spending more in their first ER years with the plans to taper back (esp. when Social Security kicks in)?

The logic would be that when you're younger and healthier, you could do more with the money?

To me, it seems like there is an element of REVERSE delayed gratification in that. Hmm. That just doesn't feel right to me, somehow.

I guess that is easy for me to say, since I have enough to not feel deprived without doing this. Maybe I would see thing differently if I was longing to climb Macchu Picchu this year, like my retired older brother just did a year or two ago. I am almost 65 now, and if he could do it I could too (but I have no desire to do so). I can't see myself doing something like that in my 80's.

I expect that as I age, I will need more money for medical/dental expenses not covered by Medicare or my insurance (like my recent dental implant) so even if I am not climbing mountains I might need more than I do today. I will claim SS in five more years, though, so I will actually have more spending money than I do now. If I decide to move into a continual care place sometime in my 70's, well, the good ones are sometimes a little pricey.

Back on topic, I have been living on 2% right now although I am expanding my lifestyle and anticipate increasing my spending to 2.5% - 3% this year and/or next. I don't *expect* to live to 95, but I am *prepared* to live to 95-105. I do not see myself ever spending 4%, especially for the next 20 years, but I will not worry if I have to during my final years.