In defense of 4% withdrawal strategy.

[donheff]

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Originally Posted by bUU I think the point that cannot be overlooked is that very well-respected experts are making it clear there are strong indications that what worked in the past - financially - will no longer work. So while we may be able to learn from the past with regard to health, attitude, and other matters of perspectives, this one specific aspect of life very likely requires a change in thinking.

As I said, for spending purposes I take this pessimistic view and probably would have taken it even if the financial community was optimistic. But my optimistic head still questions their conclusions about the long range. These same folks were yapping about 20%+ average annual gains as far as the eye could see in 1999. They exhibit recency bias in both directions.

[bUU]

I doubt that everyone making the point that the market has fundamentally changed were touting 20%+ average annual gains back in 1999. Perhaps a few people were, but that leaves the rest of the experts still saying that things have changed. How would one differentiate between a fundamental change in the nature of markets and recency bias?

[donheff]

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Originally Posted by bUU How would one differentiate between a fundamental change in the nature of markets and recency bias?

I wouldn't, thus my pessimistic withdrawal rate. I just don't buy that they are right even though I wouldn't bet my future against them. Better safe than sorry.

[bUU]

So effectively, because they are rationally predicting doom, we believe their predictions because rational predictions of doom need to be heeded more than comparably rational predictions of glory.

Sounds good, but I don't think my spouse and I are going to be able to come to consensus on that, because it would tend to lead down a path that my spouse simply cannot abide.

[Midpack]

While there have been "experts" saying "this time it's different" once again, I am not aware of a consensus. We all remember the 1979 Businessweek 'Death of Equities' cover story, and I am sure there were similar POVs in the 1930's - all seemingly convincing at the time.

I'm not advocating all is well, and we will withdraw conservatively. But we don't know what the future will bring - we've been positively surprised generation after generation (PCs, Internet, mobile) and there may be breakthroughs in healthcare, energy or who knows what else despite a more global economy.

[bUU]

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

[heeyy_joe]

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

Oh, I doubt that.

[ERD50]

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Originally Posted by enjoyinglife102 What's interesting to me about all these discussions about "safe" withdrawl rates is that they have little relevance to what people actually do. Who on earth takes 4% from their portfolio and then that plus inflation for the next 30+ years? I get so much more out of discussions around real world strategies and approaches. My parents never invested in stocks, lived responsibly, had a good and happy life and a comfortable retirement. More to learn from them than a hypothetical spread sheet analysis.

Why is this so incredible to you? Historically, it could be done and 95% of the time it would be successful. And the average retiree would have come out with about as much buying power as they went in with.

Now, 95% isn't comfortable enough for me, and I figure the future, on average, won't likely be as good as the past averages, but it seems that very many people could have done just fine on a 4% WR, no?

-ERD50

[Katsmeow]

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Originally Posted by ERD50 Why is this so incredible to you? Historically, it could be done and 95% of the time it would be successful. And the average retiree would have come out with about as much buying power as they went in with. Now, 95% isn't comfortable enough for me, and I figure the future, on average, won't likely be as good as the past averages, but it seems that very many people could have done just fine on a 4% WR, no? -ERD50

I don't disagree with you that it would have worked. But I think the point is that in the real world that is not how people decide their withdrawal rate.

I mean how many people really look at how much they had when they retired (say, $1,000,000 for sake of argument), then say that year one I can withdraw $40,000 then when year 2 arrives go look up the inflation rate then increase that $40,000 by the rate of inflation, then the next year increase it by the rate of inflation again. And do that for 30 years never even paying any attention whatsoever to the size of the portfolio?

I mean people - in my experience - just don't commonly do it that way in the real world. I'm not saying it wouldn't work historically. And they don't do it that way with a 3% withdrawal rate or a 2% rate, etc.

My sense is that most people who actually have a withdrawal plan, get a general sense when they start out of how much they think that they can afford to spend (that sense may or may not be right). If they don't get SS yet, there is a good chance they will start out with a higher rate planning to reduce it later. As time goes on, they pay attention to their portfolio and how it is doing. If it, say, reduces 25% then most people are going to reduce their withdrawal rate. If it goes up significantly beyond what they expected, then they might increase it. I think that even those setting up a percentage (say 4% or 3% or whathever) are more likely to loosely base it upon the percentage of the existing portfolio rather than basing it as an inflation adjusted percentage of the original portfolio.

[M Paquette]

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Originally Posted by ER Eddie I'm pretty ignorant when it comes to financial matters, but to me, a study based on bond yields "as of Jan 2013" and "current market conditions" is kind of flawed. As I understand it, SWR are based on the whole history of the market, not current conditions. But maybe I'm missing something.

Nope. I speculate that somewhere around 2017 the 4% withdrawal rate plans will magically start working again, as the current 'if this goes on forever' assumption becomes invalid. I expect to see the 10 year Treasury rate rise above 5% in that time frame, as the ongoing liquidity trap and consequent de-leveraging activity wraps up. But that's just me.

[imoldernu]

Hope this isn't too far off topic.
When I was born, life expectancy was 56.6 yrs.
Those born today have a life expectancy of 75.4 yrs.
At my current age, my remaining life expectancy is 9.4 years
Genetics projection was 58 yrs.

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.

[bo_knows]

Excuse the ignorance of the young here, but what exactly is the thought process with how you determine your SWR? I know that for periods of 30 years, 4% is pretty safe. When you start ERing earlier and earlier, 3% or lower becomes the comfort level.

What I mean to say is... don't you usually have an idea of how much you spend each year, and you save up until your SWR on your portfolio matches that? Or, do any of you literally sit down on Jan 1, calculate exactly 3% of your portfolio and say "Welp honey, looks like we need to take another vacation this year!"

I can see trying to lean out your spending during tremendous downturns, but I fail to grasp the concept of these very exact SWR's.

[bUU]

We're not there yet, but I see it working the other way. We'll calculate whatever our SWR dictates, and if that's less than expected budget, we'll implement our own sequester.

[Midpack]

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Originally Posted by bo_knows What I mean to say is... don't you usually have an idea of how much you spend each year, and you save up until your SWR on your portfolio matches that? Or, do any of you literally sit down on Jan 1, calculate exactly 3% of your portfolio and say "Welp honey, looks like we need to take another vacation this year!" I can see trying to lean out your spending during tremendous downturns, but I fail to grasp the concept of these very exact SWR's.

Few if any of us consider SWR %'s exact, but they're a good benchmark for setting a portfolio goal IMO. Like you, I consider 4% pretty safe for 30 years, or 3% for longer duration. But beyond using it as one input to set a nest egg accumulation goal, I am sure we won't follow the withdrawal methodology much if at all. And I don't think Bengen, Greaney, the Trinity folks or the others meant for anyone to do so.

[bo_knows]

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Originally Posted by Midpack Few if any of us consider SWR %'s exact, but they're a good benchmark for setting a portfolio goal IMO. Like you, I consider 4% pretty safe for 30 years, or 3% for longer duration. But beyond using it as one input to set a nest egg accumulation goal, I am sure we won't follow the withdrawal methodology much if at all. And I don't think Bengen, Greaney, the Trinity folks or the others meant for anyone to do so.

This is what I though, but I've seen some people reference very specific numbers like "3.3%" or "2.8%". Not to pick on anyone, but it was just mucking with my notion of SWRs and how people decided on their spending levels.

[obgyn65]

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

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Originally Posted by donheff 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]

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Originally Posted by obgyn65 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]

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Originally Posted by Mulligan 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]

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Originally Posted by ziggy29 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]

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Originally Posted by bUU 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.