Is 4% really safe?

[unclemick]

tryan

You are in a totally different ballgame. Have you trained DW in RE? Looked into setting up a hands off management structure of some sort?

The RE game is different breed of cat - I never really pumped the guys I knew during working years on how they planned to 'play the game in retirement'. Other than sell apiece here and there when the time was ripe. The other - train my son to take over.

What's da plan??

heh heh heh heh - I knew people who 'did' RE successfully in retirement but never paid attention to details - like us stock cats and calculators.

 

[unclemick]

Yep

SG came up with some pretty cool ways to 'hotrod' FireCalc.

Tryed some of his suggestions in the past - very enlightening.

 

[Cut-Throat]

Huh? Aren't you familiar with the approach SG came up with using FIREcalc?

Set your annual withdrawal to 2%, then boost your portfolio expenses by, say, 3% to represent the variable portion of your draw.

Cb

Not sure I follow this. - Could you explain please.

What I was hoping to have a calculator do was take a lesser amount after down market years (which I would do anyway) and take a greater amount after up market years.

 

[Cb]

Not sure I follow this.   - Could you explain please.

What I was hoping to have a calculator do was take a lesser amount after down market years (which I would do anyway) and take a greater amount after up market years.

That's what I'm talking about...taking a portion (say, 2%) of your witrhdrawal on a "fixed" basis as per the traditional use of FIREcalc, and taking an additional percentage (say, 2.5%) as a portion of remaining portfolio...that portion swings around a bit based on recent market returns. Incorporating that bit of feedback boosts SWR's appreciably. See SG's study here:

http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1107790433

Cb

 

[rmark]

Is 4% safe - yes and no.  This is what I wrote to help explain this too my wife.

4% withdrawal generally based on – 60% stock/40% bonds, U.S. history only, 25 yr life expectancy, no investing costs, mean reversion, annual increase for inflation

small total reits corp total bills    Past U.S. investor averages (up to 200 yrs)
         stock                bond
           12                                  arithmetic return
           -1                                   near geometric return
           -1                                   survivor bias
           10                      6           nominal return
           -3                      -3          inflation
            7                       3           saving
           -2                      -1          average down
            5                       2           withdrawal

Now with international averages, investing costs, no mean reversion, conservative retiree.

small total reits corp total bills  Past averages and extrapolated returns
         stock                bond
           12                                   arithmetic return
           -1                                    near geometric return
           -1                                    survivor bias
           10                      6           nominal return
           -3                      -3           inflation
           -2                      -1           investing costs
   6       5      4       3      2      1    saving u.s. domestic investor
           -1                      -1           lower  international
   5       4      3       2      1      0    saving u.s. global investor
           -1                      -1            lower international
   4       3      2       1      0      -1   saving u.s. international only investor
           -2                      -1            withdrawal

Near 0% after tax net real return by late life from ever more conservative portfolios.

Divide after tax fixed pensions and mixed portfolios annually over IRS life expectancy, spending part and investing the rest, thus adjusting fixed pensions for past inflation and matching conservative withdrawals to 401k type plans required minimum distributions.

Bernstein “Four Pillars of Investing” book (efficientfrontier.com)
Bogle “Common Sense on Mutual Funds” book (vanguard.com, related sites)
Hebeler “JK Lassers Your Winning Retirement Plan” book (analyzenow.com)

Jorion “Long term risks of global stock markets” article  fin. mgmt. 2003
Cooley, Hubbard, Walz “Retirement savings: choosing a withdrawal rate…”paper
Charnes, Robinson “Sustainable withdrawals” paper (includes synopsis of other articles)
Dimson, Marsh, Staunton “Irrational Optimism” paper
Jorion, Goetzmann “Global stock markets of the 20th century” paper
Dichev “What were investors actual historical returns” paper
Lewellen “Predicting stock returns with financial ratios” paper
Campbell, Thompson “Predicting the equity premium out of sample” paper
Frazzini “Dumb money: mutual fund flows and the cross section of returns” paper

 

[rmark]

To my knowledge the Cooley, Hubbard, Walz “Retirement savings: choosing a withdrawal rate…”paper was the origin og the 4% drwa.

 

[rmark]

'of the 4% draw'. Interrupted while typing.

 

[REWahoo]

To my knowledge the Cooley, Hubbard, Walz “Retirement savings: choosing a withdrawal rate…”paper was the origin og the 4% drwa.

Correct. The paper is known as the Trinity Study (Cooper, Hubbard and Walz were business professors at Trinity University), referenced by Scott Burns in several of his columns.

http://www.dallasnews.com/s/dws/bus/scottburns/readers/trinitystudy/

You will probably have to register to view...

 

[rmark]

My point is that by introducing non-U.S. history and adjusting the average returns for historic investing costs, most of the twists and turns article writers use to raise the withdrawal rate are just data mining.

 

[tryan]

What's da plan??

Well the RE training sessions started when I left the day job.  Little slow at first but it's catching on.

Long term I'll drop all the real estate (probably around the time SS and pension kick in - 23 years out) and set up a dividend paying stock portfolio (a lesson from the Norwegian widow).  This way the DW will be pretty much on auto-pilot.

All of this subject to change - of course - but it's a start.

 

[audreyh1]

On the long term care thing......

It seems that what you need to do is either buy long-term care insurance, OR earmark a certain amount from your portfolio in today's dollars that might be tapped into for say 2.5 to 3 years of living in such circumstances.  I think the average time in a nursing home is less than that.  Maybe set aside for 5 years if you want to be more conservative.  If it makes you feel better, subtract this amount from your portfolio when you compute your annual SWR.

In most cases with a prudent SWR, you're portfolio is well on it's way to having excess left over anyway - so unless you go through several bad years when starting out, you may be covered even if you don't subtract the "set aside" amount when computing your annual draw.

The "good news" is that once you are ready for a nursing home, your time line has shrunk big time - in most cases your portfolio doesn't have to last that long so you can afford larger drawdowns.

If you leave a surviving spouse - then you don't want to draw down the portfolio too much, but a single person doesn't need quite as large a portfolio as a couple either.  A healthy spouse may be the best reason to use the "set aside" for at least a couple years of long term care.

If you can't afford to "set aside" for long term care out of your retirement portfolio then you might want to buy long term care insurance instead.

Not sure if this made a whole lotta sense...... (it does to me - just not easy to explain).

Audrey

 

[Jim666]

Here’s my summary of what I believe I’ve read on this thread and elsewhere:

4% is considered the default initial withdrawal rate, indexed for inflation, but that’s only “safe” if:

Your total investment costs, including trading costs, aren’t above about 0.2%.

You keep a large percentage of your portfolio in equities, to prevent inflation from eating you alive later, and you’re in index funds or otherwise manage not to underperform the market.

Your portfolio is fully tax-sheltered, or you pay all taxes out of your withdrawal, including capital gains taxes.

During a bull market, you never increase your withdrawal more than the index, because you’re going to have to rely on those gains to get you through the next bear market.

You’re brave enough to stay the course even if the stock market drops 75% again.

You’re willing to have your money run out in about 30 years.

OR

You plan to die early.

Or you’re willing to take your own life if you don’t.

Or you feel you’ll retain the ability in your old age to earn some money if needed, or to cut your expenses.

Or you’re confident stocks will do better than they have in the past.

Or you just want to retire early and are willing to take your chances.

Of course, all bets are off if the Chinese and the Saudis call in the U.S. government’s debt, leading to a collapse of the economy like we’ve never seen before.

Jim

 

[Cut-Throat]

Jim,

And don't forget - We're all dead in the long run!

What;s with the 666 - Are you the antichrist or something?

 

[Maximillion]

Jim666, that is why a Gold Hedge is important, as well as holding other currencies.

I do not know about others, but I assume that most have some Government Pensions, some Company Pensions, that the 4% withdrawal is from a Managed Portfolio, so swings are not really dramatic??

 

[Jim666]

"What's with the 666 - Are you the antichrist or something?"

In numerology, they add up the numbers in your birth date until they each come down to a single digit. My month, day, and year each becomes a 6. I've heard that the antichrist thing is a misreading of Revelations. 6 has always seemed to be my lucky number.

Yes, I agree, in the long run we're all dead.

Jim

 

[Cb]

Jim666, here is what I've concluded over the past few years:

- 4% appears to be a pretty conservative SWR based on historical returns of US large cap stocks and non-indexed FI investments. Heavy equity allocations appeared to have been optimal in the past

- more recent studies by folks like Jared Kizer and raddr and others suggest that broader diversification into asset classes such as international equities, REITS, commodities, TIPS, and value stock indexes ought to improve SWR's somewhat.

- the more recent studies of variable withdrawal approaches suggest they might help even more.

So what's a brother to do?  Here's what I'm doing:

- planning for a 55 year retirement period (one of us living beyond 100)

- padding our budget (50/50 basic needs/discretionary)

- assuming the worst wrt to health care costs (but still somewhow living to 100+)

- diversifying broadly, driving down portfolio SD below the portfolio options modeled in  FIREcalc

- using only a 2% fixed + 2% variable withdrawal strategy in the event that future returns are lower than the worst modeled in FIREcalc.

- not ruling out the possibility of having to work at some point to fill in any gaps should all the above prove to be insufficient.

Cb

 

[Cut-Throat]

- planning for a 55 year retirement period (one of us living beyond 100)

I've got a friend that is 83 - He has to pee every 10 minutes. - Are you sure want to live to 100?

 

[Cb]

I've got a friend that is 83 - He has to pee every 10 minutes. - Are you sure want to live to 100?

Can I get back to you when I'm 82?

The Vanguard Longevity calculator say I've a ~33% shot at making 86, and one of us has a 4% at 102. I'm planning for either (very little difference anyway)

http://flagship2.vanguard.com/VGApp/hnw/content/PlanEdu/Retirement/PEdRetPicLongRetireContent.jsp

 

[Nords]

I've got a friend that is 83 - He has to pee every 10 minutes. - Are you sure want to live to 100?

What does your friend think about that question? Of course he must spend a lot of his thinking time in the bathroom...

 

[REWahoo]

I've got a friend that is 83 - He has to pee every 10 minutes...

Might not be be much of a problem if he's a real whiz at peeing...

 

[youbet]

Here’s my summary of what I believe I’ve read on this thread and elsewhere:

James......

By golly, I've think you've got it!

youbet

 

[unclemick]

Jim666

Close enough to receive the 'honorary order of the hand grenade.'

I'll save my Norwegian widow counterpoint agrument for a later date.

heh heh heh heh

 

[lazygood4nothinbum]

What;s with the 666 - Are you the antichrist or something?

just wait till all the crazies come out by june "06/06/06"

 

[Cut-Throat]

What does your friend think about that question? Of course he must spend a lot of his thinking time in the bathroom...

He is pissed about it. Very Pissed!

 

[MJ]

I've got a friend that is 83 - He has to pee every 10 minutes. - Are you sure want to live to 100?

My father wears a condom like catheter and leg bag. He started wearing it several year ago. Seems to live with it well enough. He doesn't have to worry about wet dreams.