Hopefully we have the "two or three sigma" recession behind us.
If you ER'd now, does this change your SWR percentage rate ?
Kind of three possible views:
1. No Change: 4% regardless of the past and future
2. Higher SWR: worst is over, odds of going lower are low, can do higher SWR
3. Lower SWR: could be a "lost decade" like Japan, need to lower SWR
It's been discussed before, and I think the discussion goes in circles as people don't do Apples-Apples.
Here's how it makes sense for me - consider a scenario like we have seen with portfolios dropping 50% from their peak:
A) Person A retires at a market PEAK with $1M, so a 4% is 40,000 per year (adjusted for inflation going forward).
Then a few years later after a 50% drop in the market...
B) Person B retires at a market TROUGH with $1M, so a 4% is 40,000 per year (adjusted for inflation going forward).
On average, "B" should have a much higher success rate. I think if you parse the data, you'll see that most of those failures are the people who retired at a PEAK, and then experienced a big down slide in the market (and/or rise in inflation).
I think that the people who are saying that 4% is 4% regardless of the timing are not looking at FIRECALC closely enough. I *think* this is what they are missing:
If Person B had $1M after a 50% market drop,
that means he had something close to $2M before the drop. So he could have retired then and the $40K would be just a 2% WR. IOW, it is not a static situation. Another way to look at that is that yes, $1M portfolio in a trough is worth much more than $1M portfolio at a peak. Seems obvious when you put it that way.
Of course, this is just all based on history. It sure doesn't mean we could not experience worse. So understand and plan conservatively enough to sleep at night, and generous enough to live well.
And at some point, you have to come to grips with the idea that it is all a crap shoot. You can work till you die, or retire too early with too little, or have higher than expected expenses and be destitute at some point. That can happen if you keep working too. No guarantees, just reasonable plans to work with.
BTW, a 4% WR leads to far more than 5% failure rate when you factor in the many people that would live beyond 30 years. And don't forget that a fair number of those "success" plans saw drop of over 50% along the way - even with a reasonably conservative 50-50 EQ/BOND ratio. I bet a lot of people would have sleepless nights and/or try to go back to work if they experienced that.
-ERD50