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Old 01-02-2012, 06:05 PM   #21
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I think 4% in this low interest environment is high. I will use it for about four years until SS kicks in. Once SS kicks in, I will lower it to about 2.5% or so. I think that is the best I can do given that I can't read minds, my crystal ball is cracked, and my time machine is broken.

Now, if the stock market goes up an average of 10% or more for the next four years, my plans may change. Or, if the space aliens invade, my plans may also change. Not sure what I'll do if both happen.
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Old 01-02-2012, 06:07 PM   #22
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One thing for sure, if I maintain a 4% withdrawal rate for more than a few years, it would be to delay SS so as to increase future benefits. In other words, I would be using the extra money i withdraw to purchase a higher paying annuity provided by Uncle Sam.
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Old 01-02-2012, 06:18 PM   #23
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SWR for most people are quite variable by year. I use the Fidelity Retirement Income Planning tool to forecast my cash flow for each of the next 35 years. My withdrawal rate varies from just under 2% to about 4%.

My DW still works and gets health insurance, so our SWR (for me) is less than 2%. When she retires in a couple of years, we will have to pay for HI and our SWR jumps up to 4%. When we begin to collect SS, the SWR falls back down in the 3% range (and so on).

It also depends on how and when you spend. For example we will travel heavily in the next 10 years and then slowly cut back (travel will be our largest expense). And I planned health costs to get much larger as we age.
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Old 01-02-2012, 08:31 PM   #24
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This question was asked of Bob Brinker yesterday on the radio, by a caller who was retiring at 55. Bob said he ought to lower the SWR, at least in the first few years. His rationale was that there was a greater chance of his portfolio running out of money if he took 4% out annually earlier than the 'standard' retirement age. He didn't offer his math or cite any studies, and I question the accuracy of his statement. I'd like to hear your thoughts....
Here's some more studies.

Wade Pfau is the guy who looked at international SWRs and found that the 4% rule failed in 17 of 17 other countries. Another conclusion of his article was that the "one true SWR" is only 1.8%... but only in the USA.
An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?
Pensions, Retirement Planning, and Economics Blog: Cliff Notes for "An International Perspective on Safe Withdrawal Rates" (December 2010 JFP)

But then he looked at another researcher's concept of "utility maximization" or "how far can a retiree get before game over":
New Research Challenges 4% Withdrawal Rule
Quote:
First of all, what is an acceptable failure rate for retirees? Rory Terry argued in the May 2003 Journal of Financial Planning that due to the high costs of failure, even a 1 percent failure rate sounds exceedingly high. On the other hand, in the April 2011 Journal of Financial Planning, Philip Cooley, Carl Hubbard and Daniel Walz suggest that retirees might accept a 25 percent failure rate with the understanding that they may need to make mid-course adjustments to reduce their spending. Retirees are left to choose their withdrawal rate and asset allocation based on what they deem to be an acceptable failure rate.
...
Calls for low failure rates may not have properly accounted for the risk aversion or the other sources of income available for retirees who may be willing to risk higher failure for the opportunity to spend more earlier on in their retirements.
In other words, if a portion of a retiree's income is annuitized (Social Security at a minimum, perhaps also a SPIA or a deferred annuity) then they're comfortable with taking larger risks earlier in retirement. And, of course, they never run out of money so the SWR succeeds every time.

Is the 4% withdrawal rate really safe? | Military Retirement & Financial Independence
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Old 01-02-2012, 08:38 PM   #25
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If the retiree needs a WR of 4% at 55 I'd say well done go right ahead because when they take SS the required WR will fall. Of course if initial returns won't support 4% the plan needs to be modified.
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Old 01-02-2012, 08:51 PM   #26
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In other words, if a portion of a retiree's income is annuitized (Social Security at a minimum, perhaps also a SPIA or a deferred annuity) then they're comfortable with taking larger risks earlier in retirement. And, of course, they never run out of money so the SWR succeeds every time.
In most other developed countries annuities are the default retirement income account. Self directed investing in mutual funds is rare although it is becoming more common, particularly in the accumulation phase.
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Old 01-02-2012, 08:56 PM   #27
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If the retiree needs a WR of 4% at 55 I'd say well done go right ahead because when they take SS the required WR will fall. Of course if initial returns won't support 4% the plan needs to be modified.
Those of us who believe FIRECalc has some value in determining SWR would disagree.

It is entirely reasonable to have a withdrawal rate greater than 4% during the initial years of retirement IF future income from SS or other sources sufficiently reduces the portfolio withdrawal amount.
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Old 01-02-2012, 08:57 PM   #28
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Wade Pfau's article was a sobering study that showed the SWR for the Japanese had been a minuscule 0.47%, and that the 4% for the USA has been uncommonly high among several countries. We can all surmise that the USA has been benefiting from its unique historical and demographic circumstances.

Further more, the article concluded with the following paragraph.
It may be tempting to hope that asset returns in the 21st century United States will continue to be as spectacular as in the last century, but Bogle (2009) cautions his readers, “Please, please, please: Don’t count on it.”
Ugh... I am glad I have researched RV lifestyle. With just SS, I am reasonably sure that I can live a fine life that way. Have to break this news to my wife though.
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Old 01-02-2012, 09:02 PM   #29
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Ugh... I am glad I have researched RV lifestyle. With just SS, I am reasonably sure that I can live a fine life that way. Have to break this news to my wife though.
You keep threatening her with this and she may give you the opportunity to test it out on your own.
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Old 01-02-2012, 09:07 PM   #30
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Who's threatening? It's a matter of persuasion and presenting the positive aspects of the proposal.

Just a back up plan right now, but for a guy who spent a few years of his life working on fail-safe control systems with contingencies for most foreseeable failures, it's just the right thing to do. We considered failures down to 10^-9 in probabilities. That's 1 in 1 billion!

And things still failed of course! We were either too optimistic, or forgot the "elephant in the room".
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Old 01-02-2012, 09:14 PM   #31
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Just a back up plan right now, but for a guy who spent a few years of his life working on fail-safe control systems with contingencies for most foreseeable failures, it's just the right thing to do. We considered failures down to 10^-9 in probabilities. That's 1 in 1 billion!
But did these situations include the need to stay on the right side of a wife?

Ha
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Old 01-02-2012, 09:18 PM   #32
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When the situation comes down to being that bad, does she have a choice but to take her seat in my nicely prepared RV?

Which means I do not need to alarm her right now, but should just simply go quietly about my contingency plan.
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Old 01-02-2012, 09:27 PM   #33
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Those of us who believe FIRECalc has some value in determining SWR would disagree.
I would never base my future returns on historical data, FIRECalc is an interesting tool, but IMHO no way to plan for retirement income. Of course I'm in a small minority here. Anyway, I've arranged things so that my entire post 66 income will be met with US SS, UK state pension, rental income and an annuity. My investments will span the 55 to 66 gap with a 2% WR.
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Old 01-02-2012, 09:43 PM   #34
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I would never base my future returns on historical data, FIRECalc is an interesting tool, but IMHO no way to plan for retirement income.
That's OK. I know a couple of guys who swear Elvis is still alive and one of them claims he once saw Bigfoot. Everyone believes in something - or not.
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Old 01-02-2012, 10:09 PM   #35
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I'm new at this, so here's my first 4 month's experience. I look at what I spend monthly (appx. $2,500) and what I "grow"; so far about $4,000 / month. Beginner's luck maybe. I hope I can just grow my "egg" indefinitely albeit modestly.
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Old 01-02-2012, 11:00 PM   #36
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That's OK. I know a couple of guys who swear Elvis is still alive and one of them claims he once saw Bigfoot. Everyone believes in something - or not.
True, the Elvis sightings are about as credible as the 8% return that many once touted, whether 4% or 2% are work out I'll leave to the fortune tellers
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Old 01-02-2012, 11:27 PM   #37
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I believe the 4% rule is based upon a 25 year life expectancy (4 X 25 = 100).

The real issue is whether the market returns are poor initially or good. If the market tanks very early in retirement and stays down for several years your money can run out in 15-18 years (I believe this was with a $1M portfolio but I forget the AA but probably was 50/50) whereas if it does very well early on then you could have taken out substantially more than 4% and have a lot left over in 25 years. I have read this in a couple of books and in a paper at a website with a table to show how the "order of returns" effects your portfolio.
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Old 01-03-2012, 04:30 AM   #38
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This is my view also. I am 46, semi retiring next year at 47, and my planned SWR is about 3.25%. I also plan for a variable SWR (thanks to the impact of part time work, annuities and decreased expenses at about 85+ years).
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It all depends on your risk tolerance. I am very risk averse and would not feel comfortable with 4% for a 35+ year retirement. I would use 3.5% at the very highest for such a retirement.
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Old 01-03-2012, 04:41 AM   #39
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I beg to differ. From the Bogleheads wiki :

(SWR is defined as) "the quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure; failure being defined as a 95% probability of depletion to zero at any time within the specified period. "


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I believe the 4% rule is based upon a 25 year life expectancy (4 X 25 = 100).
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Old 01-03-2012, 09:25 AM   #40
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I believe the 4% rule is based upon a 25 year life expectancy (4 X 25 = 100).
Actually 30 years is the most common duration for the 4% SWR studies that have been done. Not sure what your math is supposed to indicate. I think the rule of thumb calc is:

first year annual spending / .04 = initial total nest egg (required to provide a 95% chance of not running out of money over a 30 year period invested 60:40 or thereabouts and withdrawing in a prescribed manner*, based on many years of asset return past history.) Or probably simpler, first year annual spending x 25 = initial total nest egg.

* spending each year adjusted up by inflation, 4% is only applied to determine the starting point, not thereafter

And it's just a data based rule of thumb, I doubt anyone follows it blindly for 30 years.
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