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Is 4% SWR too high for retiring early?
Old 01-02-2012, 01:38 PM   #1
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Is 4% SWR too high for retiring early?

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....
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Old 01-02-2012, 01:46 PM   #2
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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....
The 4% "rule" is a liquidating strategy. It doesn't matter to the investing gods how long you plan to live off your portfolio, it only matters the amount and timing of withdrawals and the portfolio performance and path. Naturally, the longer you will be trying to withdraw, the greater the chance of failure. The only way for this not to be true is to get the withdrawal rate well below the earnings of the portfolio and the requiered volatility correction.

Who has a greater chance of failure, an 80 year old withdrawing $40,000 from a million dollar portfolio, or a 40 year old doing the same?
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Old 01-02-2012, 01:47 PM   #3
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IMO the low-interest rate environment makes 4% tighter than otherwise. For one thing, the portion in the near-term bucket (savings acct, money market or CDs) isn't assisting by earning 4% these days.
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Old 01-02-2012, 01:47 PM   #4
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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.

I read a very persuasive article on this topic over at the Journal of Financial Planning years ago, although I can't remember the name of the article or author. At any rate, the author said that based on market history and I believe a 70:30 portfolio? ?, a 4% SWR was pretty rock solid for 25-30 years (95%? I have forgotten). He also said that a 3% SWR was very certain (95%?) to never run out, and the idea of never running out has always stuck in my mind. Eternal money would be a huge benefit for just spending a little less.
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Old 01-02-2012, 02:09 PM   #5
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4% is for a 65 yr old (assuming 30 yrs) based on past history. It seems the indefinitely sustainable withdrawal rate is closer to 3% from what I've read, that's about where Otar was IIRC. There is no precise number (depends on returns, sequence of returns, lifespan, etc.), but you might enjoy this closely related thread Is There An Unlimited Duration SWR?
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Old 01-02-2012, 02:42 PM   #6
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Otar's general advice is that a 3.6% withdrawal rate should last you for at least 30 years.

Another of Otar's lessons is "Don't confuse percentage with dollars."
Figure your initial withdrawal rate, then index that dollar amount to inflation every year.
Theoretically, you can take out 99% of your portfolio every year for the rest of your life, and never run out of money. But it's not a very practical plan.
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Old 01-02-2012, 02:57 PM   #7
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I plan to live on less than 4%, probably more like 3% once I completely stop working, even though both of us think we would not live past 85.

That low withdrawal plus SS hopefully means we will die with money left over (unless I make some really dumb investment choices). However, that is OK. I like to count my money. Would definitely not want to die broke! Would cut back expenses if necessary, but got to have cash sloshing around for real comfort of mind. Is that enough scrooginess for you?

PS. When I mentioned SS, I meant that I could cut my withdrawal rate to even below 3% to maintain the same living standards.

One can make a FIRECalc run to see the effects of cutting back withdrawal when SS starts. Big difference in my case, as I remember it. In fact, it said I would die rich!
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Old 01-02-2012, 03:02 PM   #8
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The 4% sustained withdrawal rate (as defined properly) is a problem for early retirees. No doubt whatsoever about it. Please read Otar's book (search forum for reviews and comments). In particular, watch out for the Red Zone!

Of course, even the four-percenters don't use 4% as their sustained withdrawal rate.
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Old 01-02-2012, 04:15 PM   #9
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Interesting question. If I run a 4% withdrawal rate through Firecalc with a 30 year time horizon and a 40 year time horizon the number of failed scenarios is no different. This would suggest that a 4% SWR is ok for even a 55 year old.

That said, I would prefer 3.5%.
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Old 01-02-2012, 04:27 PM   #10
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Quote:
who was retiring at 55.
This guy should be preparing for a 40 year retirement (not 30) so a 3% SWR might be a better place to start rather than a 4%.
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Old 01-02-2012, 04:34 PM   #11
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Bob Brinker is one of my favorite talk radio hosts. He often speaks of reaching "Critical Mass". He defines Critical Mass as the amount of assets required for a person to be able to live off of his or her assets indefinitely. It appears to me that if you dip into your principal, there is some chance, however small, that your assets will not last indefinitely, regardless of the 4% rule. Now, what is the definition of indefinitely?
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Old 01-02-2012, 04:41 PM   #12
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Just be flexible - withdraw less in lean years. Variable withdrawal rate is another approach.
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Old 01-02-2012, 04:42 PM   #13
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By the way, I was amazed that Bob Brinker hosted a live show on New Year's Day. He has been taking a lot of time off lately. I turn the radio off if he has a substitute host(ess).
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Old 01-02-2012, 04:46 PM   #14
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Bob Brinker is one of my favorite talk radio hosts. He often speaks of reaching "Critical Mass". He defines Critical Mass as the amount of assets required for a person to be able to live off of his or her assets indefinitely. It appears to me that if you dip into your principal, there is some chance, however small, that your assets will not last indefinitely, regardless of the 4% rule. Now, what is the definition of indefinitely?
Not only that, but Critical Mass must depend on market conditions over the long term as well. Last year I spent 2.2%, and no more than dividends, but I still wonder what would happen if share prices plunged and then dividends plunged too and then they stayed there for 30 years. I don't stay up at night worrying but still, market conditions in the past are no guarantee of market conditions in the future AFAIK.

To me, a nestegg that lasts indefinitely would remain robust for my lifespan (I suppose another 10-40 years?).
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Just be flexible - withdraw less in lean years. Variable withdrawal rate is another approach.
Good idea and one that I plan to follow.
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Old 01-02-2012, 04:49 PM   #15
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With 10-yr bond yields at 1.88% and stock dividends around 2% it's hard to see how we can expect to draw 4% REAL indefinitely.
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Old 01-02-2012, 04:54 PM   #16
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Just be flexible - withdraw less in lean years. Variable withdrawal rate is another approach.
Absolutely , I retired in 2007 by 2008 my portfolio had lost a third of its value . The only way IMO my portfolio was able to recover was by doing some tweeking of my budget and spending less !
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Old 01-02-2012, 05:01 PM   #17
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Originally Posted by HawkeyeNFO View Post
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....
I think that:
- People withdraw less during lean times. They can't help themselves.
- People spend less as they age. He'll spend less in his 70s, and in his 80s he'll spend even less.
- The 4% system at high valuations is problematic, but there are plenty of ways to monitor the portfolio's survival and to shift tactics before it's too late.

In other words, I'd go for 4% now and check back in five years.
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Old 01-02-2012, 05:20 PM   #18
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It appears to me that if you dip into your principal, there is some chance, however small, that your assets will not last indefinitely, regardless of the 4% rule. Now, what is the definition of indefinitely?
For people who want to be sure that their money will never run out, there's always the SPIA. OK, the insurance company might go bust, so buy 5 SPIAs with 20% of the money in each.

What's that? You don't like annuity rates? Then you either have to accept some risks with your non-annuity SWR strategy, or put in more money.

For me, the idea of the SPIA backup when DW and I get to the age where our spending will decrease substantially (our main post-retirement expense will be travel, which we aim to do a lot, but realistically not too much after age 75) is an attractive one. Someone else can maybe find the link to where the concept (which had a fancy name) that "your mission is to make your SWR strategy work until you are old enough that the SPIA rate makes it worth buying" was mentioned here.
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Old 01-02-2012, 05:34 PM   #19
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Originally Posted by HawkeyeNFO View Post
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....
This topic comes up regularly in one form or another. Sooner or later, someone suggests that the 4% rule may be more useful as a planning tool during the accumulation phase than as a strict withdrawal strategy during the withdrawal phase. i.e., You can set your savings and nest-egg goals based on a 4% SWR. However, when you actually retire, you need not slavishly follow the strategy. Let your instincts be your guide to a certain extent when the time comes. Also, it never hurts to build in some backups (to your backups - in my case).

Personally, my AA is too lean on stocks to ever even consider a 4% SWR strategy for withdrawal. That too is what is often missed when financial gurus throw around the 4% rule. It must be taken in the context of appropriate AA. Again, in my case, I'm happy to live with a lower (and, yes, flexible) SWR because the ups and downs of the market are a bigger concern to me than the potential to have more money via a 4% SWR. Obviously, YMMV.
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Old 01-02-2012, 05:53 PM   #20
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Absolutely , I retired in 2007 by 2008 my portfolio had lost a third of its value . The only way IMO my portfolio was able to recover was by doing some tweeking of my budget and spending less !
+1. You have to be flexible. In the low interest rate environment we are currently in, 4% is probably too high, but that could change in a few years.....maybe. You have to re-evaluate your situation periodically (I do it annually) and make adjustments as necessary to make sure you are not drawing down your available funds too rapidly.
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