PSA: FIRECALC Success Rates for various ages & withdrawal rates

[Midpack]

Occasionally we see posts using 4% as a "safe" withdrawal rate for early, even very early retirees. The classic 4% SWR is based on retiring at age 65 and planning on 30 years, IOW success rate for the portfolio out to age 95. The success rate for early retirement assuming a 4% WR is lower all else being equal, or a lower WR is implied to maintain the desired success rate. Just plugging into FIRECALC FWIW...

Success rate 1871 thru 2011

Plan Years	20	25	30	35	40	45
Retirement Age	75	70	65	60	55	50
4% WR	100%	98.3%	94.6%	92.5%	86.1%	84.4%
3.5% WR	100%	100%	100%	99.1%	97.0%	97.9%?
3.0% WR	100%	100%	100%	100%	100%	100%

Remember these success rates are based entirely on past history. A 100% success rate means the plan would never have failed had your plan ended in 2011 or earlier. Whether or not future real returns will fall within the range of past results is unknown, but we all hope that will be the case.

And while we'd all like a 100% success rate, people have retired successfully at much lower success rates. The Retirement Calculator from Hell articles noted "A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless."

 

[arebelspy]

Interesting. Thanks for posting.

Got me thinking.

What are all the assumptions you used in FIRECalc? (I can likely guess, but don't want to assume.)

 

[GrayHare]

With so many planning for age 95, while so few will reach that age, it would seem there's a huge demand for an annuity that's simple to understand and low expense.

 

[73ss454]

With so many planning for age 95, while so few will reach that age, it would seem there's a huge demand for an annuity that's simple to understand and low expense.

I'm sure the brokers and ins. companies are hard at work on that as we speak.

 

[Midpack]

Interesting. Thanks for posting.

Got me thinking.

What are all the assumptions you used in FIRECalc? (I can likely guess, but don't want to assume.)

All the defaults, I only changed plan years and WR (by changing spending)...

 

[ducky911]

Now you got me regretting marring my wife ( 3 years younger) some 34 years ago. Knocks me down from 3.5 % to 3%. If someone had just warned me back then that that cute girl was going to cost me some day!

 

[2B]

Now you got me regretting marring my wife ( 3 years younger) some 34 years ago. Knocks me down from 3.5 % to 3%. If someone had just warned me back then that that cute girl was going to cost me some day!

Don't worry about her. Just retire and let her worry about herself. That cute girl and take care of herself.

 

[GSMAN]

Life Expectancy Realism

I find it interesting that the average life expectancy is around 78 but yet many people plan financially to live to 95. That's 17 years more than the average. I tend to play the odds.

With so many planning for age 95, while so few will reach that age, it would seem there's a huge demand for an annuity that's simple to understand and low expense.

 

[Cb]

Did you hold the portfolio allocation constant as you increased the duration, or seek an optimal Equity/FI split for each?

Cb

Edit: Doh! Just saw your reply to the earlier question. Years ago I did that exercise and found that increasing equities as the period went beyond 30 years helped, peaking at 82%, IIRC. My guess is that % might have slipped a bit with the addition of more years of data, and catching the late 60's in the 40 year retirements.

 

[ERD50]

I find it interesting that the average life expectancy is around 78 but yet many people plan financially to live to 95. That's 17 years more than the average. I tend to play the odds.

Actually, for a male who has made it to their 60's. life exp is around 85 YO average.

Retirement & Survivors Benefits: Life Expectancy Calculator

And don't forget, 'average' means half the people live longer than that.

For a couple at 65, there is a 45% chance one of them will live past 90 YO.

https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool

Do one of you really want to run out of money before you run out of life? What is your 'Plan B' if your odds go against you (or for you, depending upon POV)?

-ERD50

 

[Animorph]

I find it interesting that the average life expectancy is around 78 but yet many people plan financially to live to 95. That's 17 years more than the average. I tend to play the odds.

If you include factors such as non-smoker, exercising, and a few other things, you can increase the average quite a bit. Livingto100.com has a calc for that (looks like it might require registration now.) Last time I checked, my customized average life expectancy was 92 years old. And that would be the 50% point. I'm happy enough to use that for a planning age since I don't intend to let my portfolio value drop too much during retirement.

 

[arebelspy]

Expanding out the table from the OP to include ER before age 50 (all the way down to 30)...

Plan Years	20	25	30	35	40	45	50	55	60	65
Retirement Age	75	70	65	60	55	50	45	40	35	30
4% WR	100%	98.3%	94.6%	92.5%	86.1%	84.4%	85.7%	82.6%	81.5%	80.3%
3.5% WR	100%	100%	100%	99.1%	97.0%	97.9%	98.9%	98.8%	98.8%	98.7%
3.0% WR	100%	100%	100%	100%	100%	100%	100%	100%	100%	100%

Naturally as the Plan Years extend, the sample size grows smaller. So it's less valid, and also gets counterintuitive (though logical once analyzed) results like having a longer time frame can give you more success than a shorter one (see "?" in OP's table). Probably just worth taking the low point as possible for any of them past that (i.e. 97% for any 3.5% SWR longer than 40 years).

It seems, at least historically, a 3.5% WR ought to be enough, and 3% SWR definitely. Still, I'd be scared having a 3.5% SWR at 30, planning for a 65 year retirement...

 

[Nords]

I tend to play the odds.

While the odds may be valid for large homogeneous groups, I'd hate for my personal retirement to end up on the wrong side of the winning bet.

 

[2B]

There are so many factors in calculating SWR and portfolio survivability that anything we do now is going to look somewhat silly in 30 years. Think about your cost of living 30 or even 40 years ago. How much do you need now to support the same lifestyle? Have your investments been performing the same? What type of pension benefits did you think you would be getting? What were the taxes and government benefits? Do you think there may be as many or more changes in the coming decades?

Yes, we can run the numbers for a pseudo-inflation adjusted SWR. We can wax poetic about the nuances of various survivability rates. Ultimately, we will probably spend less (inflation adjusted) as we age and it won't be because we don't have the money. At some point we all just have to make the jump and hope our parachute works long enough.

 

[Ken11]

I have a few thoughts on longevity risk:

1) If I run out of money after age 90 what is the probability that I WILL BE AWARE OF THIS? If I am unaware there is no problem from my perspective. SO, this probability needs to be factored into the success metric. LOL

2) Strategies for managing longevity risk might involve dynamically adjusting your vice index. If it starts to look as if you will outlive your resources then increase the vice behavior appropriately to "balance the equation". Drinking smoking, overeating, skydiving are all options.

3) Health care costs are one of the biggest risks as we age. If I run up against this then committing a crime, getting imprisoned and receiving freee care looks like a viable and potentially attractive option.

4) Does retiring early cause you to live longer If so there is an even bigger issue than midpack's chart indicates. However, if so, perhaps we all should have retired a long time ago.

:>)

 

[Midpack]

There are so many factors in calculating SWR and portfolio survivability that anything we do now is going to look somewhat silly in 30 years. Think about your cost of living 30 or even 40 years ago. How much do you need now to support the same lifestyle? Have your investments been performing the same? What type of pension benefits did you think you would be getting? What were the taxes and government benefits? Do you think there may be as many or more changes in the coming decades?

Yes, we can run the numbers for a pseudo-inflation adjusted SWR. We can wax poetic about the nuances of various survivability rates. Ultimately, we will probably spend less (inflation adjusted) as we age and it won't be because we don't have the money. At some point we all just have to make the jump and hope our parachute works long enough.

Indeed. But what's the alternative?

There's some reassurance in knowing FIRECALC includes some periods of horrible returns like the Depression and the mid 60's along with several boughts of high inflation (though not positive about this part), most of us remember the late 70's early 80's I suspect. OTOH Raddr is admittedly a concern (search here or Google as needed).

While it's no guarantee as I tried to make plain in post #1, testing against 100 or so actual cycles from past history is all we have. And yes, we all have to balance how safe we can live with (albeit based on flawed history), having some contingency plans and a willingness to just jump and deal with the uncertainty.

 

[pb4uski]

While the odds may be valid for large homogeneous groups, I'd hate for my personal retirement to end up on the wrong side of the winning bet.

+1 the idea of having to eat the same foods as my pets late in life is hard to swallow

 

[pb4uski]

......The Retirement Calculator from Hell articles noted "A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless."

Great post Midpack. Thanks.

If the above statement is true then wouldn't it suggest that a 4% WR is safe across all ages since as arebelspy's expanded table suggests, even at age 30 a 4% WR has an 80% chance of success? I'm personally skeptical about the statement that the difference between 95% and 80% is meaningless.

The other thing that is interesting about the expanded table is that a 3.5% WR would be sufficient for almost any age (assuming a success rate of 95% or better) and I suspect the breakeven point for a 95% success rate at any age is probably 3.75% or so. Sorry, I gotta go.....shopping!!!!

 

[Midpack]

Great post Midpack. Thanks.

If the above statement is true then wouldn't it suggest that a 4% WR is safe across all ages since as arebelspy's expanded table suggests, even at age 30 a 4% WR has an 80% chance of success? I'm personally skeptical about the statement that the difference between 95% and 80% is meaningless.

Might be helpful to read the whole article The Retirement Calculator from Hell, Part III. This is just part 3 of 5, I think all 5 are very worthwhile reading.

95% is definitely "safer" than 80% in terms investment risk, but that isn't the only risk we may be confronted with (as 2B pointed out). Geopolitical upheaval could override investment risk, making investment risk meaningless.

The hard part, of course, is how to interpret this kind of output. Realize that these probabilities are merely an imperfect estimate of the investment risk you are taking. In other words, they assume the continuity of financial and political institutions over the period studied. Consider the implications of the above 97% success rate at a withdrawal of $2,500 per month ($30,000 per year). For this to be a useful estimate of your true chance of not running out of money, the "success rate" of your ambient political, economic, and military environment must be at least 97% over this 40-year period. Do you think that this is likely? Only if you are an historical illiterate (which, I’m afraid, subsumes many finance academics).

Let’s examine a small sampling of possible political, economic, and military failure modes:

The mildest scenario is that of catastrophic inflation, as experienced in Germany and Hungary in the 1920s or, more recently, in much of the developing world.

Political failures are slightly worse, since these threaten the basic human motivation to work and produce. The state, for whatever reason, can decide to confiscate your assets or, worse, society’s means of production. Anyone who judges this unlikely should turn on CNN during any G-8 or WTO conference.

Local military action. Probably the lowest-probability item on this list, but something to think about on other continents.

The Big One: Some deranged prime minister or colonel in central Russia, Pyongyang, or South Asia could let loose the four horsemen upon the planet.

So, think about what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years. (A 97% success rate means a 3% failure rate; those 40 years divided by 0.03 is 1,200 years.) Ignore for a minute the uncertainties of the less-developed world and think only about the winners: Germany—in this century alone, three episodes of military and/or economic disaster, the first two associated with mass starvation. Japan—wartime devastation even worse than Germany’s. England—near brushes with disaster in 1812-1814 and in both world wars. And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.

History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).

A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.

 

[pb4uski]

While the 1200 year thing might make sense statistically, when I boil it down all I care about is the next 40 years, so if I have a 97% success rate I would multiply it by 1 minus the probability of the world drastically changing in the next 40 years (which might reduce it to 95%, which is ok with me).

Since there are so many possibilities to catastrophic change, I'm not sure how one would prepare for it (other than perhaps having a bunch of gold under the mattress). I guess I'll take my chances and wing it if I need to.

 

[Aiming_4_55]

What say you with the difference between 95% and 100% success rate? Is it really much safer?

... 95% is definitely "safer" than 80% in terms investment risk

 

[Midpack]

What say you with the difference between 95% and 100% success rate? Is it really much safer?

It's 5% safer, or could be more if your WR is even lower than the actual 100% threshold. But that's only investment risk, if the Mayans followers are right it won't matter.

 

[Aiming_4_55]

Is that 5% cola'd? I think so

I admit I am too conservative to RE at age 43 even tho FIRECALC gives me 95-100% results without SS. I figure if I worked a few more years, say 48, it reduces my risk even if it's just to breakeven on daily expenses.

It's 5% safer, or could be more if you WR is even lower than the actual 100% threshold. But that's only investment risk, if the Mayans followers are right it won't matter.

 

[Chuckanut]

Now you got me regretting marring my wife ( 3 years younger) some 34 years ago. Knocks me down from 3.5 % to 3%. If someone had just warned me back then that that cute girl was going to cost me some day!

Had you not married her you would have been single. Single men do not live as long as married men. Result: Your withdrawal rate could be even higher since you would be dead sooner.

This is good?

 

[Nords]

+1 the idea of having to eat the same foods as my pets late in life is hard to swallow

Eating pet food at any stage in life is hard to swallow...