question concerning safe withdraw rate

[davidbeitz]

i would like comments to what is considered a safe withdraw rate for a planned 35 year retirement. I'm 57 and have nailed down all the details of my retirement planning except for a SWR. what does everyone consider a CONSERVATIVE SWR for a 35 year retirement?

 

[Senator]

I think the consensus for a 30 year retirement is ~4%. For a longer period, it is less, probably closer to 3%.

In your later years, you will spend less. So that is a consideration. If you have a pension, or a high level of SS, that makes a difference too, as the WR could be higher initially.

Of course, past results are no indication of future returns.

So in answer to your question, it depends...

 

[Gill]

It also depends on the asset allocation of your portfolio. You can't pull 4% out of a CD portfolio at present rates.
Bruce


Sent from my iPad using Early Retirement Forum

 

[davidbeitz]

I think the consensus for a 30 year retirement is ~4%. For a longer period, it is less, probably closer to 3%.

In your later years, you will spend less. So that is a consideration. If you have a pension, or a high level of SS, that makes a difference too, as the WR could be higher initially.

Of course, past results are no indication of future returns.

So in answer to your question, it depends...

the SWR I'm looking for is independent on other forms of income such as ss or pension

 

[davidbeitz]

I think the consensus for a 30 year retirement is ~4%. For a longer period, it is less, probably closer to 3%.

In your later years, you will spend less. So that is a consideration. If you have a pension, or a high level of SS, that makes a difference too, as the WR could be higher initially.

Of course, past results are no indication of future returns.

So in answer to your question, it depends...

It also depends on the asset allocation of your portfolio. You can't pull 4% out of a CD portfolio at present rates.
Bruce

Sent from my iPad using Early Retirement Forum

good point - assume a 60/40 AA with a 3 fund vanguard portfolio

 

[marko]

the SWR I'm looking for is independent on other forms of income such as ss or pension

Why not start with this forum's FIRECALC, Fido' RIP, iORP and such? It's a good place to start and at least get your head around the concept.

While YMMV, the generally accepted 4% is withdrawals from your portfolio. Pensions and SS are added to that amount.

As others have noted, what you're invested in can change that percentage dramatically, mostly downward.

 

[rodi]

How important is it to leave some of your portfolio to heirs? The 4% wr is based on the trinity study - 30 year retirement, 95% success rate, 4% taken the first year and then adjusted for inflation in subsequent years. In 95% of the historical market conditions there was >$0 left at the end. In other words, in some of the cases there was no money left for heirs.

I would get comfortable playing around with firecalc. Make sure you explore and experiment with all the different tabs...you can set your asset allocation, you can set an amount you want to leave heirs, you can make assumptions on inflation (vs using historic values)

I would think 3% would offer you what you want assuming you have at least 40% equities and have low expense ratios.

 

[medved]

There has been a fair amount of criticism of the 4% withdrawal rate, which was some years ago conventional wisdom. That doesn't mean it won't work. It probably will. But there might be better approaches. At least it is worth considering alternatives.

Some of the criticism relates to the inefficiency of trying to achieve a constant spending rate from a volatile portfolio (in other words, one that has a non-trivial amount invested in equities). This is a good article on that subject, though you may not like this article if you don't have at least a basic math background: https://web.stanford.edu/~wfsharpe/retecon/4percent.pdf The basic idea is that if you want constant spending, you should not expect to achieve that with a volatile portfolio, and if you want volatility (with the upside that potentially brings with it), then you should be prepared to vary your expenditures through your retirement period (which you would, in the real world, want to do anyway -- pretty much nobody spends exactly, say, $12,550 a month, every month).

Wade Pfau has also written intelligently about some problems with the 4% withdrawal rate, especially for those retiring in a low interest rate environment, and some alternatives. See for example: Making Sense Out of Variable Spending Strategies for Retirees by Wade D. Pfau :: SSRN And: http://www.fa-mag.com/userfiles/sto...-Sustainable-Withdrawal-Rates-Whitepaper-.pdf

Even Bengen does not think the 4% rule is iron-clad: http://www.nytimes.com/2015/05/09/y...-for-the-4-percent-retirement-rule.html?_r=0]

Lest you get too worried about the 4% "rule," you can see these comments from Michael Kitces, showing that the 4% rule has done pretty well in recent market conditions, though he also points out the problems that can be caused by high inflation (which our "recency bias" may minimize, but really can exist!): https://www.kitces.com/blog/how-has...he-tech-bubble-and-the-2008-financial-crisis/

 

[W2R]

How important is it to leave some of your portfolio to heirs? The 4% wr is based on the trinity study - 30 year retirement, 95% success rate, 4% taken the first year and then adjusted for inflation in subsequent years. In 95% of the historical market conditions there was >$0 left at the end. In other words, in some of the cases there was no money left for heirs.

I would get comfortable playing around with firecalc. Make sure you explore and experiment with all the different tabs...you can set your asset allocation, you can set an amount you want to leave heirs, you can make assumptions on inflation (vs using historic values)

I would think 3% would offer you what you want assuming you have at least 40% equities and have low expense ratios.

+1

I agree completely with rodi's post, and would have posted the same thing had she not beat me to it!

Since you want a conservative SWR I'd go for 3.0%, which I think is a good SWR for you.

 

[pb4uski]

For those retiring before SS and pensions start, like OP and me, I think that our "ultimate" WR is most relevant. Our WR is high from when we ERed until our FRA when my pension and our SS is on line.

For example, if I retired today our WR would be 4.9% (annual spending divided by current retirement nestegg). However, if I reduce our nestegg for an amount equal to our annual SS and pension for 6 years (from now to FRA) and then compute a WR as our annual gap (spending - pension income - SS) divided by our reduced nestegg, then I get a WR of 2.7% which is an estimate of our ultimate WR once pensions and SS are online. Alternatively, I could calculate the ultimate WR as our annual gap divided by our current nestegg less 6 years of spending and get 3.2%. In any event, those WRs a sufficiently lower than the 4% SWR so I am confident that we will not outlive our resources.

 

[MrLoco]

I think the consensus for a 30 year retirement is ~4%. For a longer period, it is less, probably closer to 3%.

In your later years, you will spend less. So that is a consideration. If you have a pension, or a high level of SS, that makes a difference too, as the WR could be higher initially.

Of course, past results are no indication of future returns.

So in answer to your question, it depends...

Actually, just the opposite is the case in many situations. Planned expenses such as travel most likely will decrease but unplanned expenses such as nursing home/ assisted living care could wipe out many of us.

 

[jkern]

Here's my viewpoint for a 35 year retirement:

4% Not very comfortable
3.5% Highest amount to feel comfortable
3% Comfortable
2.5% Very comfortable
2% Absolutely golden

 

[Sunset]

the SWR I'm looking for is independent on other forms of income such as ss or pension

First to your question, other's have answered it really well, although I would have pegged it at 3.5%

Not understanding why you would not count SS , I can understand not having any pension, but SS is fairly universal.

Maybe you don't want to count just as a fudge factor ?

Why counting SS/pension is useful is because if you have a small savings, you can smooth out your income.

Choices are:

• Don't count SS/pension and withdraw 3% or 4% and eat cat food, live deprived and when SS/pension kicks in then live better

• Or withdraw a higher % initially during the years of no SS/pension and once the income starts reduce the withdrawal to a low number

 

[GTFan]

For those retiring before SS and pensions start, like OP and me, I think that our "ultimate" WR is most relevant. Our WR is high from when we ERed until our FRA when my pension and our SS is on line.

For example, if I retired today our WR would be 4.9% (annual spending divided by current retirement nestegg). However, if I reduce our nestegg for an amount equal to our annual SS and pension for 6 years (from now to FRA) and then compute a WR as our annual gap (spending - pension income - SS) divided by our reduced nestegg, then I get a WR of 2.7% which is an estimate of our ultimate WR once pensions and SS are online. Alternatively, I could calculate the ultimate WR as our annual gap divided by our current nestegg less 6 years of spending and get 3.2%. In any event, those WRs a sufficiently lower than the 4% SWR so I am confident that we will not outlive our resources.

And if you calculate that you can live on SS/pensions alone if you wait until FRA (the situation we're in), you essentially have to only make your portfolio last until those come online. In our case, about 15 years.

Not that I'm ever going to WD enough to make it NOT last for that short of a period, but it's good to know that even if we go through another 50% stock market drop it's not going to hurt to lose 30% or so of the portfolio.

All of this assuming no big changes to SS yada yada yada...

 

[pb4uski]

We would need to reduce our lifestyle to live on just pension and SS... it covers a little more than half of our living expenses.

 

[medved]

Here's my viewpoint for a 35 year retirement:

4% Not very comfortable
3.5% Highest amount to feel comfortable
3% Comfortable
2.5% Very comfortable
2% Absolutely golden

I think most people would agree with you. But this article (one of those I posted above) seems to raise questions about what "most people" think: http://www.fa-mag.com/userfiles/stor...hitepaper-.pdf

 

[Al18]

I'll be retiring in a year or two - probably starting at 3% and raising it to 5% over the next few years. I prefer to spend it now, travel and enjoy life, rather that wait until later and spend it on medical care and medication.

 

[Sunset]

I think most people would agree with you. But this article (one of those I posted above) seems to raise questions about what "most people" think: http://www.fa-mag.com/userfiles/stor...hitepaper-.pdf

After reading:

http://www.fa-mag.com/userfiles/sto...-Sustainable-Withdrawal-Rates-Whitepaper-.pdf

It looks like just about everyone needs to go back to work

 

[GravitySucks]

After reading:

http://www.fa-mag.com/userfiles/sto...-Sustainable-Withdrawal-Rates-Whitepaper-.pdf

It looks like just about everyone needs to go back to work

I've given up reading Pfau, it's too depressing. If I read his work before retiring I'd still be at megacorp.

Im out, I ain't going back, plan B no longer includes working a real job.

To the OP, what do you consider Conservative? Personally I think 90% chance of the money lasting to an age where I have a 10% chance of being alive is extremely conservative, others here may find that fool hardy.

 

[2017ish]

Agree with GravitySucks and Sunset that Pfau is conservative on this point. But I am in the camp that sees him as an analyst whose work is worthy of consideration (others here differ, sometimes strongly!) But, he is not as conservative as one might think.

Take a look at his latest retirement dashboard (from 11/2015), which analyzes withdrawal rates for a 30 year expected retirement. Is now a good time to retire? Retirement Researcher Not too bad--as long as you don't insist upon the mechanical application of textbook SWR. The sustainable spending rates for his prototypical "conservative" couple range from 3.14 to 4.76 percent. It is only when you employ the ironclad SWR with constant inflation adjusted spending that you dip well below 3%, at 2.42%. ("Conservative" = 25% stock allocation and seeks a 95% chance that the portfolio will not be depleted within 30 years.)

Given the research showing decreased spending as we age (even the relative increase in end-of-life stages yields lower real spending than that of early retirement), adherence to a constant real spending level seems unnecessary. E.g., https://www.kitces.com/blog/estimat...penditures-and-the-retirement-spending-smile/

FWIW, we'll be going with 4% out of the box, but being very flexible in spending. (Planning for DW with 45 years in retirement, but oodles of discretionary spending in first decade.)

 

[FIREd]

Inflation-protected treasury bonds pay a slightly positive real return at the moment (except for the shortest maturities). So, even with none of your money invested in the stock market, your portfolio could be able to safely sustain a 35-year retirement at 3%. By investing part of your portfolio in the stock market you should be able to enjoy a slightly higher withdrawal rate. So I'd feel comfortable with a WR in the 3-3.5% range depending on how much risk you are willing to take and how flexible your spending is.

 

[medved]

Inflation-protected treasury bonds pay a slightly positive real return at the moment (except for the shortest maturities). So, even with none of your money invested in the stock market, your portfolio could be able to safely sustain a 35-year retirement at 3%. By investing part of your portfolio in the stock market you should be able to enjoy a slightly higher withdrawal rate. So I'd feel comfortable with a WR in the 3-3.5% range depending on how much risk you are willing to take and how flexible your spending is.

Can you explain how the current return on TIPS suggests that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years? I am not questioning that conclusion, but would like to understand it. Thanks!

 

[Totoro]

Can you explain how the current return on TIPS suggests that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years? I am not questioning that conclusion, but would like to understand it. Thanks!

0% return on TIPS means a 0% real return. a 0% real return means one can spend 100%/35 = 2.85% per annum to arrive exactly at 0 after 35 years.

Since TIPS are slightly positive it is actually a bit more.

 

[FIREd]

0% return on TIPS means a 0% real return. a 0% real return means one can spend 100%/35 = 2.85% per annum to arrive exactly at 0 after 35 years.

Since TIPS are slightly positive it is actually a bit more.

Exactly.

Can you explain how the current return on TIPS suggests that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years? I am not questioning that conclusion, but would like to understand it. Thanks!

I did not say that a zero-equity portfolio should be able to safely sustain a 3% withdrawal rate for 35 years, but it could. With TIPS, you are taking (arguably) no credit risk and no inflation risk. But that is not the case with most fixed income investments. If you park all your money in a savings account, the outcome may not be nearly as favorable.