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Safe Withdrawal Rate
Old 07-17-2011, 07:43 AM   #1
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Safe Withdrawal Rate

Hi

This may have been posted as a thread before - if so, my apologies, as am a fairly new member to this forum.

Am looking for a quick rule of thumb people have generally used for safe withdrawal rates, and hence how much is needed for retirement - and particularly for those conservative/cautious amongst us, how much more than this was saved.

Over at early retirement extreme website, my read is that 4% is suggested for a 100% equity retirement account. So if your expenses are $40k pa, you need $1M in equities to retire. Now not everyone will want all their retirement monies in equities.

Have some people used much more conservative figures, eg say 2% or even 1%, therefore $40k pa requiring $2M or $4M respectively for a large margin of safety, and is that what they ended up doing before they retired. At 1%, you obviously need 100 times your expenses before retiring - I assume at 1% that most of your original capital remains intact when you die to be left to your beneficiaries or charities?

Interested to hear what people have used, including those planning to retire, and those already retired, for their own peace of mind.
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Old 07-17-2011, 07:55 AM   #2
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Hi there.

If you search the site with "swr" you'll find lots of threads asking the same question, including this recent thread which probably addresses the issue of swr against length of retirement that you are wondering about.
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Old 07-17-2011, 09:00 AM   #3
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Read this for lots of historical review of SWR: A Safer Safe Withdrawal Rate Using Various Return Distributions

Read it carefully. At no time did anyone (I mean ANYONE) say that one needed 100% equities to get a 4% SWR.

And some folks prefer to call it a 'sustained withdrawal rate'. There really is no such thing as a 'safe withdrawal rate' since in 5% to 10% of the cases, you end up SOL.
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Old 07-17-2011, 10:31 AM   #4
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Alan and "LOL!" have given you some good links to check out that will give you information pertaining to your question.

A sweeping generalization might be that many (not all) of us who are retired have somewhere around 40%-60% equities, and assume a 4% SWR will support us for 25-30 years. A few of us who are more conservative, expect a much longer retirement, or want to leave a bigger estate, sometimes use an SWR of 3% or less.

Most of us run the FIRECalc calculator (link at the bottom of the page) at least once since it serves as a rough check to our calculations.
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Old 07-17-2011, 10:48 AM   #5
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Originally Posted by Ozziedreamer View Post
Over at early retirement extreme website, my read is that 4% is suggested for a 100% equity retirement account.
Hence the qualifier "extreme".

The issue with the linked "2.52%!" article, and many other of its genre, is that all of the calculators involve assumptions like:
1. Historical returns can be projected to future returns. (Not always.)
2. The distribution of financial returns meets assumptions for some sort of mathematical criteria which make them easier to analyze. (Not quite.)
3. People behave the same way throughout retirement. (No.)

The good news is that while #1 & #2 could cause survival failures, #3 usually makes up for the gaps.

Instead of focusing over whether the "one true SWR" is 4% or 3.8945%, or whether asset allocation should be 55% equities or 75% equities, or whether retirement will last for 30 years or 48.6 years, or... (you get the idea...) start with a rough plan of 4%. Then take a look at variable-spending like Bob Clyatt's 4%/95% or Bud Hebeler's "Analyze Now!" website or part-time work or simply two budgets-- a bare-bones recession budget and a "life is good" budget for periods of higher returns.

And if you don't have a reliable pension stream of income then consider annuitizing a portion of your portfolio.
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Old 07-17-2011, 11:15 AM   #6
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Also, be aware that taxes have to be paid out of that 4% or whatever, same as any other expense.
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Old 07-17-2011, 02:10 PM   #7
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Also, be aware that taxes have to be paid out of that 4% or whatever, same as any other expense.
And fund ERs. If your holdings have an average ER of say, .5%, you can only take 3.5% -- to be technical.
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Old 07-17-2011, 03:25 PM   #8
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And fund ERs. If your holdings have an average ER of say, .5%, you can only take 3.5% -- to be technical.
That 0.5% is already taken out before you even see the fund's NAV to calculate the size of your portfolio. So you can still take 4% of the portfolio.

OTOH if you're paying a financial adviser 1% of the portfolio... then you only have 3% of the portfolio left for your own expenses.
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Old 07-17-2011, 04:37 PM   #9
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That 0.5% is already taken out before you even see the fund's NAV to calculate the size of your portfolio. So you can still take 4% of the portfolio.

OTOH if you're paying a financial adviser 1% of the portfolio... then you only have 3% of the portfolio left for your own expenses.
I think all of the studies were done using gross sector returns -- at least I am pretty sure that the Trinity Study used gross return data. If you think about it this way -- why would you be able to take out 4% of a portfolio that had an ER of, say 50bp or also take out 4% of another (similar allocation) portfolio with an ER of, say 100bp. The answer is -- you can't. The 4% is before expenses.

Alternatively, if the studies were done with an assumed ER (I have no idea what it is) if your ER is higher than the one they assumed, you have to reduce your draw below 4%. And vice-versa -- if you can drive your ER to, say zero, you can draw more than 4%.

I try to keep my ER below 15bp - no sense paying someone else if it can be avoided.
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Old 07-17-2011, 08:37 PM   #10
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Hi all - thanks for your replies, and the links. Exactly the type of info I was after.

Much appreciated.
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Old 07-17-2011, 08:43 PM   #11
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Old 07-17-2011, 08:45 PM   #12
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Hello Ozzie - you may find additional ideas about the SWR from the Wall Street Journal blog here : Retirement - SmartMoney.com
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