Smart guys question 4% SWR strategy

[RockOn]

Originally Posted by ERD50

The vanguard calculator says a 53M/51F has a 50% chance of one making it 37 years (90 YO Male). A 3.9% SWR - 93% historical success for 37 years.

And 12% chance of one making 45 years. 3.9% SWR - 90% historical success for 45 years (98 YO Male).

One way to view it, rather than the opportunity to leave heirs/charities big bucks - what are the odds you will be asking the heirs to support you? Purely mathematical - for the 37 year period:

50% survival times 7% chance of portfolio bust = 3.5% chance of needing support at 37 years (remember that some of those failures happened much earlier (~ year 30).

12% survival times 10% chance of portfolio bust = 1.2% chance of needing support for the 45 year period.

-ERD50

Where are you getting the SWR %'s?

[ERD50]

Originally Posted by RockOn

Where are you getting the SWR %'s?

That was just the number that ESRBob threw out, because that is the number that a Vanguard annuity would provide. If you pulled that same SWR as the annuity provides, those are the numbers you get.

Unless the provider defaults. And I have trouble assuming solvency for 45 years, though the risk is probably pretty low.

-ERD50

[RockOn]

Originally Posted by ERD50

That was just the number that ESRBob threw out, because that is the number that a Vanguard annuity would provide. If you pulled that same SWR as the annuity provides, those are the numbers you get.

Unless the provider defaults. And I have trouble assuming solvency for 45 years, though the risk is probably pretty low.

-ERD50

I'm still confused, but that's not new.

[RockOn]

Originally Posted by ESRBob

For me the rub is this: I can probably get myself a 3.9% inflation-adjusted SWR for life, and still have the money at the end. With an annuity, you get a guaranteed 3.9% inflation-adjusted SWR but they keep your money.

That seems to keep coming up. I think you really need to look at the IRR of an investment and not put so much weight on that fact. If they paid you 50% a year for life, you wouldn't care if they kept your money, would you? At some price, the fact they keep your money shouldn't matter, you can always reinvest the money they pay you if you don't want to spend it. Unless of course, you really think you are going to die soon, then I'd be concerned. The question really is whether the guarantee (if there is such a thing) is worth the cost.

[youbet]

Originally Posted by ESRBob

For me the rub is this: I can probably get myself a 3.9% inflation-adjusted SWR for life, and still have the money at the end. With an annuity, you get a guaranteed 3.9% inflation-adjusted SWR but they keep your money.

Depends what you mean by "probably." At 100% success and 45 years, you're SWR will be less than 3.9%. And there will be many instances of "close calls" where your portfolio is almost depleted or diminished significantly in real terms.

Not trying to defend annuities, don't have one and don't plan to, just saying that when you up the success rate from 95% to 100% and extend the time period to 45 years, you won't get a 4% SWR. And there will be many outcomes where the ending portfolio value is well below the beginning portfolio value. Your use of the term "probably" is a little optimistic.

[cute fuzzy bunny]

I'm not sure thats such a hard and fast rule.

Basically if your SWR strategy survived the depression and the 60's-70's sideways/stagflation periods, you'd need an event worse than those to have a failure. The time period (30, 40, 50 years) isnt as relevant as the number and severity of the major events. Usually the difference between a 100% SWR and a 95% one are those two periods of time.

Whats more likely to create a failure is wading 7-8 years into a bad market, seeing that your portfolio is drawn down to under 50% of its original size, and jumping into action to "do something" and then missing the rebound.

It also depends greatly on your willingness and ability to draw down spending in bad times, what your asset allocation is, and may be improved by "bucketing" strategies. Its also been shown that one of these major events very early in the retirement period can finish you off, while one 10-15 years post-retirement generally wont hurt too much.

But yeah, a 60/40 TSM/TBM port, taking the 4% inflation adjusted every year whether you need it or not, spending it like clockwork, and the future investment returns and scenarios mimic the past...4% may or may not work.

A CPI adjusted annuity for 40 years where the CPI understates the annuitants personal inflation rate by a half percent or so every year would also fail pretty nicely. Just very slowly and not obvious at first.

[youbet]

Originally Posted by cute fuzzy bunny

Basically if your SWR strategy survived the depression and the 60's-70's sideways/stagflation periods, you'd need an event worse than those to have a failure. .

I must be doing something wrong with FireCalc runs. When I solve for a 4% WR I keep getting several percent failure rates. Plus a bunch of stressful near-misses.

I understand those outcomes and accept the risk and have planned accordingly. But am I entering something wrong? So many seem to feel you can withdraw an inflation adjusted 4%, never have a failure and wind up with much more than you started with, guaranteed. And, of course, as you say, if the future is no worse than the historical data.

Edited to add: Oh yeah, deltas between the CPI and your own personal inflation rate would impact annuities and SWR plans similarly.

Not trying to defend annuities, just trying to keep the facts straight ref FireCalc runs.

[haha]

Originally Posted by youbet

Not trying to defend annuities, just trying to keep the facts straight ref FireCalc runs.

Naughty boy!

Ha

[ESRBob]

Originally Posted by RockOn

That seems to keep coming up. I think you really need to look at the IRR of an investment and not put so much weight on that fact. If they paid you 50% a year for life, you wouldn't care if they kept your money, would you? At some price, the fact they keep your money shouldn't matter, you can always reinvest the money they pay you if you don't want to spend it. Unless of course, you really think you are going to die soon, then I'd be concerned. The question really is whether the guarantee (if there is such a thing) is worth the cost.

Good point. So that is an interesting question to throw out:

What would be your tipping point -- the point at which you'd say, "fine, I'll take the plunge and buy the annuity" for say, half of my savings in order to lock in a secure, inflation-adjusted return for life. It depends on your age, of course, but let's just keep with this example and assume you're in your mid-50s. Assume it's a reputable company, too. Would 3.9% do it for you? 4.5%? 5% or more? What would get people off the dime to send in a check for a big chunk of your life savings in exchange for an immediate annual CPI-adjusted payment for life, with all the risks and ups and downs we all know about?

[youbet]

Originally Posted by ESRBob

Good point. So that is an interesting question to throw out:

What would be your tipping point -- the point at which you'd say, "fine, I'll take the plunge and buy the annuity" for say, half of my savings in order to lock in a secure, inflation-adjusted return for life. It depends on your age, of course, but let's just keep with this example and assume you're in your mid-50s. Assume it's a reputable company, too. Would 3.9% do it for you? 4.5%? 5% or more? What would get people off the dime to send in a check for a big chunk of your life savings in exchange for an immediate annual CPI-adjusted payment for life, with all the risks and ups and downs we all know about?

7%

If a extremely reputable company would give me that, cola'd, at 55, I'd buy in for 50% of my stash. Since I'm figuring on a 3.5% SWR, I could live fine on the 7% of 50%. The other 50% would remain invested and if 15 - 20 years later the insurance company went belly up, I'd go live off the remaining portfolio at its then current value. If the insuranc company didn't go belly up, then the 50% + growth would be left to the kiddies.

[clifp]

7% sounds roughly right to me. I consider putting 1/2 my money into a 6% SWR with COLA and jump at 8%. I'd stick to 50% because even though I don't have kids I do look forward to giving away a lot when I am 80 or so.

[Rich_in_Tampa]

As an alternative to COLA for those who choose a SPIA early in retirement...Skip the COLA. 5 years later check the CPI and buy a second smaller SPIA to cover inflation and repeat until you no longer need a raise or no longer need the longevity insurance.

The advantages are lower initial cost, all your add-on SPIAs will pay better per dollar spent because you're older, you keep the add-on cost in the market until you need it, you can diversify over several carriers, and if you die young you'll leave less money on the table.

Joint survivorship may require further analysis, but that's the idea.

[RockOn]

Originally Posted by Rich_in_Tampa

As an alternative to COLA for those who choose a SPIA early in retirement...Skip the COLA. 5 years later check the CPI and buy a second smaller SPIA to cover inflation and repeat until you no longer need a raise or no longer need the longevity insurance.

The advantages are lower initial cost, all your add-on SPIAs will pay better per dollar spent because you're older, you keep the add-on cost in the market until you need it, you can diversify over several carriers, and if you die young you'll leave less money on the table.

Joint survivorship may require further analysis, but that's the idea.

If one did your plan, without the COLA, Vanguard offers about 7% right now (without surviorship).

As far as what it would take me to jump, I really think 4%, COLA'd with 100% surviorship is a pretty good deal if one can assume it is safe. The SWR of 4% assumes you could be out of money anyway in 30 years, even though it is possible it could do much better than that. I do not like risk.

Being greedy, 5% with COLA and 100% survivorship, seems pretty hard to turn down. That might be possible soon if rates back up a bit but I'm not sure how fast the insurance companies would sweeten the deal.

I doubt we'll ever see 7%.

[youbet]

Originally Posted by Rich_in_Tampa

As an alternative to COLA for those who choose a SPIA early in retirement...Skip the COLA. 5 years later check the CPI and buy a second smaller SPIA to cover inflation and repeat until you no longer need a raise or no longer need the longevity insurance.

The advantages are lower initial cost, all your add-on SPIAs will pay better per dollar spent because you're older, you keep the add-on cost in the market until you need it, you can diversify over several carriers, and if you die young you'll leave less money on the table.

.

That idea has merit Rich. Of course the downside is that if the period between your initial purchase and the time to buy the additional SPIA has been one of flat or downward portfolio growth coupled with significant infaltion (1970's) that would be a little painful....... That is, the advantages you mention are true, but you do give up having the insurance company shoulder the risk of high inflation/no or negative portfolio growth.

It's hard to have it both ways! Darn it!

[unclemick]

Hmmm - and then there are those wise acres who read threads and post things like:

Pssst Wellesley - current yield = 4.19%. Not inflation adjusted.

Heh heh heh - I guess my annuity is called early SS. Now - post 70 1/2 in 6 yrs depending on Mr Market - will I be receptive to using some of my RMD to purchasing blocks of fixed anuities to goose income? Never say never. . So far, age 49-64, 1993 - 2008 have tap danced in the 60/40ish portfolio ballpark and survived - 1 to 6% SWR depending on the yr. Stay loose! .

[Texas Proud]

Originally Posted by RockOn

If one did your plan, without the COLA, Vanguard offers about 7% right now (without surviorship).

As far as what it would take me to jump, I really think 4%, COLA'd with 100% surviorship is a pretty good deal if one can assume it is safe. The SWR of 4% assumes you could be out of money anyway in 30 years, even though it is possible it could do much better than that. I do not like risk.

Being greedy, 5% with COLA and 100% survivorship, seems pretty hard to turn down. That might be possible soon if rates back up a bit but I'm not sure how fast the insurance companies would sweeten the deal.

I doubt we'll ever see 7%.

Who is the survivor? Spouse?


My first thought was 8%..... but I guess I would do it at 7% if inflation is added... and even 5% if it covers spouse also....

[RockOn]

Originally Posted by Texas Proud

Who is the survivor? Spouse?


My first thought was 8%..... but I guess I would do it at 7% if inflation is added... and even 5% if it covers spouse also....

Yes, we are talking the spouse. SHE/he would get 100% of the same amount till the last one dies. That is what is around 4%
COLA'd right now for a mid 50's retiree. What we have been discussing assumes the spouse is about the same age.

You don't have to choose the spouse however. You could choose a child, or anyone else you like, as the survivor. The younger they are the more the percent goes down.

[Cb]

Originally Posted by youbet

I must be doing something wrong with FireCalc runs. When I solve for a 4% WR I keep getting several percent failure rates. Plus a bunch of stressful near-misses.

I understand those outcomes and accept the risk and have planned accordingly. But am I entering something wrong? So many seem to feel you can withdraw an inflation adjusted 4%, never have a failure and wind up with much more than you started with, guaranteed. And, of course, as you say, if the future is no worse than the historical data.

Edited to add: Oh yeah, deltas between the CPI and your own personal inflation rate would impact annuities and SWR plans similarly.

Not trying to defend annuities, just trying to keep the facts straight ref FireCalc runs.

I think if you include any investment expenses a 30 Year 100% SWR will be a bit below 4% in FIREcalc. If you look at longer periods (as most ER's should, IMO) the 100% SWR drops closer to 3.5%

Cb

[samclem]

Regardless of the rating of the insurer, I'd need to fully understand their business model before springing for an annuity, and the higher the promised payout percentage, the more skeptical I'd become. For example, would anyone REALLY buy an annuity that promised a 10% payout with a COLA? That would take some real explaining to get me to buy it.

What I would expect an annuity to pay out: Expected % return on a conservative basket of investments purchased with my principal + amortized return of my principal over my expected lifespan (or joint lifespan) - profit to the insurance company.

Since I already can assess this myself, anything higher sends up a red flag, and anything at this rate or lower is (in my particular situation) a poor investment.

[d]

Originally Posted by RockOn

The SWR of 4% assumes you could be out of money anyway in 30 years, even though it is possible it could do much better than that. I do not like risk.

specifying a 95% survival rate, a 30 yr 4%SWR is NOT likely to leave you "out of money" in 30 years; the average balance after 30 years would be about 1.7 times the beginning balance; there is only about a 5% chance you'd be out of money.