Sustainable Withdrawal rate opinion for a 50 year old

[daylatedollarshort]

True for older retirees who die young. Not for dudes like me (34), or longlived ladies.

At 50 years old you might still live 60 years.

That's the "annoying" part of financial planning with a long horizon:

• Noone can't predict the financial markets in the long term, as it is tied to the future of the world in general. Look at the world 50 years ago, look at it now.
• Most people that retire here could live 1 year more, or 60 years more.

Those two added up result in too great of an uncertainty. So you plan for the worst case.



In other words, one might also say:

The article uses 30 years. If you want to ER at 34 and plan to live to 90 you have to go with a different methodology or have a very high portfolio in relation to your spending. It doesn't work for every poster here, but for some it might be a better methodology fit than the mutual fund approach because of the higher safe withdrawal rates early on in retirement, especially the posters here not concerned about leaving an inheritance.

 

[Katsmeow]

Just some food for thought. I am not trying to talk anyone out of their current AA, but for the cowards among us, this article made a lot of sense to me:

"But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."
http://www.prospercuity.com/swr.htm

I'm no TIPS expert. But, isn't the yield now currently negative? That is the hypothetical given -- 1.3% real yield -- is one that doesn't currently exist?

 

[MichaelB]

I'm no TIPS expert. But, isn't the yield now currently negative? That is the hypothetical given -- 1.3% real yield -- is one that doesn't currently exist?

Only the 5 year are negative. Longer duration are a bit positive, but even the 30 year is under 1%.

Another issue is taxes. At lower inflation rates this type of approach works (in theory), but taxes are paid on the nominal interest. If inflation jumps high enough the next after tax is less than what is needed to sustain the 30 year spending.

And of course, the probability of any remaining portfolio at year 31 is 0 percent.

 

[RobLJ]

While you are all tap-dancing on the head of a pin, you do realize that the likelihood you become an invalid or drop dead before 30 years of retirement is quite high. Spending usually drops precipitously after that...

That's another scenario but one I'm not too worried about SWR.
Life is short, shorter in that scenario.

 

[daylatedollarshort]

I'm no TIPS expert. But, isn't the yield now currently negative? That is the hypothetical given -- 1.3% real yield -- is one that doesn't currently exist?

The rates vary by maturity and vary from month to month, year to year. Rates were high when deflation looked like an issue. You can get the current rates and changes from prior periods here:

United States Government Bonds - Bloomberg

The thirty years were .62% higher a year ago when inflation was less of a concern.

As for the negative yield on the short term TIPS, BB addresses that here:
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=136613

 

[noone]

• Noone can't predict the financial markets in the long term,

Yes I can.

 

[Katsmeow]

The rates vary by maturity and vary from month to month, year to year. Rates were high when deflation looked like an issue. You can get the current rates and changes from prior periods here:

United States Government Bonds - Bloomberg

The thirty years were .62% higher a year ago when inflation was less of a concern.

As for the negative yield on the short term TIPS, BB addresses that here:
Bogleheads • View topic - Liability Matching Portfoloio

I read the thread and I didn't see him giving a ringing endorsement of TIPS at the current time.

My point was that the other article you posted was apparently written at a time when yields on TIPs were much more favorable than they are now. So, while I found it interesting, in the current environment I don't think you could put all your money in TIPs and then confidently withdraw 4% per year.

 

[scrabbler1]

Pb4uski mentioned future income streams you are not eligible to receive yet. I often refer to those as my "reinforcements" which will only improve things after I turn ~60. For me they are unfettered access to my IRA, my frozen company pension, and Social Security.

My SWR for the first few years of my ER (2009-2011) was around 2.5% but has since dropped to just under 2%. That is mainly due to reduced health insurance premiums from choosing a bare-bones policy in the middle of 2011 to hold me over until the ACA went into effect this year. I also had a spike in some short-term cap gain distributions which spiked my income tax bill in 2010 (I don't see this as anything bad).

QS, I suggest you split your ER plan into 2 parts like I am doing. See what happens to your projected SWR after you can begin adding these income streams which will lower your need to use your own investments.

 

[daylatedollarshort]

I read the thread and I didn't see him giving a ringing endorsement of TIPS at the current time.

My point was that the other article you posted was apparently written at a time when yields on TIPs were much more favorable than they are now. So, while I found it interesting, in the current environment I don't think you could put all your money in TIPs and then confidently withdraw 4% per year.

I think the point of what the LPM financial writers are saying if you even get a 0 real return (all but 5 year TIPS):

100% / 25 years = 4% SWR
100% / 30 years = 3.33% SWR
100% / 50 years = 2% SWR

with no worries about bear markets or sequence of returns risk. Any real return above zero is in addition to that:

" But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."

http://www.prospercuity.com/swr.htm

Here is what BB had to say to Forbes this year:

"As to inflation, I think that TIPS and short bonds will do fine over the long run; that is, their currently low real yields will, in due time, normalize towards the 2% real historical yield of, say, intermediate Treasuries."

"http://www.forbes.com/sites/phildemuth/2014/06/24/william-bernsteins-rational-expectations-plus-qa-with-author/2/

People who have been buying TIPS under this strategy do not have a portfolio made of of all TIPS bought at today's current low yields. Even if you were interested in this strategy, it probably isn't a great idea to sell your entire portfolio tomorrow and buy 100% TIPS or any other single asset class. Even with a LMP you can diversify and dollar cost average your asset class purchases. Bodie and Bernstein are just advising to have your baseline expenses covered in safe assets at retirement and then you can put as much or as little of the rest in stocks. If you can live off your Social Security income (or maybe 75% of it given its current status), you can have 100% of your portfolio in stocks using the LPM methodology.

 

[Katsmeow]

Bodie and Bernstein are just advising to have your baseline expenses covered in safe assets at retirement and then you can put as much or as little of the rest in stocks. If you can live off your Social Security income (or maybe 75% of it given its current status), you can have 100% of your portfolio in stocks using the LPM methodology.

To a certain extent I think this really just semantics. Let's say that it would take 25% of my portfolio to put in "safe" assets under this methodology. Then assume that of the remaining portfolio, I then put 2/3 in equity funds and 1/3 in bond funds. I don't see that that is really any different from starting out and saying I'm going to have a 50/50 AA and of the 50% going to fixed income I'm going to put half of it into "safe" assets such as TIPs.

Looking at DH and me, if I take SS at 62 (not yet determined when I will take it) then SS for the both of us would cover our most basic expenses (this would involve moving to a different house). We probably need $10k from the portfolio to cover our basic expenses if we didn't move from our current house and simply cut discretionary spending and we would need $20k from the portfolio if we included discretionary spending as part of baseline expenses (which I would not). And, if I take SS at 70 (spousal at FRA) then SS covers even more.

So assuming I think of the $10k number as the one to put into "safe" assets x 25 that would be $250k. Right now, we already have $250k in a combination of CD and short term bond fund (which to me is safe enough). Now, I don't see it as following Bernstein's new recommendation (and we didn't panic and sell during the unpleasantness a few years ago). But it gets to the same place nonetheless.

 

[daylatedollarshort]

So assuming I think of the $10k number as the one to put into "safe" assets x 25 that would be $250k. Right now, we already have $250k in a combination of CD and short term bond fund (which to me is safe enough). Now, I don't see it as following Bernstein's new recommendation (and we didn't panic and sell during the unpleasantness a few years ago). But it gets to the same place nonetheless.

It seems to me like it does follow the BB approach from what you just described, though maybe not the Bodie way since he is more of an advocate of inflation adjusted asset classes for essential expenses.

But either way there is no right or wrong. It is just a framework to consider.

 

[kramer]

I retired in my 40's. As a compromise against long term risk I adopted a variation of the Liability Matching Portfolio. This has the effect of reducing the chances for huge gains in exchange for reducing the risk of ending up with little or nothing.

I have some of the old good I-bonds maturing in my mid-60's (average real rate of about 3.1%) and I have several 30 year TIPs maturing in my mid-70's (average real rate of about 1.8%).

These, when combined with the social security I plan to take at age 70, would give me a base standard of living in my old age (and if I could wait until age 72, I would be fine). What makes these bonds different from other bonds in my portfolio? I would never sell them to rebalance, even if the stock market went down by 90%.

Now in my late 40's, I compute my SWR as follows. One computation is simply my overall SWR compared to my total portfolio. However, another is my SWR with my LMP and HSA (Health Savings Account) subtracted from my portfolio.

I figure catastrophic health care costs are by far the lumpiest expense people have and so I assume my HSA will be spent.

Anyway, I look at BOTH of these SWR numbers when I am evaluating my spending.

 

[kramer]

While you are all tap-dancing on the head of a pin, you do realize that the likelihood you become an invalid or drop dead before 30 years of retirement is quite high. Spending usually drops precipitously after that...

Yes, but you are just as likely to live longer than the median longevity. These possibilities cancel each other out surprisingly well.

 

[Animorph]

Just some food for thought. I am not trying to talk anyone out of their current AA, but for the cowards among us, this article made a lot of sense to me:

"But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."

"Yet the conventional wisdom – invest aggressively and spend defensively – persists. Financial advisors advise their elderly clients to invest a significant portion of their savings in stocks in order to pursue their greater expected returns, but – because of the risks – to live more frugally than they might if they chose a safer, less-volatile, 100%-TIPS alternative. Unfortunately, few retirees are even informed about this safer alternative."

"The conventional wisdom is better tailored to helping retirees die rich than live rich."

Safe Withdrawal Rate (SWR) with Treasury Inflation Protected Securities

Yeah, I remember doing an Excel spreadsheet for an annuity that matched the 4% WR, roughly 1.5% real return. One big problem is that it leaves you with $0 after 30 years. Guaranteed. No way I'm planning for that. Though if you made it for the thirty years you definitely wouldn't die rich.

I much prefer to take 4% and die rich.

 

[TimSF]

I am planning based on a 3.5% withdrawal over 40 years. The difference between 95% and 85% FIREcalc success rate is negligible to me.

 

[daylatedollarshort]

Yeah, I remember doing an Excel spreadsheet for an annuity that matched the 4% WR, roughly 1.5% real return. One big problem is that it leaves you with $0 after 30 years. Guaranteed. No way I'm planning for that. Though if you made it for the thirty years you definitely wouldn't die rich.

I much prefer to take 4% and die rich.

The LPM model works best for people who have enough assets or other income sources and are willing to settle for low returns, like those who can live off pensions / SS / rental income / 1% of portfolio and maybe have large home equity or other assets. You don't necessarily have to spend your portfolio to zero to follow a LPM strategy.

From the articles I have read, I think Bill Bernstein felt bad when a lot of his clients had already won the game and were still taking risks when they might have slept better just hanging on to what they had, instead of shooting for more money when they had a lower risk tolerance than many here and were already multimillionaires. YMMV.

 

[Options]

Yes, but you are just as likely to live longer than the median longevity. These possibilities cancel each other out surprisingly well.

No they necesarily don't. Read Scott Burns blog as well as Dirk Cottens blog for good discussions on spending patterns in retirement and longetivity:

Scott Burns - AssetBuilder Inc., Registered Investment Advisor

The Retirement Cafe

 

[youbet]

I am planning to retire around October 2015. I was planning to withdraw 3 to 3.5% of my stash per year. I know what recent studies have suggested (going lower) but its getting a bit on the ridiculous side from my perspective. I was thinking that 2.2M divided by 35 years is 62857 per year. I currently can live on less and at a rate of return of 0% is a 2.857% swr. What would you do here? Thanks. If we assume a 2% rate of return annually (which I feel is very conservative with a 60/40 portfolio.
QUANTUM

The important issue isn't so much the investment returns you assume but the inflation rate.

When testing for inflation, try not to use some average per year figure. Rather, use a high number early on followed by lower numbers later. For example, 6% inflation for the first decade of your retirement followed by 2% for the remainder.

If you get through that with your 0% or 2% investment returns, you're in fine shape, IMHO.

 

[galeno]

Correctomundo! I'd even say the only difference between a 80 to 100% AWR is how much money do you wish to leave your heirs?

I am planning based on a 3.5% withdrawal over 40 years. The difference between 95% and 85% FIREcalc success rate is negligible to me.

 

[ERD50]

Correctomundo! I'd even say the only difference between a 80 to 100% AWR is how much money do you wish to leave your heirs?

If that is what you say (assuming 'AWR' refers to 'success rate'?), then I say you have not studied the output of a historical report like FIRECalc.

Even the 100% success rate does not assure leaving money to heirs, the marginally 100% success rate drops to ~ $0 in at least one case. And of course, the future could be worse than the past, so you might want some buffer in there.

If the future is similar to the past, what is your plan if the 1 in 5 scenario comes along, and you run out of funds? Wouldn't that be different than not running out of funds?

-ERD50

 

[Fermion]

Who really runs out of funds though? Especially someone who has spent loads of time on ER.org.

You might run out of funds if you develop a very bad chronic medical condition that doesn't kill you but is a huge resource drain. I contend that it would be hard to prevent all cases of this with almost any reasonable portfolio or SWR.

The more realistic scenario of running out of funds by overspending when the market is down just isn't going to happen for most of the people on this forum. When they see their portfolio drop by 50%, they are not going to schedule 3 Europe vacations over the next year. They might buy ground beef instead of $22/lb Angus ribeye.

 

[kramer]

No they necesarily don't. Read Scott Burns blog as well as Dirk Cottens blog for good discussions on spending patterns in retirement and longetivity:

Scott Burns - AssetBuilder Inc., Registered Investment Advisor

The Retirement Cafe

You will need to be more specific than that. Any reference to a specific blog entry or article?

 

[FIRE'd@51]

I think the point of what the LPM financial writers are saying if you even get a 0 real return (all but 5 year TIPS):

100% / 25 years = 4% SWR
100% / 30 years = 3.33% SWR
100% / 50 years = 2% SWR

with no worries about bear markets or sequence of returns risk. Any real return above zero is in addition to that:

Actually, I believe these results require a flat TIPS yield curve in addition to a 0% real YTM.

 

[ziggy29]

I think the point of what the LPM financial writers are saying if you even get a 0 real return (all but 5 year TIPS):

100% / 25 years = 4% SWR
100% / 30 years = 3.33% SWR
100% / 50 years = 2% SWR

This (as mentioned) assumes a zero real return. It also assumes that you aren't interested in passing leaving an estate behind to heirs. Frankly, if I saw my portfolio balance shrinking every year, I'd get really nervous. I'd expect it sometimes in weak years for the market but if it happened year after year without fail I'd get real paranoid real fast.

In reality I think someone age 65 and higher can get away with 4% pretty easily with a moderate allocation (say 40-60% equities earning perhaps a 3% long term real return), and as you start the withdrawals at a younger age, it gradually reduces but eventually the curve would likely flatten between 2.5% and 3%, meaning that would be the rate you could withdraw indefinitely. Sure, at some point the longer you do this the greater a chance of a "black swan" event we've never seen before, but that would likely threaten the entire economic system no matter how defensively allocated you may be.

 

[GTFan]

The LPM model works best for people who have enough assets or other income sources and are willing to settle for low returns, like those who can live off pensions / SS / rental income / 1% of portfolio and maybe have large home equity or other assets. You don't necessarily have to spend your portfolio to zero to follow a LPM strategy.

From the articles I have read, I think Bill Bernstein felt bad when a lot of his clients had already won the game and were still taking risks when they might have slept better just hanging on to what they had, instead of shooting for more money when they had a lower risk tolerance than many here and were already multimillionaires. YMMV.

But the problem here for us mortals is how do you define having 'won the game', especially given the longer periods that we're playing it? I wouldn't say that I've done so even though I'm over $1.4 mil now, because I'll only be 51 at retirement end of this year. There's lots of game still left (I hope), so I won't be cashing out all my chips for an LPM port.

And I agree, for those of us not living off of pensions and having quite a few years left before drawing FRA SS, it makes even less sense to go this route.