Sustainable Withdrawal rate opinion for a 50 year old

[daylatedollarshort]

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

A yield greater than 0 real increases these SWR higher, per the TIPS links previously posted. With a zero real yield, you'd just divide your beginning portfolio / years of retirement = SWR.

$100 beginning portfolio / 50 years = you can take out $2 a year.

100/50 =2.
1,000,000 / 50 = 20,000.

For a couple, annually this could mean:

$20K SWR ($1M portfolio, 0 real return, 50 year horizon) + $24K SS + $14K rental income = $58K retirement spending.

At age 90 annuities are pretty cheap or maybe the hypothetical couple in the above example has a $500K house for a reverse mortgage, to avoid depleting the portfolio to zero.

Instead of firecalc, you can just use a spreadsheet with inflation and real return as parameters to model your retirement planning under this methodology.

 

[daylatedollarshort]

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.

I believe your choices are - lower your expenses, work longer, work part-time, develop other retirement income streams or stick with a higher potential return methodology. However, as someone on Bogleheads pointed out once in a thread, historically a certain percent of the time, maybe 10%, stocks do not return more than bonds for extended periods, so even under the 3 fund approach what would you do in that case? Don't you have to have a retirement plan in place to live off a bond return type portfolio either methodology you choose, because maybe 10% of the time that is what is going to happen anyway?

 

[GTFan]

No way, and you didn't answer my question anyway - you can't define 'won the game' for the lesser ER mortals here that don't have multimillion ports. That's what this strategy is based on, and IMO it requires much more money than most of us have or you have to have other streams of income and/or be a fairly extreme LBYM'er. Not to mention that if you're already in a balanced AA with a lot of taxable it can take years to migrate to some sort of LPM port, and then you have all the tax implications.

There's no way I'm going solely with bonds, especially in the current environment we're in (which is essentially the 10% worst case for bonds right now). But that's just me.

 

[MichaelB]

For a couple, annually this could mean:

$20K SWR ($1M portfolio, 0 real return, 50 year horizon) + $24K SS + $14K rental income = $58K retirement spending.

Taxes must be added to this equation. This is not trivial because the ratio of the real rate divided by the nominal rate must be equal to or greater than the marginal tax rate for the life of the portfolio. Once that ratio fails the portfolio withdrawal permanently loses purchasing power.

 

[daylatedollarshort]

Taxes must be added to this equation. This is not trivial because the ratio of the real rate divided by the nominal rate must be equal to or greater than the marginal tax rate for the life of the portfolio. Once that ratio fails the portfolio withdrawal permanently loses purchasing power.

If you are using TIPS they work best held in retirement accounts because of the phantom interest issue. Bodie recommends TIPS in retirement accounts. From what I have read Bernstein just leaves it as a general framework with "safe assets" with TIPS as one option. I don't know of anyone who advocates TIPS for taxable accounts.

It is true you don't have the zero tax on capital gains with this approach. It is one of the cons of the pros and cons compared to other methodologies, though some may have other ways to pay low or zero taxes.

 

[daylatedollarshort]

No way, and you didn't answer my question anyway - you can't define 'won the game' for the lesser ER mortals here that don't have multimillion ports. That's what this strategy is based on, and IMO it requires much more money than most of us have or you have to have other streams of income and/or be a fairly extreme LBYM'er. Not to mention that if you're already in a balanced AA with a lot of taxable it can take years to migrate to some sort of LPM port, and then you have all the tax implications.

There's no way I'm going solely with bonds, especially in the current environment we're in (which is essentially the 10% worst case for bonds right now). But that's just me.

Won the game per the BB definition is to take risk off the table by covering your baseline expenses with safe assets, so at least you don't end up with a shopping cart under an overpass in your old age.

Discussion of your points, and pros and cons, here:

William Bernstein - The worst retirement investing mistake

Original article here:

https://web.archive.org/web/2012090...9/04/retirement/investing-mistakes.moneymag/?

 

[springnr]

By choosing to forgo returns one does not have to worry about returns?

Sweet, except I cast the die before acquiring enough funds for that path. The old money verses time equation. In the end the difference we are speaking about is scale? Obtaining the funds to cover your possible life span with fixed assets is great; if not possible then enough to get through a 10 year down cycle is prudent. This is why most folks end up with a 50/50 +/- 10% portfolio in the withdraw phase.

Once you have covered all expense for life, would you then put money in equities to garner some growth? This could lead to a 50/50 mix on a much grander scale. Seems we are back to money verses time, running out of time turned out to be scarier than running out of money for me.
[FONT=&quot]Different strokes, it’s all good.[/FONT]

 

[MichaelB]

If you are using TIPS they work best held in retirement accounts because of the phantom interest issue. Bodie recommends TIPS in retirement accounts. From what I have read Bernstein just leaves it as a general framework with "safe assets" with TIPS as one option. I don't know of anyone who advocates TIPS for taxable accounts.

My earlier comment holds true for TIPs and other fixed income, even in tax deferred accounts, because taxes are not eliminated, just deferred. The marginal tax rate needs to be less than the ratio of real to total interest rate or the portfolio loses value.

 

[daylatedollarshort]

By choosing to forgo returns one does not have to worry about returns? [FONT=&quot].[/FONT]

A household with a $3M portfolio experiencing a 30% drop the first year of retirement loses $1M in absolute dollars they may never be able to recover. They give up the chance for growth in return for not having to worry about losing the $1M. At $2M they need a 50% return to get back to where they started.

Some households might not want to risk the $1M drop in return for a chance to earn more. Earning $3M more is not as important as hanging on to the first $3M. In economic terms it is referred to as the law of diminishing marginal utility.

Or a household that can live off pension income may have $250K and not want to lose $75K early on in retirement.

 

[jkern]

To answer the OP question, my SWR for a 50 year old would be:

3.5%: Absolute maximum. Definitely worried I will run out of money.
3%: Good, but not great. Still a little worried.
2.5%: Great. Now I feel good. Reasonably confident I won't run out of money.
2%: Golden. No worries at all.

 

[FIRE'd@51]

A yield greater than 0 real increases these SWR higher, per the TIPS links previously posted. With a zero real yield, you'd just divide your beginning portfolio / years of retirement = SWR.

$100 beginning portfolio / 50 years = you can take out $2 a year.

100/50 =2.
1,000,000 / 50 = 20,000.

For a couple, annually this could mean:

$20K SWR ($1M portfolio, 0 real return, 50 year horizon) + $24K SS + $14K rental income = $58K retirement spending.

At age 90 annuities are pretty cheap or maybe the hypothetical couple in the above example has a $500K house for a reverse mortgage, to avoid depleting the portfolio to zero.

Instead of firecalc, you can just use a spreadsheet with inflation and real return as parameters to model your retirement planning under this methodology.

What does any of this have to do with my statement that you quoted?

Suppose I purchased at auction $1 million of 30-year TIPS at 0% real yield. Since the yield is 0%, there would be no coupons to cash each year. I would basically own $1 million of zero-coupon inflation-adjusted bonds which mature in 30 years. So how do I get my $33,333 each year? By selling 3.33% of my TIPS each year. Putting aside the logistical problems of doing this each year (paying commissions, bid-ask spreads, etc), the value of the TIPS I am selling will depend on the real interest rate at the time I sell. If real rates are above 0% when I sell, I will receive less than the inflation-adjusted 100 per bond, and I will have to sell more than 3.33% of my TIPS to get $33,333. Since these are zero coupon TIPS, the duration WRT real rates is very large - about 30 the first year. This means that if real rates rise 1%, the TIPS that I paid 100 for will only be worth about 70 when I go to sell, so instead of selling 3.33% of my position, I will have to sell 3.33%/0.7 = 4.75% of my position. As you can imagine, with real rates rising you will very likely deplete your portfolio in less than 30 years, unless you lower your SWR. This is hardly a riskless strategy, perhaps as risky as holding 100% equities. A rise of 1% in real rates the first year causes my portfolio to lose 30% of its value.

 

[GTFan]

To answer the OP question, my SWR for a 50 year old would be:

3.5%: Absolute maximum. Definitely worried I will run out of money.
3%: Good, but not great. Still a little worried.
2.5%: Great. Now I feel good. Reasonably confident I won't run out of money.
2%: Golden. No worries at all.

That's just way too conservative, judging by every retirement planner I've seen. Your SWR doesn't go down just because you're younger and FireCALC bears that out. Once you hit an SWR that gets you to 30 years at 90%+ you're basically golden from what I've seen, and that's not even including the benefit you get when FRA SS kicks in.

Having said that I plan on 3% initially but I'm not going to worry about it, and FireCALC says I can draw another $20k a year at 100% factoring in SS.

 

[youbet]

Taxes must be added to this equation. This is not trivial because the ratio of the real rate divided by the nominal rate must be equal to or greater than the marginal tax rate for the life of the portfolio. Once that ratio fails the portfolio withdrawal permanently loses purchasing power.

Many of us include taxes as a line item in retirement spending........

 

[Fermion]

A TIPS only strategy at 0% real yield is about as dumb as 100% stocks.

You have no idea if TIPS could even be adjusted enough for inflation in a high inflation rate environment. 15% inflation, they might decide to use some other methodology to be able to afford the TIPS payment.

If we get a 50% or more drop in the market that is sustained for more than a year or two, I am not 100% sure TIPS will be as safe as they are made out to be.

 

[springnr]

A household with a $3M portfolio experiencing a 30% drop the first year of retirement loses $1M in absolute dollars they may never be able to recover. They give up the chance for growth in return for not having to worry about losing the $1M. At $2M they need a 50% return to get back to where they started.

I have no heart burn with your choice, just not mine.

A side point to your example
30% drop of $1M in a $3M 100/0 portfolio
30% drop of $500K in a $3M 50/50 portfolio <-----

Link to S&P 10 year rolling returns, down cycles do happen, lot of positive years too.
http://allfinancialmatters.com/wp-c...SandP500_10-Year_Rolling_Returns_with-CPI.pdf

 

[Major Tom]

To answer the OP question, my SWR for a 50 year old would be:

3.5%: Absolute maximum. Definitely worried I will run out of money.
3%: Good, but not great. Still a little worried.
2.5%: Great. Now I feel good. Reasonably confident I won't run out of money.
2%: Golden. No worries at all.

That's just about my view too. 50 years-old here with an ~ 60/35/5 allocation.
My WR is 2.4% of my starting portfolio value and after 3 years of withdrawals, is now 2.04% of the current portfolio value. The dollar amount of my withdrawals is the same - I have not yet given myself an inflation-adjusted raise.

 

[Quantum Sufficit]

If that's the case (and I see references to it in an earlier thread), the OP is leaving out A LOT of critical information. If advice is given without considering this information, it could be worthless, or even dangerous. He left off the OP mentioning 60/40, but I'm not sure if that is his AA, or he was starting another thought for comparison - that sentence sort of trails off?

I just ran FIRECalc for a 40 year period, 100% corporate bonds, and a 100% success only allows a 1.69% WR! And OP is talking about 3-3.5%? !!!!

Me thinks inflation and the investment profile is being ignored. Proceed with caution!

<< ignores inflation!!!!

-ERD50

Sorry it took so long to answer everyone. Did not mean to leave you hanging. I decided after much thought not to pursue a 100% bond portfolio. Decided to go 60/40 ish with managed payout from vanguard. All but 15% of this total is in taxable accounts.

Hope that helps you help me

 

[daylatedollarshort]

What does any of this have to do with my statement that you quoted?

Suppose I purchased at auction $1 million of 30-year TIPS at 0% real yield. Since the yield is 0%, there would be no coupons to cash each year. I would basically own $1 million of zero-coupon inflation-adjusted bonds which mature in 30 years. So how do I get my $33,333 each year? By selling 3.33% of my TIPS each year. Putting aside the logistical problems of doing this each year (paying commissions, bid-ask spreads, etc), the value of the TIPS I am selling will depend on the real interest rate at the time I sell. If real rates are above 0% when I sell, I will receive less than the inflation-adjusted 100 per bond, and I will have to sell more than 3.33% of my TIPS to get $33,333. Since these are zero coupon TIPS, the duration WRT real rates is very large - about 30 the first year. This means that if real rates rise 1%, the TIPS that I paid 100 for will only be worth about 70 when I go to sell, so instead of selling 3.33% of my position, I will have to sell 3.33%/0.7 = 4.75% of my position. As you can imagine, with real rates rising you will very likely deplete your portfolio in less than 30 years, unless you lower your SWR. This is hardly a riskless strategy, perhaps as risky as holding 100% equities. A rise of 1% in real rates the first year causes my portfolio to lose 30% of its value.

You can't purchase all your TIPS in one year with the same maturity date for this to work if you want to withdraw more than the interest each year. If you cash out your TIPS before maturity, you aren't guaranteed to get your principal back plus inflation.

The main financial guru advocates of liability matching are not recommending 100% TIPS, and when they do mention TIPS it is usually a ladder. The basics of the LMP are here:

Matching strategy - Bogleheads

Bodie recommends inflation adjusted asset classes including TIPS, I bonds, SS and inflation adjusted annuities for your safe asset floor. You can invest the rest in stocks under this methodology. He is just suggesting you not invest in stocks the money you absolutely cannot afford to lose.

The key concept is what are the safe withdrawal rates with a real return of 0 - 2%, which is the historical return of safe assets, which may include TIPS. Prior to the Fed lowering of interest rates 30 years TIPS were yielding inflation + ~2%.

 

[daylatedollarshort]

My earlier comment holds true for TIPs and other fixed income, even in tax deferred accounts, because taxes are not eliminated, just deferred. The marginal tax rate needs to be less than the ratio of real to total interest rate or the portfolio loses value.

Per youbet's post, I include taxes as an expense in our budget. For the hypothetical couple they would have to come out of the $58K.

If the $1M is in a 401K, the withdrawal would all be treated as income, wouldn't it?

 

[pb4uski]

Sorry it took so long to answer everyone. Did not mean to leave you hanging. I decided after much thought not to pursue a 100% bond portfolio. Decided to go 60/40 ish with managed payout from vanguard. All but 15% of this total is in taxable accounts.

Hope that helps you help me

60/40 seems much more sensible than 100% bonds.

 

[GTFan]

100% of anything is a much riskier bet IMO, doesn't matter what it is. What we're seeing here is a classic overreaction to the events of 2008-09.

 

[mpeirce]

What we're seeing here is a classic overreaction to the events of 2008-09.

And the next crisis will always be a bit different.

Kinda like the military adage about fighting the last war.

 

[GregfromTexas]

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

I went through the same logic. A couple people have pointed it out, but yeah the achilles heel to this comforting assessment that at this point you could simply spend $62,857per year is inflation. True, but after even 20 years of 3% inflation that would let you live like you were spending $25,896/year today. I don't get the sense that's your goal

At the end of the day, I bet inflation is as much the reason why a good chunk of the people here decide they need to deal with the volatility and stress of equities and higher yield bonds as any other factor.

 

[GregfromTexas]

A household with a $3M portfolio experiencing a 30% drop the first year of retirement loses $1M in absolute dollars they may never be able to recover. They give up the chance for growth in return for not having to worry about losing the $1M. At $2M they need a 50% return to get back to where they started.

Some households might not want to risk the $1M drop in return for a chance to earn more. Earning $3M more is not as important as hanging on to the first $3M. In economic terms it is referred to as the law of diminishing marginal utility.

Or a household that can live off pension income may have $250K and not want to lose $75K early on in retirement.

Looking historically though, there does seem to be some basis for believing in reversion to the mean within 5 years or so IF you are highly diversified. A 100% return in a relatively short period following a 50% drop is not such an unrealistic expectation. As my dad used to tell me, the stock market is like a kid on an escalator with a yoyo.

 

[pb4uski]

......At the end of the day, I bet inflation is as much the reason why a good chunk of the people here decide they need to deal with the volatility and stress of equities and higher yield bonds as any other factor.

Spot on. That and if one avoids equities then you need a lot more money to retire all else being equal.