SWR

[Independent]

Quote:

Originally Posted by golfnut I have read many articles and utilized many calculators (including FIRECALC). I would like opinions from the forum members as well (especially the early retirees) on what a swr would be given no pensions or social security proceeds for a couple (ages - 57 male and 54 female). Just curious. Thanks, Golfnut.

I assume you want a range of responses, I'll be on the conservative side. (BTW, we retired at 59, but included SS and a pension in our plans.)

I think of our spending as "needs" and "wants". The needs portion should be funding at near 100% confidence. The wants can be less certain.

For the needs, I would note that current TIPS yields are somewhere around CPI+0%. If I'm planning for 40 years of spending, I'd feel I could start with 1/40 = 2.5% of my needs portfolio. I know there's lots of history that says US securities generated a lot more than CPI+0% in the 20th century, and that may convince me to put my needs portfolio into something other than TIPS. But, I wouldn't spend that extra yield until after it's realized, so I'd still start at 2.5%.

The wants are another story. I'd invest that in whatever seems to have a good long term average and have a flexible spending plan. In theory, I could spend 100% in the first year if I want to have all my fun when I'm "young". In practice, I'd probably start at 6% or higher, then vary in future years based on performance, not on inflation.

[Danmar]

@Independant. I think yours is a good way of looking at this question. What would you do if your pension covered your needs? Go 6% on the portfolio?

[Independent]

I'd be concerned about whether the pension is COLA'd, but yes, I agree with some earlier posters that having a base income allows you to take more chances with the rest.

In our case, deferring SS to 66 and 70 will probably cover our most basic needs. Adding even 1/3 of our non-COLA'd pension seems like enough to cover more generously defined "needs". So that means we should be more aggressive.

That said, I'm married to the most risk-averse person I know, so it's not like we're into any interesting investments. Still, we're currently spending fast enough to draw down real principle. I'm not losing sleep over it.

[Huston55]

Quote:

Originally Posted by Independent I assume you want a range of responses, I'll be on the conservative side. (BTW, we retired at 59, but included SS and a pension in our plans.) I think of our spending as "needs" and "wants". The needs portion should be funding at near 100% confidence. The wants can be less certain. The wants are another story. I'd invest that in whatever seems to have a good long term average and have a flexible spending plan. In theory, I could spend 100% in the first year if I want to have all my fun when I'm "young". In practice, I'd probably start at 6% or higher, then vary in future years based on performance, not on inflation.

Here's another data point. This is similar to our current plan: to cover "needs" (essential) with guaranteed income and "wants" (discretionary) with a reasonable AA portfolio. In our case, the 'guaranteed' (highly reliable is probably a better term) is SSx2, a small COLAd pension, and an SPIA. The 'discretionary' expenses will be covered by an AA of ~45/45/10 (+/- on S/B), beginning with a SWR of 3.3-3.7% because it needs to last ~40 years.

Quote:

Originally Posted by Independent That said, I'm married to the most risk-averse person I know, so it's not like we're into any interesting investments. Still, we're currently spending fast enough to draw down real principle. I'm not losing sleep over it.

Didn't know my DW had a sister.

[clifp]

I don't have a SWR per se. Retiring at 40 made any "fixed" SWR too risky IMO. Rather my spending is based on investment income; dividends + interest. Historically spending has been started at around 2.5% and has increased to 3% from my initial portfolio. Other than 2008 my spending has been less than my interest and dividend income. Since I retired in 99/2000 a true 4% SWR would have been pretty awful as been documented in several places in on the web. I think my SWR rate would near 10%.

[Chuckanut]

Quote:

Originally Posted by Independent That said, I'm married to the most risk-averse person I know, so it's not like we're into any interesting investments. Still, we're currently spending fast enough to draw down real principle. I'm not losing sleep over it.

Does this risk-averse person understand the risk of inflation over the next 30+ years? I ask because I have met many people who claim they do not want any risk, but then remain idle while the value of a life-time of earnings is diminished due to inflation.

[Independent]

Quote:

Originally Posted by Chuckanut Does this risk-averse person understand the risk of inflation over the next 30+ years? I ask because I have met many people who claim they do not want any risk, but then remain idle while the value of a life-time of earnings is diminished due to inflation.

If you're truly risk averse, the response to understanding inflation as a risk is not to invest in more volatile assets, but to really cut spending.

[youbet]

Quote:

Originally Posted by Chuckanut Does this risk-averse person understand the risk of inflation over the next 30+ years? I ask because I have met many people who claim they do not want any risk, but then remain idle while the value of a life-time of earnings is diminished due to inflation.

I'm surprised at how infrequently methods of dealing with inflation are discussed in terms of making a portfolio last over long periods of time in the face of rising prices. While the current version of FireCalc doesn't display the graph showing which years failed, you can still do so by down loading and inspecting the spreadsheet. The period including the early 70's stands out as the worse time to begin RE, not because of retiring into a recession/depression, but because of retiring into moderately high (NOT "hyper") inflation.

My own feeling is that folks relying heavily on non-cola'd pensions and spia's coupled with conservative portfolios may find themselves in "interesting" times 10 - 20 years down the road.

[Danmar]

@Youbet. I agree that inflation is probably the biggest risk for a long retirement. That's why I take more "risk" with a 100% equity portfolio. If my dividends grow by say 5-6% that will likely cover inflation for my entire retirement income,including the non-cola pension. Incidently my two biggest positions each raised their dividend today by 6%