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View Poll Results: SWR for 40-year-old retiree
0.5% 2 1.77%
1% 3 2.65%
1.5% 6 5.31%
2% 7 6.19%
2.5% 20 17.70%
3% 47 41.59%
3.5% 16 14.16%
4% 12 10.62%
Voters: 113. You may not vote on this poll

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Old 04-16-2010, 03:20 PM   #21
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I think a 3% withdrawal rate will work, i.e. taking out an amount equal to 3% of the original portfolio and adding onto the withdrawal the inflation every year.

My plan is to primarily rely on dividends for my withdrawal. I do have some funds in my portfolio like small cap index, that I will be selling shares of one day, but for the most part I try to buy stocks that have a descent dividend yield, i.e. 2% or more.

I plan to continue working part-time forever. So, I believe my withdrawal strategy, which will be lower than necessary and also volatile, will work out ok. If I found myself in a situation where dividends were too low, I'd try to find more work. I also plan on keeping a year or two of living expenses in cash, in case I have trouble finding that extra work.

My strategy looks to be similar to that of jIMOh. I do focus on dividends simply because it is much easier to figure out where you are at. I can look at the previous year's payouts for a fund/stock and using the current share price, and how much money I have to invest, and figure out what the dividend yield will probably be and how much money I would receive if I owned the shares.

I am very wary of dividend focused funds that use a mechanical screening process. The only one of that type I like is VIG, which isn't a high yield fund. For a higher yield I like market cap weighted sector indexes like XLU or buying individual stocks.

Right now I am mostly in broad market index funds. Thanks to the crash I was able to buy them and still have a dividend yield of roughly 3.5% based on my cost basis and last year's payouts. I prefer to buy the broad market indexes if I can get at least a 2% dividend yield. In time the payouts should increase and my dividend will be closer to 3% or more.
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Old 04-16-2010, 03:36 PM   #22
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I seem to recall from the Trinity study that 3% will probably work for a very long time or possibly forever.

I voted for 2.5% because I have a very cautious nature, and because with a possibly even 50-60 year retirement, heaven only knows what could happen.
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Old 04-16-2010, 03:47 PM   #23
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I thought that living off dividends and interests was the best way to go too. Until I realized how much my dividends have been cut over the past year and how long it is taking for them to start rising again. I do tend to focus somewhat on dividend-paying investments but I will probably stick with a total return approach during the withdrawal phase (even though most of my withdrawals will be funded with dividends). My portfolio currently yields about 2.9%.

I am thinking about living on 3% of portfolio value each year. In good years there will probably be a surplus which will be set aside to supplement the lower income during bad years. This method will hopefully help smooth our income through booms and busts.
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Old 04-16-2010, 03:48 PM   #24
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Without context its tough to say, but 3% withdrawal rate has enough room for someone to increase their standard of living (moderately, just to keep up with US average) and still keep the portfolio whole.
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Old 04-16-2010, 04:45 PM   #25
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When I retired at 40, I didn't know what SWR was much less how to calculate it. A year later I learned about stuff like the Trinity study. For the first few years of my retirement the debate on ER board was could you go higher than 4% by controlling the expenses. I decided that 4% was more than enough for my needs. Fast forward 10 year the debate now is 4% to aggressive. My portfolio has shrunk, and eventhough I'm 50, my SWR is 3.5% of my current balance.
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Old 04-16-2010, 05:59 PM   #26
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If a 40-year old RE has a pretty high risk tolerance, I see no reason to ever go anywhere near 3% or below. This is related to the "one-more year" syndrome that many people have. A 40-year old has a significant amount of time left in which they can return to the workforce, so they are able to carry a somewhat higher amount of equities than a normal retiree. This results in a more sustainable portfolio. If there is a market crash just after the 40-year old retires, which is the most likely scenario in which 3% would be a really good idea, they can, fairly easily, re-obtain an additional few years of work. I think that 3.5% is appropriate for most 40-year old retirees, assuming they do not have health problems, and have a good handle on their expenses.
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Old 04-16-2010, 06:17 PM   #27
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Retiring at 40 means that your money may have to last 50 years (or more). That is a long time and a lot can happen in that time - just look back on the last 50 years and consider some of the things which have happened and how they would affect you if they were to reoccur - much higher tax rates (in many countries in the 1960s and 190s), prolongued double digit inflation (1970s), a very long period of deflation (like Japan). It's also a long period for your personal circumstances to change as well - disability, old age, medical issues etc.

I will be retiring in my mid-40s and intend to maintain the real value of my portfolio indefinitely. Any other approach is, IMHO, too risky. Most of my assets will be in equities and real estate (some bonds) and I intend to live off less than 100% of the income (which i hope will grow in line with inflation over the longer term).

Given that you have social security and health care in the US, you probably have room to be less conservative than me.
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Old 04-16-2010, 08:39 PM   #28
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I seem to recall from the Trinity study that 3% will probably work for a very long time or possibly forever.
http://en.wikipedia.org/wiki/Trinity_study
http://www.retireearlyhomepage.com/safewith.html
http://www.dallasnews.com/s/dws/bus/...dy/table3.html
http://fnadoc.techtrefoil.com/retire...al/Vol1014.pdf

Bengen did some work around that time with rebalancing and asset allocations that made him confident of at least 35 years. But the Trinity authors faced the same problem that everyone eventually runs into-- using historical data for longer retirements, there just aren't enough overlapping periods to give confidence in the data or the analysis.

But Monte Carlo can "prove" anything!
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Old 04-16-2010, 10:25 PM   #29
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I'm targeting 2.5-3%. Barebones keep-me-alive-dry-and-warm part of the budget from fixed income (corporates and munis) with play and enjoyment money from dividends. If I maintain the 55/45 level and same equity diversification I have now, the cash throw-off will be about 3.5-3.7%. The extra cash thrown off beyond my budgeted withdrawal will be re-invested to keep the barebones cash flow from fixed income up with inflation. Well, this is my current thinking anyway. I am a bit of a belt and suspenders kind of guy, with no pension, no HC and probably lower SS than most because I worked overseas for 8 years as a local hire before returning to the US and a SS paying job...I have 17 years in now, at age 48.

So anyway, I prefer the lower SWR at age 51 target retirement because: 1) I plan to live to 100 even though it more likely be just early 80s, and 2) I don't want to see an asset deflation right after I pull the plug, and feel like I have to go back to work. If I retire with a 2.5% SWR and then the value of my portfolio dropped 37.5%, I would still be at a 4% WR. I would be nervous, but would probably feel like I could survive. If I punched out with a 4% SWR and then stocks fell that much, then my WR to live would have to be 6.4% to maintain the same standard of living. If that happened, I would be looking for work or eating catfood out of fear that I would outlast my port.

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Old 04-16-2010, 10:26 PM   #30
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Trinity study - Wikipedia, the free encyclopedia
What's the "safe" withdrawal rate in retirement ?
News for Dallas, Texas | Dallas Morning News | Scott Burns: Columns 2006
http://fnadoc.techtrefoil.com/retire...al/Vol1014.pdf

Bengen did some work around that time with rebalancing and asset allocations that made him confident of at least 35 years. But the Trinity authors faced the same problem that everyone eventually runs into-- using historical data for longer retirements, there just aren't enough overlapping periods to give confidence in the data or the analysis.

But Monte Carlo can "prove" anything!
Thanks for providing the links! I was over at Franks when I posted that, and did not have the Trinity study or other materials at hand so I was working from memory. You're right - - that wasn't the study. I read that 2.5%-3.0% would last a very long time somewhere, and was persuaded by what I read that the idea had merit, but I'll have to search to figure out where I read it.

You're right about using historical data for longer retirements. I'd go even farther and say that I feel uncomfortable about using historical data even for shorter retirements. Who is to say that change is impossible, that historical market behavior will be repeated (in a statistical sense) for the infinite future? There is an consistency assumption here that I don't really feel comfortable with. All we can do is use the accepted SWR's as a jumping off point for our initial SWR estimation, and be prepared to be flexible and do what we can to deal with market difficulties.
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Old 04-17-2010, 01:44 AM   #31
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4% here.

Small risk of needing to move to Panama/Thailand/Mexico/etc. for awhile is easier to swallow than working additional years to increase portfolio by 33%.
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Old 04-17-2010, 05:29 AM   #32
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The general guidance seems to be the longer the duration, the lower the rate. Of course it depends on your portfolio performance and method of withdrawal (fixed, adjust for inflation, lifecycle, etc) also.


If you intend to live off your portfolio for possibly 50+ years, you either need to have quite a bit of money or be willing to manage expenses proactively and tighten your belt if needed. You are taking a risk... but it can be managed.


IMO - it is fine to work the numbers and plan... but I prefer to have a margin of safety. Assuming ER is not forced for some reason... I would rather work one more year (at peak earnings), than take the risk of having to go back to work at a much lower wage after being out of the work force for a number of years. Of course, I am tired of my job.. but I do not hate it (at least not on a regular basis), When I am done w*rking.... I know I am done!
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Old 04-17-2010, 05:34 AM   #33
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4% here.

Small risk of needing to move to Panama/Thailand/Mexico/etc. for awhile is easier to swallow than working additional years to increase portfolio by 33%.

I hear you. I would be fine with it... but DW would not.

Funny thing is... I would be willing to take a number of measured risks with very early ER if my only concerns were about me.
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Old 04-17-2010, 09:42 AM   #34
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Funny thing is... I would be willing to take a number of measured risks with very early ER if my only concerns were about me.
Yeah, I hear that. If I were the only one who had to bear the consequences of my questionable/risky decisions, it would be a lot easier for me to follow through on those decisions than it is when other loved ones have to pay the price along with me. That's one of the reasons why I tend to be ultraconservative to the point of paranoid when it comes to money and finances.
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Old 04-17-2010, 10:50 AM   #35
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I plan to retire in early 40's and am aiming for the standard 4% SWR. Why so "high" rather than something like 2 or 3%? Well I'm in a decent profession and feel that I could fairly easily get back into the workforce if required as age and experience is valued in the profession (I'm basically same as a CPA up here in Canada). Chances are that I will get to my desired SWR and then do the part time/consulting thing for two or three years as a bridge to full retirement. Also in Canada we do not have to worry about health care at all and that MUST have some kind of impact to SWR (and yes I know that the US passed legislation recently, so maybe a non issue now in US)
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Old 04-17-2010, 12:32 PM   #36
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I plan to retire in early 40's and am aiming for the standard 4% SWR. Why so "high" rather than something like 2 or 3%? Well I'm in a decent profession and feel that I could fairly easily get back into the workforce if required as age and experience is valued in the profession (I'm basically same as a CPA up here in Canada). Chances are that I will get to my desired SWR and then do the part time/consulting thing for two or three years as a bridge to full retirement.
That is great. I guess it might be hard to establish a client base when you are 90 years old if you haven't worked for 45 years or more, but doing part time/consulting work like this early in your retirement instead could bring in more money and lower your withdrawals.

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Also in Canada we do not have to worry about health care at all and that MUST have some kind of impact to SWR (and yes I know that the US passed legislation recently, so maybe a non issue now in US)
It will take a little time before we know the details of how this very complex legislation will affect us here in the U.S. I think that it is premature for U.S. citizens to adjust our projected expenditures in retirement because there are still a lot of variables and unanswered questions. Eventually we will know more.

I think that technically, health care affects our projected expenditures, not our SWR. What one spends should match one's withdrawal but doesn't always. I am acutely aware of that because my spending is much lower than my withdrawal and I need to make them match.
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Old 04-17-2010, 06:48 PM   #37
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Thank you for all the replies, keep them coming! Very interesting distribution in the votes too...
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Old 04-18-2010, 02:55 AM   #38
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Anything lower than 3% is the "wrong portfolio" IMO

Make sure there is enough in a dividend income fund to provide income
then invest the rest for growth...

every dividend investor which replied to a survey I did (about 2 years ago) told me they had a yield higher than 3%.
Dividend investing- do you get a 3% yield?

Live off the dividends, keep the capital growth in portfolio
and have some cash and bonds set aside as an emergency for short term market fluctuations in dividend payout.
This has been my strategy also. But when we talk of SWR aren't we talking about principle not income. eg If I earn 3% dividend yield isn't the SWR is on top of that? Also if we never sell anything aren't we going to leave a pretty big estate?
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Old 04-18-2010, 07:38 AM   #39
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I didn't vote, but I'm a little surprised to see 3% as the leading answer for a 40 year old. 4% seems to be the norm for a 30 year retirement (age 65) and in his latest book Otar, among others, makes a case for 3% for a 55 year old (call it 40 year retirement).

Yes, I understand that at some level the nest egg is theoretically good indefinitely. And I understand that a 2% change in real return makes a mind-boggling difference in the outcome/success. But jumping off with the equivalent of a 55 year retirement window just spooks me a little without an even lower WR than 3%. YMMV
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Old 04-18-2010, 08:41 AM   #40
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I think of 3% as really being the "perpetual survival" SWR where you are highly likely to end with the original principal intact.

So, personally, I don't think 3% is too high for a 40 year old. I think it's low.

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