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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 04-18-2010, 08:43 AM   #41
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Originally Posted by Danmar View Post
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?
No. The SWR assumes the portfolio appreciates over time from both dividends and capital gains. It only looks at total return which includes dividends. It doesn't pay attention to what is principal and what is income.

Audrey
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Old 04-18-2010, 08:53 AM   #42
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Wow -- two people said 1%? I thought I was paranoid ultraconservative and even I said 2.5%...
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Old 04-18-2010, 10:09 AM   #43
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It has been a while since I ran Firecalc, so I decided to have a look. I started with a $1,000,000 portfolio, a $30,000 (3%) withdrawal and a 50 year time frame. I used the default market portfolio with equity percentages varying between 30% and 75% in 5% steps. All other inputs were at the default. Then I did it all over again with a 4% withdrawal. The results were surprising.

At 3% withdrawal, everything is hunky-dory. Firecalc predicts 100% success for all portfolios with more than 40% equities, and the success rate is still 92% at 30% equities.

The picture is drastically different at 4% withdrawal. Even at 75% equities, the success rate was only 85.4%. At 30% equities, the success rate is only 41%.

This is very disturbing to an old retired engineer. I want solutions to be stable and relatively insensitive to input parameters. If the solution is on a part of the curve with a very steep slope, like it seems to be here, I get nervous.

Here it seems like the difference between 3% and 4% withdrawal is like the difference between easy street and eating cat food.

Have I screwed up (again)? Any Firecalc gurus out there?

I know that modern portfolio theory and all that is not well accepted here (with some justification IMHO), but it is worth remembering that the standard deviation of the endpoint of a random walk is proportional to the square root of the time frame. ( I wish I could make that sound less geeky, but I can't.) In other words, if you annual portfolio standard deviation is say, 10%, then projecting out 50 years with a random walk model means that you are looking at a standard deviation of the final portfolio value of about 70%. Even if you don't believe in the random walk model, it does seem reasonable that the amount of "fuzziness" in results will grow with time.

One last problem. For a 50 year timeframe, Firecalc only ran 89 simulations. I'm not going to bother calculating the Student-T distribution values for that (I can sense eyes glazing over just at the mention of it), but suffice it to say that I wouldn't base my retirement solely on statistical results derived from 89 simulations. It just ain't enough. This isn't a slam against Firecalc. There just isn't enough market history to go on.
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Old 04-18-2010, 10:15 AM   #44
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IP, I'm sure you've seen this, right? (FAQ archive): Bernstein's "Retirement Calculator from Hell" articles

I'm especially referring to the "Thus, any estimate of long-term financial success greater than about 80% is meaningless." quote...

When it comes to FIRECalc and other tools to determine portfolio withdrawal success rates I see a lot of "measuring with a micrometer, mark with a grease pencil and cut with an axe" going on.
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Old 04-18-2010, 10:23 AM   #45
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REWahoo,
Yep, saw it, but so long ago that I had forgotten that nugget about 80%. Truer words, and all that.

You summary is perfect.

So here we are, back to square one, basing retirement plans on feelings and gut instincts and probably relying on our natural risk-taker or risk-adverse personalities more than we care to admit.
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Old 04-18-2010, 10:39 AM   #46
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Without doing all the w*rk that IP did, I voted for 2%. If you lived to be 100, that would be 60 years, and there are just too many unknowns. Heck, I'm planning 2% RSWR* based on FIRE at age 55-57 and publicly funded healthcare.

*RSWR = really safe withdrawal rate
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Old 04-18-2010, 10:40 AM   #47
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Originally Posted by audreyh1 View Post
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.

Audrey
History would suggest you are correct, and I hope that holds true indefinitely.

It all depends on what real returns are going forward. FIRECalc is a great tool to explore this and indeed if you enter a 3% WR and leave other (historically accurate) assumptions as-is, the nest egg does indeed survive indefinitely - I quit trying to make it fail after 70 years.

However, I think the FIRECALC default average return on equities is still 10% and 4% on fixed with an average inflation of 3% (please correct me if I am wrong, is this actually stated somewhere within FIRECalc that I am missing?). That's a 4.6% real return at 60/40 (7.6% return less 3% inflation). Guess I'm too conservative to rely on that outcome for the next 40 to 55 years, coupled with Bernstein's "any estimate of long-term financial success greater than about 80% is meaningless."

OTOH, life is uncertain no matter what. At some point you make the jump and have contingency plans in mind...
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Old 04-18-2010, 10:52 AM   #48
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However, I think the FIRECALC default average return on equities is still 10% and 4% on fixed with an average inflation of 3% (please correct me if I am wrong, is this actually stated somewhere within FIRECalc that I am missing?).

I don't think FireCalc uses any assumed "default average return" as you suggest. It used actual historical data. This is what I like about FireCalc. It avoids the serious issues involved with using historical averages.

Where did you see these 10%, 4% and 3% figures you mentioned?
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Old 04-18-2010, 10:52 AM   #49
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No. The SWR assumes the portfolio appreciates over time from both dividends and capital gains. It only looks at total return which includes dividends. It doesn't pay attention to what is principal and what is income.

Audrey
Thanks for the response. I guess that is why the literature doesn't say very much about dividends as they are ignored (mostly). If would have thought this would have been dealt with more explicitly-or maybe I missed it. This seems a little strange to me though. My portfolio yields about 3.25% (100% equity) If I only spend the dividends how can I run out of money? Sure all the companies can go bankrupt but other than that and considering they are all the bluest of blue chips and virtually no dividend cuts in the last 75 years? I was one of the guys who said 1%
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Old 04-18-2010, 10:56 AM   #50
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I don't think FireCalc uses any assumed "default average return" as you suggest. It used actual historical data. This is what I like about FireCalc. It avoids the serious issues involved with using historical averages.

Where did you see these 10%, 4% and 3% figures you mentioned?
Not well stated on my part. I did not mean FIRECalc uses a constant rate of return, but there is some underlying average return or equivalent real return for each period it uses.

To check myself against the default historical real sequence of returns, I took the 10%/4%/3% figures from the third choice on the returns page, not knowing what the default was equivalent to. I then set the return to a real return of 1% or 2% using the third choice (presumably constant and therefore unrealistic) and the fourth choice (randomized, presumably somewhat like market history). The results were dramatically lower probabilities of success even at 2% real return. So I assume that means whatever FIRECalc equates to is a significantly higher real return.

Don't get me wrong, I think FIRECalc is an outstanding tool, but users need to be aware of all the variables and their substantial influences.
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Old 04-18-2010, 11:06 AM   #51
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Don't get me wrong, I think FIRECalc is an outstanding tool, but users need to be aware of all the variables and their substantial influences.
Yep, that variable is history. If the future is unlike the past, FIRECalc outputs will be inaccurate.
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Old 04-18-2010, 11:16 AM   #52
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My portfolio yields about 3.25% (100% equity) If I only spend the dividends how can I run out of money? Sure all the companies can go bankrupt but other than that and considering they are all the bluest of blue chips and virtually no dividend cuts in the last 75 years? I was one of the guys who said 1%
Danmar, with this approach you could *possibly* run into 2 issues:

(1) With a 60-year-horizon (if you were 40-year-old), you are betting these companies will still be around and continue to pay that dividend for a very long time... Was not BAC, C, GM, and many other companies also considered "bluest of blue chips" not that long ago?

(2) Even if you do continue to get 3.25%, high inflation may make these 3.25% less than what you need to live on requiring you to sell some equities. (Of course, at least in US history, principal appreciation and historical dividend growth took care of this, and so this had not been a problem, at least in the past in US... unless someone corrects me here.)

Since you responded 1% to the poll, then you clearly do not believe 3.25% might be a "safe" WR (for a 40-year-old)... So, I am not sure how to reconcile you poll vote with your reasoning then... On a second thought, I think I do - you mentioned that you consider dividends separately somehow. Most folks think of them as part of the growth of the portfolio and independent of how much you decide to withdraw; so I wonder if your real answer would then be 4.25%.
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Old 04-18-2010, 11:21 AM   #53
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Yep, that variable is history. If the future is unlike the past, FIRECalc outputs will be inaccurate.
Not to mince words, but FireCalc outputs will be 100% accurate even if the future is unlike the past. FireCalc does not predict, it clearly states what it is doing and that is testing a set of FIRE assumptions against historical market and inflation performance.

However, I know what ya mean....... If FireCalc tests your assumptions and says that your portfolio would have historically survived 95% of the time, you'd like to think that means there is a 95% chance your portfolio will survive in the future. But alas, FireCalc makes no such claim and clearly states so in the instructions.

A little leap of faith is in order. Not a lot different from the one we take when we leave the womb into who knows what historical and circumstantial conditions......
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Old 04-18-2010, 11:31 AM   #54
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Danmar, with this approach you could *possibly* run into 2 issues:

(1) With a 60-year-horizon (if you were 40-year-old), you are betting these companies will still be around and continue to pay that dividend for a very long time... Was not BAC, C, GM, and many other companies also considered "bluest of blue chips" not that long ago?

(2) Even if you do continue to get 3.25%, high inflation may make these 3.25% less than what you need to live on requiring you to sell some equities. (Of course, at least in US history, principal appreciation and historical dividend growth took care of this, and so this had not been a problem, at least in the past in US... unless someone corrects me here.)

Since you responded 1% to the poll, then you clearly do not believe 3.25% might be a "safe" WR (for a 40-year-old)... So, I am not sure how to reconcile you poll vote with your reasoning then... On a second thought, I think I do - you mentioned that you consider dividends separately somehow. Most folks think of them as part of the growth of the portfolio and independent of how much you decide to withdraw; so I wonder if your real answer would then be 4.25%.
Thanks for the thoughtful response. I have to reassess my poll choice. More like my current div yield-say 3%. I agree that inflation is my biggest risk. Dividends only represent about half my projected spending and the spending levels were based on pension and portfolio yield, so I could easily reduce spending if necessary. Also have about 3 years of spending in cash. 60 on my next birthday so I don't see running into problems. My real issue is how much more to spend or give away.
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Old 04-18-2010, 11:37 AM   #55
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I'd aim for 2% or less. From age 40 you've got to make it last a long time.
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Old 04-18-2010, 12:05 PM   #56
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Yep, that variable is history. If the future is unlike the past, FIRECalc outputs will be inaccurate.
That my problem, I don't believe the future will mimic the past. I think there is plenty of cause for optimism in our future, just not as much as history would suggest. Hence a small additional margin of safety beyond history for my decision, say 1% in WR. I'm at 2.6% now (still working), not comfortable yet, but very close. YMMV
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Old 04-18-2010, 12:24 PM   #57
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This is very disturbing to an old retired engineer. I want solutions to be stable and relatively insensitive to input parameters. If the solution is on a part of the curve with a very steep slope, like it seems to be here, I get nervous.

Here it seems like the difference between 3% and 4% withdrawal is like the difference between easy street and eating cat food.

Have I screwed up (again)? Any Firecalc gurus out there?
I don't think you screwed up. I think the problem you're seeing is with FIRECalc's definition of "success". Success means having $1 left at the end of the period. So there are potentially a lot of very marginally successful portfolios in any FIRECalc run. Change any assumption and those "successes" tip easily to "failures". Most of us wouldn't consider running down our portfolio to the last dollar to be very "successful". One way to adjust for this is to set a minimum net worth requirement in FIRECalc. That also helps to highlight the benefit of lowering the SWR below levels where the standard run produces 100% success rates.
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Old 04-18-2010, 12:34 PM   #58
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I use a constant percentage of portfolio like Audrey and a few others stated. I currently use 4%, but if I include the management expense of my mutual funds, it is closer to 4.5%. With possible longevity of 50+ years, I do not feel comfortable that there are enough unique periods to trust any predictions based on historical data.

I initially thought of using the Clyatt 4%/95% solution, but have shied away from using the 95% backstop in 2009. We managed with 4% of our much reduced portfolio - which has given us a great deal of confidence in facing the future.

I haven't found a tool that shows the variance in annual withdrawals using historical data for a constant % withdrawal. For example, for a 60/40 portfolio and a 4% withdrawal rate, what would the withdrawals for each year look like historically?

Anyone know of such a tool?
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Old 04-18-2010, 01:24 PM   #59
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To test the variation of SWR using a constant percentage of portfolio method, I put a simple spreadsheet together using two funds. Vanguard's total market and intermediate bond index.

You can change the allocation & SWR and see the effect of an SWR as a constant % of portfolio. Values are adjusted for inflation.

Please check the calculations - I did this very quickly and there may be errors. You can unprotect the sheet - it isn't password protected. There are no macros.

I got the data from Simba's spreadsheet
Bogleheads :: View topic - Spreadsheet for backtesting (includes TrevH's data)
Attached Files
File Type: xls Constant Withdrawal Variation.xls (35.5 KB, 7 views)
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Old 04-18-2010, 02:01 PM   #60
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40 years old means 60 years in retirement with no improvement in standard of living. Imagine living the “Leave it to Beaver” lifestyle today. Not satisfactory.

Shiller PE10 says future returns will be low. I’d want some room to at least let my standard of living rise along with the rest of the world. A 40 year old has a very good chance of a life-impacting event – like marriage, divorce, kids.

My 3% is not a recommendation, it is the absolute minimum.

Has this ever been discussed before on this forum?
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