SWR for healthy 40-year-old

[plex]

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.

 

[traineeinvestor]

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.

 

[Nords]

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/scottburns/readers/trinitystudy/table3.html
http://fnadoc.techtrefoil.com/retire/images/withdrawal/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!

 

[Rambler]

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.

R

 

[W2R]

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/images/withdrawal/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.

 

[tuixiu]

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%.

 

[chinaco]

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!

 

[chinaco]

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.

 

[ziggy29]

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.

 

[accountingsucks]

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)

 

[W2R]

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.

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.

 

[smjsl]

Thank you for all the replies, keep them coming! Very interesting distribution in the votes too...

 

[Danmar]

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%.
http://www.early-retirement.org/forums/f28/dividend-investing-do-you-get-a-3-yield-37716.html

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?

 

[Midpack]

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

 

[audreyh1]

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

 

[audreyh1]

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

 

[ziggy29]

Wow -- two people said 1%? I thought I was [-]paranoid[/-] ultraconservative and even I said 2.5%...

 

[IndependentlyPoor]

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. yuk: 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.

 

[REWahoo]

IP, I'm sure you've seen this, right? http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html

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.

 

[IndependentlyPoor]

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.

 

[Meadbh]

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

 

[Midpack]

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...

 

[youbet]

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?

 

[Danmar]

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%

 

[Midpack]

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.