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The 6% SWR -- it's official
Old 12-07-2008, 09:05 AM   #1
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The 6% SWR -- it's official

I read Scott Burns' latest article and my initial reaction was to shout BS. As I thought about the details, it seems to make sense. It also addresses many of the threads that bemoan there seriously reduced SWR.

Here's the link....

Sometimes, Down Is Up - Registered Investment Advisor

It is worth considering but goes against our nearly religous commitment to a 4% SWR. Like many things in this ER business, it requires a giant leap of faith to say when enough is truly enough.

I get a chuckle out of the people that are delaying or have delayed ER so they can get by on a 2% SWR. These people seem to be getting a deep satisfaction from their low target. Now that their portfolios are down are we going to see further delays and are people in this group returning to w*rk?

The 4% is based on all our historical financial records. Retiring with a 4% SWR should still be ok even if the next day 25% of a portfolio disappears. Of course, I don't see how anyone would be able to maintain their old level of spending in the face of the decline. Scott's column addresses this with an extensive but crude data review.

Any rebuttals? Thoughts? Anyone cheered up a little by this?
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Old 12-07-2008, 09:52 AM   #2
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Seems like whistling past a grave. It assumes that P/E's are below average - which is not a given at all. It also assumes that the immediate future is immediately bright, because stocks have been hit. What if this is another period like 1960-1982, or 1929-? If so, and a reasonable person should plan for that possibility, then increasing SWR at this point is probably suicidal.

There is such a thing as sleeping well, which is a better anodyne (to me) then buying a new iPod.
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Old 12-07-2008, 10:10 AM   #3
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Assuming you can know the true valuation and if you assume that periods of low valuation are followed by periods of higher valuation, then that article is another way of saying that if the market goes up soon after you retire you will have a better success rate.

The same flaws I suggested in this thread:

Timing Your Retirement

apply. This is, someone who has X dollars during a period of low valuation is richer than someone who has the same X dollars during a period of high valuation.
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Old 12-07-2008, 10:25 AM   #4
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Other than the mortgage debate, this topic dealing with the interaction of valuations with SWR has been our most contentious.

To me it is obvious- stocks aren't imaginary, they represent a claim on disbursements over a long period of time. As such they have economic value, and at some times that stream of payments will be overpriced, at other times, underpriced. If you buy it when it is overpriced, you are not going to get as much for your money. Likewise, buy it when it's underpriced and get more.

Nothing could be more straightforward. And it has little or nothing to do with current PE, or PE next year either. These are long term flows we are talking about, and their value is very mildly impacted by near term events short of nuclear war.

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Old 12-07-2008, 11:07 AM   #5
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This is, someone who has X dollars during a period of low valuation is richer than someone who has the same X dollars during a period of high valuation.
I definitely agree on this point. This is what I think when someone says "but what if this is Japan 1990 or great depression 1929?".

We have already lost 30-50% of our portfolio values. If we can take 4% today and live on it, then it is obviously safer than taking 4% of what we had a year ago. Buying or owning at lower valuation levels increases your likelihood of having better returns going forward versus buying or owning at high valuation levels.
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Old 12-07-2008, 11:12 AM   #6
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I get a chuckle out of the people that are delaying or have delayed ER so they can get by on a 2% SWR. These people seem to be getting a deep satisfaction from their low target. Now that their portfolios are down are we going to see further delays and are people in this group returning to w*rk?
2% SWR is way too conservative, but we are extending ER for a few more years even at 4% SWR.
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Old 12-07-2008, 11:13 AM   #7
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Yes, I totally agree with what T-Al said. Earlier, I read the referenced thread, and got to chime in now.
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Old 12-07-2008, 11:18 AM   #8
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Just to be sure, I went back and checked, and the historic record hasn't changed. We still had a market crash in the 1920's, a great depression in the 1930's, stagflation in the 1970's, and several recessions and bear markets in between. And over all those historic periods, a 4% withdrawal rate survived for 30 years +/-.

So contrary to some claims, I don't have to make any assumptions about what current P/E's are or that the immediate future will be rosy. The only assumption I need to make is that our future is no worse than the worst we've experienced over the past 120 years. Still a pretty good bet in my book.

So if a 4% withdrawal rate was deemed "safe" 12 months ago, a higher WR must be "safe" today.

Based on my numbers, if you retired at the end of 1929, right after the first market crash but before both the depression and another ~70% stock decline, a 5% withdrawal rate adjusted for inflation (and deflation as the case might be) would have lasted you 25 years. If you waited a year and retired at the end of 1930, a 5.5% withdrawal rate would have worked. If you waited two years and retired at the end of 1931, a 6.9% withdrawal rate would have lasted 25 years.

(These numbers do make a 6% current WR seem too optimistic, though.)
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Old 12-07-2008, 11:19 AM   #9
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My goal is to draw 4% of the current portfolio value. This means to reduce my obligatory living expenses, and to have lots of margin.

In good years, I splurge and take international travel. In bad years, well, I stay home and fix my old car.

I have been drawing more than 4% this year, but my excuse is that it is for my children college tuition, not a perpetual expense.
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Old 12-07-2008, 11:30 AM   #10
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1992.

Don't have my retirement booklet from Vanguard anymore(forget that silly computer stuff) but it seems to me 6-8% was the normal range starting at age 65 back then providing you croaked at a 'normal' age.

Time passes. Things change. Or not - maybe we weren't that smart in 1992.

heh heh heh -
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Old 12-07-2008, 01:26 PM   #11
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and are people in this group returning to w*rk?
You know, I keep hearing this statement made all the time when referring to the previously Retired. I am curious as to where the person posing the solution believes these jobs are. Perhaps these job seekers could create their own. Here is one (of many many) statements on the current (and for some time into the future) job situation:

Robert Reich's Blog: Shall We Call it a Depression Now?

(I chose this article merely because it was at hand and for no other reason.)

If 1.2 million (or whatever 6.7% equals) are without w*rk and perhaps as many working fewer hours than they can comfortably live on...

Anyway, an old person "getting" a job anytime they wish seems more like a dream than a reality.
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Old 12-07-2008, 01:38 PM   #12
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It is worth considering but goes against our nearly religous commitment to a 4% SWR. Like many things in this ER business, it requires a giant leap of faith to say when enough is truly enough.
I get a chuckle out of the people that are delaying or have delayed ER so they can get by on a 2% SWR. These people seem to be getting a deep satisfaction from their low target. Now that their portfolios are down are we going to see further delays and are people in this group returning to w*rk?
Any rebuttals? Thoughts? Anyone cheered up a little by this?
Our shorthand terminology can give a lot of mistaken impressions.

For example, the "4% SWR" is only the initial percentage. Withdrawing that "initial4%+CPI" in later years may actually consume 6-7% of the portfolio, but the long-term math claims that the portfolio will survive just fine. Burns is affirming that without going into the details. He's also saying that if you can get FIRECalc to work during sucky markets like this, then you're going to be fine. It's the Dow 14,000 ERs, especially the ones who only asked FIRECalc to make an 80% success rate, who should be breaking out into little fine beads of sweat now.

Many aspiring to a 2% SWR are doing it for ERs that exceed the Trinity study's 30-year period. If you're trying to achieve success over five or six decades then 2% might actually be a better SWR. Raddr's research indicates that 4% is exceedingly optimistic past 30 years.

I think that all humans find it difficult to apply long-term analysis to short-term panic...
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Old 12-07-2008, 01:43 PM   #13
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Originally Posted by RonBoyd View Post
You know, I keep hearing this statement made all the time when referring to the previously Retired. I am curious as to where the person posing the solution believes these jobs are. Perhaps these job seekers could create their own. Here is one (of many many) statements on the current (and for some time into the future) job situation:

Robert Reich's Blog: Shall We Call it a Depression Now?

(I chose this article merely because it was at hand and for no other reason.)

If 1.2 million (or whatever 6.7% equals) are without w*rk and perhaps as many working fewer hours than they can comfortably live on...

Anyway, an old person "getting" a job anytime they wish seems more like a dream than a reality.
I agree! DH and I no longer do our half-jokey (but still seeing it as an option, if needed) thing about how if our FIRE has been compromised too much by what we lost in the stock market, we could always work at Starbucks, Wal-Mart, etc. Retailers weren't hiring around here this season. Today I noticed that the Atlanta newspaper, which had about ten pages of classified ads years ago, now has about two....it looked more like the classified section of a small town than a major metropolitan area.
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Old 12-07-2008, 01:46 PM   #14
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Anyway, an old person "getting" a job anytime they wish seems more like a dream than a reality.
Maybe. But someone who is retired already -- especially if they have other retirement income (from personal savings, Social Security and/or pensions)) -- they may be able to take some of the part-time/no benefits jobs that are out there which many job seekers aren't able to seriously consider.

There's a difference between needing (say) an extra $10,000 to slow the burn of retirement savings and needing a job to furnish 100% of your income and benefits. The former have many more opportunities to find work, even in a crummy economy.
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Old 12-07-2008, 01:57 PM   #15
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-- they may be able to take some of the part-time/no benefits jobs that are out there which many job seekers aren't able to seriously consider.

Hmmmm. I doubt very much that pool is very big... or deep. Still thinking dream world.
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Old 12-07-2008, 02:02 PM   #16
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Hmmmm. I doubt very much that pool is very big... or deep. Still thinking dream world.
You don't think there are a lot of part-time jobs out there? In really bad economies, when jobs do appear, these tend to be the ones that are most available. Employers are often hesitant to hire full-timers in an economy like this.
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Old 12-07-2008, 02:17 PM   #17
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Assuming you can know the true valuation and if you assume that periods of low valuation are followed by periods of higher valuation, then that article is another way of saying that if the market goes up soon after you retire you will have a better success rate.

The same flaws I suggested in this thread:

Timing Your Retirement

apply. This is, someone who has X dollars during a period of low valuation is richer than someone who has the same X dollars during a period of high valuation.
Friday morning while "cocooning" during an actual poisionous gas release that was happening ,a colleague asked if I was still planning to RE end of next year with the way the stock market had been. My reply was that I was more certain than ever because I had run the numbers and even with my savings reduced by 20% this year I was still able to do it comfortably.

He seemed to understand when I told him that if I was able to RE now, after this last year of big losses, then I had less risk than if I had the same stash following several bull years. I also mentioned the fact that the risk of being enveloped in poisionous gases was also a lot less after I had RE'ed
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Old 12-07-2008, 02:24 PM   #18
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Today I noticed that the Atlanta newspaper, which had about ten pages of classified ads years ago, now has about two....it looked more like the classified section of a small town than a major metropolitan area.
Don't confuse newspaper ad lineage with the state of the economy.

Craigslist and other local boards are where people look for jobs & resales now. I can't remember the last time I placed a free classified ad in a newspaper, let alone paid them for one, but I'm pretty sure it was during the last millenium...

Whatever you're selling or seeking (use your imagination) you'll be able to find the customers & products on Craigslist.

http://atlanta.craigslist.org/
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Old 12-08-2008, 10:14 AM   #19
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All I know is that the last couple of years I felt so comfortable because I could live well enough on a 3% WR. It was really disappointing to see what a 3% draw has dwindled down to now.

Then I realized! Hey, I'm still allowed to do a 4% WR. Well, we're OK then! Not so bad.

Besides, I don't need to even think about withdrawals from my retirement portfolio until 2011.

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Old 12-08-2008, 03:11 PM   #20
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My math has never been advanced but here are the numbers I come up with: start with my portfolio value on the day I retired times 4% = $xx. Now if I subtract 25%-30% from that original portfolio value, I can get very close to the same $xx number at a 5.3%-5.7% withdrawal. Is this just another way of saying that the 4% method works?
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