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Old 07-08-2010, 08:15 PM   #21
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Old 07-08-2010, 09:56 PM   #22
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I was thinking along those lines:


Now I think that Scott is right that traditional SWRs for longer retirements might need to be revised downward (I never said he was wrong by the way). Traditionally, a 3% SWR should be good enough for a 40-50 year retirement. But a 3% SWR means that you only have about 33 x annual expenses saved up, so you need strong real returns to stretch your money for 40-50 years. If you don't have strong real returns, then your SWR will have to plunge to 2.5% or even 2% in order to make it work.
It has been documented the "lowest" SWR for any 40-50 year portfolio is 3.1%. This is based on a study linked here a few months back.

Study was detailed enough to even so far as it does not matter what the allocation is (80% equity or 20% equity or 40% or 60%) that the success rates were all the same with 3.1% SWR over 40 year periods (meaning when making portfolio last that long, SWR matters, allocation does not).

My take then is when I see someone suggest a SWR of 2-2.5% that more thought is needed, because other studies have shown lowest SWR needed is 3.1% (regardless of allocation).
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Old 07-08-2010, 10:18 PM   #23
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It has been documented the "lowest" SWR for any 40-50 year portfolio is 3.1%. This is based on a study linked here a few months back.

Study was detailed enough to even so far as it does not matter what the allocation is (80% equity or 20% equity or 40% or 60%) that the success rates were all the same with 3.1% SWR over 40 year periods (meaning when making portfolio last that long, SWR matters, allocation does not).

My take then is when I see someone suggest a SWR of 2-2.5% that more thought is needed, because other studies have shown lowest SWR needed is 3.1% (regardless of allocation).
You seem to believe that this study can accurately forecast the future when in fact it is based on past market performance. Read again what I wrote:

Quote:
But a 3% SWR means that you only have about 33 x annual expenses saved up, so you need strong real returns to stretch your money for 40-50 years. If you don't have strong real returns, then your SWR will have to plunge to 2.5% or even 2% in order to make it work.
All the study shows is that, in the past, real returns were strong enough to support a 3.1% SWR for at least 40 years. How can you be so sure that real returns will continue to support such as high SWR in the future? What I said above is that if future real returns are lower than past real returns, then a 3.1% SWR is too optimistic. Can you prove me wrong?
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Old 07-09-2010, 03:39 AM   #24
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All the study shows is that, in the past, real returns were strong enough to support a 3.1% SWR for at least 40 years. How can you be so sure that real returns will continue to support such as high SWR in the future? What I said above is that if future real returns are lower than past real returns, then a 3.1% SWR is too optimistic. Can you prove me wrong?
My bold.

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Old 07-09-2010, 08:32 AM   #25
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There's a lively discussion over at Bogleheads on this article, for those interested. Bogleheads :: View topic - Safe Withdrawal Rate May be Changing

IMHO The 4% withdrawal rate is more at risk from high volatility than low returns.
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Old 07-09-2010, 09:04 AM   #26
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The ever shrinking SWR must have a floor. After all, a 4% SWR requires to accumulate 25 x annual living expenses, so even with a long period of real returns at 0%, one's money should last at least 25 years,
That's a good point, but it's true only if the real returns have a floor. But real return could be less than zero. Also, even with a real return of zero, volatility might make the stash last less than 25 years.
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Old 07-09-2010, 09:15 AM   #27
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That's a good point, but it's true only if the real returns have a floor. But real return could be less than zero. Also, even with a real return of zero, volatility might make the stash last less than 25 years.
If you use TIPS, you do put a floor under real returns, since TIPS guarantee that your real return will be at least positive. And when using TIPS, as I explained above, volatility is irrelevant since you hold them to maturity. Now if you have a traditional stock/bonds portfolio, then you are right, nothing is guaranteed.
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Old 07-09-2010, 09:21 AM   #28
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My bold.

The world will end next week! Can you prove me wrong today?
Surely, as a man with a science degree, you do see a difference between your example and mine. My assertion (that lower real returns in the future would not support a 3.1% SWR) can be proven right or wrong mathematically. A simple excel spreadsheet for example will show you that, on average, you need an annual real return of at least 1% (with zero volatility) for a 3.1% SWR to be viable over a 40-year period.

That real return would have to be, on average, at least 2% per year for a 3.1% SWR to be viable over a 50-year period. If annual real returns are only 1% on average over the next 50-year period, then your SWR would have to drop to 2.5% for your portfolio to survive at least 50 years.
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Old 07-09-2010, 09:25 AM   #29
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Here's a summary of the article in four words:

Things are different now.
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Old 07-09-2010, 10:04 AM   #30
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Here's a summary of the article in four words:

Things are different now.
Good summary.

But aren't things always different?
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Old 07-09-2010, 10:43 AM   #31
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If real return is zero, this is equivalent to zero inflation with zero returns. Then if you draw out 1/25th of your money every year, it will last 25 years.

Peter
For those of us above the zero fed + state income tax level, adjustments must be made. A real pretax return of zero = a negative real return after taxes.
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Old 07-09-2010, 11:00 AM   #32
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I was not impressed by his article. It struck me as nothing but yet another "publish or perish" quality writing.

The question is always, "What can you do about it?" "What are your alternatives----and how many of them are real?"

If the future is going to be crappy with real returns much much lower than the historical returns, then we are in a world of hurt. But you know what? The financial/investment market isn't a world isolated to itself. If thngs are bad there, that's because things are bad in the entire economy. So there will be nowhere to hide. Lowering your SWR to 2% or 3% isn't going to keep you safe----it's just going to keep you going a little bit longer before you crash.

The primary thesis of his article is "Things are different now." But this is the biggest & most common economic fallacy there is. As long as human nature is human nature, then things are NEVER different now.
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Old 07-09-2010, 11:16 AM   #33
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For those of us above the zero fed + state income tax level, adjustments must be made. A real pretax return of zero = a negative real return after taxes.
Your SWR includes taxes paid on your investments. So makes no difference to the SWR scenario.

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Old 07-09-2010, 11:18 AM   #34
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Surely, as a man with a science degree, you do see a difference between your example and mine. My assertion (that lower real returns in the future would not support a 3.1% SWR) can be proven right or wrong mathematically. A simple excel spreadsheet for example will show you that, on average, you need an annual real return of at least 1% (with zero volatility) for a 3.1% SWR to be viable over a 40-year period.

That real return would have to be, on average, at least 2% per year for a 3.1% SWR to be viable over a 50-year period. If annual real returns are only 1% on average over the next 50-year period, then your SWR would have to drop to 2.5% for your portfolio to survive at least 50 years.
Although I assume your math is correct, basing your analysis on "average" returns makes it meaningless. The sequence of annual returns over the period is key and must not be ignored.

The examples you give have never even come close to occuring historically and I'm betting never appear in the future either.

edit: you do mention "zero volatility" so apparently you're aware of the unlikelyhood of your numbers ever coming to bear in reality. But for others..... You can't work with average returns unless you're expecting future returns to be the same year after year after year. Sequence counts.
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Old 07-09-2010, 11:28 AM   #35
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Your SWR includes taxes paid on your investments. So makes no difference to the SWR scenario.

Audrey
Ahhhh..... No. SWR is an estimate, based on historical investment return and inflation rates over a given time period, that does not include taxes.

Perhaps we're talking apples and oranges. My comment refered to real rates of return. In a zero real rate of return environment (returns = inflation), reducing the pre-tax return by the amount it is taxed (specific to you) will drive your apparent return negative.
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Old 07-09-2010, 11:41 AM   #36
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Ahhhh..... No. SWR is an estimate, based on historical investment return and inflation rates over a given time period, that does not include taxes.

Perhaps we're talking apples and oranges. My comment refered to real rates of return. In a zero real rate of return environment (returns = inflation), reducing the pre-tax return by the amount it is taxed (specific to you) will drive your apparent return negative.
To stay within your selected SWR, all taxes on the portfolio or other tax expenses must come out of your SWR, otherwise you are actually withdrawing at a higher rate. Taxes are considered part of your expenses in all the SWR models. To say SWR does not include taxes is incorrect.

In a zero real return environment, your 4% withdrawal will still last you 25 years because you are paying your taxes out of that 4% withdrawal.

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Old 07-09-2010, 12:01 PM   #37
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To stay within your selected SWR, all taxes on the portfolio or other tax expenses must come out of your SWR, otherwise you are actually withdrawing at a higher rate. Taxes are considered part of your expenses in all the SWR models. To say SWR does not include taxes is incorrect.

In a zero real return environment, your 4% withdrawal will still last you 25 years because you are paying your taxes out of that 4% withdrawal.

Audrey
We seem to have two subjects here.

1. My original comments refered to income taxes reducing a zero real return to negative. This was without reference to SWR, which you added.

2. Taxes and SWR. The way I look at it Audrey, if I'm using a 4% SWR for my annual withdrawal, I withdraw $40k out of $1MM. I then include taxes as a budget item in spending the $40k.

In my thinking return (real or nominal) and SWR are NOT the same thing and I don't use them interchangably.
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Old 07-09-2010, 12:57 PM   #38
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This is my route. If things go consistently poorly I guess you could end up pretty bare bones but what is the alternative - never retiring?
That seems to be the attitude of so many journalists these days. The best way to "master your retirement" is ... to keep working! Till you're 70! Till you're 80! Never mind that half of America is ready to blow their brains out every Sunday night.

This isn't really a comment on Scott Burns' article. He's maybe my favorite financial writer.
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Old 07-09-2010, 12:58 PM   #39
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We seem to have two subjects here.

1. My original comments refered to income taxes reducing a zero real return to negative. This was without reference to SWR, which you added.

2. Taxes and SWR. The way I look at it Audrey, if I'm using a 4% SWR for my annual withdrawal, I withdraw $40k out of $1MM. I then include taxes as a budget item in spending the $40k.

In my thinking return (real or nominal) and SWR are NOT the same thing and I don't use them interchangably.
I assumed you were referring to SWR since SWR in low return environments is the subject of this thread and the zero real return example was referring to SWR.

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Old 07-09-2010, 01:22 PM   #40
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I assumed you were referring to SWR since SWR in low return environments is the subject of this thread and the zero real return example was referring to SWR.

Audrey

OK. No problem.
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