Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
USA Today article on SWR
Old 07-19-2013, 10:58 AM   #1
Thinks s/he gets paid by the post
Ready's Avatar
 
Join Date: Mar 2013
Location: Southern California
Posts: 1,822
USA Today article on SWR

I found an interesting article on SWR rates today on USA Today:

3%? 4%? 5%? How much to take for retirement

It takes the position that a 4% SWR is conservative, and those who argue it should be closer to 3% are going to leave money behind while being too stingy in enjoying their retirement years. It suggests that 4% is already quite conservative, and you could probably take out more than 4% as long as you don't just blindly keep taking it out even if we have a couple of rough years in the market.

Curious to see what others think of the article. I tend to agree with it, even though I'm more on the conservative side myself.
__________________

__________________
Ready is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-19-2013, 11:06 AM   #2
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,823
I like the article, overall. The author seems to have some common sense and an entertaining writing style.

However, like you, I am a bit more conservative. I remember back in the 90's, people were talking about a retirement withdrawal rate of 6% or more. Then it went down to 5%, then 4%, and lately people have been talking about 3% or less.

So, I think ideas do change over time, and spending flexibility is pretty important in retirement.
__________________

__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is offline   Reply With Quote
Old 07-19-2013, 11:18 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Feb 2012
Posts: 1,102
I'm very conservative and don't come near to 4, or even 3%. That said, I tend to agree with the article. People who have a good deal of fiscal sense and CAN retire early tend to be conservative in their approach to things like SWR IMO. That would be most of us. However, I really do believe a lot of us will leave a fair amount of assets as we depart. We all seem to focus on the worst case scenario and plan for that. If it's what makes you comfortable, fine. I use the FIDO calculator and have to remind myself that it spits out numbers based on 90% success. In other words, there's an 9 in 10 chance I'll leave a lot. A whole lot if you look at the 50% probability.
__________________
H2ODude is offline   Reply With Quote
Old 07-19-2013, 12:48 PM   #4
Full time employment: Posting here.
ER Eddie's Avatar
 
Join Date: Mar 2013
Posts: 721
Good read, thank you. It boosted my confidence in the standard 4% recommendation. I'm not financially savvy enough to comment, but if he's right that the 3% projections are based on assumption that bond rates will continue to be as low as they are today...well, frankly, that seems a little stupid, even to someone non-financially savvy such as myself.

He's also right that a lot of people will not take the inflation adjustment that is figured in to SWD. I doubt I will.
__________________
ER Eddie is offline   Reply With Quote
Old 07-19-2013, 01:40 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,811
Easy read and hits the high points. He makes the good point that the 4% rule generally assumes a 30 year life span. For "ordinary" people retiring at 65, this is already conservative, so the rule combines a conservative lifespan with a conservative investment return.

He flubs on SS. He should have mentioned that you can defer SS and that's usually a better deal than buying a private SPIA.

And, I'm always cautious about lines like this:

"Given the low returns from bonds the 10-year T-note yields a miserly 2.5% some academics have suggested lowering the initial withdrawal rate to 3%. There are two problems with that. The first is that rates probably won't stay this low forever. .."

So interest rates go up, how much of a benefit is that for retirees? I just bought that 10 year Treas yielding 2.5%. Rates go up to 4.5% and the market price of my bond drops by 16%. I lose money if I sell, and if I hold I still earn 2.5% on my initial balance.

My benefit from raising rates (which may be driven by rising CPI) depends on the duration of my bond portfolio.
__________________
Independent is offline   Reply With Quote
Old 07-19-2013, 03:59 PM   #6
Full time employment: Posting here.
 
Join Date: Feb 2008
Posts: 920
I saw that this morning as well, and appreciated the point that 4% is not an autopilot impossible to change scenario. Most fail cases are fairly obvious early on in distribution phase and I certainly wouldn't continue blindly pushing forward with an inflation adjusted 4% if I suffered significant losses early into retirement.
__________________
tuixiu is offline   Reply With Quote
Old 07-20-2013, 11:05 AM   #7
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Quote:
Originally Posted by Ready View Post
It takes the position that a 4% SWR is conservative, and those who argue it should be closer to 3% are going to leave money behind while being too stingy in enjoying their retirement years. It suggests that 4% is already quite conservative, and you could probably take out more than 4% as long as you don't just blindly keep taking it out even if we have a couple of rough years in the market.

Curious to see what others think of the article. I tend to agree with it, even though I'm more on the conservative side myself.
I always find it interesting that people who prefer an 'iron-grip' safety net (like myself) and who plan for high 2%/low 3% initial withdrawal rates are chastised for 'guaranteeing to leave money on the table', rather than using a 4% (or slightly higher) WR and then cutting back if need be.

For those who are assuming an initial 2%/3% WR, don't you think we'll be just as adjustable in 5-10 years time if we see our portfolios rise substantially above projections, to the point of being able to ratchet up our WRs to a mid-high 3% or over 4%? A WR can be adjusted down as easily as it can be adjusted up. Those who start out with a higher WR and can adjust down aren't the only flexible ones out there!
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 07-20-2013, 01:01 PM   #8
Recycles dryer sheets
Focus's Avatar
 
Join Date: Oct 2009
Posts: 471
Quote:
Originally Posted by MooreBonds View Post
For those who are assuming an initial 2%/3% WR, don't you think we'll be just as adjustable in 5-10 years time if we see our portfolios rise substantially above projections, to the point of being able to ratchet up our WRs to a mid-high 3% or over 4%?
Actually, I don't. It sounds logical, but so much of this is about feeling secure, which is more emotional. For folks who are that cautious (i.e., financially conservative), it's harder to raise the WR than lower it, I think. There's always the possibility of a downturn in the future to plan for, and once you've achieved a lifestyle with the lower WR that you're satisfied with, why take on extra risk by raising it?
__________________
Focus is offline   Reply With Quote
Old 07-20-2013, 01:07 PM   #9
Thinks s/he gets paid by the post
Ready's Avatar
 
Join Date: Mar 2013
Location: Southern California
Posts: 1,822
Quote:
Originally Posted by wishin&hopin View Post
Actually, I don't. It sounds logical, but so much of this is about feeling secure, which is more emotional. For folks who are that cautious (i.e., financially conservative), it's harder to raise the WR than lower it, I think. There's always the possibility of a downturn in the future to plan for, and once you've achieved a lifestyle with the lower WR that you're satisfied with, why take on extra risk by raising it?
My concern is being too overly cautious in my younger years, when I'm capable of being most adventurous and traveling a lot. If I reserve too much of my nest egg for the future, and then my health begins to decline, I may have the means to travel but not the physical ability to do so, and then I think I would regret not spending it while I was healthy enough to enjoy it.
__________________
Ready is offline   Reply With Quote
Old 07-20-2013, 01:10 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
Quote:
Originally Posted by Ready View Post
My concern is being too overly cautious in my younger years, when I'm capable of being most adventurous and traveling a lot. If I reserve too much of my nest egg for the future, and then my health begins to decline, I may have the means to travel but not the physical ability to do so, and then I think I would regret not spending it while I was healthy enough to enjoy it.
+1 It is a delicate balancing act that I fight with myself. I can't see much sense to being old and loaded other than it beats the alternative of being old and poor.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 07-20-2013, 01:36 PM   #11
Thinks s/he gets paid by the post
 
Join Date: May 2006
Location: Largo
Posts: 1,945
Quote:
Originally Posted by pb4uski View Post
+1 It is a delicate balancing act that I fight with myself. I can't see much sense to being old and loaded other than it beats the alternative of being old and poor.
We live in a 55+ apartment community and it's interesting to see how little some of the oldsters spend. This is what I saw with my MIL also who passed at 94.8. Of course, I am seeing those who are capable of living mostly independently in their own apartment although many are getting their meals delivered to their apartment from the Assisted Living portion of our "compound." The meals are $10 each for a salad/soup, entree, side, and desert. Most of the folks get two servings out of the meal so it's very cost effective.
__________________
Buckeye is offline   Reply With Quote
Old 07-20-2013, 01:56 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
I read the article this morning.

The danger is for anyone about to retire we are in uncharted waters.

Never before have equities have been at such high valuations while interest rates are at record lows.

The first 15 years of your retirement determines the course of an entire retirement time frame.

Low rates and high valuations can make for some tough going forward early on.

It used to be if markets fell 15% bonds would make you whole again in about two years.

Thats not going to happen so folks may have to be both very conservative on their swr expectations as well as dynamically adjusting.
__________________
mathjak107 is offline   Reply With Quote
Old 07-20-2013, 02:19 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,255
Quote:
Originally Posted by tiuxiu View Post
I saw that this morning as well, and appreciated the point that 4% is not an autopilot impossible to change scenario. Most fail cases are fairly obvious early on in distribution phase and I certainly wouldn't continue blindly pushing forward with an inflation adjusted 4% if I suffered significant losses early into retirement.
How much would you be willing to cut? How soon? How long? What triggers a change?

If your portfolio drops 50%, like many scenarios in the past have, how much effect will going from 4% to 2% for a few years have?

Have you ever modeled this?

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-20-2013, 06:22 PM   #14
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 398
Quote:
Originally Posted by pb4uski View Post
+1 It is a delicate balancing act that I fight with myself. I can't see much sense to being old and loaded other than it beats the alternative of being old and poor.
I never understood this.

Person A retires with $1M and uses a 4% SWR. The initial withdrawal of $40K/yr provides Person A with a comfortable but far from extravagant retirement lifestyle. Person A prudently spends down the portfolio and has little left at death. Person A is complemented for living a well-planned financially responsible life.

Person B retires with $10M and uses a 0.4% withdrawal rate. At an initial withdrawal of $40K/yr, Person B has an identical retirement lifestyle as Person A. Due to investment growth, Person B has a $50M portfolio at death. These funds are given to family and/or charity. Person B is chastised for being the "richest person in the graveyard," accused of being "stingy and cheap," and is said to have led a life of "deprivation." People constantly told Person B, "you would be happier if you spent more money because you can't take it with you."

Both individuals led identical retirement lifestyles. However, Person A is complimented for living a productive happy life and Person B is criticized for being an unhappy miser. Personally, I'd much rather be Person B than Person A. I do not need to spend all or even most of my money to be happy. More so, the financial security provided by "excess money" would provide significant emotional value.
__________________
Shawn is offline   Reply With Quote
Old 07-20-2013, 06:32 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by ERD50 View Post
How much would you be willing to cut? How soon? How long? What triggers a change?

If your portfolio drops 50%, like many scenarios in the past have, how much effect will going from 4% to 2% for a few years have?

Have you ever modeled this?

-ERD50
Can you name the many times that a 75/25 portfolio dropped 50%?
__________________
utrecht is offline   Reply With Quote
Old 07-20-2013, 06:43 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,388
Quote:
Originally Posted by MooreBonds View Post
For those who are assuming an initial 2%/3% WR, don't you think we'll be just as adjustable in 5-10 years time if we see our portfolios rise substantially above projections, to the point of being able to ratchet up our WRs to a mid-high 3% or over 4%? A WR can be adjusted down as easily as it can be adjusted up. Those who start out with a higher WR and can adjust down aren't the only flexible ones out there!
If one draws 2-3% and is fortunate to see his portfolio rise in a 5-10 year period, he can still draw just the same WR, but of the portfolio present value instead of the original value. That alone provides for a big boost to one living standard. If your portfolio gains 50%, the 3% WR of present value is the same as 4.5% of the initial value. Hog heaven! LBYM is good, even in retirement.

I am spending 3.5% now, mainly because it happens to be exactly what my expenses were when I was still working, but with my children college costs excluded (they are done with school, and have a good job now).

So, no change in living standard for me during the transitioning into ER, but I think I can cut down some if I need to. Stay "agile and hostile", like Unclemick likes to say.
__________________
NW-Bound is offline   Reply With Quote
Old 07-20-2013, 07:28 PM   #17
Recycles dryer sheets
GoodWishes's Avatar
 
Join Date: Jul 2013
Posts: 79
Quote:
Originally Posted by Ready
My concern is being too overly cautious in my younger years, when I'm capable of being most adventurous and traveling a lot. If I reserve too much of my nest egg for the future, and then my health begins to decline, I may have the means to travel but not the physical ability to do so, and then I think I would regret not spending it while I was healthy enough to enjoy it.
+1

My parents retired at their early sixties. They traveled and did all kinds of things with some relatives and friends. They were a little concern back then about spending too much but now they are glad they did it. In their group, one passed away several years ago at 74, one is close to 80 and can't walk any more, most others are not healthy enough to do much traveling.
__________________
GoodWishes is offline   Reply With Quote
Old 07-20-2013, 08:08 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,255
Quote:
Originally Posted by ERD50 View Post
How much would you be willing to cut? How soon? How long? What triggers a change?

If your portfolio drops 50%, like many scenarios in the past have, how much effect will going from 4% to 2% for a few years have?

Have you ever modeled this?

-ERD50
Quote:
Originally Posted by utrecht View Post
Can you name the many times that a 75/25 portfolio dropped 50%?
Yes.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-20-2013, 08:14 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,255
Oh, you probably wanted a more complete answer. How about "35"?

In other terms, how about 68.5% of the time? (edit - reading error on my part, failures were 100-68.5, so 31.5%, or about 1/3 of the time) ?

Quote:
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 35 cycles failed, for a success rate of 68.5%.
More here (this sets the portfolio at 4% spend on a $1M portfolio, 0.18% fees, and a $500,000 'floor' for failure):

FIRECalc: A different kind of retirement calculator

So yes, a 75/25 portfolio has historically dipped below 50% over 2/3rds (edit: about 1/3rd) of the time.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-20-2013, 08:29 PM   #20
Recycles dryer sheets
 
Join Date: Jul 2013
Posts: 108
Quote:
Originally Posted by H2ODude View Post
I'm very conservative and don't come near to 4, or even 3%. That said, I tend to agree with the article. People who have a good deal of fiscal sense and CAN retire early tend to be conservative in their approach to things like SWR IMO. That would be most of us. However, I really do believe a lot of us will leave a fair amount of assets as we depart. We all seem to focus on the worst case scenario and plan for that. If it's what makes you comfortable, fine. I use the FIDO calculator and have to remind myself that it spits out numbers based on 90% success. In other words, there's an 9 in 10 chance I'll leave a lot. A whole lot if you look at the 50% probability.
Quote:
Originally Posted by Ready View Post
My concern is being too overly cautious in my younger years, when I'm capable of being most adventurous and traveling a lot. If I reserve too much of my nest egg for the future, and then my health begins to decline, I may have the means to travel but not the physical ability to do so, and then I think I would regret not spending it while I was healthy enough to enjoy it.
Quote:
Originally Posted by pb4uski View Post
+1 It is a delicate balancing act that I fight with myself. I can't see much sense to being old and loaded other than it beats the alternative of being old and poor.
What a relief to hear you guys express such views. I have a clear sense of discomfort about the whole 4% line of thinking, I had it since the first time I read it. Just planning for the worst might not be the best way to manage one's life, notably when you have precious few years left in it... It might actually be a pretty good way to miss great opportunities... And the 95% formula doesn't ring to me as a proper fix either.

Whatever the starting number nowadays, I'd love to hear a self-adjusting SWR process which is better balanced, something with reasonable protection against bad events (but no extreme paranoia), something benefiting from good events (without betting the farm on it), something sensible compared to the reality of one's life (please don't wildly swing spending from X to 2X or 0.5X within a few years)... I have yet to read it... Advice welcome.

Best quote of the article... If you're really conservative, you didn't run out of money, but you left a lot of retirement joy in the bank.
__________________

__________________
siamond is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 05:56 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.