USA Today article on SWR

[Ready]

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.

 

[W2R]

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.

 

[H2ODude]

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.

 

[ER Eddie]

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.

 

[Independent]

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.

 

[tuixiu]

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.

 

[MooreBonds]

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!

 

[Focus]

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?

 

[Ready]

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.

 

[pb4uski]

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.

 

[Buckeye]

+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.

 

[mathjak107]

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.

 

[ERD50]

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

 

[Shawn]

+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.

 

[utrecht]

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%?

 

[NW-Bound]

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.

 

[GoodWishes]

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.

 

[ERD50]

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%?

Yes.

-ERD50

 

[ERD50]

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) ?

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

 

[siamond]

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.

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.

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.

 

[REWahoo]

Whatever the base number nowadays, I'd love to hear a 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 realistic 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...

This topic has been under discussion for centuries. See The Quest for the Holy Grail

 

[siamond]

This topic has been under discussion for centuries. See The Quest for the Holy Grail

All right, touché!

(although you have to acknowledge that the holy grail is often viewed as something oh-so-simple, just a basic cup made in wood...)

 

[utrecht]

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) ?



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

Sorry, I thought you meant the portfolio took a 50% haircut due to market losses alone. You are talking about including withdrawals, right?

 

[ERD50]

Sorry, I thought you meant the portfolio took a 50% haircut due to market losses alone. You are talking about including withdrawals, right?

Right, that example was with the 4% WR.

If you have a portfolio, and you don't make any withdrawals, does it make a sound when it crashes?


But to humor you, here's a run with no withdrawals - I limited to 5 years, as that is where the trough appeared on a 30 year run, so I could get an ending portfolio number. The two year dip is close. Yikes! :

FIRECalc: A different kind of retirement calculator

No drops of 50%, but:

Here is how your portfolio would have fared in each of the 136 cycles. The lowest ... portfolio balance throughout your retirement was $610,198 ...

pretty close.

I hope I didn't offend with my earlier response, I was just having a little fun. Data runs get pretty dry.


-ERD50

 

[urn2bfree]

http://cornerstonewealthadvisors.com/files/08-06_WebsiteArticle.pdf

Basically creates "financial guard rails" for withdrawals, capping Inflation increases at 6%, lowering withdrawals if the WR rises more than 20% above the original and increasing when WR drops more than 20% of the original. This is some heavy going, a fairly technical paper, but worth reading.
As I understand it if you start with a 4% WR and sometime later the inflation adjusted amount and the size of your portfolio makes the actual WR either over 4.8% or under 3.2% would mean you would NOT take that amount but would,lower it by 10%, or increase it, respectively.