What SWR% would you suggest?

[Sparky]

Two advantages to EER:

1) Health care expenses are fairly low while you're young (we're paying about $300/mo for a family of 3 w/HSA).

2) You're young enough that you can more easily rejoin the rat race workforce than somebody who retires at, say, 65.

While the long-term risks are potentially high, recovery from early failure is relatively easy. I started out with a 50-year retirement. Yikes! But now that I'm 5 years into it, it's only a 45-more-years retirement and my portfolio has grown enough to give me a larger margin of safety. Amazing how that works, eh?

That's true!

We bailed 4-5 years ago in our early 40s and got a catastrophic (5K deductible) health insurance policy that is now $220 per month for 2. The issue at this time is qualifying for such a plan - if you are significantly oveweight or have had cancer, it's tough to get. However, once you are in, I believe that they cannot drop you.

Another thing to consider (if you don't care about leaving the house to the kids) is a reverse mortgage after you turn 62 - that's like another pension. So between whatever SS is, a reverse mortgage and your investments, you should be okay.

That's our plan.

 

[tryan]

This is turning into SWR limbo .... HOW LOW CAN YOU GO! Got 4% .... do I hear 3% ... got 3 now go to 2.5 ... then 2%!

4% is 100% safe ... what's the problem?

IF we hit a depression ... go back to work. Not because you need the money (4% is 100% safe) but because you'll need the peice of mind.

Point being, there are MANY other "events" which can end your retirement besides a market crash: divorce, healthcare crisis, uninsured losses (terrorist attack, flood ...). If you "worry" about all this stuff you'll simply NEVER RETIRE. So just KEEP WORKING.

 

[wabmester]

Wab, Is that just insurance cost or total expense including all deductables and out-of-pocket?

The $300/mo is just the insurance premium. Deductible is $3200 for the entire family. Coverage is generally 80%. Even assuming you're out the entire deductible in a year (unlikely unless you break your wrist roller-skating or something), the total out-of-pocket is a managable expense.

Nobody knows what the future will bring of course, but if insurance costs go wild, I'd expect blood in the streets and reform measures flying through congress pretty quickly.

 

[FIRE'd@51]

The $300/mo is just the insurance premium. Deductible is $3200 for the entire family. Coverage is generally 80%. Even assuming you're out the entire deductible in a year (unlikely unless you break your wrist roller-skating or something), the total out-of-pocket is a managable expense.

Nobody knows what the future will bring of course, but if insurance costs go wild, I'd expect blood in the streets and reform measures flying through congress pretty quickly.

Is there an out-of-pocket maximum (excluding the deductible), or are you on the hook for 20% of the total expenses?

 

[wabmester]

Is there an out-of-pocket maximum (excluding the deductible), or are you on the hook for 20% of the total expenses?

Max out-of-pocket is $5000/individual and $10,000/family, including deductible.

 

[Sam]

I am shooting for 2%. Given the above, would you chance 3 or 4%? Firecalc says yes. If portfolio falters, or expenses creep, could be faced with hard choices, when w*rking a while longer when still at a relatively youthful age would have prevented all that.

Should your SWR be related to your portfolio allocation? 2% might be risky if all you hold is cash.

 

[firewhen]

Again, thanks everyone. I will answer a few of the questions/comments:

I have a good feel for our annual expenses, with some cushions for home repairs, etc.
Taking this annual amount, the question becomes how large a portfolio to support that expenditure, and that is where the SWR rate comes in. As Sam says, the underlying investments make a big difference.

One of our problems is that living in NJ, this is a guaranteed insurance state, in that everyone can get access to health insurance, despite any risk factors, but because all comers are enrolled, the rates are very high. I believe HSA-eligible policies are not even offered here. Most family policies here are upwards of $1,000 per month, even with large deductibles and copays. A strategy would be to move to another state while we are younger and healthy, but come back if we are ever dropped by an insurer if our health turns and get the guaranteed insurance here. Of course, moving because I decide to quit w*rk and lose insurance might be a hard one for the rest of the family to swallow.

At the end of the day, knowing I have a substantial cushion takes some of the edge off the issues/disappointments at w*rk, since who really cares anyway. I am just trying to add to the nestegg for awhile longer, and with a good market, this might not be that much longer anyway.

To tryan's point, if I do reach the 2%, I hope I do not come up with some scenario to keep me going. I have already promised myself that I would not.

 

[JJac]

If you can get to a 1.6% swr, you could put it all in the S&P500 and let it ride. You can just live off the dividends

 

[tryan]

... do I hear 1.5% ??

 

[rmark]

Just divide your portfolio over your IRS life expectancy.

 

[perinova]

Since you are considering ER you will want the highest SWR ou can come up with. Sure you can retire with 1.5% but that won't be ER.

4% shows it will work for whatever time you will need. It doesn't mean that there won't be risk involved but that will be ER. Some people consider 4% not quite as safe and go down to 3.5% for very long retirement.

I suggest you search threads where we talked about withdrawal schemes like hybrid withdrawals (inflation adjusted and portoflio adjusted). Those scheme have a higher safety than the variable withdrawal plan while still providing a higher possible income than the fixed inflation adjusted withdrawl scheme.

 

[sidney]

"4% is 100% safe ... what's the problem?"

There are many studies that show that with 4-4.5% the probability of running out of money is > 0. Here is one:

http://www.fpanet.org/journal/articles/2001_Issues/jfp1201-art6.cfm

90% equity is very risk. Look at the bear market of the 1970s if you have any thoughts that you can't lose over half your net equity position.

 

[jIMOh]

"4% is 100% safe ... what's the problem?"

There are many studies that show that with 4-4.5% the probability of running out of money is > 0. Here is one:

http://www.fpanet.org/journal/articles/2001_Issues/jfp1201-art6.cfm

90% equity is very risk. Look at the bear market of the 1970s if you have any thoughts that you can't lose over half your net equity position.

The trinity study, which is where the 4% SWR comes from, is based on a 60-40 portfolio over history.

 

[tryan]

with 4-4.5% the probability of running out of money is > 0.

The point I was trying to make was striving for anything near 0 is analysis paralysis considering your retirement will MORE LIKELY be de-railed by: divorce, a health care crisis, or unsinsured loss. Running out of $$ is the easiest of these to fix simply get a job!

 

[REWahoo]

Running out of $$ is the easiest of these to fix simply get a job!

Not such an easy/simple fix if you happen to run out of money at age 80 or so...

 

[tryan]

good point, I am keeping a reverse mortgage as my final debt and safety net.

 

[Running_Man]

A 3.5 % withdrawl rate should be safe come hell or high water. Nothing is absolutely certain but if you can comfortably fit your spend in that and not just the bare minimum, there should never be a reason to look back from there.

The number of possibilities that exist that would make a 3.5% withdrawl rate fail yet a 2% withdrawl rate succeed must be much lower than the instances where both the 2% and 3.5% withdrawl rate will fail. (See Early Russian Retirees from 1917 or the Early American Indian retirees of the late 19th century )

 

[Gone4Good]

That's the main reason that you do not want to have a 100% concentrated equity portfolio. I do not think a properly designed diversified portfolio can suffer a 50% decline.

It can in real purchasing power, which is what you really care about. At a 4% inflation adjusted withdrawal rate a retiree in 1966 with a 60/40 equity/bond mix would have the real purchasing power of his portfolio cut 60% by 1980. If that guy was 45 when he retired, he'd be thinking about taking some pretty drastic steps to make sure the portfolio survived another 40 years or so.

 

[Gone4Good]

Not such an easy/simple fix if you happen to run out of money at age 80 or so...

Or you're 10 years out of work and the unemployment rate is 8%+

 

[unclemick]

Hmmm - I suppose one 'could' consider getting back to old time religion:

De Gaul and the Norwegian widow.

Toss the 4% studies/spreadsheets/computers and any thought of raises/chasing some mythical inflation number over time.

Read appendix 1(I think) of the 4th edition 'The Intelligent Investor' and see if you can avoid 'Magic, Mystery and Manipulation' and grasp Ben Graham's "the middle way" - 100% stocks with neither too high or too low a dividend and just the 'right' amount of dividend growth.

heh heh heh - just kidding of course - we're all hooked on computers/spreadsheets/studies - right?
Not to mention those pesky hormones. :, , 8).

 

[kat]

What SWR? I'm going with 3% at age 44, which happens to fit the divs/interest distributions in my taxable account. Going to take more, using Gummy's sensible withdrawal method, half of whatever is over inflation in good years when I want a better vacation or need a new roof.

 

[sgeeeee]

I'm not sure what analysis leads you to a 2% SWR. Are you hoping to leave a lot of money to heirs? Are you investing only in fixed income investments?

Any number below 3% for a 50 year retirement is definately worse than anything we've seen historically and worse than any historical extrapolation based on shorter periods. If you look at an appropriately diversified portfolio historically, you can easily justify using a 3.5% withdrawal rate for a 50 year retirement. If you really plan on using a 2% SWR, you might consider going all TIPS or I-bonds. If we don't see significant inflation, a 2% withdrawal rate could almost allow you to get away with burrying your money in jars in the back yard.

One thing to consider when looking at longer retirements, is that SWR has not been a linear function of retirement years. For retirements longer than about 25 years, each incremental reduction in spending results in significant increases in years that a portfolio will last. Historically, the SWR asymptotically approaches a value of 3% to 3.5% (depending on asset mix) for long retirements. Going below that in the past simply led to massive accumulation of portfolio value.

Of course you can always assume that the future will be worse than anything we've ever faced in the past. If you start with that assumption, I don't know how to estimate a SWR.

 

[firewhen]

Sgeeeee,

I posted this below last month. Assuming what I did in excel was accurate, I came up with a 3% SWR eventually failing without a truly drastic scenario, though it took 45 years, and not factoring in any Social Security. From this I would say 3% looks almost fool-proof. The different opinions were interesting, and I was glad to see that not everyone believes 4% is the lowest SWR. How did I come up with 2%? For now, that is pretty close to the dividend yield, so even if the market's gains only keep pace with inflation, one could live off the dividends in real terms and not lose any buying power over the long haul.

22 General / FIRE and Money / Re: Are you to chicken to RE? on: March 11, 2007, 10:51:25 PM
I was playing around in excel, and obviously this is nowhere near as complicated or robust as others have come up with in their models, but this is what I found:

Retire day 1 and stock market falls by 10% per year while still maintaining original 3% SWR amount and growing that by 3% for inflation. By the 5th year, portfolio lost about 55% of value and SWR equals over 7% of current portfolio. For next 5 years, stock market bounces back at 20% per year, as often good years are followed by bad and portfolio is back to 87% of original value (though granted it is worth less than 10 years before plus affects of inflation) and SWR is back to about 4.5%. After that market returns are 10%. By 30th year, portfolio tripled from its original value and SWR equals 2.3%.

This shows that even after retiring into one of the worst markets downturns 3% is safe. Change the above and assume after 5 years the market goes up by 10% per year and not 20%. What a difference!
After 10 years portfolio at 50% of original value and SWR at 7.6%. At 30 years SWR is over 11% and portfolio is exhausted after 45 years.

But the second scenario is pessimistic. It assumes the market returns 4% per year on average over 18 years. All this shows that mathematically you can come up with a busted plan even using a conservative withdrawal rate. But we would have to experience terrible returns, and the portfolio still lasted 45 years with the SWR remaining constant in real terms (with 3% inflation adjustment each year).

A final point, as the SWR rate gets low enough, it could be possible to live off dividends, and never touch the original portfolio, though dividends could be cut over time as stock prices fall.

 

[haha]

The point I was trying to make was striving for anything near 0 is analysis paralysis considering your retirement will MORE LIKELY be de-railed by: divorce, a health care crisis, or unsinsured loss. Running out of $$ is the easiest of these to fix simply get a job!

This is an underappreciated fact. I wonder how many of us would be shot right out of the saddle by a divorce? And which is statistically more likely in America, a divorce or a 15 year grinding stagflationary bear market?

All it takes is a few drinks with an attractive acquaintance, followed by a visit with the beast with eight legs, followed by spousal discovery and bang! I hope you remembered to keep your job skills up.

Ha

 

[Alan]

This is an underappreciated fact. I wonder how many of us would be shot right out of the saddle by a divorce? And which is statistically more likely in America, a divorce or a 15 year grinding stagflationary bear market?

All it takes is a few drinks with an attractive acquaintance, followed by a visit with the beast with eight legs, followed by spousal discovery and bang! I hope you remembered to keep your job skills up.

The "beast with eight legs". This is a new one for me - care to explain the reference unless it breaks the forum's rules of decorum 8)

Your point is absolutely right in my opinion. When I made my "secondment" permanent back in '92 and joined the US payroll system of my Megacorp, my manager gave me some advice I always remember. He made sure that HR had explained the 401(k) scheme to me and said that the only reason that many long term employees don't become millionaires is divorce. He said that he was blessed that he and his wife had remained happily married for 25 years and raised 2 daughters. Even with weddings, college fees etc, he attributed his wealth and ability to retire early due to his strong marriage.