What SWR% would you suggest?

[Rich_in_Tampa]

Not sure I understand the OP's focus on SWR. I'd focus first on what kind of lifestyle would make you happy and what expenses would it take to meet that goal?

Given those priorities, the SWR would reflect how great a chance you are willing to accept that you will run out of money and therefore how much you need to save.

Focusing on the SWR primarily is upside down to me.

[Spanky]

I think he wants to know if he should pursue a 2% SWR (for added safety/insurance) even though a 4% SWR would support his lifestyle fully.

[curanderotk]

I tend to agree with #20. Instead of taking the time to figure if you can "live" on
2-3-4% SWR. I believe it would take the same amount of energy, and would probably result in a higher quality of life, to sit down and add up, the actual
dollar amounts needed. Look at the real costs that one needs to survive happily on a daily,weekly,monthly or annual basis, then add 10-15% cushion onto that, for fun and emergencies. Once you have a realization of true costs, for the type and quality life you,your spouse and family are ready to accept, you can compare your annual dollar needs to your total Nest-Egg capital, and surmise more maturely
whether your SWR should be 2 or 3 or 4%...Living for 30-50 years counting every single penny...seems to lose its luster for me...I would rather find an interesting part-time/full-time job, that I enjoyed...and have a good time enjoying life...
Only another humble opinion...and in no way a criticism of your own life-style
planning...for all I know, you may already have done the numbers...
Good luck and warmest wishes...
Curanderotk

[TargaDave]

Originally Posted by wab

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

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


Here is my novice calculation on all this. For a given annual expense budget (I wouldn't squeeze it down), a 2% WR requires twice the stash as 4%. How long does it take to double a portfolio? [Example from simple comp interest calc: $1M stash, 6.5% avg annual gain, $50k added per year ==> 7 yrs to $2M]. I realize this is a gross over simplification given the uncertainties, but you can get a reasonable idea of the time it might take to get to that extra SWR comfort level for your particular #'s.

If it was me; bail at ~2.5% WR and fill in with part time work so total income is greater than the planned budget. Perhaps one spouse with a job that could qualify for a group plan. You'd have several different safety valves available as "3-yrs-to-go" mentioned. I think that a part time work schedule would work well if your kids are still in school with their own structured schedules . The WR and work hours could be tweekable. You could always jump off (or retreat) from there. Good luck.

[jIMOh]

Originally Posted by firewhen

Consider this scenario:

- middle aged with young children (and the typical expenses that entails)
- no sources of income except what will be generated from portfolio (dividends/selling investments) and whatever SS will pay 2 decades from now
- no health care benefits (will need to self-pay for private family coverage)
- potentially could be in retirement for 50 years, without any possible advances in longevity between now and then

So there is no safety net whatsoever besides our investments.

Through LBYM, 2 incomes living as cheaply as one, etc., our portfolio is already able to fund 4%, probably even 3% depending on what future expenses turn out to be.

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.

Thoughts?

I'd look for 4 25% legs to sustain income stream, each with different functions/features.

1) I would look for 25% of income needed from TIPS (~2% yield). The pro is this stream is "indexed to inflation". The con is the real return is quite low (relative to alternatives).

2) I would look for 25% of income needed from dividends. Dividends tend to go up faster than inflation historically. Plan for a 2% yield and live off the 2% (for the 25%)... any yield above 2% reinvest.

3) bonds/money markets. I would suggest 25% of income come from bonds and money market instruments. This stream of income is constant. Could even be an annuity (immediate annuity). Not indexed for inflation, but a guaranteed stream of income which does not go away.

4) growth of principal (stocks). I would suggest 25% of the portfolio be well diversified. This portion would be "drawn down", so with this portion, I would look for a 4% SWR.


I would then "work backwards" to build this. FOR EXAMPLE If you need 60k to live on (60k is an assumption), 15k needs to come from each "leg". 15k from TIPS (yielding 2%) is $750,000. 15k from dividends suggests another $750,000. 15k from an immediate annuity would have another cost ($500,000??) and 15k from a diversified portfolio is $375,000.

SS adds a fifth leg once you reach normal retirement age.

[Sparky]

Originally Posted by wab

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]

Originally Posted by TargaDave

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]

Originally Posted by wab

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]

Originally Posted by FIRE'd@51

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]

Originally Posted by firewhen

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/articl...p1201-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]

Originally Posted by 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/articl...p1201-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!