What's the highest SWR you're comfortable with?

[Focus]

Thought I'd do my first poll. Unless I missed it in my site search, this hasn't been asked in a few years.

 

[John Galt]

i'm dumb and don't know what swr is.

 

[traineeinvestor]

Safe Withdrawl Rate - the rate at which you can deplete your savings without running out of money

Our nest egg will have to last 40+ years so I'm planning on a SWR of zero.

 

[landover]

Safe Withdrawl Rate - the rate at which you can deplete your savings without running out of money

Our nest egg will have to last 40+ years so I'm planning on a SWR of zero.

How is WR defined, Total Expenses/All Assets? I guess present value of pension, free medical etc. should be part of assets and expenses should include full value of free medical etc. SWR is maximum WR which will not deplete assets in one's (or a couple's) lifetime.

 

[CoolChange]

I am tentatively planning to cap my annual spending at 3.5% of my portfolio per year (not 3.5% of initial value adjusted anally for inflation); so, theoretically, my pile should last forever as long as I can stick with this plan.

 

[traineeinvestor]

@landover - since I'm not intending to draw down principal at all, I have not personally gone into this in that level of detail. That said, I have seen advocates look at SWRs based on (i) starting value at commencement of retirement (ii) starting value at commencement of each financial year and (iii) inflation adjusted starting values.

@CoolChange - sounds ok if your returns are 3.5% pa + and you can adjust your spending downwards in years when the markets have not been kind to you (or you are all in TIPs etc). Incidentally, that sounds like a rather painful way of adjusting for inflation

 

[rgarling]

I would go with 5% of the average portfolio value of the previous three years.

Your poll seems to assume x% of your portfolio value at retirement, subsequently adjusted for inflation.

 

[rescueme]

Actually, I can't answer the question, for our situation.

Since I retired at age 59 and my DW planned to do the same (we're the same age), we would have retired without all our retirement income streams being "on-line".

For instance, my wife has two small pensions, which start at age 65.
Our respective SS income is planned at age 62 for DW, 70 for me.

Using a forecast tool such as Fidelity's RIP, which does show year by year portfolio withdrawal rates "guessitimates", it shows a current withdrawal rate of 6.1%, increasing each year to a maximum of 8.52% at age 69.

That's a problem, correct? Actually, no it isn't. At age 70 (when all our income sources are active), the forecast withdrawal rate drops to 2.5%. This is the rate, even though we had a much higher rate during our early years of retirement.

The RIP report goes on to say that it is expected that we won't pass that "magic 4%" till age 88 (4.19%) and even at age 100 - the end of our forecast, our withdrawal rate is at 6.55% - less than the early years of our retirement.

For those that retire and have a pension that starts immediately, along with drawing SS on day one of retirement, that 4% goal might be a good target.

For those that have a slightly different plan - especially for those ER types like us, that 4% means little.

That’s why I say the poll can’t be answered for our situation.

 

[Rich_by_the_Bay]

I am planning on 4.5% but only because I am using the "percent of total portfolio per year" method, rather than the "4% to start, forever after adjusted for inflation" strategy. If I were using the latter I'd choose 4%.

 

[skyvue]

If you have worked 30 years or more does anybody really every "run out of money"? What I mean is even if you deplete all your 401k and other investments, you should still have social security to fall back on. If you defer taking your social security out till the last possible month, that should provide most people enough money to get by on if they are in their 70's?

 

[DoubleDown]

This exactly the plan I am going to use when I retire in 9 years. Keep 3 years of withdrawals in cash and the rest in diversified conservative and moderate mutual funds. Each year move 5% of the portfolio value to the MM or bank account. Then withdraw 1/3 of the value of cash account for living expenses next year.

I would go with 5% of the average portfolio value of the previous three years.

Your poll seems to assume x% of your portfolio value at retirement, subsequently adjusted for inflation.

 

[NW-Bound]

I am planning on 4.5% but only because I am using the "percent of total portfolio per year" method, rather than the "4% to start, forever after adjusted for inflation" strategy. If I were using the latter I'd choose 4%.

When I grow up and stop working for real, I plan to do the same, but will draw 4% of the current portfolio. One never runs out of money this way. But in order to do this, one must know his bare-bone expenses, and hopefully these are low enough to match a portfolio drop of 30-40% like we experienced in 2008-2009.

After last year, I am getting a better feel for that minimum expense level. Oh, I know what we spend on RE taxes, food, utilities. However, it would not be prudent to assume that we can forgo needed home and car repairs, dental work, etc..., in bad years. So far, so good. Our expenses in the past had quite a bit of discretionary spending. Because it varied almost 3 to 1 in past years, we have plenty of room to tighten the belt if needed.

One thing people forget is that as we age, we inevitably spend less. Our parents spend so little. What do people in their 80s and 90s spend their money on? And I may not even last that long. The spending model that assumes that our expenses keep going up with inflation is not realistic.

People will say that, but as we get older medical costs will get higher. I really do not know how one can really budget for that, as that amount can be nearly infinite. A billionaire can spend tens of million to buy the most experimental treatment to outlast a plebian similar patient by a few months, but can I or do I need to match his deep wallet?

Me, worry? No, not about money. Or at least not as much as other "stuff".

 

[Moemg]

I do 4% of portfolio value on Jan.1 . It's easy to figure out but it did have me taking a budget cut in my second year of retirement . I always have an excess left in my budget so in reality I'm at 3.5% .

 

[Rich_by_the_Bay]

Vaguely related to the topic, I originally was not going to have an "emergency fund" in retirement, figuring that my whole portfolio was essentially that, money to live off of forever.

But I changed my mind when I realized the impact of having a run of bad luck (replace a car, break a tooth, big medical bills, roof and furnace, etc.) on the portfolio and cash flow. I acknowlege that it's more of an emotional crutch but for "smoothing" purposes we decided to keep a few months of living expenses in an Ally savings account and kind of forget it's there until needed.

 

[rescueme]

Vaguely related to the topic, I originally was not going to have an "emergency fund" in retirement, figuring that my whole portfolio was essentially that, money to live off of forever.

Since I'm retired, I keep 3-5 years in "cash instruments" (e.g. cash bucket), of which is split into a six month taxable and the remainder in IRA tax deferred MM accounts.

Each month I transfer both my monthly budgeted amount from my TIRA (paying federal taxes during that withdrawal) and putting the proceeds in my taxable account.

The reason I keep six months in the taxable account is for the reason you stated. I found out the hard way that part of the problem is that if you need to spend a good amount of money for whatever reason, unless you have a taxable account to withdraw from (we don't), you have the possibility of being pushed into a higher tax bracket due to excessive withdrawals of tax deferred funds. I found out about this the hard way two years ago, when I purchased a car and paid cash for it (hey, why not?). Not paying attention moved me from the 15% to the 25% federal rate that year.

 

[Nords]

How is WR defined, Total Expenses/All Assets? I guess present value of pension, free medical etc. should be part of assets and expenses should include full value of free medical etc. SWR is maximum WR which will not deplete assets in one's (or a couple's) lifetime.

Oh boy, let's not start beating that horse again.

Let's just [-]avoid the perpetual debate[/-] simplify by assuming that every ER has some pot of assets called "the ER portfolio" out of which they're going to draw their annual expenses. How the ER gets that pot of assets is their own personal valuation method and not part of this discussion. We just show up at the table and declare a percentage, whether or not it's based on "real" assets or what others may deem as nothing more than a fervent hope.

This way we don't have to decide whether to count home equity, future value of unsecured pensions, political risk of healthcare plans, personal property, eBay's assessed value of that favorite pair of designer jeans, leveraged b33ver cheeze futures, the unripened marijuana crop in the back yard, or pocket change. Save those topics for a separate thread.

If you have worked 30 years or more does anybody really every "run out of money"? What I mean is even if you deplete all your 401k and other investments, you should still have social security to fall back on. If you defer taking your social security out till the last possible month, that should provide most people enough money to get by on if they are in their 70's?

Good grief. "Simplicity" is one thing, but portfolio survival and quality of life are quite another category of assumptions.

First, not all U.S. workers are eligible for Social Security. And expat U.S. retirees may not be able to access Medicare, let alone Medicaid.

Second, many ERs do not have (and hopefully will never have) 30 years or more of paid labor.

Third, let's not confuse "working for 30 years or more" with "saving for 30 years or more". Every family has at least two examples of relatives who are blissfully ignorant of this distinction.

Fourth, "getting by" should not require a decision over whether next month's expenses will include a full ration of calories or a full dose of prescription medication.

In a more complex discussion, deferring Social Security is a multi-factor decision that has to be made by each person (and in many cases, each couple). Delaying SS by as much as eight years could savage an ER portfolio below the level of eventual recovery without any guarantee that the annuitant will ever live long enough to regain the foregone benefits. OTOH accepting a permanent 25% reduction in lifetime SS benefits may allow eight crucial years of capital infusion that a portfolio needs to survive a bear market and thrive during the subsequent 20-30 years of retirement.

But I agree that the surviving member of each marriage would probably appreciate a spouse's decision to defer SS to age 70.

In our case, 4-5% is no problem in our late 40s. A year or two of 6% in our 40s would cause some concern and a lot of spreadsheet time but would probably be deemed acceptable. If we were in our 30s (or 20s?) then 3% would be much more reassuring. And when we hit our 60s then I'd have no problem with ramping up to 5-6%.

If military retirees did a thorough analysis of the present value of a govt-backed COLA'd pension, along with the lifetime value of cheap healthcare and prescription benefits, then in their 60s they'd comfortably withdraw 8-10% of their remaining tax-deferred/taxable assets. And if the forecasting tools were widely available for anyone to do that analysis before filing for a military retirement, then veterans would probably ER in their late 30s/early 40s.

In 20 years I think the Trinity Study's assumption of "4% plus inflation for 30 years" is going to seem hopelessly oversimplified, just as today the 1980s concept of "retirement annual expenses at 80% of current income" is widely discredited.

 

[MarthaT]

I would be comfortable with 3.5-4 here

 

[W2R]

This year I withdrew 3.45% and I will do so until I claim SS. At that point I can re-evaluate and will probably cut back to 3%.

3% is supposed to last just about forever, from all I can gather, even with a portfolio that is mostly bonds. A great deal of this type of information for different portfolio structures is available in the many, many excellent papers on this topic available here.

4% is supposed to be fine for 25 years, and in 25 years I will be 86. However, I do not want to spend my last years sleeping in a cardboard box under a bridge and begging for food, if I should live beyond 86. I have been desperately poor before, and I have been hungry before, and it isn't my idea of fun. This is why I am not comfortable with 4% (for me, anyway).

Besides, I doubt I can manage to find ways to spend 3% as it is. Honestly I am perfectly happy and content with what I have. Life is the proverbial bowl of cherries these days. Finding this contentment has been awesome and I hope I don't lose track of it.

Vaguely related to the topic, I originally was not going to have an "emergency fund" in retirement, figuring that my whole portfolio was essentially that, money to live off of forever.

But I changed my mind when I realized the impact of having a run of bad luck (replace a car, break a tooth, big medical bills, roof and furnace, etc.) on the portfolio and cash flow. I acknowlege that it's more of an emotional crutch but for "smoothing" purposes we decided to keep a few months of living expenses in an Ally savings account and kind of forget it's there until needed.

I do that, too. To me, money in my (local, bricks and mortar) bank does not count as part of my portfolio. It includes my emergency fund and money for my 2010 living expenses as a retiree, and for a while it also included the money I had saved for my new car. I will probably replenish it from my 3.45% in case I want another car before I stop driving. Not sure how that will pan out.

To me, the idea of not saving just because I am retired would show some disconnect with reality. I will still want to purchase things like a car that don't fit into my monthly budget, and I will still have the occasional large unexpected/emergency expense.

 

[MasterBlaster]

You'll probably die Richer than you think

As you all know. The 4% SWR gets you through those brutal markets fairly safely. If you are lucky enough to retire into a bull market (or even a flat-ish market) then you can do quite a bit better than the 4%SWR benchmark.

here's Gummi's chart showing what the maximum withdrawal rate would be for given retirement durations and a mixed portfolio.

If you have trouble with charts and numbers....

Here's the bottom line - For a 30 year retirement (The right end of the chart) the safe withdrawal rate is 4 %. However if you are so lucky to retire into a better than horrible market then you could withdraw quite a bit more without going broke. For really lucky ones (retireing in a 1950's-like historical market) they could withdraw up to 14% of their portfolio.

Gummi has done a pretty good analysis if you want to wade through it all...

here's the link sensible withdrawals

 

[MasterBlaster]

As For Me

I intend to divide the stash into a "safe" pile and into a "wild" pile.

The safe pile will be withdrawn using the 4% SWR method we are all so familiar with. That pile will provide a no-frills basic existence should bad times come.

With the leftover stash in the "wild" pile I'll use a larger withdrawal rate. Or maybe I'll use a larger withdrwal rate that is just a percent of the balance. It goes without saying that this wild pile has a chance to go to nada, but will allow me to augment my no-frills lifestyle.

And yet I'll still probably die with a large stash left behind. The odds suggest that I am much more likely to die with a large stash left behind than to die broke.

Anyway that's my thinking at this time.

 

[FIREd]

I voted 3% as the highest SWR I would feel comfortable with. That's based on FIRECalc and other sources given our particular situation.

 

[cardude]

For the last 11 months (my only data in my short-term ER) we have averaged just under 3%, and that included some months with the lowest portfolio values we have ever had.

I'm 45 with young kids, so alarm bells start going off when my SWR gets over 3%. Right now with all the rentals full, DW contributing a little bit to the budget from her j*b, and with the portfolio pretty much recovered we are right at a 2% SWR.

If DW quits working, and if all rentals were empty and portfolio dropped back to the depressed leves from earlier this year we would be at about 3.7%.

 

[Gotadimple]

As Nords says, it's complex situation. I voted 5%+, as I have a single income stream at this point with more to come later. ORP tells me I could go as high as 6% early in my retirement until Social Security kicks in.

-- Rita

 

[traineeinvestor]

Looking at the responses so far, it looks like elgibility for SS or other income streams is highly relevant to determining the SWR from retirement savings.

 

[MasterBlaster]

Looking at the responses so far, it looks like elgibility for SS or other income streams is highly relevant to determining the SWR from retirement savings.

It really isn't. However if you have enough income from sources other than your retirement savings to live on, then you could take a more aggressive withdrawal at the risk of running out of money.

Don't confuse a safe withdrawal rate with (somewhat) unsafe withdrawal rates coupled with other secured income.