Withdrawal rates, age & probability of success

[MichaelB]

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Originally Posted by barbylardy First post, so hope I am doing this correctly. I have done all of the FIDO, FireCalc, T. Rowe, and Vanguard projections, but still have a question on WR % calculations. When you are calculating the WR %, simply on beginning portfolio value, do you use your estimated inflation adjusted spending as the numerator or do you use your non-inflation adjusted spending as the numerator? This is for the purposes of my Excel spreadsheet double check all the external calculators number Thank you very much!

Most of us would use inflation adjusted spending, which is what all of the online calculators use.

[MooreBonds]

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Originally Posted by Ed_The_Gypsy One reason to consider non-US equities. I am still 50/50 (roughly).

+1 - that's why my current equity allocation is about 34% foreign (majority in emerging markets), and trying to up it gradually over time to get closer to 50%.

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Originally Posted by Ed_The_Gypsy Still, having seen a little bit of the outside world, it is amazing how screwed up everywhere else is. China, you say?

Yes, something that I must keep in mind and another good reason to stay with ETFs and not individual stocks touted in financial porn that turn out to be nothing more than a full fledged fraud stocks.

[NW-Bound]

Of the 70% AA for equity, I am right now at 45% for domestic and 25% for foreign. I have been shifting more to international stocks.

I buy ADRs of large foreign corps, and ETFs of smaller foreign markets. They have been trailing the S&P in price if counted from 2 years ago, and pay higher dividends too.

[WestLake]

Aside: what would be a some general ADRs or ETFs in this category ?

[supernova72]

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Originally Posted by Midpack Correct, thanks REW...and yes without Soc Sec. The purpose was not so much the numbers, but to illustrate trends. Everyone should model their specific situation, not use this table. I see some people here and elsewhere using 4% as if it applies at any age (even in their 40's) and/or assuming it provides a 100% success rate. Not true. I also see some people mistaking the 4% SWR as withdrawing 4% per year from a portfolio. Also not true. The table was meant in part to illustrate how both are not true. I've edited the OP, thanks for the suggestions...

So, I'm newbie to posting so be easy on me

In regards to the above post on SWR: "I also see some people mistaking the 4% SWR as withdrawing 4% per year from a portfolio. Also not true."

Can you expand what what is not true? I'm sure there is more to the SWR formula than saying taking 4% in January or equal distributions from a portfolio over a given year. I was thinking SWR was a safe withdraw rate adjusted for inflation over a given retirement period? Cheers!

[MichaelB]

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Originally Posted by supernova72 So, I'm newbie to posting so be easy on me In regards to the above post on SWR: "I also see some people mistaking the 4% SWR as withdrawing 4% per year from a portfolio. Also not true." Can you expand what what is not true? I'm sure there is more to the SWR formula than saying taking 4% in January or equal distributions from a portfolio over a given year. I was thinking SWR was a safe withdraw rate adjusted for inflation over a given retirement period? Cheers!

Hi supernova. The difference between 4% SWR and 4% per year is a 4% SWR means taking 4% from the portfolio the first year, then taking that same amount plus inflation every year after that, regardless of what % of the portfolio it represents. OTOH, 4 % per year means you take 4% of whatever amount is in the portfolio. If it has declined by 1/3, so has your spending amount.

Hope that helps. Why not stop by here and introduce yourself

[NW-Bound]

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Originally Posted by WestLake Aside: what would be a some general ADRs or ETFs in this category ?

The following are examples that I have bought or looked at.

For specific sector or industry play, there are many ADRs that trade just like US stocks. For example, in consumer staples, there are Unilever (UL) and Nestle (NSRGY). In energy, there are Total (TOT) and BP. In mining, there are BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE), etc...

For country-specific index ETFs, there are many, nearly one for every foreign country: EWC for Canana, EWA for Australia, EWG for Germany, EWS for Singapore, ENZL for New Zealand, etc...

Of course there are the even broader international ETFs, such as Vanguard's VSS and VWO. For people with a Schwab account, they can trade without fees the equivalent Schwab ETFs such as SCHC, SCHE, SCHF. These also have even lower expense ratios than the Vanguard ones.

So many to chose from!

[supernova72]

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Originally Posted by MichaelB Hi supernova. The difference between 4% SWR and 4% per year is a 4% SWR means taking 4% from the portfolio the first year, then taking that same amount plus inflation every year after that, regardless of what % of the portfolio it represents. OTOH, 4 % per year means you take 4% of whatever amount is in the portfolio. If it has declined by 1/3, so has your spending amount. Hope that helps. Why not stop by here and introduce yourself

Thanks Michael B! That helps a lot on the SWR...no adjustment for portfolio ups and downs then.

I see you are the moderator and yes I will get an intro together here and post. Essentially it's: 52 yrs old and dreaming about potentially a 55 retirement date. Good to dream...

[Lsbcal]

Quote:

Originally Posted by MichaelB Hi supernova. The difference between 4% SWR and 4% per year is a 4% SWR means taking 4% from the portfolio the first year, then taking that same amount plus inflation every year after that, regardless of what % of the portfolio it represents. OTOH, 4 % per year means you take 4% of whatever amount is in the portfolio. If it has declined by 1/3, so has your spending amount. Hope that helps. Why not stop by here and introduce yourself

Generally I just state my 4% SWR choice since I'm not sure that there is a standard practice on this. Or is there ? To me 4% SWR could apply to several approaches and I'd specify 2 of them as:
1) 4% of the inflation adjusted portfolio
2) 4% of the start of the year portfolio

another example would be:
3) 4% of the average of the portfolio the past 3 years

and it goes on, and on, and on .... Pick your poison.

[NW-Bound]

I thought I would try for 3.5% of portfolio at the beginning of the year.

It turned out that I spent 4% or 14% overshoot, but since 2012 was a good year, I only spent 3.58% of the end value of the portfolio.

Hey, my accounting standard is a lot better than that of our Congress, oui?

I think that from now on, I reserve the right to use the highest value of the portfolio during the year to benchmark my WR. It's only fair, yes?

PS. If the market god gives you money and you don't spend it, don't cry when he (or is it a she) takes it away next year.

[Midpack]

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Originally Posted by Lsbcal Generally I just state my 4% SWR choice since I'm not sure that there is a standard practice on this. Or is there ? To me 4% SWR could apply to several approaches and I'd specify 2 of them as: 1) 4% of the inflation adjusted portfolio 2) 4% of the start of the year portfolio another example would be: 3) 4% of the average of the portfolio the past 3 years and it goes on, and on, and on .... Pick your poison.

Nothing wrong with the withdrawal methods you describe, but none of the above should be referred to as meeting 4% SWR methodology. There is a standard practice, there have been dozens of academic papers written (Bengen, Trinity Study, etc.) describing how it works Safe Withdrawal Rates - Bogleheads.

The 4% SWR methodology is as MichaelB described above. You never look at portfolio value after the first year (probably not wise, or practiced by many).

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Originally Posted by MichaelB 4% SWR means taking 4% from the portfolio the first year, then taking that same amount plus inflation every year after that, regardless of what % of the portfolio it represents.

[REWahoo]

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Originally Posted by Lsbcal Generally I just state my 4% SWR choice since I'm not sure that there is a standard practice on this. Or is there ?

Not sure there is a standard practice, but if you take a look at the Trinity Study you'll see MichaelB's explanation of the 4% Rule accurately describes the result of that study.

Quote:

The 4% refers to the portion of the portfolio withdrawn during the first year; it's assumed that the portion withdrawn in subsequent years will increase with the CPI index to keep pace with the cost of living.

Edit: Cross-posted with Midpack.

[Lsbcal]

I guess when I see "4% SWR" I do think of the Trinity study. So I'll try to remember to stick with this convention and be a good rabbit -- I mean boy.

[Midpack]

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Originally Posted by Lsbcal I guess when I see "4% SWR" I do think of the Trinity study. So I'll try to remember to stick with this convention and be a good rabbit -- I mean boy.

Maybe I should lighten up, but I do see people confuse the 4% SWR methodology (Bengen, Trinity, et al) with various ways of withdrawing 4% from a portfolio each year. Right or wrong, I worry when I see someone confuse the two, especially newbies who are grappling with planning. As you know, the results from the two are vastly different.

• If you follow the 4% SWR blindly (not recommended, it's just a theoretical roadmap), your income goes up every year and you would not have run out of money 95% of the time from 1871 thru 1981. You may leave a large residual, or less, or even run out of money 5% of the time (historically).
• If you withdraw 4% each year blindly (also not recommended?), your income will flucuate up and down from year to year, but obviously you can never run out of money and you'll leave a large residual most likely.

In practice, most people do neither blindly. They adjust their annual withdrawals to smooth income from year to year somewhat, and increase or decrease their withdrawal rate over the long term based on how the portfolio holds up during the 30 year (or whatever duration) retirement - and what their bequest/residual plans are.

[audreyh1]

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Originally Posted by REWahoo I'm sure Midpack will be along shortly to respond, but my take is not "all investment portfolios", but using the FIRECalc default: Quote: FIRECalc will assume you want to keep your annual spending about the same for as many years as you specify, you aren't planning on receiving any Social Security or pension, and your retirement portfolio is invested in a "couch potato" portfolio of 75% stock index and 25% bond funds, with a 0.18% fee to the fund.

Who, upon retiring, keeps their portfolio invested 75% in stock mutual funds? Very few, I believe, based on the posters here. 50/50 seems more typical, and quite a few posters have a much smaller stock exposure in retirement.

The long-term survival results may not make a huge difference between say 40% equities and 75% equities, but I don't remember in the Firecalc case.

[REWahoo]

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Originally Posted by audreyh1 The long-term survival results may not make a huge difference between say 40% equities and 75% equities, but I don't remember in the Firecalc case.

Same holds true for FIRECalc. This chart of FIRECalc results shows with an equity allocation of 40% or more the success of a portfolio is essentially flat, dropping a bit if above 80%:

[Lsbcal]

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Originally Posted by audreyh1 Who, upon retiring, keeps their portfolio invested 75% in stock mutual funds? Very few, I believe, based on the posters here. 50/50 seems more typical, and quite a few posters have a much smaller stock exposure in retirement. The long-term survival results may not make a huge difference between say 40% equities and 75% equities, but I don't remember in the Firecalc case.

In our case I ran two FIRECalc simulations and looked at detailed spread sheet results:
1) 65/35 with 4% withdrawal of the current balance
2) 40/60 with 4% withdrawal of the current balance

I found that #1 allowed me to spend about 10% more per year. While #2 did better in economically stressful decades. Those periods were 10 years in length starting in 1973 and 2000. The 1973-1983 period was followed by an economically good decade. We don't know what 2010-2020 will quite look like yet though it is starting out good.

Our current portfolio resembles #1 but if we get a period of excess returns (above 7% after inflation) in equities, I might drop back to portfolio #2. Should be an interesting ride.

[audreyh1]

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Originally Posted by Lsbcal In our case I ran two FIRECalc simulations and looked at detailed spread sheet results: 1) 65/35 with 4% withdrawal of the current balance 2) 40/60 with 4% withdrawal of the current balance I found that #1 allowed me to spend about 10% more per year. While #2 did better in economically stressful decades. Those periods were 10 years in length starting in 1973 and 2000. The 1973-1983 period was followed by an economically good decade. We don't know what 2010-2020 will quite look like yet though it is starting out good. Our current portfolio resembles #1 but if we get a period of excess returns (above 7% after inflation) in equities, I might drop back to portfolio #2. Should be an interesting ride.

Hmmmm - interesting strategy.

We're at 52.5% equities now, and very gradually reducing every year by 0.5% so that when we reach our 70s we have less equity exposure. At our rate that would be 45% equities at 70 which still seems pretty rich.

[audreyh1]

I was looking at Midpack's table, and thinking that we might increase our % withdrawal as we enter each new "survival" decade.

We're at 3.3% now, our ages average to 55. At 65 bump it up to 3.6%, at 75 bump up to 4.4%, etc.

We use the withdraw X% of portfolio value at beginning of each year method, not the classic SWR which only looks at the initial portfolio value and uses inflation to adjust withdrawals thereafter.

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Originally Posted by Midpack Withdrawal rates Yrs retired 40 30 20 10 100% success 3.3% 3.6% 4.4% 7.0% 95% " " 3.7% 4.0% 4.9% 8.2% 90% " " 3.9% 4.3% 5.1% 8.8% 85% " " 4.0% 4.4% 5.4% 9.4% Retirement age approx 55 65 75 85

[Animorph]

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Originally Posted by audreyh1 I was looking at Midpack's table, and thinking that we might increase our % withdrawal as we enter each new "survival" decade. We're at 3.3% now, our ages average to 55. At 65 bump it up to 3.6%, at 75 bump up to 4.4%, etc. We use the withdraw X% of portfolio value at beginning of each year method, not the classic SWR which only looks at the initial portfolio value and uses inflation to adjust withdrawals thereafter.

You can bump it up as part of your budget, but can you actually spend it? It is nice to know if our portfolios are declining slowly we can bump up our percentage withdrawals.