Withdrawal rates, age & probability of success

[REWahoo]

And what's the probability that this will happen before the next super volcano erupts?

Don't hijack this thread, start a new one.

 

[Alan]

Don't hijack this thread, start a new one.

Good idea, we haven't had an end of the world thread for ages.

 

[REWahoo]

Good idea, we haven't had an end of the world thread for ages.

Yep, a seriously FIRE-related topic.

 

[NW-Bound]

Eh, I dunno about the probability of an asteroid or a volcano, but these seem to be much less frequent than the changing of the guard in human history as to which nation is the economic power.

I am sticking to 3.5%WR, and if my portfolio goes up as I hope it will, then my patience will still be rewarded when my portfolio doubles, just as it might, in even less time than I get to draw SS.

A strange thing like the above already happened in the past, as my portfolio is currently 2.93X its nadir on Oct 9, 2002. But until that happens again, I am not going to count my chicken.

Wait a minute! This potential doubling of spending seems to be in direct conflict with the Bernicke's steep slope that I feel is happening personally.

What to do, what to do?

 

[haha]

Why am I not surprised?

Ha

 

[Midpack]

Well, count me as a skeptic for FIREcalc results mirroring the past going forward. The data is based on the history of the USA becoming the premier industrial/financial nation in the world. Although not impossible to repeat the last 100 - 150 years I think it is unlikely. Nonetheless. Although Britain did not regain its Empire after WWII, the Brits continued to enjoy a nice standard of living afterward and barring the arrival of Godzilla I think so will we.

Sounds good except FIRECALC and the 4% SWR rule are based on avoiding the worst 5% of outcomes, the other 95% 'based on the history of the USA becoming the premier industrial/financial nation in the world' are outside portfolio failure - which is all FIRECALC "success" represents. Maybe the highs won't be as high, but that doesn't matter anyway, what matters is will the worst of the worst lows be deeper and/or more frequent.

From the market data from 1871 to present that FIRECALC uses, at a 95% success rate, the worst 5% of 30 year periods (it's easy enough to work up other durations if you like) are all in the same era (1981-82 tight fiscal policy to kill inflation, 1980 Iranian Revolution and increase in oil prices, [FONT=verdana,geneva]1973-75 OPEC's increase in oil prices and massive spending in the escalation of war in Vietnam led to stagflation, 1969-70 massive spending in Vietnam War and OPEC's increase in price of oil) [/FONT]:
1965-1995
1966-1996
1967-1997
1968-1998
1969-1999
1973-2003

How spectacular the best years* were really doesn't matter to "success" - only residual estate.

*
1932-1962
1933-1963
1942-1972
1943-1973
1975-2005
1978-2008

 

[ejman]

Sounds good except FIRECALC and the 4% SWR rule are based on avoiding the worst 5% of outcomes, the other 95% 'based on the history of the USA becoming the premier industrial/financial nation in the world' are outside portfolio failure - which is all FIRECALC "success" represents. Maybe the highs won't be as high, but that doesn't matter anyway, what matters is will the worst of the worst lows be deeper and/or more frequent.

From the market data from 1871 to present that FIRECALC uses, at a 95% success rate, the worst 5% of 30 year periods (it's easy enough to work up other durations if you like) are all in the same era (1981-82 tight fiscal policy to kill inflation, 1980 Iranian Revolution and increase in oil prices, [FONT=verdana,geneva]1973-75 OPEC's increase in oil prices and massive spending in the escalation of war in Vietnam led to stagflation, 1969-70 massive spending in Vietnam War and OPEC's increase in price of oil) [/FONT]:

1965-1995
1966-1996
1967-1997
1968-1998
1969-1999
1973-2003

How spectacular the best years* were really doesn't matter to "success" - only residual estate.

*
1932-1962
1933-1963
1942-1972
1943-1973
1975-2005
1978-2008

True enough and a very valid observation. But the unanswered question in my mind: is the 5% of worst outcomes we had in the past as bad as it can get? Well of course not. The part that is bothering to me is that the bad periods you mentioned were all followed by times when the USA REGAINED ITS GROWTH TRAJECTORY. I beileve that a period of long stagnation (decades) after a major decline in economic performance would be a first for the US if it were to happen no?

 

[obgyn65]

Thanks for the post, Midpack.

When I joined this website a couple of years ago I was planning on 4% SWR. Now at age 47, I am planning on about 3.5%. In fact, when FIRE starts hopefully this year, it is likely my SWR will be even lower because I am frugal by nature and very risk averse. I guess I will adapt and re-adjust accordingly annually.

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.

​

 

[Midpack]

Thanks for the post, Midpack.

When I joined this website a couple of years ago I was planning on 4% SWR. Now at age 47, I am planning on about 3.5%. In fact, when FIRE starts hopefully this year, it is likely my SWR will be even lower because I am frugal by nature and very risk averse. I guess I will adapt and re-adjust accordingly annually.

Great, that was one of the reasons I did the table. But just run your own numbers and draw your own conclusions & plans, I suspect you already have...

 

[Brett_Cameron]

Thanks for the post, Midpack.

.... adapt and re-adjust accordingly annually.

+1

 

[Lsbcal]

I wonder how many use the option at the bottom of the "Investigate" tab to more fully define "SUCCESS rate"? Here is what it looks like:

For me, if the portfolio drops below a certain amount I'd be extremely worried. I don't want to do that trip. Got a modest preview of it in 2008 and hated the feeling. It never went to my minimum that I now define in the option shown above but it was bad enough.

So when I get 100% success in FIRECalc, it might be different from other's FIRECalc "success" rates.

 

[grasshopper]

Wait a minute! This potential doubling of spending seems to be in direct conflict with the Bernicke's steep slope that I feel is happening personally.

What to do, what to do?

Sounds like a slippery slope.

 

[Alan]

I graduated and entered the workforce in 1976, in England. This was the economics at the time. I don't believe the USA will get into such a bad state anytime soon, and even if they do, I have faith they can get through it, just as the UK did.

BBC NEWS | UK | UK Politics | 1975 economic fears are laid bare

'Incalculable problems'

Britain asked the IMF for a £2.3bn bail out in 1976 saying unemployment and inflation were at exceptional levels.

Inflation peaked in 1975 and by 1976 Healey was telling the IMF that "the social contract" with the trade unions had reduced the average increase in earnings from 27.6% in 1975 to 13.9% in 1976.

 

[Ed_The_Gypsy]

The data is based on the history of the USA becoming the premier industrial/financial nation in the world. Although not impossible to repeat the last 100 - 150 years I think it is unlikely....

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

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

Over the years, I have enjoyed all the predictions from hecklers with inferiority complexes from all over the world about the impending fall of the US. I see it every day on the cable TV over here in Baku, even from CNN. CNN over here displays almost Canadian self-loathing. Bon chance, mon ami.

 

[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!

 

[MichaelB]

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]

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%.

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]

SWR decoding?

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]

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]

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]

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]

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.