Safe withdrawl rate for young retirees

[claire]

I read somewhere that the recommended SWR of 4% is not appropriate for young retirees. Why is this? Can anyone shed any light?

Thanks


Claire

 

[crazy connie]

Quite simply a long (my guess 5 years or more) of down markets which would cause principal erosion. Of course if you have enough funds and can belt tighten or augment with work... The fear factor would be long term reduced standard of living. Not sure I would be willing to go that way. I want enough positive fudge factor to not have to make a return to work decision.

 

[mathjak107]

The 4% withdrawl rate is dependent on what your overall rate of return is and whats your inflation rate?

 

[lazyday]

4% would have worked in the past, for someone with a 30 year retirement, depending on the investments.

If you retire young, you might have a much longer retirement than that.

Also, many people expect stock market returns to be lower in the future than they have in the past, because today's markets seem relatively expensive compared to the stock markets of several decades ago which had higher dividend yields and lower price/book ratios.

 

[dory36]

The whole issue of SWR gets easily confused.

First, a 3.98% withdrawal works, using the default settings in FIRECalc, 95% of the time for 30 year withdrawals, while the rate drops to 3.73% for 50 years, and 3.56% for 75 years.

What makes the safe rate as low as it is is almost always what happens in the first 5-7 years of a retirement. If you are lucky enough, or your crystal ball is good enough, to retire into a rising market, then by the time your portfolio has been growing for those 5-7 years, it can withstand almost anything, and your problem will be what to do with all the money, not worrying about the withdrawal rate.

Think of this like sea turtles. If a hatchling can get past the predatory birds and get into the ocean, it's OK for the long run.

So a prolonged downturn at the the beginning is the threat. How big a threat is it? Since 1871, we have only had two 5-year periods when each year-end stock market value was lower than the previous year-end, and that was back in the pre-depression days. (This is adjusted for inflation -- there was only one such period when I ignore inflation). There were only three periods with consecutive 4 year downturns, and only five 3 year downturns.

Because the impact is so critical at the beginning, it doesn't make a whole lot of difference how long you'll keep going -- that's why the rate drops only 0.4% when the duration chances from 30 to 50 years.

 

[REWahoo]

Think of this [ER] like sea turtles. If a hatchling can get past the predatory birds and get into the ocean, it's OK for the long run.

"Hey REW, since you retired early, whaddya do all day?"

"I'm still working...at being a lucky sea turtle."

 

[perinova]

Past experience is that 4% is a SWR 95% of the time. Past experience also shows that a 25% portfolio yearly decline is "fairly" likely, it is advisable for a young retiree to make sure that you can live with 75% of your portfolio.

This means can you for a while live with only .75*4%=3% of your portfolio? If yes you are good to go...

3%=bare-bone expenses + 1%=what can be postponed.

 

[Nords]

"I'm still working...at being a lucky sea turtle."

"Squirt, dude, you so totally rock!"

Sorry, our kid's been watching "Finding Nemo" again...

 

[Khan]

The whole issue of SWR gets easily confused.

First, a 3.98% withdrawal works, using the default settings in FIRECalc, 95% of the time for 30 year withdrawals, while the rate drops to 3.73% for 50 years, and 3.56% for 75 years.

What makes the safe rate as low as it is is almost always what happens in the first 5-7 years of a retirement. If you are lucky enough, or your crystal ball is good enough, to retire into a rising market, then by the time your portfolio has been growing for those 5-7 years, it can withstand almost anything, and your problem will be what to do with all the money, not worrying about the withdrawal rate.

Think of this like sea turtles. If a hatchling can get past the predatory birds and get into the ocean, it's OK for the long run.

http://www.earthwatch.org/site/pp2.asp?c=dsJSK6PFJnH&b=1147421

 

[scrubradio]

http://www.earthwatch.org/site/pp2.asp?c=dsJSK6PFJnH&b=1147421

Now that's something I could see myself doing in RE

 

[obryanjf]

SWR's are time dependant as well as inflation, allocation and return sequence dependent. A very early retiree would likely need to shave a little off the oft quoted 4% number. Likewise as one ages and the expected 'time in retirement' goes south of say 40 then 30 then 20 years the 4% SWR can theoretically be increased some.

Here is some data from my calc.
Mode: WD %: Retired time:
Fixed 7.8 10
Fixed 4.7 20
Fixed 4.0 30
Fixed 3.8 40
Fixed 3.7 50
Fixed 3.6 60
Hybrid 10.9 10
Hybrid 6.6 20
Hybrid 5.4 30
Hybrid 5.0 40
Hybrid 4.8 50
Hybrid 4.6 60

job

 

[perinova]

Here is some data from my calc.
Mode: WD %: Retired time:
Fixed 7.8 10
Fixed 4.7 20
Fixed 4.0 30
Fixed 3.8 40
Fixed 3.7 50
Fixed 3.6 60
Hybrid 10.9 10
Hybrid 6.6 20
Hybrid 5.4 30
Hybrid 5.0 40
Hybrid 4.8 50
Hybrid 4.6 60

job

thanks DO,
Can you remind me your definition of hybrid?

 

[obryanjf]

A hybrid is a mixture where part of each years withdrawl is based on the fixed inflation adjusted model (what the 4% number is based on) + part of the withdrawl based on a percentage of the net worth. The downside is the withdrawls will not be constant however, there will be feedback from the portfolio to avoid the large networth swings (up or down). My data is from a 50% fixed/50% variable hybrid.

job