Morningstar- Safe Withdrawl wkst

[bizlady]

I found this worksheet put together by Morningstar to help determine safe withdrawl rates. Not perfect, but an interesting approach for starters.

http://news.morningstar.com/pdfs/Income_Worksheet_Retire.pdf?section=ToollncomeWorksheet

 

[W2R]

One nice thing about the worksheet is that it considered retirements as long as 40 years.

My asset allocation lay halfway between two of their choices. My retirement is planned for 35 years, halfway between two of their choices as well. But, at least I got an idea of a high and low tentative SWR, and I feel comfortable somewhere in that range.

 

[REWahoo]

The SWR I got from running my calculation was ... 4%. Shocking.

 

[DeborahB]

LOL! For every portfolio mix, at the 85% level of confidence, the SWR was about 4%. I didn't bother to fill in the worksheet.

 

[W2R]

I went for 95%, so according to the worksheet my SWR lies somewhere between 3.3% and 4.0%.

That works for me since I will probably take 3.5% until I claim my SS, then 3.0%. Or less, if/when the market tanks.

 

[rmark]

It's interesting they mix an inflation adjusted withdrawal from the left hand side with unadjusted cash flow on the right hand side (or they assume all pensions are COLA I guess)

 

[MichaelB]

Anybody look at the expected returns? I think the SWR numbers are high. Valuation matters.

Expected real compound rates of return are:
large-cap stocks 5.5%,
mid/small-cap stocks 6.5%,
international stocks 6.0%,
bonds 3.0%,
cash 1.5%

 

[WilliamG]

"Anybody look at the expected returns? I think the SWR numbers are high. Valuation matters. "

This worksheet was first referenced in the below linked article dated 2001. Long enuf time to review numbers?

Repositioning Your Portfolio at or Near Retirement

 

[chinaco]

We are planning on 4% (without factoring in Pension, and our SS). So our WR% will drop.

Given the drop in the WR, I figure we have a reasonable margin of safety.

 

[traineeinvestor]

I'm planning on around 3% - which I hope will be a bit less than the after tax income from the portfolio. FIRECalc and other calculators tend to tell me that I am being too conservative, but with a 40+ year time horizon I'd rather work for an extra few years now to achieve a lower SWR than be faced with looking for work in my 80s.

 

[rayvt]

Well, I'm using the Guyton/Klinger withdrawal strategy, and am using 4.5% SWR.

Funny thing is, when taken together with my pension and SS (started at age 62), that's much more than we need, and slightly more net income than my final (net) salary income before I retired. So most months we put the excess back into the portfolio.

--edit--
In accordance to the G/K rules, the "Capital Preservation Rule" kicked in for 2009 so the 2009 draw was reduced from the 2008 draw. Also, the "Modified Withdrawal Rule" kicked in for 2010 so there was no increase in the draw from 2009.

 

[rsingh6675]

This is what I don't understand

This is what I don't understand. If your portfolio spills out an average of 6-8% per year, why can't you withdraw 5-6% every year and still keep your principal? If you have conservative portfolio, chances are your portfolio will earn 5-8% and may loose 5-10% (once every 5-10 year). The loss should be covered by 6-8% minus 5% withdrawl rate. Why everyone is too worried about keeping the principal for ever. Don't we all have to leave this world sooner or later?

 

[WilliamG]

This is what I don't understand. If your portfolio spills out an average of 6-8% per year, why can't you withdraw 5-6% every year and still keep your principal? If you have conservative portfolio, chances are your portfolio will earn 5-8% and may loose 5-10% (once every 5-10 year). The loss should be covered by 6-8% minus 5% withdrawl rate. Why everyone is too worried about keeping the principal for ever. Don't we all have to leave this world sooner or later?

Inflation.

 

[Rich_by_the_Bay]

This is what I don't understand. If your portfolio spills out an average of 6-8% per year, why can't you withdraw 5-6% every year and still keep your principal? If you have conservative portfolio, chances are your portfolio will earn 5-8% and may loose 5-10% (once every 5-10 year). The loss should be covered by 6-8% minus 5% withdrawl rate. Why everyone is too worried about keeping the principal for ever. Don't we all have to leave this world sooner or later?

A fixed percent of assets approach is reasonable and common, though not at that high a rate. This has the advantage of theoretically never running out, but the disadvantage of diminishing if the WR is too high. It also requires some flexibility in your cost of living to you can belt-tighten during lean years.

See Clyatt's book cited in the archives here for one detailed approach to this. Many of us who use this approach choose 4.3 to 4.5% WR since it goes down during bad years and up during good years.

 

[shotgunner]

If I am reading this spreadsheet correctly it looks to me that for 20, 30 and 40 year time horizons there is virtually no difference between a Conservative portfolio or an Agressive portfolio (and everything in-between) for a 95% probability of success. Does that seem correct for a 40 year window especially? If you trust this data then what reason would there be to put any more than 25% of one's assets in equities if the probability for success remains the same? A larger estate for your heirs? If so I guess the question would be does one want to take the greater risk for someone elses reward.

 

[jIMOh]

This is what I don't understand. If your portfolio spills out an average of 6-8% per year, why can't you withdraw 5-6% every year and still keep your principal? If you have conservative portfolio, chances are your portfolio will earn 5-8% and may loose 5-10% (once every 5-10 year). The loss should be covered by 6-8% minus 5% withdrawl rate. Why everyone is too worried about keeping the principal for ever. Don't we all have to leave this world sooner or later?

Inflation for 1
volatility of returns for another

If you PLAN on an 8% return, the assets which provide that return will have returns which range from -5% to +25% about 66% of the time (that is the known deviation of large cap stocks). So if you take out 6% in the year which the market drops -5%, your porfolio just lost around 11% in one year. 2-3 years like that and you are dealing with a much smaller sum of money that you planned for.

Average returns are one thing, the volatility of those same returns is why the withdraw rate is less.

Add to that a 4% withdraw in year 1 is increased 3% each year for inflation (in projections and planning), so 24 year into retirement, its highly possibly you are taking out 8% of your portfolio value and not 4%.

 

[jIMOh]

If I am reading this spreadsheet correctly it looks to me that for 20, 30 and 40 year time horizons there is virtually no difference between a Conservative portfolio or an Agressive portfolio (and everything in-between) for a 95% probability of success. Does that seem correct for a 40 year window especially? If you trust this data then what reason would there be to put any more than 25% of one's assets in equities if the probability for success remains the same? A larger estate for your heirs? If so I guess the question would be does one want to take the greater risk for someone elses reward.

I noticed same thing

For 40 years, the SWR is 3.3% regardless of asset allocation
For 30 years the SWR ranged from 3.9% to 4% regardless of asset allocation
For 20 years, the SWR ranges from 5%-5.3% regardless of asset allocation

To me, what this tells me is SWR has a bigger influence on results than the exact allocation.