Retirement savings: 3% is the new 4%

[marc515]

Anyone read this yet:
Retirement savings: 3% is the new 4%

 

[MasterBlaster]

I didn't actually read the whole article, however we have seen a number of similar articles and posts with similar thoughts.

Very low bond yields, high (perhaps overvalued) stock valuations, along with an end in sight to FED bond purchases and interest rate manipulation make traditional SWR metrics much less certain. Add in long term fiscal uncertainty to the mix and it makes you just want to go live in a cave or something.

 

[youbet]

While the basic message of the article make sense, and indeed we have seen a number of similar articles recently, this particular article has an unusally large number of goofy statements. For example:

But an initial withdrawal rate of 3% might be an even safer starting point.

Well, duh! No Sh*t! I needed to have a study conducted and read an article to know that withdrawing less from a portfolio, everything else being equal, will result in the portfolio being "safer." Not......... Even my DW, on an Xmas shopping trip to the mall, knows that if she spends less she's less likely to run out of money.

 

[StickInTheMud]

And, if you're afraid of running out of money, Finke says you can also consider buying an advanced life deferred annuity.

Oh Mr. Finke, you silly goose! You almost had me believing this was real advice up until the very end. Well played, sir.

 

[Theduckguru]

Guys, you discount how stupid some people in the world really are.

 

[tuixiu]

Very low bond yields, high (perhaps overvalued) stock valuations, along with an end in sight to FED bond purchases

With a nod towards the usual talk of how much the first part of a retirement affects success rate more, when looking at a (possibly) 40+ year retirement do factors like this really weigh that much on a SWR? The situation could be completely different with decades of withdrawal time left.

 

[foxfirev5]

When I look at my SS statement showing income over the last 40+ years I see big fluctuations. We had good years, lean years and everything in between. Our base expenses were kept in check so we could react to the income swings. I don't see it being any different in retirement. Fortunately my DW and I have had this experience although it wasn't always a breeze at the time. I have no plans to stick to any SWR in retirement, but view it as a flexible guideline.

 

[MasterBlaster]

With a nod towards the usual talk of how much the first part of a retirement affects success rate more, when looking at a (possibly) 40+ year retirement do factors like this really weigh that much on a SWR? The situation could be completely different with decades of withdrawal time left.

Some may believe that a portfolio consisting of high-PE stocks and low-yield bonds in a rising interest rate environment is doomed to underperform historical averages. But as you suggest, whether that portfolio can or cannot sustain the oft-benchmarked 30 or 40 year retirement given traditional withdrawal rates remains to be seen. Perhaps an underperforming portfolio depletion is already incorporated into the SWR data. And then perhaps it's not.

It certainly doesn't give warm fuzzies though retiring into strong headwinds.

 

[tuixiu]

Agreed, it would sure as hell play with my head if I started my withdraw phase off with a whimper due to strong headwinds.

Honey, we're moving to rural Kentucky.

 

[Animorph]

Wade Pfau's Retirement Researcher Blog: Wall Street Journal Spreecast: Does the 4% Rule Still Work?

"On Monday, December 9, at 3pm Eastern, Anne Tergesen of the Wall Street Journal will be hosting a 30 minute webcast called, "Does the 4% Rule Still Work?" I will be joining her panel along with (my frequent co-author) David Blanchett, and the original creator of the 4% rule, William Bengen. If you can't make it live, replays are available. "

 

[timo2]

The nature of the comments in this thread is one of the reasons I like this forum so much

 

[MooreBonds]

Some may believe that a portfolio consisting of high-PE stocks and low-yield bonds in a rising interest rate environment is doomed to underperform historical averages. But as you suggest, whether that portfolio can or cannot sustain the oft-benchmarked 30 or 40 year retirement given traditional withdrawal rates remains to be seen. Perhaps an underperforming portfolio depletion is already incorporated into the SWR data. And then perhaps it's not.

When you consider a few historical perspectives regarding valuations:

Historical Average PE: 14-15 S&P 500 PE Ratio versus 20 now
Historical Average Dividend Yield from market: 4.43% S&P 500 Dividend Yield (and never less than 3% prior to 1990), versus 1.91% now
Historical interest rates: Never this low before File:S and P 500 pe ratio to mid2012.png - Wikipedia, the free encyclopedia

I'm definitely going to be leaning more towards a 2.5%-2.75% WR for my hopeful 40+ year retirement, because I truly do think "it's different" for at least the near-term - especially considering that the dividend yield from the market has never been below 3% (and dividends make up a significant portion of total return), in addition to the other factors above.

I suppose deflation could change all of the "it's different this time around" for bonds, but probably wouldn't do much good for stocks.

The good thing is that for a 40 year retirement, the worst case scenario is that a 2.5% withdrawal each year will pay for all of your expenses over 40 years even with a 0% real return.

 

[Texas Proud]

When you consider a few historical perspectives regarding valuations:

Historical Average PE: 14-15 S&P 500 PE Ratio versus 20 now
Historical Average Dividend Yield from market: 4.43% S&P 500 Dividend Yield (and never less than 3% prior to 1990), versus 1.91% now
Historical interest rates: Never this low before File:S and P 500 pe ratio to mid2012.png - Wikipedia, the free encyclopedia

I'm definitely going to be leaning more towards a 2.5%-2.75% WR for my hopeful 40+ year retirement, because I truly do think "it's different" for at least the near-term - especially considering that the dividend yield from the market has never been below 3% (and dividends make up a significant portion of total return), in addition to the other factors above.

I suppose deflation could change all of the "it's different this time around" for bonds, but probably wouldn't do much good for stocks.

The good thing is that for a 40 year retirement, the worst case scenario is that a 2.5% withdrawal each year will pay for all of your expenses over 40 years even with a 0% real return.

One thing that I think is different (but do not know where to find out if true) is that today a lot of businesses are foregoing dividends as a way of getting value to shareholders in lieu of stock buybacks...


As an example, I have heard that people are pushing Apple to buy back $50 BILLION in stock over what they have planned... I have heard that Exxon has been buying back billions every year...

What would the dividend yield be if you included all the stock buyback