In defense of 4% withdrawal strategy.

[heeyy_joe]

For those of you unsure of a 4% withdrawl strategy, here is an article for you.


David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. Here is a USNEWS and World report article:

Why 4 Percent Annual Withdrawals are Still Safe - Yahoo! Finance

Here are a few reasons a 4 percent withdrawal rate could still work for you:

-Safe withdrawal rates are based on the absolute worst case scenario.
-What are the chances you will live to 95?
-You can adjust your spending.
-Look at your budget closely, and there are many things that can be cut.
-Social Security will still serve as a solid foundation.
-Low expected returns won't last forever.

As for me, I think I will stick with a 3% plan until interest rates come back to historical norms.

 

[ziggy29]

I think most of us accept that the math has historically worked very well for 4%.

I think significantly more of us aren't sufficiently convinced that the economic factors that have allowed 4% to work for the last 80+ years will allow it to keep working for another 50+ years. Or at the very least, are afraid to assume the next 50 years will be like the last 80+ years.

 

[marko]

[QUOTE

-Safe withdrawal rates are based on the absolute worst case scenario.
-What are the chances you will live to 95?
-You can adjust your spending.
-Look at your budget closely, and there are many things that can be cut.
-Social Security will still serve as a solid foundation.
-Low expected returns won't last forever.

If the first is true and living to 95 is likely low, this is good news. I wonder if sometimes folks get caught up in the 'four corners' of the equation without taking a step back.

 

[ziggy29]

The thing is, all we can look at is the worst case scenario relative to things that have happened since they started recording the historical data. We can't backtest anything worse than has occurred over the look-back period, but something worse COULD happen.

Obviously, it *could* (not suggesting it will) get worse than the perceived "worst case" (and it nearly did in late 2008). But so far, it has survived the market crashes and inflation over the entire look-back period. That gives *some* confidence about the future, but no guarantees.

 

[Live And Learn]

I think the 4% rule is fine for a 'traditional' retirment at age 65, for all the reasons in your bullet points.

I'll be at somewhere between 3 and 3.3% and am hoping for 45 years. I'm not convinced teh 3.3% is "good enough" but hopefully I'll be able to mitigate the risks as I go along

 

[braumeister]

-Safe withdrawal rates are based on the absolute worst case scenario
unless we haven't seen the worst case yet.

-What are the chances you will live to 95?
not bad, based on my family history

-You can adjust your spending
you may have to adjust it quite a lot.

-Look at your budget closely, and there are many things that can be cut
but for most retirees, not that many and not that much.

-Social Security will still serve as a solid foundation
unless it doesn't.

-Low expected returns won't last forever
unless they do.

My 2% plan lets me sleep at night.

 

[Midpack]

The 4% WR has been safe over any 30 year period since 1871 in the past 95% of the time (calling it worst case is overstating it slightly). In fact you could withdraw more than 4% each year inflation adjusted 95% of those periods, as much as 12% if you were really lucky (though in hindsight). So the 4% SWR model does allow for most of the worst periods, with a big upside in the past.

We're planning on less than 3% to start, and maybe using % remaining portfolio (vs initial WR plus inflation adjusted thereafter ala SWR) in the first decade or so. What happens in the decades ahead of us is anyone's guess... let's hope we're all pleasantly surprised (and relieved).

 

[David1961]

I think 4% is a good ballpark figure that you may need to tweak depending on your situation. And a lot seems to depend on how your portfolio does the first few years of ER.

 

[audreyh1]

We'll probably increase our fixed withdrawal percentage to 4% once we reach 65 or 70.

 

[Katsmeow]

The 4% WR has been safe over any 30 year period since 1871 in the past 95% of the time (calling it worst case is overstating it slightly). In fact you could withdraw more than 4% each year inflation adjusted 95% of those periods, as much as 12% if you were really lucky (though in hindsight). So the 4% SWR model does allow for most of the worst periods, with a big upside in the past.

Midpack what is the source of the data in the images that you posted? Did you do the images or did you get them from somewhere?

I ran a 4.5% WR in Firecalc (55% equities since that is my current allocation) and it had a roughly 78.4% chance of success. Even 5% is 60.4%

Of course I realize not everyone is at a 30 year period of time. When DH retired we used a longer period but he is now 65 and is comfortable with 30 years. I'm 6 years younger so my time horizon is a little greater. Even so, with a 36 year plan, 95% would be somewhere between 3.7 and 3.8%.

I get that things may be different in the future, but I also am fairly sure that if it is we can adjust. I've looked at a lot of the year end balances on those periods that failed in Firecalc and usually it is clear that there will be problems many years in advance of failure.

Just this weekend while we were running errands, DH and I talked about what spending things are really important and where we could cut. We both agreed that after the kids where gone, for example, we could easily live in a house half the size of our downsized (!) house and that we would give up dining out before we gave up high speed internet. We actually talked about what we would ever need to do to live on half the income that we plan to spend based upon Firecalc and Fidelity RIP results. We don't actually plan to live on that income, of course, unless necessary but the point is that in real life people do adjust and don't just blindly keep withdrawing 4%.

 

[donheff]

We'll probably increase our fixed withdrawal percentage to 4% once we reach 65 or 70.

I'm eight years in and will reach 65 later this summer. DW is 60. I figure in 5-10 years I will lighten up the reins a bit. Business Class anyone?

 

[ER Eddie]

Thanks, Joe, that's good news. I was getting a little concerned.

 

[Midpack]

Midpack what is the source of the data in the images that you posted? Did you do the images or did you get them from somewhere?

I have seen similar plots several places, but that one is from Wade Pfau.

Retirement Researcher Blog: Safe Withdrawal Rate for a U.S. Retiree Invested in the World Developed Markets

 

[dtbach]

My 2% plan lets me sleep at night.

And your kids will be happy with all the money they get on your demise

 

[braumeister]

And your kids will be happy with all the money they get on your demise

Utterly irrelevant in my case. I have absolutely no desire to spend more than I do.

 

[ziggy29]

And your kids will be happy with all the money they get on your demise

That makes it a win-win situation, does it not?

 

[audreyh1]

We have no children. Our main heirs will be siblings and charity. But we prefer to give now, rather than later. For this reason we are perhaps more aggressive on the withdrawal rate side, and will become more aggressive as we get older.

We feel totally comfortable with pulling back, if needed, to adjust to changing circumstances. Heck - we'd probably just need to suspend the gifting temporarily - last year it was 20% of our (after tax) spending! Last year's spending was still under budget, so we were also able to set aside the excess for a rainy day in the near future.

I don't feel that just because interest rates are low today, it means the rules have changed going forward. One reason I am not that concerned, is because we are already been through a decade of grueling bear markets. These cycles do eventually end. I'm one of the 1999/2000 retirees - we're the ones who are supposed to be on the most recent "dangerous path". 2000 could end up to be the new year on the graph for showing the lowest survivable withdrawal rate. But our personal situation is fine - we had other resources to draw on during the first decade and were able to let our retirement fund grow, which was part of our original plan.

Current withdrawal rate - 3% of end of (prior) year retirement portfolio value. [That means there is no yearly inflation adjustment - we get a raise if the portfolio does well, we take a cut if the portfolio does poorly].

 

[dtbach]

That makes it a win-win situation, does it not?

Not necessarily. I know I'm only a sample of 1 but my parents (still going at 91 and 93) were very miserly with their money. Heck, they are still re-investing dividends! And now they wish perhaps they had spent some more to go on a cruise or tour Europe, etc. I'm going to most likely get a bundle of money but I wish they had done a few more things when they were younger. You can't take it with you.

 

[ziggy29]

Not necessarily. I know I'm only a sample of 1 but my parents (still going at 91 and 93) were very miserly with their money. Heck, they are still re-investing dividends! And now they wish perhaps they had spent some more to go on a cruise or tour Europe, etc. I'm going to most likely get a bundle of money but I wish they had done a few more things when they were younger. You can't take it with you.

But if they have no real desire to spend more, what are they supposed to do? Spend more now (because you think they should) even if they have no desire to, just in case they regret not "living enough" in the past?

My mom is the same way. She's almost 78 and able to spend a lot more, and I want her to use her money as much as she needs to be happy... but it makes her happier living simply and frugally as she has done for most of her 78 years, and in giving to charities, children and grandchildren. Her "discretionary spending" is almost all involved in traveling to see family and in an annual trip to Reno with my aunt. If spending all her money is what would make her happy, that's what I'd want her to do. But if that's not how she is, who am I to tell her she should do it anyway?

 

[Midpack]

Current withdrawal rate - 3% of end of (prior) year retirement portfolio value. [That means there is no yearly inflation adjustment - we get a raise if the portfolio does well, we take a cut if the portfolio does poorly].

Though you haven't tried to, you've gotten me to think more about it and I am heavily leaning to withdrawing a fixed % of remaining portfolio (vs inflation adjusted like SWR methodology) at least for the first 10-15 years if possible. If something happens and we have to adjust, no problem.

Occurred to me that our annual spending over the past 35 years really has not correlated well with inflation or even our incomes. There have been some stepwise changes with job relocations, boat ownership, etc. - but we've also gone several consecutive years without increasing spending at all. As much as folks debate the issue, inflation has not been the primary factor in our annual spending rate of change.

Again, I am NOT claiming you've tried to influence me or anyone else.

 

[Dino1]

I think Ben Stein recommends 3.2% for someone retiring at 62. Which sounds about right.

 

[audreyh1]

Though you haven't tried to, you've gotten me to think more about it and I am heavily leaning to withdrawing a fixed % of remaining portfolio (vs inflation adjusted like SWR methodology) at least for the first 10-15 years if possible. If something happens and we have to adjust, no problem.

Occurred to me that our annual spending over the past 35 years really has not correlated well with inflation or even our incomes. There have been some stepwise changes with job relocations, boat ownership, etc. - but we've also gone several consecutive years without increasing spending at all. As much as folks debate the issue, inflation has not been the primary factor in our annual spending rate of change.

That has been our experience. Our spending has been more or less flat in nominal terms, even though varying as much as 20% from one year to the next, it has averaged flat. We had quite a bit of pent up spending on travel early on (which we had set aside extra funds for anyway) and have still not exceeded those levels over a decade later. I also think we also got a lot smarter on how to get a better bang for the buck after a couple of years of travel.

We've been ramping up our gifting in the past couple of years to try not to fall too far behind the spending side.

I think those with children understandably see leaving an inheritance as generally a good thing, but for those of us without, leaving behind a big pile is much less of a "win-win".

Again, I am NOT claiming you've tried to influence me or anyone else.

Of course not!

 

[sailfish]

I wonder how many people figure in the 1% or more of their savings portfolio that they may pay a financial advisor. I don't use one but a lot of people do. Many of my fellow retirees went to one right away after retiring. This would have to affect your withdrawal rate to some extent.

 

[ziggy29]

I think those with children understandably see leaving an inheritance as generally a good thing, but for those of us without, leaving behind a big pile is much less of a "win-win".

Depends on how much you like the charities who might get what's left.

 

[scrinch]

I wonder how many people figure in the 1% or more of their savings portfolio that they may pay a financial advisor. I don't use one but a lot of people do. Many of my fellow retirees went to one right away after retiring. This would have to affect your withdrawal rate to some extent.

Hmmm. I guess that would be 1% for the financial advisor and 3% for you, instead of 0.1% for Vanguard and 3.9% for you. Isn't that how it works if you're going to "withdraw" 4% each year?