The 6% SWR -- it's official

[haha]

Maybe 2% would be more appropriate? So after your assets are cut in half, you still can take a 4% SWR?

You don't know his wife!

 

[FUEGO]

You don't know his wife!

Are you suggesting that his assets are not the thing that will get cut in half?

 

[bongo2]

6% is wussy. The 4% retiree in January 2000 (with the FIRECalc default portfolio) was drawing over 6% last year. It's about 9.5% now (with an S&P of 900). This doesn't include any money lost in bond defaults.

 

[laurence]

Are you suggesting that his assets are not the thing that will get cut in half?

He knows that even at 50% SWR I will never outlive my money!!

 

[chinaco]

Kitces P/E10 research comes to a similar conclusion. 4% in low P/E valuation periods may be overly conservative for a 30 year withdrawal period and that in low P/E10 periods a larger withdrawal rate can survive.


http://www.kitces.com/assets/pdfs/Kitces_Report_May_2008.pdf

 

[clifp]

6% is wussy. The 4% retiree in January 2000 (with the FIRECalc default portfolio) was drawing over 6% last year. It's about 9.5% now (with an S&P of 900). This doesn't include any money lost in bond defaults.

Hey I resemble that person. If I actually was withdrawing 4% of the amount I retired with summer 99 (heavily tech oriented). I'd be at a rate of 7.5%.
Fortunately, my portfolio didn't do as bad as the S&P and my withdrawal rate was closer 2.5%, still it has risen to above 4% of current value.

 

[lazygood4nothinbum]

6% is wussy. The 4% retiree in January 2000 (with the FIRECalc default portfolio) was drawing over 6% last year. It's about 9.5% now (with an S&P of 900). This doesn't include any money lost in bond defaults.

thanx bongo2. if what you cite is true, that somewhat scary example lends credence to what i had only a vague sense of dread about & expressed here:

it seems nothing more than a crap shoot to take long term averages and apply them to short term lives. it all sort of depends when you hop on the ride.

 

[ziggy29]

6% is wussy. The 4% retiree in January 2000 (with the FIRECalc default portfolio) was drawing over 6% last year. It's about 9.5% now (with an S&P of 900). This doesn't include any money lost in bond defaults.

How would that compare to someone at the end of 1974 who started taking 4% in 1966, particularly in real dollars?

 

[harley]

Many aspiring to a 2% SWR are doing it for ERs that exceed the Trinity study's 30-year period. If you're trying to achieve success over five or six decades then 2% might actually be a better SWR. Raddr's research indicates that 4% is exceedingly optimistic past 30 years.

Nords, can you point me to any documentation or discussion of this? I searched the site, but couldn't find what I was looking for. And since I'm hoping (probably foolishly) for a 50 year retirement this would be a good thing to read up on. I might need to buy an annuity.

 

[Gone4Good]

How would that compare to someone at the end of 1974 who started taking 4% in 1966, particularly in real dollars?

My simulation shows that with a 60/40 portfolio and a 4% SWR, the Jan 1, 1966 retiree's withdrawal rate would have only been 4.9% after 8 years. But that is before things really hit the fan. The WR jumps to 6.11% the following year and 8.11% the next. It plateaus for a couple of years but then it's pretty much downhill after that.

The retiree spends most of the last 17 years of his/her life drawing double digit percentages from the portfolio desperately hoping that they expire before the money does (which happens by the end of 1997).

An interesting side note. A 10% cut in spending in 1974, once the SWR hit 6%, keeps the portfolio alive for another 10 years.

 

[Gotadimple]

So your simulation shows that one shouldn't withdraw more than 6%, or 6% less 10% (no more than 5.9%) when the economy started downward?

-- Rita

 

[bongo2]

How would that compare to someone at the end of 1974 who started taking 4% in 1966, particularly in real dollars?

Very close. That one withdraws $52.5k Jan of 1975 from a portfolio of $548k for a WR of 9.5%. 1966 runs out of money in year 23. The worst (after 9 years) is 1973 with a 1982 withdrawal of 11.7%. The bull market soon kicks in and this one just barely runs out of money in year 30.

You can look at this in the detailed results of FIRECalc.

Clifp: 2.5% in 2000 becomes 4.9% today. You can benchmark against that.

Yrs to go: you must have very different data from what FIRECalc is using. Changing the allocation to 60/40 (from the 75/25 default) doesn't change the numbers in FIRECalc nearly that much.

 

[Gone4Good]

So your simulation shows that one shouldn't withdraw more than 6%, or 6% less 10% (no more than 5.9%) when the economy started downward?

-- Rita

Not exactly. What I was trying to show was that cutting spending can make a big difference. FIRECalc assumes people blindly increase spending each year with inflation regardless of what is happening. That is not a reasonable assumption. Instead I took an arbitrary date (1974) where someone with a pulse might have had a clue that something bad was happening, and assumed they cut spending by 10%. The result was that the portfolio lasted for another 10 years.

 

[NW-Bound]

What I was trying to show was that cutting spending can make a big difference. FIRECalc assumes people blindly increase spending each year with inflation regardless of what is happening.

Not really. Firecalc has different spending models, whose parameters you can tweak, which reduce the expenditure during lean years.

The trick is to make sure that your initial 4% still has enough discretionary expenses that you can cut during bad times like travel, dining out, Xmas gift, etc...

Failing that, I think most people would do something more drastic if this turns out to be a long dry spell. I would sell my house, regardless of how low it fetches, to move into a smaller home with lower operating costs, or to a rural area with a lower cost of living, get rid of one car, for example.

Who in the right mind would draw his/her assets down to 0?

 

[2B]

Who in the right mind would draw his/her assets down to 0?

My in-laws just about did. Wait a minute. You wrote "in their right mind."

Unfortunately, money management skills don't get better as we age.

 

[W2R]

Who in the right mind would draw his/her assets down to 0?

I always specify in Firecalc that I don't want my portfolio ever to be any smaller than $200K. I am thinking of doubling that amount in future runs. I also specify 100% probability of success. These specifications just provide a peace of mind factor, for me.

 

[ziggy29]

I always specify in Firecalc that I don't want my portfolio ever to be any smaller than $200K. I am thinking of doubling that amount in future runs. I also specify 100% probability of success. These specifications just provide a peace of mind factor, for me.

A year ago, FIREcalc was showing me 100% success at age 52 (assuming no changes in my j*b situation between now and then). Today that 100% success level is back up to 57 because of the whacking my portfolio has taken. If I put in a part-time j*b at $1,000 a month until age 62 I can get that back down to 54. And if my wife can ever find a j*b (in this crappy economy) at $20,000/yr, it's back down to 52.

Think I'm going to invest in a sandwich board.

Sigh.

 

[W2R]

A year ago, FIREcalc was showing me 100% success at age 52 (assuming no changes in my j*b situation between now and then). Today that 100% success level is back up to 57 because of the whacking my portfolio has taken. If I put in a part-time j*b at $1,000 a month until age 62 I can get that back down to 54. And if my wife can ever find a j*b (in this crappy economy) at $20,000/yr, it's back down to 52.

Think I'm going to invest in a sandwich board.

Sigh.

Let's list some options:
(1) wife somehow manages to land a j*b (something you can't control)
(2) invest in a sandwich board and hope for a miracle (something you can't control)
(3) LBYM a little more (something you can control!)
(4) work an extra 5 years.

They all sound pretty dismal, though one sounds more appealing to me than the others.

 

[Architect]

FIRECalc assumes people blindly increase spending each year with inflation regardless of what is happening. That is not a reasonable assumption.

Great point! Inflation is a complicated beastie. Sure the headline number increases by 3% - but what about your personal inflation rate? I don't enjoy travel much (too much of that in my job), and eat a vegan diet of vegs, fruits, beans and grains. The price of my foods is very stable, I didn't notice anything like the meat and milk eaters did when energy speculation drove up their costs last year.

If you live a low key lifestyle inflation doesn't have to be very troubling.

 

[ziggy29]

Let's list some options:
(1) wife somehow manages to land a j*b (something you can't control)
(2) invest in a sandwich board and hope for a miracle (something you can't control)
(3) LBYM a little more (something you can control!)
(4) work an extra 5 years.

They all sound pretty dismal, though one sounds more appealing to me than the others.

We already live rather simply and in reality, if we cut out all the nonessential "stuff" we enjoy, other than making life feel like it sucks a lot more, the additional amount we could save is a puny pittance compared to another (or longer-lasting) income stream in terms of the "safe" retirement date. I saw that with no other changes in income and employment, saving another $3,000 a year would move the needle one year at most -- if that. It would only change the amount we're currently saving each year by about 10%.

Sure, it's something, but I don't know that moving up the exit date one year is worth living in near-austerity until then.

 

[W2R]

We already live rather simply and in reality, if we cut out all the nonessential "stuff" we enjoy, other than making life feel like it sucks a lot more, the additional amount we could save is a puny pittance compared to another (or longer-lasting) income stream in terms of the "safe" retirement date. I saw that with no other changes in income and employment, saving another $3,000 a year would move the needle one year at most -- if that. It would only change the amount we're currently saving each year by about 10%.

Sure, it's something, but I don't know that moving up the exit date one year is worth living in near-austerity until then.

Well no - - I was thinking more like living a little simpler for the rest of your lives, which would lower the required income. But if this would take the fun out of life (more than working an extra five years would do), then it isn't the best option for you.

For me, well, I don't really need much more than what I have, and my house is paid off. So when we move to Springfield, where the cost of living is less, my essential expenses will be pretty low. Although I will enjoy spending any extra money I might have, what I spend over and above the essentials really doesn't matter to me as much as having the time to enjoy what I have now. YMMV and you are younger than me, so maybe the idea of working an extra 5 years isn't as much of a downer for you as it might be for me.

 

[haha]

I always specify in Firecalc that I don't want my portfolio ever to be any smaller than $200K. I am thinking of doubling that amount in future runs. I also specify 100% probability of success. These specifications just provide a peace of mind factor, for me.

Be honest now. Judging from your feelings and posts during the current or recent stress, how peaceful would your mind be if your portfolio declined to $200,000- or to $400,000 for that matter?

Ha

 

[ERD50]

Great point! Inflation is a complicated beastie. Sure the headline number increases by 3% - but what about your personal inflation rate? I don't enjoy travel much (too much of that in my job), and eat a vegan diet of vegs, fruits, beans and grains. The price of my foods is very stable, I didn't notice anything like the meat and milk eaters did when energy speculation drove up their costs last year.

If you live a low key lifestyle inflation doesn't have to be very troubling.

I disagree - "it depends" is a more accurate answer, IMO.

For example, my health ins payment increase *alone* in one year accounted for over 6% 'personal inflation'.

Heck, if I had a lower lifestyle, that would have been an even higher portion of my 'personal inflation'. And I don't consider having health insurance for me and my family to be living the "high life".

-ERD50

 

[W2R]

Be honest now. Judging from your feelings and posts during the current or recent stress, how peaceful would your mind be if your portfolio declined to $200,000- or to $400,000 for that matter?

Ha

Not peaceful at all! You are right. But, I could probably manage somehow.

 

[Moemg]

A year ago, FIREcalc was showing me 100% success at age 52 (assuming no changes in my j*b situation between now and then). Today that 100% success level is back up to 57 because of the whacking my portfolio has taken. If I put in a part-time j*b at $1,000 a month until age 62 I can get that back down to 54. And if my wife can ever find a j*b (in this crappy economy) at $20,000/yr, it's back down to 52.

Think I'm going to invest in a sandwich board.

Sigh.

Maybe a rich relative will die and leave you a chunk of money and then you can brag to the board how frugally you lived to make it to retirement .