Assuming our retiree is lookiing ahead, not behind, and he consider a SWR as something higher than 50% success, then taking 7% each year requires two handy optimistic provisos: good portfolio returns on the early years and no worse than moderate inflation. And the unstated one: that the historic returns of the world's most productive economy are a good data set for predicting results over the next few decades.
4.5% is the updated SWR according to Bill Bengen
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Assuming our retiree is lookiing ahead, not behind, and he consider a SWR as something higher than 50% success, then taking 7% each year requires two handy optimistic provisos: good portfolio returns on the early years and no worse than moderate inflation. And the unstated one: that the historic returns of the world's most productive economy are a good data set for predicting results over the next few decades.
I ran firecalc for 45 years and export to excel. I conditional formatted for values below starting and values 125% of starting. The only thing I could see as a problem is staying constant dollar value (not increasing for inflation) so any downturn hits you just as hard as retirement day 1
If your balance grows a healthy amount the. You generally have a cushion. If you have a higher SWR you need to better evaluate failure risk.
If your balance grows a healthy amount the. You generally have a cushion. If you have a higher SWR you need to better evaluate failure risk.
GTFan
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Really? It's fairly straightforward as these things go, I don't see any heavy math here. If you're driving your own ER car you'd better know what's going on with it.
Like many here, I'm a retirement calculator dork and the more I run it, the more 4-4.5% seems like the safe withdrawal rate. I am at 3.23% because this is my portfolio yield and I'm a bit old fashioned, but at 46 and not spending 4%, my kids could be looking at an enormous inheritance. My goal is to leave what I have today inflation adjusted and that requires about a 4.25% withdrawal rate assuming a 7% return, 2.5% inflation and low portfolio turnover, low expense ratio paying income taxes out of withdrawal cash flow...
It boils down to the following. A long-term return of 8% less long-term inflation of 3% supports a long-term withdrawal rate of 5%. Withdrawing less than 5% creates the "safe" cushion against relatively short-term bad times. Your personal SWR, a value less than 5%, depends on your tolerance for risk.
GravitySucks
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Reading the Redditt AMA what i find most interesting is that before Bengens paper the usual advice FAs gave is you can pull 7%. This is what I still hear from some of my older acquaintances. Must have left more than a few portfolios on the failing side. What did FAs advise their clients to do at that point?
I look forward to reading his upcoming paper on fixing a failing portfolio.
I look forward to reading his upcoming paper on fixing a failing portfolio.
Did the Oldtimers tell people that the 7% draw was to be increased for inflation? I remember hearing "7%" myself but I believe that was to be done in the manner of a fixed annuity type payout
NW-Bound
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7% may be quite all right, considering that people usually retire in their 60s, and then do not live another 30 years.
I don't expect to live another 30 years, but I do not do 7% WR because I like to have a lot of money to count while I am still alive.
I don't expect to live another 30 years, but I do not do 7% WR because I like to have a lot of money to count while I am still alive.
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I think you and I have a different definition of risk.
Never.
I've got a spreadhsheet that figures the N-month rolling returns for whatever AA you pick, for whatever N you pick. Every rolling 12 month return, not just the Jan-Jan returns.
It shows the min, max, median and average--of all such periods from 1950 to 2016.
The worst ever 12-month return for a 60/40 portfolio was -27.1%. That was the period beginning 4/1/2008.
Heck, the worst 12-month return for 100/0 was "only" -43.3%. Same date - 4/1/2008.
audreyh1
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12 month doesn't matter. Peak to trough for losses can be far worse, and take more than 12 months, as in our most recent bear market of Oct 2007 to March 2009.
And, when one is drawing from a portfolio, and trying to keep up with inflation, the erosion can happen over decades.
Dang hard to go wrong if we use that time period and country. But anybody counting on future returns looking like the post WW-II US is, well, "optimistic."
foxfirev5
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This topic reinforces why I live on what the market gives me. Fortunately this is enough. Will I maximize my returns? No. Do I sleep well? Yes indeed.
Interest and dividends, no math beyond 5th grade required.
Interest and dividends, no math beyond 5th grade required.
RunningBum
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I didn't want to work as long as it would've taken to live off interest and dividends.
pb4uski
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Amen.
Yes (or very likely) since the 4% is predicated on the worst case historical scenarios. Most taking 4% or less will likely bequeath a considerable estate to their heirs or charities.
NW-Bound
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If you go to a finer 1-day checkmark, then the period of 3/9/2008-3/9/2009 was worse at -46.3%, and that even included dividends.
If you go to a finer 1-day checkmark, then the period of 3/9/2008-3/9/2009 was worse at -46.3%, and that even included dividends.
In October '08 I was down, briefly, 27%. I dealt with this by ignoring it, like the tech crash, on the assumption anything I do. . . will be wrong. (In '03 29% but I was 90% stocks then and DW's Dynegy 401k match was down. . . . 98% which kind of skewed the percentages a bit. I'll point out she had no choice but take the match in company stock, to forestall the clucking.)
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marko
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Our friend MathJak will shout "total return!!" but that's how I do it as well. Set aside my dividends and cap gains into a separate bucket and draw from that. Covers all the bills.
I even monitor my annual spending against my dividends and cap gains and see how over/under I am in not touching the principal.
teejayevans
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For two of us the subsidies are about $8k. We have a fair amount of money in taxable accounts and this can make it easier to manage MAGI. We are delaying pension income to help keep MAGI down also. Contributions to your HSA also reduce MAGI. You can estimate your subsidies with the linked calculator. Also, there are several historical threads on ways to manage MAGI and maximize the subsidies.
To put us back on topic, we don't need subsidies. Bengen just gave us an extra .5% WR.
Never let it be said that a Dawg didn't try to help a Gator.
FN
Wow, what a difference between states, NC subsidies are twice what Florida are. If ACA goes away, I expect even more transients to move south.
Danmar
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Right, I understand. But in my case, ( obviously not representative) I built an equity portfolio that yields about 3.5-3.75% which might approximate a reasonable SWR. Don't have any fixed come as my pension covers this (in my opinion). The real problem is low interest rates not low dividend yields.
Now after 11 years of retirement and having quite a lot more in the portfolio than when I started, I am starting to liquidate small amounts of stock that will bring the WR up to about 4.25%.
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GTFan
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+1000. Yeah it's a nice thought, but for most folks wanting to ER it takes way too long to get to this point.
Independent
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Imagine starting retirement with a plan that says annual withdrawals will be the greater of:
1) 4% of the initial fund, increased with the CPI
2) 4% of the current fund.
Of course, (1) is the traditional SWR.
This "greater of" plan both decreases the risk of dying with lots of money which could have been spent, and increases the risk of running out of money before I die, relative to (1) alone.
Is this the plan that you prefer?
I finally had some time to sit down and read both Bengen's paper and Raddr's thread on his 75/25 Portfolio. Bengen's was for 30 years and Raddr was for 40-50 years of retirement. We are talking about Bengen 1994 paper called "Determining Withdrawal Rates Using Historical Data" not Raddr portfolio Y2K.
1. Bengen looked at 50 to 75% stock and he actually said someone in middle would be best, which is @ 60%. Raddr only used 75%.
2.Bengen said Intermediate treasury fund which is 10 year treasuries. Buy 10y treasuries and sell when at the 5 year mark, rinse and repeat. Now comes the big reason why Raddr's portfolio is way down. He buys 6 month CD's and short term commercial paper for the 17 years and so far hasn't changed.
3. Runningman you take Raddr's number $491k right off his website.
Here are the inflation adjusted numbers off the Portfoliovisualizer.com website using Vanguard total stock market fund and Vanguard intermediate treasury fund. 55/45 1,181,323 60/40 1,137,996 65/35 1,088,995 and of course the 75/25 974,091. They aren't setting the world on fire but they are a far cry from your 491,000 and they only have 13 years to go. This is for a 4% withdrawal rate.
Bottom line is you can't compare apples to oranges and you need to read before you comment on something.
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