Is a 4% withdrawal rate good again?

[MichaelB]

The last few years we have seen numerous reports that withdrawal rates are declining and 4% was no longer safe. This morning the WSJ reported on a new analysis by Morningstar that says this has now reversed and 3.8% is now “safe”.

Below is a link to the report and a snippet of the key findings. The report requires signing up, but interested members can enter any data, it’s not verified. https://www.morningstar.com/lp/the-state-of-retirement-income

For retirees who seek a fixed real withdrawal from their portfolio in retirement, a starting withdrawal rate of 3.8% is safe in Morningstar’s model over a 30-year time horizon, assuming a 90% success rate (defined here as a 90% likelihood of not running out of funds) and a balanced portfolio.

That is appreciably higher than the 2021 figure, which was 3.3% for a balanced portfolio with a 90% success rate.

Employing a more aggressive equity allocation does not meaningfully improve safe starting withdrawal rates.

Investors with shorter time horizons of 10 to 15 years can employ a higher withdrawal rate if using a conservative portfolio mix than they can with a more equity-heavy one.

Dynamic withdrawal strategies may help retirees consume their portfolios more efficiently, factoring in both portfolio performance and spending, but they also add variability to retiree spending that may or may not be acceptable to the individual.

Of the dynamic strategies we tested, the “guardrails” system does the best overall job of balancing higher withdrawals alongside cash-flow-volatility considerations.

The right level of flexibility in a retiree’s spending system will depend on the individual's situation—the extent to which fixed expenses are covered by nonportfolio income sources.

 

[audreyh1]

Oh no! Not another is 4% WR safe article!

 

[Major Tom]

My goodness. If anyone is following this so closely, that the difference between 4% and 3.8% is significant to their retirement plans, then I think that either -

1) they need to reduce their WR a bit so that they can sleep at night or
2) they should probably reduce their exposure to equities.

 

[Gumby]

The only safe rate is 0%.

 

[Major Tom]

The only safe rate is 0%.

Well gosh. If you're going to go there, then nothing is really safe, is it?

Which, of course, it isn't!

 

[ncbill]

3.8% worked for the mid-1960s retiree who saw annual inflation go from under 2% to double digits...increasing over the entire first half of their (theoretical) 30-year retirement.

Plus they had to endure the 1973-74 stock market crash with the DJIA down nearly 50% over a roughly two-year-long bear market.

Somehow their portfolio lasted until their (theoretical) death.

 

[Dtail]

Whoa thank god.

 

[RobbieB]

Nothing is safe, there is no safety. There is only life.

I've been well above the "safe" 4% for 8 years now and still have more dough than I started with. Not to mention I also have a "yacht", thanks to 80% equities.

All just more "retirement noise" for the money. They pay me to write words. Please click.

 

[daylatedollarshort]

TIPS have been yielding enough for a 4% safe withdrawal rate over 30 years lately.

 

[NW-Bound]

The only safe rate is 0%.

One nice thing about 0% WR is that you can retire with a portfolio of any size, including $0.

Just think how liberating that is.


PS. I just remember MasterBlaster. He used to post photos like the one below, saying that's all one needs for retirement.


PPS. Here's one of his last posts. https://www.early-retirement.org/forums/f29/possibly-moving-to-las-vegas-113859.html#post2770152

 

[Samsung4321]

One nice thing about 0% WR is that you can retire with a portfolio of any size, including $0.

A no sale no withdrawal inheritance:

https://www.holdmyark.com/blog-1/2019/3/6/is-this-the-oldest-stone-mason-work-in-the-world

 

[marko]

My goodness. If anyone is following this so closely, that the difference between 4% and 3.8% is significant to their retirement plans, then I think that either -

1) they need to reduce their WR a bit so that they can sleep at night or
2) they should probably reduce their exposure to equities.

+1. If 0.2% is the difference between success and failure, now might be a good time to rethink those retirement plans.

Personally, I've been hovering around 5.5% for almost two decades yet have doubled my portfolio (somehow) along the way.

 

[NW-Bound]

Personally, I've been hovering around 5.5% for almost two decades yet have doubled my portfolio (somehow) along the way.

Dang! Does FIRECalc show this? I have not run FIRECalc lately to see if it gets updated data.

Maybe it's your stock picking skill?

 

[marko]

FireCalc says --and always has--that I should stay in the ~4% range.

 

[NW-Bound]

Two big market crashes in the last 20 years, and that does not make it the worse period in investment history.

Something to ponder...

 

[audreyh1]

Two big market crashes in the last 20 years, and that does not make it the worse period in investment history.

Something to ponder...

Followed by a very very long bull market and long periods of very low interest rates. Firecalc contains many positive long-term scenarios as you can see from the graphs it generates. It is simply identifying the worst case for a given withdrawal rate and length of time. If you don’t happen to live through one of the few worst case scenarios, you can definitely get away with a higher withdrawal rate.

 

[marko]

Maybe it's your stock picking skill?

If you've been following my 7000+ posts you know that I'm an idiot. A lucky one maybe, but still an idiot!

 

[Ronstar]

Yep, raising the WR from 3.3% to 3.8% will be just enough to cover increased expenses due to 8% inflation.

 

[NW-Bound]

Followed by a very very long bull market and long periods of very low interest rates. Firecalc contains many positive long-term scenarios as you can see from the graphs it generates. It is simply identifying the worst case for a given withdrawal rate and length of time. If you don’t happen to live through one of the few worst case scenarios, you can definitely get away with a higher withdrawal rate.

On the other hand, 2000 to 2022 is only 22 years. Still 8 years left to round up a 30-year period for FIRECalc.

But then, as Marko said, he has doubled his money, and will be able to survive the upcoming years very well, even if they turn out to be terrible.

 

[audreyh1]

On the other hand, 2000 to 2022 is only 22 years. Still 8 years left to round up a 30-year period for FIRECalc.

But then, as Marko said, he has doubled his money, and will be able to survive the upcoming years very well, even if they turn out to be terrible.

Normally folks get into trouble during those first 15, and since Marko has experienced growth instead “failure” seems unlikely in his case.

His portfolio doubling may not look so great if he inflation adjusts his portfolio growth since inflation since Dec 1999 has been around 77%, but he is still ahead.

 

[MarieIG]

Hi Mike,

I think of the withdrawal rate as a basic plan to keep in the back of my mind but actually mix in a "guard rail" approach for security - and I believe flexibility is key.

This is my first year of retirement. I did not enjoy the inflation or market volatility.

I spent more than I had initially anticipated due to making larger Roth conversions than initially planned but have been using pre-bucketed cash to pay the tax.

My sale of equities this year was to reduce taxes going forward (and replace lack-luster expensive funds with cheaper etfs) rather than to fund living expenses.

Next year I will start [selectively] taking a portion of dividends and interest from taxable accounts for expenses (mostly taxes).

I did not raise my withdrawal rate to chase [inflation] lifestyle (although DH and DS certainly paid more for food and utilities).

 

[CRLLS]

+/- 0.2% could easily be seen in different assets being held, both being 60/40. There is no "safe" number IMO. Retire and retire again makes more sense to me. Don't "set and forget" using any WR, and expect it to follow for 30-40 years in the future.

I did use the 4% as a rule of thumb when in my accumulation phase. A weight came off me when I reached the magic number. Life has changed over the last 18 years. It will change again in the next 30.

 

[enjoyinglife102]

It was always good and will forever be good as an academic exercise for the period covered. Just one of many things one can consider when managing their money.

 

[Dd852]

Ignore the excitement, back to normal everybody!

After a ton of articles saying the 4% “rule” was over … now it seems the good folks at Morningstar have decided it’s actually back!

As you were.

https://www.wsj.com/articles/the-4-rule-for-retirement-spending-makes-a-comeback-11670772621

 

[Dd852]

After a ton of articles saying the 4% “rule” was over … now it seems the good folks at Morningstar have decided it’s actually back!

As you were.

I forgot the link. Sorry. https://www.wsj.com/articles/the-4-rule-for-retirement-spending-makes-a-comeback-11670772621