Marketwatch Article on Withdrawal Strategies

[JLP]

Did you guys see this article by Robert Powell?

One of the guys interviewed for the article is Stuart Lucas. He recommends withdrawing no more than 3% per year. Doesn't that seem kind of low to you guys?

 

[MasterBlaster]

Well 3% might be high if your stash is all tied up in high-cost high-fee accounts that banks and financial planners like to push.

think 4-5 percent minus their 2 percent fees gives you the recommended 3 percent.

 

[Mysto]

I'm starting to suspect that this is a ploy to sell annuities. I can get a better guaranteed rate for life than 3% without the market. Some of this may come from Monte Carlo simulations. They can be very rough on withdrawal rate calculations.

On the other hand, I reported that Ray Lucia suggested a 6% withdrawal in one of his radio broadcasts.

Trinity suggests about 4% or so and most of my Firecalc trials have confirmed that as a reasonable amount.

 

[2B]

The people that manage your money for a fee or sell you investment products have a massive incentive to have you work/contribute to your portfolio as long as possible and to have you take as little as possible out of it when you do. If they can sell you a turd innuity that's just frosting on the cake.

The whole subject of SWR has been beaten to death here. I lean towards the "Spartan budget" where your essentials are covered at a nominal 4% withrawl rate. With extra cash, I think it's appropriate to go for a higher withdrawl rate (6 or 7% depending on the market) knowing that in bad times you can avoid going back to work by not living as well. Again, you have to have a basic acceptible lifestyle covered with a safe cash flow.

I believe that this will work out because our natural desire to spend will drop off as we age, the 4% SWR will create a massive residual estate if spending isn't increased and what's the point of ERing if you're going to live like a pauper. It's better to work a couple of extra years and have a reasonable plan.

 

[molly]

As I mentioned in another post, I am an avid radio junkie for the Ray Lucia show. In most instances he recommends 4%....give or take a bit ..........depending on the person's age and also if he/she will be receiving more/less income in the future.

I have not heard him say that 6% is the usual recommended SWR . If you only listened to one broadcast...hmmmm.

 

[retire@40]

My informal SWR plan A is to take 4%.  From the 4%, 3% is for essentials (with some fluff), 1% is strictly for travel and entertainment.

Plan B is to go to 3% in bad times.

Plan C is to go to 2% in really bad times and make up the 0.5% to 1.0% difference with some self-employed work.

Plan D is to live on brainpower and send my wife to work.

 

[preben]

2B and Retire@40 I am doing exactly the same. Like 2B I do believe that i can take more in good times - also let's not forget that the 4% rule is based on the historical worst case 30 year scenario , blindly adjusting for inflation and spending no matter what the market does , a portfolio consisting ONLY of US large caps and US fixed income , holding no "real assets" like commodities .

Here is a great study showing how adding commodities (and international) to a portfolio bumped the SWR up to close to 6% (for the period the study covers): http://raddr-pages.com/research/CommodityFutures.htm
It is an easy read, but if you can't wait the scroll to the bottom to see the returns depending on the % allocations. a portfolio with 20% each in TIPS ScV SP500 EAFE Commodities would have a 5.7% SWR.

Add to that, some resonable adjustments in spending (through budget 1 covering basics, and budget 2 covering frivilous things like fast cars, exotic travel Etc.) for bad market years, and we should probably worry less and live more!

Cheers!

 

[kramer]

Hi Ben,

This thread has got be a little optimistic

But I have always considered that spending should be adjusted up or down based on the value of your entire portfolio, not on whether a particular year you are up or down. For instance, I wouldn't want to increase spending much if my portfolio had taken a beating down to 0.3 of original value, and there is a great year that brings it up to 0.4. To me, this situation is identical to one where my portfolio just took a hit from 0.5 of original value to 0.4 of original value.

I think people tend to think there is a correlation of returns between adjacent years when there really isn't (e.g., one bad year foreshadows another).

What do you think?

Kramer

 

[2B]

Hi Ben,


But I have always considered that spending should be adjusted up or down based on the value of your entire portfolio, not on whether a particular year you are up or down.  For instance, I wouldn't want to increase spending much if my portfolio had taken a beating down to 0.3 of original value, and there is a great year that brings it up to 0.4.  To me, this situation is identical to one where my portfolio just took a hit from 0.5 of original value to 0.4 of original value.

That's where the Guyton article goes. It doesn't adjust from the target withdrawl rate until the original withdrawl is 20% off from the original target based on current portfolio. If you were taking 5% initially, you wouldn't adjust your withdrawl down until your current withdrawl was 6% of your current portfolio. Then your $$ amount would go down 10%.

Guyton lets you start at a higher SWR but you can find your withdrawls cut. Someone here ran some numbers and in a bad case the amount was cut in half before rallying back to the starting withdrawl (all in inflation adjusted dollars). It does keep you from deferring spending while your portfolio value grows to the sky.

 

[HFWR]

Plan D is to live on brainpower and send my wife to work.

Isn't that Plan "JG"?

 

[preben]

I am with you Kramer. Again it is a question of pure logic vs mathematical "rules" based on history one would jump from anyway should the portfolio take a beating.

Even though the study I linked to shows that an initial 5.7% have worked historically (for the period the study covers) for a well diversified portfolio - few would keep withdrawing the (high) USD$ amount (being say 10%) blindly due to a market drop 40% even though histoy indicates that is has worked BEFORE.

The 2 budget method (or 3 or 4) ensures that one can adjust based on the total $ amount in the nest egg.

Cheers!

 

[youbet]

I think the budgeting process is extremely important. It defines your lifestyle in retirement.

I don't hate my job. But it does consume a bunch of my time and I'm looking forward to ER (very soon!) and having time for vacations, travel, home projects, volunteer work, family, etc.) Going to a "Budget B," where travel, vacations and other miscellaneous fun items are dropped for a few years, isn't really acceptable. I'd stay at work longer if that was the case.

So, for me, I planned fun items into my budget and worked until a conservative withdrawal plan supported that budget, even in bad market periods, as defined by historical performance.

Everyone needs to look at lifestyle choices, plan a retirement budget for your own tastes and pleasures and feel comfortable that it will work for you.

Also, everyone, even those without a finance or business background, needs to understand how Firecalc tests withdrawal rates. When you vary the assumptions, the Firecalc testing no longer holds true. Understand what you are varying and why.