Retirement Withdrawal rates - NYT Article

[Gumby]

Our current plan is that a combination of pension income and a 3.5% withdrawal rate (both net of taxes) will equal or exceed our current cash in-the-door income (i.e. - net of taxes and 401k contributions). Given that our mortgage (P&I = about 16% of current expenses) will be paid off concurrent with our retirement date and that we will no longer be making after tax contributions to our savings (currently about 12% of net income), I calculate that we can drop down to a 2% withdrawal rate and still maintain our current lifestyle. As further cushion, I count on zero social security and estimate the value of our house as zero. My goal is to have the same standard of living after retirement and even to be able to increase it if we want. For instance, we currently have a $10k travel line item in the budget. We probably will want to travel more than we currently do

 

[LOL!]

Much of the discussion in this thread is also covered in Otar's new "Unveiling the Retirement Myth" book. As mentioned on the other thread, it was available for a free download, but is now $3.99. There is also free excel retirement planner/optimizer software download that is very FIRECalc-esque, but with more features.

I don't know if audreyh1 has read Otar's book yet, but it appears she could has lived parts of it. For one thing, a SWR less than 1/30th of assets. Also he talks about changing the amount of withdrawal based on what's happening with the portfolio. He talks about asset allocation in term of stocks:bonds ratios, etc.

Not surprisingly, when you have lots of assetss and withdraw less than 3% a year, then it doesn't really matter what your asset allocation is or whether you reduce withdrawals when the portfolio goes down. You are in the GREEN zone and can survive lots of portfolio and market travesties. However, if you are living on the edge then lots more of these little things can affect the final outcome.

What is also nice about the book, is that he tests some of the recommendations of others. He doesn't name names, but you all will recognize who he is writing about. Sometimes the ideas of others clearly do not work in his tests.

I may sound like a broken record, but I think Otar's book is going to turn out to be a classic in the early retirement community. His retirement planner may even supplant FIREcalc.
(Now where is that book review by Nords? Is he a slow reader or what? )

 

[audreyh1]

No, I haven't read Otar's book yet, and I wasn't sure that I would, but the people's comments I have been reading have sufficiently [-]perked[/-]piqued my interest.

 

[W2R]

No, I haven't read Otar's book yet, and I wasn't sure that I would, but the people's comments I have been reading have sufficiently perked my interest.

I had intended to download it today, since the free downloads were supposed to end on August 31st. However, they were cut off early and now all you can get for free is the first chapter. Maybe I will buy a copy later, but not at the moment.

 

[audreyh1]

Seems like since you are right on the cusp of retirement Want2Retire, it might be $3.99 well spent! IMO, given the size of the book and the positive reviews (in terms of worthwhileness) so far, it's worth it. I have no problem with spending $4 for a book download - it's more the time factor in reading it for me. But I'm becoming more inclined to spend the time as well. I get more intrigued the more I read people's comments.

Audrey

 

[W2R]

Maybe I will buy a copy later, Audrey, but not at the moment.

Chapter 1 just did not inspire me to reach for my wallet. At least not today. Maybe later I will be more interested!

 

[Moemg]

After reading all the positive reviews I down loaded it . Now all I have to do it read it .

 

[Nords]

(Now where is that book review by Nords? Is he a slow reader or what? )

Easily distracted!

My reading pile has Josh Peters' "Ultimate Dividend Handbook", Charlie Munger's "Poor Charlie's Almanack", the typical magazine or two, and proofreading the kid's college applications & essays. Plus the usual 1-2 hours/day on discussion boards, a financial-analysis question or two, and (oh yeah) finishing my own bibliography/recommended reading list. So Otar's rant against the financial-adviser status quo is sinking to the bottom of the priority list. He's not wrong, he's just written a polemic. At least he's more readable than Taleb.

I need good trashy summer novels in among the "serious" reading to clear my palate. I tried re-reading a classic Jack Chalker sci-fi series and was a bit surprised to discover that it had a clichéd plot and was full of typos. Maybe that was typical of 1980s paperbacks. I'd hate to think that I'm growing out of my appreciation for his writing.

I think Otar's also inadvertently affirming that reading PDFs off of a computer screen is good for the first 40-50 pages but not much beyond.

 

[audreyh1]

I don't think there is anything at all wrong with someone choosing a 50/50 AA. It's just that your post with the "?!?!?" regarding a 75% Equity AA seemed to imply that you thought 75% was in "crazy territory". I was just pointing out that long term, it does not seem crazy at all. I'm not glossing over volatility, but I think long term volatility really matters to a retiree, too. Long term volatility is reflected in the success rate reported by FIRECALC.

-ERD50

OK ERD50, I (somewhat) take back my shock ?!?!? reaction. I just stumbled across the old retireearly page on the "safe withdrawal" rate published in 1998, and it pretty much advocates 75% stocks / 25% long term corporates as the "optimal asset mix". I can now easily see how a 1999 retiree might have started there. What's the "safe" withdrawal rate in retirement ?

I remember back then figuring out that 70% equities might be the optimal mix for my portfolio survival, but my immediate gut reaction was that I just wouldn't be able to live with the short term volatility. So I pulled back to an equity % that was still "good enough".

Audrey

 

[ERD50]

Clyatt tested this for his book and concluded that you can limit any year's withdrawal reduction to 95% of the previous year's withdrawal and still come out OK. It is true that you are likely going to face a little belt-tightening on the variable plan, but it's comforting to know that a 95% floor is the worst compromise you'll probably have to make.

OK, I have not read the book, but that means 95% year-after-year in a bear market right? Here's a FIRECALC run:

FIRECalc: A different kind of retirement calculator

4% initial rate (I used $40K/$1M for easy math), 30 year, 50/50 AA; and the 95% rule. There are a bunch of lines that dip that initial $40K spending into the $18K-20K range, a full drop in half. I'm not sure that people realize the spending drops can be this severe.

Different approaches fit different people, (I think I mentioned this in another thread a while back), but I'd rather start with a more modest WR that the data says I can maintain, than to start out higher WR and risk needing to cut it in half (or more!) just 3-10 years later, as many of those lines show. But that might be an attractive trade-off for some.

Not surprisingly, when you have lots of assets and withdraw less than 3% a year, then it doesn't really matter what your asset allocation is or whether you reduce withdrawals when the portfolio goes down. You are in the GREEN zone and can survive lots of portfolio and market travesties.

Right. I've seen that with a bunch of FIRECALC runs - get down around 2.5% and you have a "forever" portfolio (based on past history, of course).

I'll check that book out later when I have some reading time (I'm back-logged, but I am a slow reader).

I remember back then figuring out that 70% equities might be the optimal mix for my portfolio survival, but my immediate gut reaction was that I just wouldn't be able to live with the short term volatility. So I pulled back to an equity % that was still "good enough".

Audrey

Makes sense. I guess all I'm saying is that in light of comments like the "green zone" above, it probably does not make much actual difference. So it makes sense for each to choose the path that seems most comfortable.

I still tend to wonder if those that have chosen the variable spending plan have looked at where that spending might lead them. I guess (for the run above) if half of one's spending is stuff they could easily do w/o, it makes sense, but that is just not for me.

-ERD50

 

[Rich_by_the_Bay]

OK, I have not read the book, but that means 95% year-after-year in a bear market right? Here's a FIRECALC run

FIRECalc is flakey in implementing the 95% rule in my experience but I may be using it wrong.

In any event, just to be clear, the concept is that you use a percent of total value in year 1 (say 4% of 1mm = 40k). Next year your total value is 900K you only drop to 95% of the 40k, or $38K, and another drop in total value the following year would drop you to $36.1K.

It's a smoothing strategy to avoid what would otherwise have been three years of 40k, 36k, and 32K. He tested the plan historically and you eventually catch up.

I recommend you read Clyatt - it's thoughtful and balanced, IMHO.

 

[ERD50]

FIRECalc is flakey in implementing the 95% rule in my experience but I may be using it wrong.

In any event, just to be clear, the concept is that you use a percent of total value in year 1 (say 4% of 1mm = 40k). Next year your total value is 900K you only drop to 95% of the 40k, or $38K, and another drop in total value the following year would drop you to $36.1K.

It's a smoothing strategy to avoid what would otherwise have been three years of 40k, 36k, and 32K. He tested the plan historically and you eventually catch up.

I recommend you read Clyatt - it's thoughtful and balanced, IMHO.

I'm not so sure that FIRECALC is flakey on this. Look at this run:

FIRECalc: A different kind of retirement calculator

That is a simple, conservative 3% WR on a $1M portfolio, 50/50 AA, 30 year default inflation adjusted spending. You can see many, many lines dipping to around the 50% of original NW area, some are close even in year 5. And that area stays populated for many years (tough to determine if they are the same lines or not). So clearly, starting with a 4% WR will drop it down faster in those cases. It would take 5 1/2 years of 95% reductions to go from 4% WR to 3% WR (.95^5.5=.75), and 10 years to get to a 60% reduction in WR (2.4%WR).

The "failures" in FIRECALC are likely the long and drawn out bear/inflationary periods, so it seems that one must prepare for the possibility of these eventual 50% cuts in spending if they choose that variable model. It might be the right choice for some, it doesn't look attractive for me (non-COLA pension).

Does Clyatt's book trace the numbers through the 5% failure scenarios that FIRECALC alerts us too? If so, I would be interested to see how far the spending drops in an extended bear/inflationary market.

-ERD50

 

[george76]

Btw, if you want to see how Guyton's rules would work out, I created this spreadsheet a while ago
http://www.early-retirement.org/for...tions-using-guytons-decision-rules-29684.html

Great spreadsheet! Thanks for sharing it. If I read the NYT article correctly (which I may not have), it seemed that Guyton was also advocating a withdrawal rate that was dependent on the PE ratio.

So, this would complicate the calculation a little bit since it is no longer necessarily dependent on the original 4% rate.

 

[Independent]

Kitces approach makes sense to me. It's essentially what current retirees do when they try to maintain withdrawals when the market is down. As mentioned, most actual retirees probably make small adjustments.

But note that it is a market timing strategy. He says you can withdraw more in low P/E times because there is a higher probability that the market will go up than down. If this is true when you're retired, this is also true when you are accumulating. Many of us are skeptical of any market timing.

 

[youbet]

I'm not so sure that FIRECALC is flakey on this.

FireCalc isn't flakey on this and your math, IMO, is correct.

A year or two of WR reductions to 95% of the previous year's level might be tolerable for the typical retiree who started out with a well padded budget. But that level of reduction for several years in a row......... painful, very painful.

Of course, the retiree's absolute level of WR dollars is key. Reducing from $150k to $75k would hurt, but you're still at a middle class lifestyle. Reduce from $50k to $25k and you just might begin to feel the pangs of poverty if your health care costs and real estate taxes are high....... It's a relative thing.

When trying to help DW understand some of the possibilities ER might bring to us, I usually mention:

Even though our plan has a FireCalc 100% survival rate (based on our 6/2006 ER starting date) and our retirement portfolio is likely to survive, there will most likely be wild swings along the way. (And sure 'nuf, there have been already! )

Modest reductions in WR will most likely not reverse sustained crappy portfolio performance accompanied by high inflation over a prolonged time.

Comments and analysis form folks whose retirement funding is based primarily on COLA'd pensions, SS and/or ridiculously low WR's should be taken in that context. If, for example, a budget is so padded that a 50% reduction would not be painful and that level would be covered by a govt COLA'd pension (or similar), then I don't think that person really has a feeling for the risk involved in a portfolio funded ER.

Life passes by and unlike your retirement portfolio has a well known, unquestioned outcome: death. Be thoughtful of how you spend your fortune, but even more so of how you spend your time.