SWR failures from history

[corn18]

I found the below chart fascinating. Over on bogleheads, they are convinced 3% is the new 4% SWR and then data like this pops up.

 

[aja8888]

I found the below chart fascinating. Over on bogleheads, they are convinced 3% is the new 4% SWR and then data like this pops up.

So how reliable is data going back to 1871?

 

[ERD50]

Gonna need some context here. I can see it was kitces site, but it's just an image file, where's the text to explain it?

Is it inflation adjusted withdrawals? Some sort of adjusted w/d method? What portfolio length?

They say a picture is worth 1,000 words, but a graph w/o context, not so much.

-ERD50

 

[Montecfo]

Good point. I think some folks fail to understand how conservative a 4% rate has been, historically.

Lower is always better and "safer" but diminishing returns arrive pretty rapidly.

A related topic is people who compute a conservative SWR, and then treat sequence of return risk as a separate issue not contemplated by the research.

 

[corn18]

Here's a link to the Kitces article

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

 

[youbet]

I found the below chart fascinating. Over on bogleheads, they are convinced 3% is the new 4% SWR and then data like this pops up.

Looking at the graph OP posted, I recall years ago, FireCalc output included a bar chart which had ending values on the Y axis and starting years on the X axis. I found it very useful. Anyone else remember this?

 

[Ginny]

Does this say to you that no one below 5% SWR failed?

 

[corn18]

Does this say to you that no one below 5% SWR failed?

I think what it says to me is that 4% is a good floor for planning purposes only. Helps me deal with all the rhetoric that 3% is the new 4%.

My actual decision to retire and my withdrawal strategy has little to do with the 4% rule. It's just another rule of thumb to compare to. I like Firecalc and The Flexible Retirement Planner better. And I really like my spreadsheet.

 

[Dtail]

4%WR has only technically failed at a 60/40AA over 30 years in 1966 start year and that's with including theoretical taxes and fees I believe. Otherwise it passed.
There are continuing articles about how the 4% guidance will not work currently, but even the 2000 retiree with 2 bear markets is still in decent shape.
IIRC, the typical WR which would work over 30 years, if one removes the 5 or 6 worst starting years is 6.5%
Thus the 4% guidance is still considered fairly conservative.

 

[corn18]

Here's another article from Fidelity with more recent data:

https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last

 

[RunningBum]

30 and 28 retirement periods fall short for some of us ER folks.

 

[TechLead]

I tend to agree with this article. Look at at graph in it that shows all years.

We are now economically/politicly in the middle of 1930s-1940s. SWR is 2%-3% (less if you are under 60)

 

[corn18]

30 and 28 retirement periods fall short for some of us ER folks.

I agree with that. If you are planning for longer than 30 years, I would definitely go for a lower WR. But I don't think we need to panic and come off 4% for a 30 year plan.

 

[Sunset]

It's a bit moot for many folks, since travel expenses are nearly zero for the rest of the year, and possibly next year.

While I consider 4% fairly safe, I can imagine someone at the end of 1965 thinking the same thing.
Ending up being surprised at all the flavors of cat food available during the end of their retirement.

 

[RunningBum]

There's one other aspect to failure with a 4% WR. Someone can say, I project a need for $40K (on top of SS), I have $1M, so I'm safe, right? While it's true that history says that market returns and inflation rates make this plan safe (assuming the future isn't worse than ever this time), it doesn't cover someone underestimating their expenses. A combination of running over budget with bad sequence of returns or runaway inflation can sink a 4% plan.

 

[youbet]

Thus the 4% guidance is still considered fairly conservative.

One of the things seldom mentioned in these discussions is that historical outcomes are all based on holding a specific AA with rebalancing. I think, in reality, few folks actually do this. For example, currently many folks are posting changes to their AA due to current economic conditions. Once you do that, you can be assured your back-testing no longer holds. You may have improved things. You may have made things worse. But you absolutely changed the parameters on which the back-testing was done.

Another issue would be the composition of the fixed portion of our AA. I check the 5 year treasury box in FireCalc. But, I don't a single 5 year treasury! I own a mix of funds, TIPS, CD's, MM's, etc.

If it turns out that if whatever you hold in your FIRE portfolio performs differently than what you said you had when setting up FireCalc (or any other tool based on history), then your results are inaccurate. You might turn out better. You might turn out worse. But it will be different.

Just other reasons to be conservative.

 

[Montecfo]

One of the things seldom mentioned in these discussions is that historical outcomes are all based on holding a specific AA with rebalancing. I think, in reality, few folks actually do this. For example, currently many folks are posting changes to their AA due to current economic conditions. Once you do that, you can be assured your back-testing no longer holds. You may have improved things. You may have made things worse. But you absolutely changed the parameters on which the back-testing was done.

Another issue would be the composition of the fixed portion of our AA. I check the 5 year treasury box in FireCalc. But, I don't any a single 5 year treasury! I own a mix of funds, TIPS, CD's, MM's, etc.

If it turns out that whatever you hold in your FIRE portfolio performs differently than what you said you had when setting up FireCalc (or any other tool based on history), then your results are inaccurate. You might turn out better. You might turn out worse. But it will be different.

Just other reasons to be conservative.

True. Reducing equity exposure could take you outside the test set. Hopefully people doing that have won the game and have lower withdrawal rates, but I am sure this is not true in all cases.

 

[TechLead]

One of the things seldom mentioned in these discussions is that historical outcomes are all based on holding a specific AA with rebalancing. I think, in reality, few folks actually do this. For example, currently many folks are posting changes to their AA due to current economic conditions. Once you do that, you can be assured your back-testing no longer holds. You may have improved things. You may have made things worse. But you absolutely changed the parameters on which the back-testing was done.

That is market timing Even though someone doing it might not think so.
It pretty much never leads to better returns.

 

[OldShooter]

One of the things seldom mentioned in these discussions is that historical outcomes are all based on holding a specific AA with rebalancing. I think in reality, few folks actually do this. For example, currently many folks are posting changes to their AA due to current economic conditions. Once you do that, you can be assured your back-testing no longer holds.

Exactly. To me an SWR number is like a ruler; useful for measuring things. But I think virtually everyone's withdrawal rate varies during retirement. Some things, like travel, charitable donations, restaurant dining, special wines, etc. are highly discretionary. Other things, like inflation, investment returns, the effect of COVID-19, real estate taxes, insurance, nursing home, etc. are almost completely uncontrollable. Life cannot described accurately by a calculator, so there is not much point in getting excited about a particular number. When life is good we bask in the sun. When the storms come we trim our sails and go belowdecks until things settle down.

 

[Midpack]

Exactly. To me an SWR number is like a ruler; useful for measuring things. But I think virtually everyone's withdrawal rate varies during retirement. Some things, like travel, charitable donations, restaurant dining, special wines, etc. are highly discretionary. Other things, like inflation, investment returns, the effect of COVID-19, real estate taxes, insurance, nursing home, etc. are almost completely uncontrollable. Life cannot described accurately by a calculator, so there is not much point in getting excited about a particular number. When life is good we bask in the sun. When the storms come we trim our sails and go belowdecks until things settle down.

It's supposed to. SWR was never meant as anything but an axe to plan with, it's not a scalpel - and it does NOT predict the future, just as FIRECALC doesn't. SWR is obviously rear view mirror, all the original academic papers specifically said same, and many authors have had to repeat same over and over and over for some reason. I would think it would be wise to re-assess every 5 years or so, but not annually.

Taken literally, such a plan has been criticized as unrealistic. Even if the tests showed that the plan had a 98% success rate over all past time periods, would a prudent person blindly go on steadily increasing withdrawals in a prolonged bear market? It also leads to apparent absurdities. Say that retirees A and B have saved $1 million in 2008, and the market crash reduces their portfolios to $800,000 in 2009. A, however, retires in 2008 while B waits until 2009. The Trinity study bases withdrawals the dollar value of the portfolio at the start of retirement. The value fluctuates with the vagaries of the stock market. Thus, even though their situations are almost identical, in the Trinity scenario, retiree A, by virtue of having retired in 2008, is allowed to withdraw $40,000 plus COLA in 2009; while retiree B, despite being in an almost identical situation, would be allowed only $32,000.

The authors of the paper, however, did not mean for their scenarios to be applied rigidly or uncritically. The article makes this very important statement:

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
​

Nisiprius requested clarification from Professor Philip L. Cooley, senior author of the Trinity study:[3]

What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.
​

Professor Cooley's response:

You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees.[4]​

https://www.bogleheads.org/wiki/Safe_withdrawal_rates

 

[FREE866]

There's one other aspect to failure with a 4% WR. Someone can say, I project a need for $40K (on top of SS), I have $1M, so I'm safe, right? While it's true that history says that market returns and inflation rates make this plan safe (assuming the future isn't worse than ever this time), it doesn't cover someone underestimating their expenses. A combination of running over budget with bad sequence of returns or runaway inflation can sink a 4% plan.

Right. Seems like a lot would have to go wrong for 4% to go wrong. I also read that 2/3 of the time not only does 4% work , but the balance is like 2x the original balance. Not sure what the source was though.

 

[Dtail]

Right. Seems like a lot would have to go wrong for 4% to go wrong. I also read that 2/3 of the time not only does 4% work , but the balance is like 2x the original balance. Not sure what the source was though.

IIRC, Kitces article is one source of this statement.

 

[Dtail]

One of the things seldom mentioned in these discussions is that historical outcomes are all based on holding a specific AA with rebalancing. I think, in reality, few folks actually do this. For example, currently many folks are posting changes to their AA due to current economic conditions. Once you do that, you can be assured your back-testing no longer holds. You may have improved things. You may have made things worse. But you absolutely changed the parameters on which the back-testing was done.

Another issue would be the composition of the fixed portion of our AA. I check the 5 year treasury box in FireCalc. But, I don't a single 5 year treasury! I own a mix of funds, TIPS, CD's, MM's, etc.

If it turns out that if whatever you hold in your FIRE portfolio performs differently than what you said you had when setting up FireCalc (or any other tool based on history), then your results are inaccurate. You might turn out better. You might turn out worse. But it will be different.

Just other reasons to be conservative.

Agree, plus it was always meant to be a guidance, not an actual WR%. I don't know one person who strictly uses this concept.
However when calculating am I good to go for retirement, it is one historical source which can assist in the decision making process.

 

[Navigator]

I put together a graph of historical 30 year 60/40 SWRs vs the P/E 10 for the S&P 500 (a measure of how pricey the market is). The data is from a portfolio that has small cap and international stocks, so its lowest historical SWR was 4.5%. At a P/E 10 of 30 (about what it is today), it suggests a SWR of 4.05, with a 50% chance of success. If you want an 84% chance of success, the SWR drops to 3.3%. There is reason to believe that even this withdrawal rate is too high because we have an aging population and slowing growth rate in the US, which indicates we will have slowing increases in GDP going forward. The bogleheads seem to be correct: a 3% fixed withdrawal rate seems to be reasonable for a 30 year retirement with fixed withdrawals.

 

[music-and-ski]

I put together a graph of historical 30 year 60/40 SWRs vs the P/E 10 for the S&P 500 (a measure of how pricey the market is). The data is from a portfolio that has small cap and international stocks, so its lowest historical SWR was 4.5%. At a P/E 10 of 30 (about what it is today), it suggests a SWR of 4.05, with a 50% chance of success. If you want an 84% chance of success, the SWR drops to 3.3%. There is reason to believe that even this withdrawal rate is too high because we have an aging population and slowing growth rate in the US, which indicates we will have slowing increases in GDP going forward. The bogleheads seem to be correct: a 3% fixed withdrawal rate seems to be reasonable for a 30 year retirement with fixed withdrawals.

It’s true that those historical returns are for the USA market which was expanding dramatically due to demographics. The question is, are there other markets, elsewhere in the world, that might grow more quickly than the USA, because they have a younger demographic?

Personally, I’ve invested into some global equity index funds, under the thought that just because the USA has been so good in the past, doesn't mean it will be so good in the future. But, so far, these global funds haven’t performed that well.