When Does True SWR Begin?

[Midpack]

Safe in this context means "not run out of money".

The oft-unstated secondary condition is "...while maintaining a relatively steady income from the portfolio."

Nobody cares if the portfolio doesn't run out of money, but the income from it is $1.98.

The problem with taking an annual X% of the portfolio is that your income will vary wildly from year to year. People don't like that. People prefer to have a steady, predictable income.

And that's why you have to make adjustments along the way, even the Trinity authors said that. For those who want something more systematic, there are hybrid withdrawal schemes, e.g. https://www.bogleheads.org/wiki/Variable_percentage_withdrawal.

But no matter what, the retiree(s) must watch and course correct and have a plan B. While some may have to tighten spending, historically some have been able to loosen...

 

[kgtest]

I plan to make adjustments throughout my life during withdrawals. It is a disservice to plan thinking that one would NEVER adjust the SWR. Things happen, and there are opportunities to adjust it based on your fixed income needs.

For me, I plan for a 3.5% SWR (based on advice from this forum and other smart people in finance), but then I only need to take that for about 20 years as SS, and pension will start after that duration, effectively lowering my SWR. Plus there is no way I could predict my future fixed income needs every single month of every single year in the future...believe me, I've tried.


A one time windfall of inheritance is an example of a scenario where you would likely be able to adjust your SWR down if that occurred. Maybe for a year, maybe for the rest of your life, depends on how much more fixed income comes in.

Personally, I plan my SWR based on facts and data as it relates to my own investing duration.

 

[ERD50]

And that's why you have to make adjustments along the way, even the Trinity authors said that. For those who want something more systematic, there are hybrid withdrawal schemes, e.g. https://www.bogleheads.org/wiki/Variable_percentage_withdrawal.

But no matter what, the retiree(s) must watch and course correct and have a plan B. While some may have to tighten spending, historically some have been able to loosen...

Not with a conservative WR. Historically, a WR below ~ 3.3% survives everything, with no adjustments.

Of course the future could be worse than the worst of the past. But it's not clear how/when one would effectively adjust for that.

A few years back I made some studies of these statements about "oh, of course we would just cut spending in bad times", and it really isn't clear to me how one would do this. If you cut on every dip, you have hurt your quality of life.

And if your portfolio drops 40%, going from a 4% WR to a 2% WR for a few years just isn't going to make a big difference to portfolio survival. But it sure would hurt your quality of life. Try to simulate that, it just isn't so easy to know when to ride it out, and when to adjust. It's a lot like market timing.

-ERD50

 

[audreyh1]

The problem with taking an annual X% of the portfolio is that your income will vary wildly from year to year. People don't like that. People prefer to have a steady, predictable income.

Yet some of us still choose to do precisely that.

 

[RunningBum]

Well, there are people who have said that you can trust the system, and never adjust. http://www.early-retirement.org/for...return-risk-may-impact-a-portfolio-91404.html

I'm not willing to risk my future on that. As far as when to adjust, it seems clear to me that if you make small adjustments, cutting out some fat sooner rather than later, it's a lot easier to take then blindly going without adjustment until it's very obvious your plan is failing. At that point you have to make more drastic steps, like perhaps moving in with family.

 

[Midpack]

The problem with taking an annual X% of the portfolio is that your income will vary wildly from year to year. People don't like that. People prefer to have a steady, predictable income.

Yet some of us still choose to do precisely that.

IIRC you adjusted/re-evaluated every 5 years? Seemed like a smart way to adjust to avoid some of the variation in income.

And to the former post, sure people prefer to have a steady income, but there is no 'systematic' withdrawal method that also provides steady inflation adjusted income short of an absurdly low WR that could leave huge $ on the table and based on historic probability provide an income well below what's reasonably available. No matter what you choose, you'll have to make adjustments, always balancing "steady" vs "safe” and there are many other variables and varying goals.

There is no black and white answer, and there never will be...

 

[marko]

This discussion has drifted far away from the OP's question (above).

The answer to the question is: SWR has nothing to do with retiring. The SWR has to do with the portfolio and what it does in the subsequent 30 years.

So: The SWR begins on the date you start withdrawals.

OP here.
Speaking for myself and I'm sure many others, I started withdrawals from my portfolio 30 years before I retired. It was my 'savings' and if I needed something, I withdrew some money.

At RE the 'savings' sort of take on a different role however as care should be taken to prevent over-withdrawing, hence some sort of limit is in order.

As I noted, there could be a ten or fifteen year transition due to one or both spouses working PT, an extended severance or some other temporary income stream. You might be RE'd and taking small withdrawals but haven't reached the X plus inflation concept of true withdrawals.

My question of "when does one start the calculated X% plus inflation phase truly begin" has been answered however as I now understand that it is really more of an abstract confirmation than what most use in actual practice.

There's 'withdrawals' that can take place over a lifetime and then there's 'withdrawals' based upon portfolio longevity at retirement.

If one spouse is still working and one's withdrawal is .05% you haven't really started the X% plus inflation track IMO

 

[Sojourner]

I wonder how many people actually stick to that firm "X% plus inflation" from a portfolio calculation made 8 or 9 years ago.

Not me. I tend to view the SWR from FIRECalc as a rough benchmark for how much I could spend each year, if I were so inclined, not how much I should spend or should withdraw from my portfolio. As long as I'm spending less than that number, I feel like the financial part of my ER is going fine, and I don't need to worry about it very much. And since I derive my SWR by setting the historical portfolio survival rate to 100% in FIRECalc and not including SS or inheritance in my scenario, I feel there is some wiggle room for spending more if and when needed, so this gives me even greater peace of mind.

Fundamentally, my spending levels are not driven at all by my SWR. I spend about as much as I always have, which is enough to meet all of my needs and 95% of my wants while remaining well below my SWR. I think this is a natural byproduct of a long-standing and fairly deeply ingrained LBYM mentality. I don't think I'd ever feel comfortable withdrawing and spending the full SWR amount every year, and since I'm perfectly happy spending less, that's what I do.

 

[Dtail]

Not with a conservative WR. Historically, a WR below ~ 3.3% survives everything, with no adjustments.

Of course the future could be worse than the worst of the past. But it's not clear how/when one would effectively adjust for that.

A few years back I made some studies of these statements about "oh, of course we would just cut spending in bad times", and it really isn't clear to me how one would do this. If you cut on every dip, you have hurt your quality of life.

And if your portfolio drops 40%, going from a 4% WR to a 2% WR for a few years just isn't going to make a big difference to portfolio survival. But it sure would hurt your quality of life. Try to simulate that, it just isn't so easy to know when to ride it out, and when to adjust. It's a lot like market timing.

-ERD50

Bolded - Thus I will be trying to use the Clyatt 5/95 formula, but will use a 3% WR instead of 4%.
If the market tanks ~50%, then conceptually I would be at 4% effectively.

If one cuts back tremendously on discretionary, then what is the point of retiring?

 

[Dtail]

Yet some of us still choose to do precisely that.

+1 will be doing as such.

 

[Dtail]

Not me. I tend to view the SWR from FIRECalc as a rough benchmark for how much I could spend each year, if I were so inclined, not how much I should spend or should withdraw from my portfolio. As long as I'm spending less than that number, I feel like the financial part of my ER is going fine, and I don't need to worry about it very much. And since I derive my SWR by setting the historical portfolio survival rate to 100% in FIRECalc and not including SS or inheritance in my scenario, I feel there is some wiggle room for spending more if and when needed, so this gives me even greater peace of mind.

Fundamentally, my spending levels are not driven at all by my SWR. I spend about as much as I always have, which is enough to meet all of my needs and 95% of my wants while remaining well below my SWR. I think this is a natural byproduct of a long-standing and fairly deeply ingrained LBYM mentality. I don't think I'd ever feel comfortable withdrawing and spending the full SWR amount every year, and since I'm perfectly happy spending less, that's what I do.

Bolded - I don't believe many at all use the 4% adjusted for inflation formula for actual withdrawals.
However the bolded comment is an interesting different concept.
I for one have chosen to use a formulaic formula for withdrawals (although variable results) and then spend around that number.

I think I am somewhat in the minority here vs. many folks who spend within reasonably within their means and perhaps then compare it to a WR% quarterly or yearly to see if they are within a generalized unofficial budget.
Maybe not, not sure here.

 

[jollystomper]

So when do you put that stake in the ground and say: "Ok, now we start our real X% SWR from THIS portfolio balance?

I bring this up because for years I thought this is what I was doing when in reality I learned from another thread (thanks audreyh1) that I was actually using a 'percent of portfolio' approach.

I wonder how many people actually stick to that firm "X% plus inflation" from a portfolio calculation made 8 or 9 years ago.

To answer this from my specific circumstance: as the many posts have said, it varies based on retirement circumstances.

I based our SWR solely on our cash and investment portfolios at my retirement. But after retirement I received severance and unexpected bonus pay. That, along with DW's part time income, means that so far we have not started drawing down our portfolio from where it stood the date I retired.

In addition, we will be getting an unexpected distribution from our parents estate that is the equivalent of more than a year's withdrawal for us... so again technically we could just spend that and delay SWR for another year.

But our first real withdrawal will probably be in January, for 2019. And the amount will be based on how things end up for 2018. Our planning SWR is just over 2%. That is the minimum we will withdraw. But if the markets stay flat or go higher, we may withdraw more as our "bonus". And as the years go by, we will adjust it based on portfolio performance and our wants.

In sum, our SWR will start the first full year of my retirement, and the SWR may vary annually based on circumstances.

 

[clifp]

Bolded - I don't believe many at all use the 4% adjusted for inflation formula for actual withdrawals.
However the bolded comment is an interesting different concept.
I for one have chosen to use a formulaic formula for withdrawals (although variable results) and then spend around that number.

I think I am somewhat in the minority here vs. many folks who spend within reasonably within their means and perhaps then compare it to a WR% quarterly or yearly to see if they are within a generalized unofficial budget.
Maybe not, not sure here.

I started off being formulaic; withdrawing < than dividends plus interest that lasted great from 2000-2008. In 2009, the massive dividend cuts in many of my primary holds made that no longer feasible. So I did backtrack and look at an amount that was lower than 4% of my 2000 balance, but more than 4% of my 2009 balance. Since then the bull market has been so strong, and I've picked up rental properties, which provide both diversifications and a reasonably dependable stream of income, that I'm pretty much relying on being LYBM.

I should add that I think it wise to be more formulaic for say the first 5 years of your retirement or maybe until you hit your first bear market. Conceptually the Clyatt rule was always one of favorites, I can easily do a 5% belt tighten during an ugly bear market.

 

[Dtail]

I started off being formulaic; withdrawing < than dividends plus interest that lasted great from 2000-2008. In 2009, the massive dividend cuts in many of my primary holds made that no longer feasible. So I did backtrack and look at an amount that was lower than 4% of my 2000 balance, but more than 4% of my 2009 balance. Since then the bull market has been so strong, and I've picked up rental properties, which provide both diversifications and a reasonably dependable stream of income, that I'm pretty much relying on being LYBM.

I should add that I think it wise to be more formulaic for say the first 5 years of your retirement or maybe until you hit your first bear market. Conceptually the Clyatt rule was always one of favorites, I can easily do a 5% belt tighten during an ugly bear market.

That is what I am thinking too on the Clyatt. I am only in year 2 of retirement.
However, even though we always lived below our means, we are not the "classic" LBYMers of which it appears many here are more so.
Thus, we will probably continue to be governed by some formula deep into retirement I suppose, to keep us in check of sorts.

 

[unclemick]

I consider the 'traditional SWR rule' to be the point from which everyone (including me) deviates.

Yep. After a period of some temp work early ER maybe 1-2 years it went to zero for months at a time. Ballpark 2 -6% depending over the next say 23 years.

heh heh heh - Best guess. Small non-cola pension at 55, SS at 62, married at 70. 4% is the mental benchmark.

 

[Retch The Grate]

Not with a conservative WR. Historically, a WR below ~ 3.3% survives everything, with no adjustments.

Of course the future could be worse than the worst of the past. But it's not clear how/when one would effectively adjust for that.

A few years back I made some studies of these statements about "oh, of course we would just cut spending in bad times", and it really isn't clear to me how one would do this. If you cut on every dip, you have hurt your quality of life.

And if your portfolio drops 40%, going from a 4% WR to a 2% WR for a few years just isn't going to make a big difference to portfolio survival. But it sure would hurt your quality of life. Try to simulate that, it just isn't so easy to know when to ride it out, and when to adjust. It's a lot like market timing.

-ERD50

I really like the analysis here: https://earlyretirementnow.com/2017...de-to-safe-withdrawal-rates-part-11-criteria/

basically all the adjusting either has no significant effect on survivability if it is small or means you have wildly variable amounts to live on, with real risk of extended periods way below your starting value. It's what convinced me that I just want to get down to a 3-3.25% withdrawal rate and go infinite.

 

[audreyh1]

I should add that I think it wise to be more formulaic for say the first 5 years of your retirement or maybe until you hit your first bear market. Conceptually the Clyatt rule was always one of favorites, I can easily do a 5% belt tighten during an ugly bear market.

I think that 5% belt tighten can happen several years in a row.

AND

It’s nominal - meanwhile inflation can be rising so your 5% belt tightening is worse in terms of real spending power.

Just wanted to point out that it might be a bit more painful than just one year down 5%.

 

[MainerUSNR]

SWR = Safe Withdrawal Rate

For those who are new SWR means Safe Withdrawal Rate.

 

[big-papa]

I think that 5% belt tighten can happen several years in a row.

AND

It’s nominal - meanwhile inflation can be rising so your 5% belt tightening is worse in terms of real spending power.

Just wanted to point out that it might be a bit more painful than just one year down 5%.

Yep, true, but you can also choose to adjust the Clyatt formula to be 5% real instead of nominal. Definitely softens the blow and when I backtested it a few years ago it worked out just fine. And there's nothing sacred about 5% either. But there's a tradeoff. At least historically, the smaller the percentage you use, the longer it might take for your returns to recover back to the original withdrawal % in the event of a prolonged bear + high inflationary period such as the early 70's. Additionally, using 5% real means you're draining your portfolio a little faster than if you used 5% nominal.

Was strongly considering such a method before I found VPW and its variants.

 

[ERD50]

I really like the analysis here: https://earlyretirementnow.com/2017...de-to-safe-withdrawal-rates-part-11-criteria/

basically all the adjusting either has no significant effect on survivability if it is small or means you have wildly variable amounts to live on, with real risk of extended periods way below your starting value. It's what convinced me that I just want to get down to a 3-3.25% withdrawal rate and go infinite.

Thanks for that link. I downloaded the paper too. What I may have missed in skimming the 47 pages is any simple plot of portfolio value versus the various withdrawal rates.

But the web page does seem to show what I was talking about - the adjustable withdrawal approaches have you cutting significantly (more than ~ 25% cut in spending from 4%) for a decade or more, and those dips in WR go down to below 2.4% ( ~ 60% cut from 4%). That's a long time to do without so many things that could enhance your life.

To each their own, but I prefer to plan for a conservative WR of ~ 3.2%. And since it is conservative, I would also consider increasing that if the portfolio grew faster than inflation, and since I could also adjust for lower life expectancy years remaining.

-ERD50

 

[FIREd]

I wonder how many people actually stick to that firm "X% plus inflation" from a portfolio calculation made 8 or 9 years ago.

It was my intention to stick to "3% plus inflation" when my wife retired 3 years ago (for her it was important to have a stable income). We stuck to that plan from 2015 to 2018, although our expenses did not increase as much as inflation over that time and we elected not to take the full inflation adjustment in 2016, 2017, and 2018.

We divorced recently, and my WR will reset next year (new location, different lifestyle, etc...). Being single, I will have more control over my expenses and I will be able to stand having a slightly more volatile income. So I may investigate other strategies.

 

[big-papa]

Thanks for that link. I downloaded the paper too. What I may have missed in skimming the 47 pages is any simple plot of portfolio value versus the various withdrawal rates.

But the web page does seem to show what I was talking about - the adjustable withdrawal approaches have you cutting significantly (more than ~ 25% cut in spending from 4%) for a decade or more, and those dips in WR go down to below 2.4% ( ~ 60% cut from 4%). That's a long time to do without so many things that could enhance your life.

To each their own, but I prefer to plan for a conservative WR of ~ 3.2%. And since it is conservative, I would also consider increasing that if the portfolio grew faster than inflation, and since I could also adjust for lower life expectancy years remaining.

-ERD50

Part 11 of the series discusses his CAPE rule in more depth.
https://earlyretirementnow.com/2017...l-rates-part-18-flexibility-CAPE-Based-Rules/


This brings up an important point. All of this is a nice complex interaction between withdrawal methodology and your Asset Allocation. A 50/50 portfolio would have acted differently during this time than the 80/20 he simulated. The dips would have been reduced, but the potential for upside was also reduced. One would also expect that a dose of TIPs would also have changed things a bit during the early 70's had they existed during that time. By the way, you can also overlay short term smoothing on top of any of these variable methods (like the 5%/95% rule).

Again, it's all a tradeoff and what any individual finds to be most important. And to repeat: "If there was one best withdrawal method, we'd all be using it".

 

[Retch The Grate]

The whole series is excellent and worth the time to read and think about, it helped me figure out that I need to stick with 98% equities given the time frame I'm currently aiming for (and that that changes if I work a lot longer than I'm hoping to), and that I personally can feel comfortable at 3.25% or lower.

I really like the CAPE analysis, that will help me have expectations for when I retire, I think being aware of the historical trends will help with the emotional preparation part.

 

[Dtail]

Yep, true, but you can also choose to adjust the Clyatt formula to be 5% real instead of nominal. Definitely softens the blow and when I backtested it a few years ago it worked out just fine. And there's nothing sacred about 5% either. But there's a tradeoff. At least historically, the smaller the percentage you use, the longer it might take for your returns to recover back to the original withdrawal % in the event of a prolonged bear + high inflationary period such as the early 70's. Additionally, using 5% real means you're draining your portfolio a little faster than if you used 5% nominal.

Was strongly considering such a method before I found VPW and its variants.

So big-papa, as an example if one started with 1mm in 1966 using 4% of remaining portfolio with the 5% real adjustment as necessary, what would be the portfolio after 30 years?
I always appreciate your WR% posts.

 

[Huston55]

The whole series is excellent and worth the time to read and think about, it helped me figure out that I need to stick with 98% equities given the time frame I'm currently aiming for (and that that changes if I work a lot longer than I'm hoping to), and that I personally can feel comfortable at 3.25% or lower.

I really like the CAPE analysis, that will help me have expectations for when I retire, I think being aware of the historical trends will help with the emotional preparation part.

+1

I like reading his analyses; it lets me see things in a different way & makes me re-examine my approaches. He’s very numbers oriented (like Kitces), and I like studying the numbers. On the other hand, Dirk Cotton makes me re-examine my ‘philosophy’, which I’ve also found very useful.