Withdraw Rate effect on Portfolio Performance

[Life_by_Fire]

Hello everyone. I'm not sure if this has been asked before but I'm curious as to what people's experiences have been.

The consensus seems to be that a SWR ranges from 3-3.5%. My question is, what has been your WR and has your portfolio continued to grow, stayed the same, or has it diminished over time?

Basically, I'd like to see if the SWR is accurate for spending down a portfolio or if it is too conservative and leaves a person with a much larger portfolio at death than when they retired, meaning they could have spent more money on non-essentials like travel, finer things in life, grandkids, etc.

Hope this makes sense and thank you in advance.

 

[RunningBum]

Oh, I think a lot of people here say 4% is fine, especially if you have some fat you can cut just in case. 3-3.5% probably is pretty conservative.

I could tell you what my WR has been and how my portfolio has grown, but that's in the recent past, over a very good run in the stock market. It doesn't give any real glimpse into your future. You are better served doing Firecalc runs and looking at the ending balances. However, you don't know what sequence you will hit, so you might be more on track with one of the lines that approaches 0 (failure).

Perhaps using VPW would work for you. https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

If your portfolio grows, you can withdraw more. That extra can go to travel, gifts for grand kids, etc. After a down year, you don't get quite as much. It's all smoothed out over your remaining estimated life span, so the changes aren't drastic.

Or withdraw 4%, even if you don't need to spend it all. As that surplus grows, you can spend it on the extras.

 

[ERD50]

I think you misunderstand what a SWR is (so it's good that you ask).

A 3~3.5% withdraw rate is considered safe based on it surviving the worst periods in the historical record.

So whether current posters have seen their portfolio grow or not is only a measure of how the market has performed relative to the worst times in history. And we won't really know for 30~40 years, to account for various cycles. But if you had a time machine and went back to a randomly selected year, you would almost always do far better than just survive.

Look at all those squiggly lines on a FIRECalc result graph. Most of them show a growing portfolio, some of them reach for the stars.

-ERD50

 

[audreyh1]

Hello everyone. I'm not sure if this has been asked before but I'm curious as to what people's experiences have been.

The consensus seems to be that a SWR ranges from 3-3.5%. My question is, what has been your WR and has your portfolio continued to grow, stayed the same, or has it diminished over time?

Basically, I'd like to see if the SWR is accurate for spending down a portfolio or if it is too conservative and leaves a person with a much larger portfolio at death than when they retired, meaning they could have spent more money on non-essentials like travel, finer things in life, grandkids, etc.

Hope this makes sense and thank you in advance.

It totally depends on your time frame. For folks here who retired before say 2010 or during the 2010s, we’ve seen our portfolios grow tremendously since then if we had a good chunk in equities, even at higher withdrawal rates. Folks who retired in 2000, generally they saw their investments shrink during the 2000s unless they were mostly in bonds, but recover during the 2010s.

FIREcalc does those calculations for you, based on historical data. You can look at how withdrawal rates behaved, which were the failure cases, what were the averaging, max and min ending portfolio sizes, etc. that’s really the only way to explore the answers to your question.

 

[youbet]

Hello everyone. I'm not sure if this has been asked before but I'm curious as to what people's experiences have been.

The consensus seems to be that a SWR ranges from 3-3.5%. My question is, what has been your WR and has your portfolio continued to grow, stayed the same, or has it diminished over time?

Basically, I'd like to see if the SWR is accurate for spending down a portfolio or if it is too conservative and leaves a person with a much larger portfolio at death than when they retired, meaning they could have spent more money on non-essentials like travel, finer things in life, grandkids, etc.

Hope this makes sense and thank you in advance.

Try to keep these points in mind:

1. Portfolio performance over time is dependent on AA. If you don't actually maintain the same or very similar AA that you used for your historical testing, you didn't test what you're actually doing and the results are meaningless.

2. A given AA and WR will have outcomes that vary significantly depending on the years comprising the test. Don't expect that you can select an AA and WR and closely know how things will turn out. You can only know that historically that AA and WR resulted in an SWR with few or no failures. And you can't do much about it. A WR and AA combination resulting in 100% success will have outcomes ranging from ending with near zero to a fortune in your ending portfolio.

3. Asking forum members for their WR's and whether those WR's have resulted in portfolios growing over time is meaningless. Few here have been withdrawing over 15 yrs or so and most much less. Current withdrawals are all from about the same time period (the last few years). In no way will this answer your question " I'd like to see if the SWR is accurate for spending down a portfolio."

I'd suggest you spend more time with FireCalc and other similar portfolio survivability tests. Accept that the time-period-dependent outcomes will have wide variability. That is, in order to be conservative enough to survive periods of low return and high inflation will require an AA that results in a large ending portfolio for periods of high return and low inflation.

If you can't accept high levels of variability, you may be a candidate for a (gulp) annunity.

 

[pdxgal]

@Life_by_Fire, good question. I am revisiting myself, as my last day as an employee is tomorrow (!). The forum sages' replies here are very instructive and helpful. A different thread had referenced a SWR post by the Mad FIentist that you may find helpful too (I did). https://www.madfientist.com/safe-withdrawal-rate/

 

[Chuckanut]

IIRC, the original 4% recommendation was also age-based. It assumed retirement in the mid 60's. Retiring earlier may not provide the same level of financial certainty.

Personally, I would run FireCalc and at least one of the Monte Carlo simulators using one's projected retirement age and passing age, just to see what might happen. No guarantees, of course.

 

[Markola]

Since successful retirees’ SWRs and methodologies are completely all over the map, we chose to instead work with a trusted partner, Vanguard, to put together a clear, flexible plan that we could believe in and then implement gradually together. It works extremely well for us, a married couple with differing spending styles and financial savvy, to get together regularly with a knowledgeable, neutral professional who is in alignment with us, because, again, uniquely, Vanguard.

It allows us to anticipate “life” as best we can, both expenses and revenues, and adjust the plan as “life” actually unfolds. The resulting plan focuses only partially on protecting our portfolio, because its goal is rather more important: Ensuring we have enough money for life. As such, it is inclusive of all revenue sources coming and going over time, and various expense categories changing over time. IOW, “life.”

Had we instead opted for some variation on the 4% Rule, we would have been hitched to our full time jobs into our 60s rather than semi-FIREing in our mid 50s, so there is that. Good luck and YMMV.

 

[kcowan]

Having been retired since 2002, we have only experienced one downturn and the markets have cooperated in the total period. We have benefited from an 85% equity weighting, and any rebalancing is really buying and selling stocks, not necessarily selling winners and buying losers.

We do hold some underperforming stocks to maintain our sector weighting but it is not equal. We have avoided any holdings with highly elevated PEs.

I share this only to say that you can increase your odds beyond the FIRECALC gospel. I would say that growth assumptions going forward should be lower excluding speculative holdings.

 

[Life_by_Fire]

Thank you all for the replies and very interesting points.

pdxgal, Congrats on the retirement! I hope every day has been champagne breakfasts and feeling like vacation.

 

[ncbill]

Thank you all for the replies and very interesting points.

pdxgal, Congrats on the retirement! I hope every day has been champagne breakfasts and feeling like vacation.

Here are historical results for some popular portfolios following the 4% rule:

https://retireearlyhomepage.com/reallife21.html

 

[RobbieB]

I've been pulling at 5 to 7 percent for 7 years now. Investable assets up 43% and net worth up 40%.

 

[Whisper66]

Play around with Firecalc, it's very helpful. I retired in 2015 at 55 yrs old. Wife and I plan to take SS early at 62. No other "pension". AA has varied from 65/35 to 85/15 since retirement. Due to the bull market our portfolio has grown 25% above what we had at retirement. That's occurred even though I haven't made the best investment choices and we have averaged 5.4% yearly spend. Just made a quick Firecalc run now with today's portfolio and a 5.4% spend rate. It shows a ~75% success rate if we continued spending at that rate. That may feel scary but for us, we just go to "Plan B" if Mr Market goes south. Each year we rerun Firecalc (and I-ORP) and consider how much we plan to spend vs what the results tell us. We have very large discretionary expenses (Roth conversions, monetary gifts) that allow us to significantly cut back if needed based on this yearly review. In a bad market, I'd probably reduce expenses enough to give us something like 90% success rate. I'm less conservative than many here but you get the idea.... with Firecalc you can bounce around various ideas / plans on how to spend during retirement and get a plan you are personally comfortable with.

 

[Time2]

I'm an outlier for about 6 more months. We have been retired 2 years and have a kid in high tuition school. The tuition is more than our expenses. Over two years I spent 6.1% each year, for 12.2%. But the portfolio is up 31%.
After the kid has graduated we can easily live on 2%. SS is anywhere from next month to 4 years away.

We got to learn how to BTD!

 

[RetireeRobert]

My withdrawal rate was 0% for the first sixteen years of my retirement as I have a good pension and then SS. Since I hit age 70-1/2, my withdrawal rate from IRAs was dictated by the IRS RMD requirements. My net worth has increased since RMDs began.

You could use RMD rates for withdrawals and not go too far wrong, IMO.

 

[chassis]

@Life_by_Fire

If you have a withdrawal rate of 3%-3.5% and have >50% stocks in your asset allocation, you will end up with more money at death than when you started retirement.

You didn't mention Social Security. Where does this figure into your stated withdrawal rate?

Living expenses go down with age, excluding major medical problems.

Social Security + declining living expenses over time + 3.5% withdrawal rate = large portfolio balance at time of death assuming a fair chunk of equities in the allocation.

 

[RobLJ]

A few observations (or hypotheses):
1) Many here probably do use a WR of 3.5% or less.

2) I can be corrected since it's been a while but the Bergen/Trinity study originally proposed a 4% SWR and later raised it to 4.5% (and then I think Bergen indicated his comfort with a bit above 5%). This is for a 30 year retirement, however, and many here are not 60 or 65 but younger, so the caution may be justified.
3) There have been several posts proposing that, given bond yields and inflated stock values, this time may be different--or worse than the worse withdrawal/portfolio results that you can observe at the bottom of the FireCalc results.

I'm skeptical--but none of us knows. The historical data indicate you will very likely, almost surely, have a larger portfolio adjusted for inflation with a 3.5% or lower withdrawal rate.

4) I myself am comfortable withdrawing more than 4% now and for the next 4 years until my SS FRA, particularly since the WR goes down radically then and even more when DW is at FRA 4 years later.

5) This means nothing, since any 3 years proves nothing, but I've withdrawn 5.5%, 6.3%, and 9.6% the last 3 years from MY portfolio and.......... MY portfolio is larger than it was 2 and 3 years ago. DW's portfolio finally passed mine 2 years ago, as I had modelled, but it is only 8% larger rather than the 20-30% I had thought was possible with semi-bad returns while we were withdrawing ONLY from my portfolio.

I had reduced my equity allocation from almost 70% to 55, 50, then 45 and 43% in anticipation of SORR risk. While that has reduced my potential returns, it also meant I bought stocks in March 2020 since I thought a 38% was far too low. Now I am at 51% and may scrape off 2-3% of gains for future withdrawals if the market gains continue another 4%. YMMV. I can start withdrawing from DW's portfoio in 2022, so it's almost an even draw from hereon.

6) A good 25% of our withdrawals is hedonistic, beyond the necessities for day to day life. The larger the hedonistic margin (I believe), the larger the potential withdrawal rate--if you and the significant other are truly able/willing to cut back. Easier said than done. FireCalc now indicates we can withdraw more, although in a market collapse, that would change.
After DW is at FRA for SS, I will feel more comfortable with a "firmer" withdrawal result. It's nice, in other words, to have a decent margin of error in ER.

 

[Markola]

@Life_by_Fire

If you have a withdrawal rate of 3%-3.5% and have >50% stocks in your asset allocation, you will end up with more money at death than when you started retirement.

You didn't mention Social Security. Where does this figure into your stated withdrawal rate?

Living expenses go down with age, excluding major medical problems.

Social Security + declining living expenses over time + 3.5% withdrawal rate = large portfolio balance at time of death assuming a fair chunk of equities in the allocation.

+1. This OP asked about portfolio performance (survivability), which is a different matter than running out of money.

 

[Rick0]

I've been pulling 5-5.5% out of my portfolio for the last 5 years, and it's still grown significantly. My rate will decrease to 3.5-4% once SS starts in a few years.

Personally, I'm OK with a small probablilty of -GASP- "running out of money" - which to me means having to cut back expenses for a few years if the market has a long term bad stretch.