Hi, I am Depressed

[Sam]

My native name is hard to pronounce, even harder to spell.  For everyone's sake, I'll call myself Sam.

I'm Vietnamese, 48 years old, came to the US in 1978.  My dream is to retire in 5 year, when my youngest son graduates from college.  I'm an engineer, so am quite obsessed with numbers.  I have revised my spreadsheet many, many times.  I'm very satisfied with it, knowing that I can achieve my dream.   The numbers are correct, the expectations are reasonable... until I stumbled onto this ER forum!

Here's my problem:  I have always used 6% withdrawal rate in my calculation along with a conservative 7% ROI.  But it appears that the concensus here is 4% withdrawal rate, meaning that my future income is reduced by a third.  Not a very happy prospect for me.  I either have to delay my retirement, or learn to live more frugaly.

Questions:

1)  Is 4% TOO CONSERVATIVE?

2)  Has anyone actually used 5% or 6% or more?

3)  How UNreasonable, how reckless am I, if I were to stick with my 6% withdrawal rate?

I'm really depressed,
Sam

 

[Cool Dood]

In my opinion the 4% is meant to take into account really drastic outcomes, and will in reality essentially necessarily turn out to be too conservative. I haven't retired so I can't speak from experience, but I believe that with 5% or 6% you'll still almost certainly wind up with more than you planned on having. Also, bear in mind that each person's tolerance for risk varies quite a lot, so you'll have to determine for yourself how "risky" something seems to you, but on the whole I don't think anyone can fairly call you unreasonable or reckless for planning around 6% withdrawal.

 

[Cool Dood]

Also, just doing what you were planning on would already put you in something like the 95th percentile or higher in terms of reasoned, intelligent planning, so you should definitely have a beer or something and relax and cheer up about the whole retirement thing

 

[Sheryl]

Hi Sam -

I know what you mean about depressed. I recently stumbled onto ANOTHER retirement calculator that told me I could only withdraw about 3.5% That was REALLY depressing.

Have you tried working with the FIRECacl program (link on the bottom of this page?) If you plug in your information and then ask it to give you a detailed result it will show you all of the years since 1870 or something and how you would have done - then you can decide yourself if you're willing to take the risk.

My big frustration is that in order to get a result that is safe 90% of the time, I will end up with a too many millions left over in many of the other scenarios.

It's a gamble. But it's also a gamble to keep working...

 

[SteveR]

Sam,

Welcome to the board.  

I am no expert on the 4% Safe Withdrawl Rate (SWR) but others here have discussed this at length.....many times.  

One suggestion.  If you have not run FIRECalc. then do so.  I will give you a more "realistic" (gonna regret saying that here) perspective on what the expected SWR might be for your situation.  

From all the board messages I have read on this over the past couple of years I can say that 4% is a hotly debated number and is contingent on many factors.  

NORDS and other have links to many of these discussions that you may find useful.  

In my case, I am going to do a higher initial SWR for a few years and then a lower one later in retirement.  This is to fit my lifestyle and my assets.  Your mileage will vary based on your personal financial situation.

Do a search on SWR and read some of the posts.  Good luck and don't get depressed quite yet.

 

[Cut-Throat]

Let me ask you a question first. Was the 6% adjusted for inflation? That is, you took 6% the first year and then if inflation was at 3% for that year you took the 6% plus the amount of inflation for the following year? That is usually how we figure 4% SWR.

And we always state the amount as the original amount calculated. Not 6% of the remaining portfolio (In which you would never run of money, technically)

The 4% is a guideline for a withdrawal rate. Like everything in life, it is not set in stone.
For example if you retire before you can collect Social Security, it may be prudent to take 6% now and when Social Security kicks in take only 2 or 3%. Everyone has their unique plan. The 4% is an average. Some years you may need to take 6% for buying a car etc., other years you may only need 3%.

However, I think it may be a bit on the optomistic side to plan on taking 6% adjusted for inflation for 40 years for a portfolio.

Also keep in mind, the sooner you die, the better your porfoilo has a chance of surviving!

 

[Nords]

Welcome to the board, "Sam". (You might be surprised at the pronunciation skills of several of the expat posters.)

My father-in-law worked with several emigrant Vietnamese technicians at CBS. He remembers how happy they were to join in with the other technicians and start buying rental homes in the DC area. Two of them recently retired on their rental's cash flow. As long as they're landlords they'll have annuitized income. Instead of worrying about 4% or 6%, their SWR is whatever their tenants are paying.

The short answer to your question is "It depends." If you want a perfectly safe withdrawal rate that's survived through 135 years of FIRECalc data, many rolling three-decade periods, a depression, several recessions, and all sorts of portfolio allocations, then 4% is it. It's the equivalent of wearing a belt & suspenders while driving a Volvo with both airbags & racing-car driver restraint harnesses. With big fat knobby snow tires. In the slow lane at 30 MPH.

Here's the long answer in several paragraphs. For starters, if you're willing to shoulder some more risks, then things get a lot easier. For example, ESRBob's book "Work Less, Live More" modifies the 4% SWR to take a little less money in down years. It also expects that you'll cut your spending in down years or even (*gasp*) work a part-time job once in a while.

William Bernstein comes at the retirement-calculator problem from the other direction. He thinks that anything over an 80% success rate is polishing the cannonball, but that has some pretty grim thoughts behind it. Here's the links to his five-part article:
http://www.efficientfrontier.com/ef/998/hell.htm
http://www.efficientfrontier.com/ef/101/hell101.htm
http://www.efficientfrontier.com/ef/901/hell3.htm
http://www.efficientfrontier.com/ef/103/hell4.htm
http://www.efficientfrontier.com/ef/403/hell5.htm .

If you're running your portfolio through a Monte Carlo simulation, then you're probably being excessively conservative. MC calculators don't consider that annual returns have some correlation (like 2-3 good or bad years in a row) and they consistently give lower SWRs.

What's your asset allocation? 7% is probably a pretty reasonable return for a retirement portfolio that's 100% stocks with a tilt toward small-cap value & international. You're not gonna see 7% from a portfolio that's 75% bonds/25% cash.

Recently we've been asked to believe that the financial-advisor community knows a dirty little secret: 85-year-olds have too much money for the rest of their lives. The theory is that spending early in retirement can be boosted to 6-7% and backed off later as we become less mobile. The reality is that few of those studies take a hard look at the rising cost of healthcare & prescription medications. However I think in the next decade we're going to see a lot of variable-withdrawal calculators that advocate a 5-6% SWR for the first 20 years (up to age 75-85) and then cutting back to 4%. For example, see the study linked in MasterBlaster's post.

Finally, Gnobility on Raddr's board posted this study suggesting that a better SWR is over 5% for high-equity portfolios.

So theoretically you could retire, start withdrawing 6% on a retirement portfolio of 80% equities, work 10-20 hours/week during the next bear market, slow down the SWR to 4% in your late 70s, and live happily ever after to your life expectancy. That's what could happen to the majority of the posters on this board.

Or you could retire into a vicious bear market, chew through half your portfolio in the next decade at a 5% SWR, work 20-hour weeks for most of that time, and live well into your 100s on Medicaid. If you can figure out a way to avoid this scenario and still withdraw 6%, I'm listening.

 

[Coach]

Nords, I have to say, that's a beautiful post! Clear, concise, to the point.

 

[Cut-Throat]

I agree. This is probably one of the best descriptions of the 4% withdrawal rates that I have seen!

If you want a perfectly safe withdrawal rate that's survived through 135 years of FIRECalc data, many rolling three-decade periods, a depression, several recessions, and all sorts of portfolio allocations, then 4% is it. It's the equivalent of wearing a belt & suspenders while driving a Volvo with both airbags & racing-car driver restraint harnesses. With big fat knobby snow tires. In the slow lane at 30 MPH.

 

[Nords]

Nords, I have to say, that's a beautiful post! Clear, concise, to the point.

I agree. This is probably one of the best descriptions of the 4% withdrawal rates that I have seen!

Thanks, guys.

I'm beginning to appreciate that more can be spent, I just don't see much worth spending it on...

 

[Sam]

SteveR, Nords, Sheryl, Cut-Throat, and Cool Dood:

Thank you all for sharing your insights.  I have run FireCalc, read the articles and related discussions.  The one thing that grabs my attention is the life expectancy used in those calculations.  It's way too optimistic for me.  I plan to retired at age 53, and don't expect to live more than 30 years.

My understanding of various withdrawal rates is as follow:

4%  Ultra conservative.  Fail safe.  Everyone dies a multi millionaire.

5%  Reasonable.  Minimal risk.  Still a sizeable inheritance left for the kids.

6%  Reasonably optimistic.  Small to medium risk.  Small inheritance for the kids.

7%  Too optimistic.  20 to 30% failure.

8%  Reckless.

I need to do some additional risk assesment.   Overall, I think I will stick with my 6% for the first 10 years, then drop to 5% when SS kicks in.  Another drop to 4% when I'm eligible for Medicare.

Have a good weekend,
Sam

 

[retire@40]

By the way, have you thought about what you will do during the 30 years you plan to live in retirement?

Don't forget, if you are depressed concerned about whether your portfolio will carry you for 30 years, a small side job can help alleviate some of the anxiety, at least for the short-term.

Every dollar that you can earn doing something fun, or at least not stressful, on the side is $20 to $25 less you need to have in your savings.  So if you can earn $5000 a year, that's $100K to $125K less you need in your savings.  This could be a job that you can work 1 or 2 days a week and quit whenever you want, or even better, a small side business you can operate from your home at your convenience.

Even when I get to full retirement I can still see myself making some extra spending money by doing small consulting jobs from time to time over the phone in my house or over the Internet.

 

[Sam]

Every dollar that you can earn doing something fun, or at least not stressful, on the side is $20 to $25 less you need to have in your savings.

Thanks Retire@40.  Yes, I'm aware of that.  Although I use a smaller ratio,  1:15 instead of 1:20 or 1:25.  I'm sure I will find something to do when I retire, part-time, mainly for fun (money won't hurt either!)

Sam

 

[Ed_The_Gypsy]

Hi, Sam,

I know the feeling! About ten years ago I discovered the same thing, and I found out I had been planning on too high a rate of return and not saving enough.

Eventually, I figured that I might have to work longer or retire overseas--or both. Once I figured out how to survive no matter what, I was a lot happier. I am sure that will help you, too. Things have since turned out a little better than I hoped. You may have the same experience.

The major problem now may be getting my wife to adjust her expectations of life after working, but again, things may work out better than I thought.

 

[HardCharger]

>You're not gonna see 7% from a portfolio that's 75% bonds/25% cash.

check out the returns of Loomis Sayles Global Bond Return, LS Strategic Income, LS Bond Retail, Fidelity Strategic Income, WM High Yield, throw in some Real Estate for Inflation Protection, (US & Int'l). RE is sort of like a bond, not totally in step with stock market.

 

[Spanky]

I'm sure I will find something to do when I retire, part-time, mainly for fun (money won't hurt either!)

tqs,

Do you have anything in mind? There will always be contract engineering positions available. However, they are usually full-time and time pressured to get a project done.

Spanky

 

[Sam]

tqs,

Do you have anything in mind? There will always be contract engineering positions available. However, they are usually full-time and time pressured to get a project done.

Spanky

Spanky,

I'm in the software development field. So, the opportunities are diverse. I plan to never touch any time pressured project in my retirement. That would defeat the whole idea of retiring.

Sam

 

[Sam]

Hello Ed,

After studying the articles about the 4% SWR, I felt good about my original 6% rate.  Yes, there is some small risk at that rate, but so is everything in life.

I plan to split my time between the US and overseas when I retire.  I like south east asia and central america.

I'm no longer depressed.  I'm sticking to my original plan, with minor modifications.

Sam

Hi, Sam,

I know the feeling!  About ten years ago I discovered the same thing, and I found out I had been planning on too high a rate of return and not saving enough.   

Eventually, I figured that I might have to work longer or retire overseas--or both.  Once I figured out how to survive no matter what, I was a lot happier.  I am sure that will help you, too.  Things have since turned out a little better than I hoped.  You may have the same experience.

 

[Ed_The_Gypsy]

Sam,

Glad you bounced back!

See you in Central America one day!

Cheers!

Ed

 

[cute fuzzy bunny]

A few of those suggestions are potentially as volatile and subject to losses as stocks.

Presumably one can make a case that the usual bond holdings are intended to reduce volatility, not replace one volatile item with another.

Also, RE is really not quite like a bond at all, although it may not be in step with the stock market.

But then again, presumably one could argue any line of thinking if an argument was all that one wanted to have...

 

[Sam]

A few of those suggestions are potentially as volatile and subject to losses as stocks.

What suggestions are you referring to?
Sam

 

[cute fuzzy bunny]

Whoops, the quote didnt work.

I was thinking stuff like global and high yield bonds.

 

[free4now]

Just wanted to agree that post by Nords above was one of the best I've seen. Well done.