30 Year Withdrawal Rates - Fun with numbers!

[conversationalphrase]

I've been off work for the holidays, the weather has mostly been bad, so I've been playing with spreadsheets! Here's what I did:

Using historical returns for S&P 500, 1 yr T-Bill, 10 yr Bonds, and annual inflation rates I calculated the maximum inflation adjusted withdrawal rate that would result in zero remaining savings after 30 years, starting each year between 1928 and 1988. These are sequential calculations for each 30 year period, they are not randomly picked historical returns and inflation rates.

I used an asset allocation of 60% stocks, 10% T-Bills, and 30% Bonds.

The results are shown in the attached plot.

Some Statistics:

• The minimum successful withdrawal rate was exactly 4% (1966)
• The average successful withdrawal rate was 6.4% with a standard deviation of 1.7%

I'm interested in your thoughts and observations. Has anyone seen a similar analysis elsewhere?

 

[razztazz]

"Similar" analysis exists all over the place. I always like to see different iterations of the theme though.

Did you use a cost factor? i.e. transaction costs or mutual fund fees? That would bring the numbers down a tad. 1966 would be sub-4% etc

 

[Dtail]

Yeah seen various versions.
1982 was the best year for a 30 yr retirement. Shows how the sequence of returns comes into play, as the 1982 person went through 2000 and 2008 bear markets, but already built up enough asset increases in the first 17 years.

 

[youbet]

Yeah seen various versions.
1982 was the best year for a 30 yr retirement. Shows how the sequence of returns comes into play, as the 1982 person went through 2000 and 2008 bear markets, but already built up enough asset increases in the first 17 years.

I love these illustrations because they point out the lunacy of studies that assume some fixed rate of average investment return over the years. That method is just soooo wrong, due to sequence of returns!

Every time I hear someone say they've created a spreadsheet where they assumed some average rate of investment return and some average rate of inflation, I gulp at how they can be so naive. Consistent investment and inflation numbers from year to year to year never, ever happens. Sequence of return consequences always happen.

 

[NYEXPAT]

Yeah seen various versions.
1982 was the best year for a 30 yr retirement. Shows how the sequence of returns comes into play, as the 1982 person went through 2000 and 2008 bear markets, but already built up enough asset increases in the first 17 years.

Yeah, 1982 the end of the great Secular Bear market!

 

[corn18]

WOuldn't it be sweet to know whether 2019 was the start of a 4% run or 6% run? Sure would make my life easier.

 

[youbet]

WOuldn't it be sweet to know whether 2019 was the start of a 4% run or 6% run? Sure would make my life easier.

Yep!

It's always interesting here on the FIRE Forum to read strategies people come up with to try to avoid variability of outcomes with their FIRE portfolios over time. "I'll have a cash cushion." "I'll spend less when the market is down." "I'll change my AA over time." "I'll set money aside in good years to fill the gaps in bad years." "Etc., etc."

While all these things can have some impact on reducing variability, the fact is that over a long retirement, there is going to be significant variability beyond your ability to control. Given my family's spending and possible future inflation rates and investment returns, I'm expecting to die somewhere between broke and a multi-millionaire...........

As you say, wouldn't it be swell to know that at the beginning?

 

[flintnational]

If I understand your example (actual returns and actual inflation for 30 year consecutive periods starting in the 20's) that is what the Trinity Study and Firecalc both do. And yes, the average SWR would have historically been 6%. But, we don't know if we are in an average 30 year period. So, most of us plan for the worst historical case, about 4%.

 

[REWahoo]

If I understand your example (actual returns and actual inflation for 30 year consecutive periods starting in the 20's) that is what the Trinity Study and Firecalc both do.

Yes, and FIRECalc goes more than 50 years farther back, starting in 1871.

OP, you can see how FIRECalc works here: https://firecalc.com/intro.php

 

[NW-Bound]

Good concepts deserve to be discovered, and rediscovered.

 

[conversationalphrase]

This looks like the same or very similar analysis https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

And the numbers also seem to follow - at least as close and I can tell. So I guess that's a good thing!

I did not consider an investment "cost factor"

Firecalc only goes back to 1871 for stocks. Interest rates are simulated before 1952 (5 yr treasury) or 1925 (30 year treasury).

 

[corn18]

I'm going to apply my extraordinary expertise in predicting the future and discern that the SWR is cyclical and we are in a downward trend to 4%. I need to retire immediately to avoid the fall back to 4% SWR. I have updated my spreadsheet to 8% SWR and put a downpayment on a private jet. This FIRE stuff is easy!

 

[Cut-Throat]

While all these things can have some impact on reducing variability, the fact is that over a long retirement, there is going to be significant variability beyond your ability to control.

Exactly! --- That is why you should Plan on variability... Withdrawal methods such as VPW, do exactly that. You cannot control variability, but you can react properly to it.

 

[audreyh1]

Exactly! --- That is why you should Plan on variability... Withdrawal methods such as VPW, do exactly that. You cannot control variability, but you can react properly to it.

Same here. My income varies, so does my spending. I also have planned on it. With a very high discretionary spending % in the budget we have a great deal of flexibility.

 

[daylatedollarshort]

We invest using matching strategies and plan on 0 - 1% real returns, plus the house going up to match inflation. SS and pensions will cover most of our long term retirement expenses, so barring the asteroid strike our net worth will be fairly similar at our "end of plan" time as it is today in inflation adjusted dollars, and we are happy with that amount to leave to the kids.

 

[Dtail]

We invest using matching strategies and plan on 0 - 1% real returns, plus the house going up to match inflation. SS and pensions will cover most of our long term retirement expenses, so barring the asteroid strike our net worth will be fairly similar at our "end of plan" time as it is today in inflation adjusted dollars, and we are happy with that amount to leave to the kids.

Silly question on the 1% real return.

If one has a portfolio of 1mm, after 2 years using simple math, does the return equal 10k or 20k in dollars?

 

[daylatedollarshort]

Silly question on the 1% real return.

If one has a portfolio of 1mm, after 2 years using simple math, does the return equal 10k or 20k in dollars?

I am not sure I completely understand your question, but there is a description on how the real return plays out for a $1K TIPS bond in the third paragraph in this article on how TIPS work.

 

[Vincenzo Corleone]

Same here. My income varies, so does my spending. I also have planned on it. With a very high discretionary spending % in the budget we have a great deal of flexibility.

If I may ask - what is your discretionary expense as a % of total budgeted expenses?

 

[corn18]

If I may ask - what is your discretionary expense as a % of total budgeted expenses?

Not the guy you asked, but we are planning on about 40% discretionary.

 

[Cut-Throat]

Not the guy you asked, but we are planning on about 40% discretionary.

Me neither, but we're about 75% Discretionary..... Living in Hawaii this winter....

 

[Dtail]

I am not sure I completely understand your question, but there is a description on how the real return plays out for a $1K TIPS bond in the third paragraph in this article on how TIPS work.

Let's ask this a different way.
If one has a 1mm portfolio and states that he wants to achieve a 1% real return. What is the inflation adjusted value of his portfolio after 2 years?

 

[Cut-Throat]

Let's ask this a different way.
If one has a 1mm portfolio and states that he wants to achieve a 1% real return. What is the inflation adjusted value of his portfolio after 2 years?

What's the inflation rate?

 

[audreyh1]

If I may ask - what is your discretionary expense as a % of total budgeted expenses?

It’s been around half (after taxes), maybe a bit more these days,

 

[HadEnuff]

Andre Tobias once wrote "a luxury once sampled becomes a necessity." Hence, none of my spending is discretionary. I have to have all of this stuff.

 

[Closet_Gamer]

Yep!

It's always interesting here on the FIRE Forum to read strategies people come up with to try to avoid variability of outcomes with their FIRE portfolios over time. "I'll have a cash cushion." "I'll spend less when the market is down." "I'll change my AA over time." "I'll set money aside in good years to fill the gaps in bad years." "Etc., etc."

While all these things can have some impact on reducing variability, the fact is that over a long retirement, there is going to be significant variability beyond your ability to control. Given my family's spending and possible future inflation rates and investment returns, I'm expecting to die somewhere between broke and a multi-millionaire...........

As you say, wouldn't it be swell to know that at the beginning?

At the risk of starting the first back-and-forth ER forum tirade of 2019, I do think this is where a SPIA can come into play by bringing some known stability as a foundation.

Variability over the long haul will exist for sure, but one can contain it to some extent by creating a base level of certainty. Obviously, there are return trade-offs that come along with this approach or similar approaches that rely more heavily on very safe fixed income securities.

OK everyone, let's be nice now...