4.5% is the updated SWR according to Bill Bengen

[walkinwood]

That's the mystery to me.... why would there be a difference in SWR if the money was in a tax-deferred account vs a taxable or tax-free account?.... IOW, it shouldn't matter whether you use the withdrawals to pay taxes or buy martinis.... money is fungible.

+1

 

[NW-Bound]

That is why I favor some prudent ratcheting up of withdrawals/spending as one avoids the burly bear.

If someone retired 5 years ago with $1 million and a 4% WR and they now have $1.5 million then I see no reason why they cannot prudently ratchet up to 4% of $1.5 million.... it is just as prudent as someone with $1.5 million who is just now retiring starting with a 4% WR...

But he is not as prudent as a guy who retired in late 2008/early 2009 at the same time as his stash got decimated by the Great Recession. If he has upped his WR only to match inflation, he is now spending only 15% more than what he did when starting out.

Meanwhile, if he had $1M in 2009, that money would have grown to $2.3M if invested in Wellesley (with no withdrawal).

 

[NW-Bound]

I just thought of checking my own situation. Compared to my personal low point on March 9, 2009, I now have 1.997x in nominal terms.

That's amazing, considering that from 2009 to 2012 I was still working part-time but made only enough to cover expenses, and did not add to the stash.

And I have been retired since 2012 and spending money like a drunken sailor. Not at all prudent here!

PS. I may have to pay for my sin soon. Watch out for the next recession!

 

[razztazz]

That's the mystery to me.... why would there be a difference in SWR if the money was in a tax-deferred account vs a taxable or tax-free account?.... IOW, it shouldn't matter whether you use the withdrawals to pay taxes or buy martinis.... money is fungible.

I haven't seen any references to it but I think it has to do with rebalancing. If you rebalance, with an abundance of stocks especially, in a tax-protected account, that is a free transaction. If the money is in a taxable account you could get hit with a big tax bill not for any actual withdrawals or spending but just to balance your asset allocation thus leaving you with less to rebalance. They can't reconcile that in their models. Or to do so would require a lot more calculatin' and lines of code.

 

[daylatedollarshort]

I'm too cheap to increase my WR to a higher percentage.... I worry about the ACA cliff - which could be very painful... $1 too much and we have a huge tax bill.

+1. We've kept our budget lower than we would have without the ACA maximum income rules. It has been kind of a math game for us to try to live well without going over the MAGI cap each year. We decided life like this is actually pretty good so we probably won't spend much more even when we are off ACA, so in a way the ACA did us a favor over and above subsidies. Plus the college financial aid limits were very similar so when the kids were younger we got both ACA subsidies and free college tuition.

 

[Ready]

I read the entire reddit thread where Bengel was a guest blogger and what was fascinating to me was how many times he said he recommends no more than 50% equities, and is holding a lot of cash right now. I couldn't tell whether he was doing some market timing because of the long bull run, or whether that advice is just based on all of his historical research. But it definitely has me thinking about whether to ratchet down from 60% to somewhere in the 50-55% range.

 

[FlaGator]

Originally Posted by rodi View Post
I'm too cheap to increase my WR to a higher percentage.... I worry about the ACA cliff - which could be very painful... $1 too much and we have a huge tax bill.

+1. We've kept our budget lower than we would have without the ACA maximum income rules. It has been kind of a math game for us to try to live well without going over the MAGI cap each year. We decided life like this is actually pretty good so we probably won't spend much more even when we are off ACA, so in a way the ACA did us a favor over and above subsidies. Plus the college financial aid limits were very similar so when the kids were younger we got both ACA subsidies and free college tuition.

I expect to be eligible for subsidies for the first time next year. Without getting personal, can you share some info as to what they could be worth?

 

[haha]

This thread is the model for my absolutely favorite threads of all time.

Keep at it ladies and gentlemen, I enjoy every line!

Ha

 

[daylatedollarshort]

I expect to be eligible for subsidies for the first time next year. Without getting personal, can you share some info as to what they could be worth?

Our subsidies this year will be around $15K for the two of us. To make the equivalent from a part-time job instead, we would have to make more than the $15K to cover taxes, commute costs, job costs and of course at least one of us would have to actually work for X dollars per hour. For the subsidies we just have to keep a close watch on our annual MAGI.

 

[flintnational]

I expect to be eligible for subsidies for the first time next year. Without getting personal, can you share some info as to what they could be worth?

For two of us the subsidies are about $8k. We have a fair amount of money in taxable accounts and this can make it easier to manage MAGI. We are delaying pension income to help keep MAGI down also. Contributions to your HSA also reduce MAGI. You can estimate your subsidies with the linked calculator. Also, there are several historical threads on ways to manage MAGI and maximize the subsidies.

To put us back on topic, we don't need subsidies. Bengen just gave us an extra .5% WR.

Never let it be said that a Dawg didn't try to help a Gator.

FN

 

[Running_Man]

I guess if you pick your own allocation you can make it look bad. Well here's my 60/40 total stock market and total bond market, which over on bolgehead's forums if pretty common. It does just fine thank you. Why would you pick ST treasuries?
https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults

I did not pick ST treasuries RADDR did, it was common wisdom in most of the financial articles at the time to pick short term treasuries because they had been performing better than bonds for quite a while. The reason is quite simple, at the time studies showing optimal performance using long term bonds would have terrible results from the late 70’s and 80’s while short term treasuries had constantly readjusting upward rates leading to improved performance, leading to their recommendation . However from 2000 to 2010 long term bonds actually outperformed stocks so now more long term bonds in hindsight make the portfolio work better so after the fact it is better to include more

This is not the first time I have seen this “from Y2K 4% holds up well” there was a similar thread here about a Wade Pfau post stating the same thing, but when I found the actual paper he was using for 2000 study to followup on it actually recommended short term treasuries rather than the 10 year treasuries he utilized in the look back ———and the result was 100% different, instead of being successful Wade showed by 2010 the portfolio was retiree was not actually doing well but had a 8.45 percent withdrawal rate. Wade Pfau surprisingly actually showed this in a post correcting his originally assumptions quoting the actual studies and my post on this forum and that the result was not “pretty”. Finding a proper portfolio after the fact is much easier than actually having a portfolio selected during the time period, yes changes in portfolios are common, that is why most individual investors in funds far underperform the funds.

 

[FlaGator]

Our subsidies this year will be around $15K for the two of us. To make the equivalent from a part-time job instead, we would have to make more than the $15K to cover taxes, commute costs, job costs and of course at least one of us would have to actually work for X dollars per hour. For the subsidies we just have to keep a close watch on our annual MAGI.

For two of us the subsidies are about $8k. We have a fair amount of money in taxable accounts and this can make it easier to manage MAGI. We are delaying pension income to help keep MAGI down also. Contributions to your HSA also reduce MAGI. You can estimate your subsidies with the linked calculator. Also, there are several historical threads on ways to manage MAGI and maximize the subsidies.

To put us back on topic, we don't need subsidies. Bengen just gave us an extra .5% WR.

Never let it be said that a Dawg didn't try to help a Gator.

FN

Thanks to both of you. Looks to be worthwhile to maximize them - will allow me to further waste my new, higher WR

Can't have the World's Largest Outdoor Cocktail Party with people you dislike - nothing but love for Dawgs in this house

 

[alaska55]

I did not pick ST treasuries RADDR did, it was common wisdom in most of the financial articles at the time to pick short term treasuries because they had been performing better than bonds for quite a while. The reason is quite simple, at the time studies showing optimal performance using long term bonds would have terrible results from the late 70’s and 80’s while short term treasuries had constantly readjusting upward rates leading to improved performance, leading to their recommendation . However from 2000 to 2010 long term bonds actually outperformed stocks so now more long term bonds in hindsight make the portfolio work better so after the fact it is better to include more

This is not the first time I have seen this “from Y2K 4% holds up well” there was a similar thread here about a Wade Pfau post stating the same thing, but when I found the actual paper he was using for 2000 study to followup on it actually recommended short term treasuries rather than the 10 year treasuries he utilized in the look back ———and the result was 100% different, instead of being successful Wade showed by 2010 the portfolio was retiree was not actually doing well but had a 8.45 percent withdrawal rate. Wade Pfau surprisingly actually showed this in a post correcting his originally assumptions quoting the actual studies and my post on this forum and that the result was not “pretty”. Finding a proper portfolio after the fact is much easier than actually having a portfolio selected during the time period, yes changes in portfolios are common, that is why most individual investors in funds far underperform the funds.

Well Vanguard total bond fund has been around since 1986, picking nothing but short term treasuries is like picking all large cap value instead of total stock market. By the way the only 2 bond fund I have invested in since 2001 is 80% vanguard total bond fund and 20% vanguard corporate intermediate bond fund. Vanguard has recommended for a long time to invest in a mix of treasuries. Long term treasuries have done the best lately so would you go all LT now?

 

[Running_Man]

Well Vanguard total bond fund has been around since 1986, picking nothing but short term treasuries is like picking all large cap value instead of total stock market. By the way the only 2 bond fund I have invested in since 2001 is 80% vanguard total bond fund and 20% vanguard corporate intermediate bond fund. Vanguard has recommended for a long time to invest in a mix of treasuries. Long term treasuries have done the best lately so would you go all LT now?

I would not but I predict if LT bonds enter a 20 year bear market and treasury rates steadily increase to 15 % over those 20 years that there will be many studies quoting the studies of 2000 that advocated all short term treasuries and how well you would have done with that advice.

As a point in 1996 Bernstein recommended the "Cowards Portfolio"
here is the bogleheads link to it as you can see it recommended 40%
ST treasurieshttps://www.bogleheads.org/blog/william-bernsteins-cowards-portfolio/
And the Bogleheads even promoted which bond funds to use - VBISX.

 

[daylatedollarshort]

You can estimate your subsidies with the linked calculator. Also, there are several historical threads on ways to manage MAGI and maximize the subsidies.

There are historical threads on ways to save money as well as freebies and discounts, too, that are somewhat related. For us the money we save on actions like grocery shopping at outlet and warehouse stores, making the house energy efficient, earnings from credit card and travel hacks (nontaxable income / rewards), and savings by using seat filler subscriptions help to lower our expenses and give us some breathing room on the ACA MAGI cap.

 

[Perryinva]

What does the MAGI have to be under to be eligible for subsidies? Just curious as we will never use ACA, and have pensions that likely will bump us too high anyway.

 

[jimbee]

What does the MAGI have to be under to be eligible for subsidies? Just curious as we will never use ACA, and have pensions that likely will bump us too high anyway.

Less than four time the federal poverty level.
https://www.healthcare.gov/glossary/federal-poverty-level-FPL/

 

[flintnational]

What does the MAGI have to be under to be eligible for subsidies? Just curious as we will never use ACA, and have pensions that likely will bump us too high anyway.

The Kaiser Family Foundation has this calculator. You can enter your income and family size. As Jimbee stated, the max Magi is 4 times the Federal poverty level. That varies by family size. The calculator includes this adjustment. Pensions would also put us over the Magi limit. We are both 57 so we are letting the pensions increase in value and will take them later while maximizing subsidies now.

 

[Doc0]

Begen's paper

http://www.retailinvestor.org/pdf/Bengen1.pdf

The 4.5% figure is based on a number of caveats like 30 years longevity, asset mix, 5-7 year periodic re-balancing etc. 4% is a regression to a longer time horizon like making your portfolio last 50 years. According to the paper if you just start making your own assumptions like "My assets grew to 1.5 M therefore I'm resetting to a new SWR" without doing the in depth analysis, you likely will run out of money. I think non taxed accounts are chosen because taxed accounts returns are dependent on the dividends being taxed. My way around this was to invest in tax efficient post tax equities like BRK.B and to accumulate a few hundred K of LT cap loss over decades and consider that a separate asset class. I lived through 2000 and 2008 so it wasn't hard to sell losers and reinvest thereby accumulating LT cap loss and resetting my basis. So now that I'm retired, if I sell a asset with a long term cap gain, say to buy a car, I just apply LT cap loss against it and pay no tax. I haven't started RMD from my IRA accounts but I'm going to spend the next 4 years taking out as much as I can to the 15% tax limit and putting that into a Roth before RMD hits me at 70 1/2

Another thing I did was to withdraw 5 years of living expense as cash and put it into short term muni's using some of my LT cap loss. This made a kind of homebrew annuity on which I will live, while I am moving IRA money into Roths. It completely divorces me from the portfolio market volatility for living expense during this 5 year period, and completely controls my taxes. It also gets me 5 years into retirement, which seems to be the period one needs to allow your retirement to stabilize. The annuity plus my portfolio gives me a asset mix of 55:45 stocks:FI as of today, which will bias my ratios to 66:33 when my annuity is spent in 5 years, which is about where I want to be. I will then re-evaluate and re-balance as needed. My % SWR remains slightly below 4%. My time horizon is about 45-50 years as my wife is younger and the portfolio includes her longevity.

I decided to wait to 70 to take SS since that is like paying myself 5% compounded on that annuity. When it finally fails and the congress is forced to cut payments 25% I will basically be back to square one: the amount I would have gotten if I took it at 66. The 25% cut should stabilize it for my expected lifetime, as I should be dead before the Millennials begin retirement.

I strongly suggest you read and understand Begen's paper before you make any moves.

Best

 

[mathjak107]

the 5 year period is not really what is critical . what is critical is that you have a good up market before getting hit with an extended down market .

having five years of money and having the downturn 6 years in accomplished nothing unless you had a good up cycle first . .

in fact according to kitces cash buckets hurt us more than help most of the time .

 

[pb4uski]

....According to the paper if you just start making your own assumptions like "My assets grew to 1.5 M therefore I'm resetting to a new SWR" without doing the in depth analysis, you likely will run out of money. ....

Ok Doc, perhaps then you can explain something to me.

You say above that if my assets grew to $1.5 million and I reset my WR (I increase it from whatever it was to 4% or 4.5% of $1.5 million) that I "will likely run out of money".

If what you say is true wouldn't someone that is retiring for the first time with $1.5 million and a 4% or 4.5% WR also be equally likely to run out of money?

Assuming that they have the same AA then their risk of ruin is identical.... how can it be anything but identical since they are taking the same WR from the same AA portfolio starting at the same date?

 

[RunningBum]

Ok Doc, perhaps then you can explain something to me.

You say above that if my assets grew to $1.5 million and I reset my WR (I increase it from whatever it was to 4% or 4.5% of $1.5 million) that I "will likely run out of money".

If what you say is true wouldn't someone that is retiring for the first time with $1.5 million and a 4% or 4.5% WR also be equally likely to run out of money?

Assuming that they have the same AA then their risk of ruin is identical.... how can it be anything but identical since they are taking the same WR from the same AA portfolio starting at the same date?

I'm a fan of looking at both situations as (nearly) the same. I think both are at a greater risk of sequence of returns, because in this scenario the market has had a nice run-up, and may be due a correction, perhaps a big one.

I think the person who has been retired and reset their WR is probably safer than the newly retired, because presumably they were getting along fine on the smaller withdrawal, and could easily cut back to it if the correction does come.

IMO, if you're going to reset your WR or basis for the WR, you might as well use VPW, which resets the basis of your slightly increasing WR every year. With a good start, you'll slowly increase your withdrawals, and in bad times you'll slowly decrease, rather than making a sudden jump. But with a good start in your retirement, just about every strategy is going to work.

 

[Doc0]

You can increase your wr in the good times as long as you proportionally can stand decrease in the bad times, but that level of decrease may take you under substistance, If you buy into a higher lifestyle or debt. What happens in your scenario when your 1.5M portfolio drops to 750K, or when inflation ticks up to 10 or 15%?

Did you read Begen's paper? He looks at some failure scenarios.

Best

 

[jazz4cash]

BIL is committed to 5% without offering any rationale other than "someone told him". I have insisted that 4% is the norm to no avail. I fear he is heavily invested in his employer s stock and maybe using a dividend capture (market timing) scheme. If 4% is really 4.5%, I might have to buy him a case of beer.

 

[pj.mask]

Ok Doc, perhaps then you can explain something to me.

You say above that if my assets grew to $1.5 million and I reset my WR (I increase it from whatever it was to 4% or 4.5% of $1.5 million) that I "will likely run out of money".

If what you say is true wouldn't someone that is retiring for the first time with $1.5 million and a 4% or 4.5% WR also be equally likely to run out of money?

Assuming that they have the same AA then their risk of ruin is identical.... how can it be anything but identical since they are taking the same WR from the same AA portfolio starting at the same date?

Let's say you run firecalc when you retire and you have 90% chance of success. 6 years out stocks have gone up considerably. That likely drops the 10% failure off the table.

Now you reset your basis. You're back at 90% but with more income. Now the market busts dropping 50% of the success cases off the table. You now have 5/35 or 15% risk of failure.

Just a ballpark example but every year you walk down the path of retirement, the amount of different future paths decrease. If you start retirement climbing mountain, your probability of sinking in the ocean decreases with every step.