4% is now considered too high

[Texas Proud]

Saw this while reading a few articles...


Advisers Lowering 4% Withdrawl Rates for Retirees - Focus on Funds - Barrons.com


I have not yet read the article mentioned... but the take away is....

4% might be to high going forward because of a bad market...

 

[ziggy29]

And as soon as the economy is booming, we'll suddenly see many of the same people claim that 5% is sustainable. Typical analyst/advisor behavior.

 

[W2R]

If there was no inflation at all, 4% would last 25 years even if the money was kept in money market.

The article emphasizes market returns, but the difference between market returns and inflation is more relevant, it seems to me. Yes, we are getting lower than historical returns on our equity investments, but inflation hasn't been chipping away at those returns very much (yet).

Also, some never thought 4% was low enough and have always preferred 3% for the long run. No changes there.

 

[bizlady]

I have thought for sometime that the "4% SWR" figure is too widely misunderstood. Especially for those on this board, if you retire early, unless very wealthy, less than 4% is likely needed. I think the 4% rule was generally created at a time most retired at 65. Pensions, SS, and lifestyle all have to be considered. With pending SS changes in the future, this too may have an impact down the road.

 

[ziggy29]

Also, some never thought 4% was low enough and have always preferred 3% for the long run. No changes there.

As do I, but I did so even when the economy and market were strong since I tend to be conservative to the point of borderline paranoia when it comes to our finances and future assumptions.

But what's telling is that many analysts and planners are playing the usual game of changing long-term recommendations based on current conditions rather than trying to find a single "magic bullet" that is workable in just about any environment short of unprecedented economic Armageddon.

The whole idea behind the SWR is to find something one can stick with in good times and bad, and when these people change it depending on economic conditions they defeat the purpose.

 

[Onward]

Next week's article: The Death of Equities.

 

[kyounge1956]

I have thought for sometime that the "4% SWR" figure is too widely misunderstood. Especially for those on this board, if you retire early, unless very wealthy, less than 4% is likely needed. I think the 4% rule was generally created at a time most retired at 65. Pensions, SS, and lifestyle all have to be considered. With pending SS changes in the future, this too may have an impact down the road.

+1
the study on which the "4% SWR" is based assumed a 30-year retirement and an equity allocation of 75%. I think also the 4%WR assumed that the portfolio would be totally consumed at the end of the 30 years and had a 5% probability that you would outlive your money. I'm going by memory here, so I'm open to correction.

If your retirement will differ from those parameters, an adjustment to the WR is probably in order.

 

[HFWR]

YMMV...

 

[MasterBlaster]

There have been lots of these type studies on safe withdrawal rates. The 4% number keeps popping up though. It's kind of the floor for all the rest of the studies to beat.

here's a couple of Bernstein's charts using a stock-bond mix for your entertainment.

 

[rescueme]

I have thought for sometime that the "4% SWR" figure is too widely misunderstood. Especially for those on this board, if you retire early, unless very wealthy, less than 4% is likely needed.

Well, in our case (me retiring at age 59, a few years ago and my wife retiring at age 63, early next year) our projected withdrawals will be in excess of 4% for more than a few years.

Why? Simply because not all our retirement income sources will be available at our respective retirement dates (such as two small pensions at age 65 and SS for both of us - DW at age 66, my spousal claim at 50% against her at my age 66, and my personal claim at age 70).

While our projectections show that we will be exceeding that "magic 4%" (by multiple factors) over the next 7-8 years, at age 70 (when my SS starts), our withdrawal drops to just over 2% - even with living off our respective portfolio's for quite a few years.

BTW, we don't plan on exceeding 4% till our early 90's (assuming we live that long); at that age, a greater withdrawal rate is certainly acceptable.

 

[devans0]

I am aiming for 3% or lower to the point of never touching real purchasing power principle. When I clone my body and live forever, I'll need to make sure that I won't outlive my nest egg.

No, I don't have tin foil in my hat, I use an antenna and LISTEN to the voices...

 

[MasterBlaster]

Well for those 1-3% swr people. You should never run out of money but you'll almost certainly go with a huge stash left behind. Does anyone besides myself see that as a huge opportunity cost ?

for fun, here's a link to the flip side of the 4% SWR....

http://www.early-retirement.org/forums/f28/beware-the-4-rule-50857-5.html#post952928

...If you were lucky enough to retire in 1950 then (over 30 years) you could take out just over 15% per year and never go broke...

the 4% SWR will probably insure that if you retire into a severly falling market that you won't end up eating dog food. However mostly that doesn't happen per the link above.

I suspect that even those people deciding on a 1-3% withdrwal rate, that they would increase withdrwals should the nest egg grow substantially. I suspect that they wouldn't be true to the original withdrwal rate scheme.

 

[ziggy29]

Well for those 1-3% swr people. You should never run out of money but you'll almost certainly go with a huge stash left behind. Does anyone besides myself see that as a huge opportunity cost ?

Like so much else in financial planning, it depends on one's own risk tolerances. Some people would prefer the "security" of a 3% withdrawal rate even if they know they are likely to leave a large account behind when they die; to them the "risk" of running out of money, low as it might be at 3.5% or 4%, is more than they are willing to accept and they'd rather face the "risk" of leaving a lot of money in their estate.

Similarly, others may be a little less fearful about spending down principal and would rather spend more to "live for today" even if it means a bit of an increase in the chances of running out of money.

Like the right asset allocation or whether or not you choose to pay off a mortgage or invest with a lump sum, there is no one right answer once you consider that risk tolerances are different for different people and that some people would prefer to maximize the "good" while others seek instead to minimize the "bad". The two goals are not the same.

 

[rescueme]

Well for those 1-3% swr people. You should never run out of money but you'll almost certainly go with a huge stash left behind. Does anyone besides myself see that as a huge opportunity cost?

For me? No. I would rather die with money than live without it ...

 

[Gone4Good]

Well for those 1-3% swr people. You should never run out of money but you'll almost certainly go with a huge stash left behind. Does anyone besides myself see that as a huge opportunity cost ?

Only marginally so.

The magnitude of any "opportunity cost" is inversely related to how constrained you feel in your budget. I don't feel constrained nearly at all in my sub 3% budget, so my "opportunity cost" is very low.

 

[teejayevans]

4% is not the problem, the problem is that you under-estimate your expenses and 4% becomes 6%.
TJ

 

[donheff]

5%, 4%, 3% any of these may work or may fail if you follow the concept of a fixed initial amount adjusted by an inflation rate regardless of market performance (which the oft cited 4% rule is based on). Most of us reject that thinking and accept that we will adopt any of a variety of techniques to adjust spending to accommodate long term market trends as they play out. If you have plenty of slack to adjust downward if things don't play out well starting at 4% or so is not a problem and (if that starting point is large enough) may insure that at least your initial ER years include some fun

 

[mickeyd]

Next week's article: The Death of Equities.

 

[obgyn65]

I agree with bizlady. My projected SWR is about 3.7%. Despite what I have read on this website, I still plan to annuitize some of my savings when I turn 62, hopefully getting the rate closer to 4%.

I have thought for sometime that the "4% SWR" figure is too widely misunderstood. Especially for those on this board, if you retire early, unless very wealthy, less than 4% is likely needed. I think the 4% rule was generally created at a time most retired at 65. Pensions, SS, and lifestyle all have to be considered. With pending SS changes in the future, this too may have an impact down the road.

 

[chinaco]

4% inflation adjusted (or the % for the time horizon) is only a guideline. People 20 years ago and today should be aware they might need to adjust.

I use the 4% as a max sustainable guideline rather than using it as a max spending level and planning to do it.

Besides... Our planned inflation adjusted lifestyle can be supported with an average 2% over the long term because of SS and pension. But since we will ER, the percentage will be about 4% of our securities in the beginning for a few year and decrease as other income streams as available (e.g., SS) down to zero.

I have no intention of trying to manage our income solely on a % of a constant mix. We don't need to take the risk. I will create a guaranteed income.

I will use the % as a guideline for sustainable spending against our excess asset portfolio which is basically our reserve fund to cover whatever happens or whatever we want over and above our planned long-term lifestyle.

 

[teejayevans]

I have no intention of trying to manage our income solely on a % of a constant mix. We don't need to take the risk. I will create a guaranteed income.

As long as you understand that guarantee is only as good as the insurance company stays in business and like your investments, you might want to be diversified.
TJ

 

[shotgunner]

Just for fun I plugged $1M dollars with $40K annual withdrawal and a 30 year term into Firecalc. I plugged in a 50% holding in equities with 5 year treasury for interest rate on fixed portion, I also used a 3% inflation factor. Guess what I got...................a 95.5% probability of success.

I guess the author thinks and feels the future will be worse than the history used by Firecalc. Maybe they are right, maybe they are not.

 

[devans0]

Any excess unspent may be seen as an opportunity cost, or as a financial legacy. I have one daughter, and hopefully a granddaughter in a few months. Imagine if your Roth was fully funded from 0-18 yrs old. I will have all that I need, and extra, and security.
I don't discount security. My parents were depression era people. My mother always worried whether they would have enough. They made poorly timed financial decisions because of that basic gut fear, driving them to sell low and buy high. It is a very human trait, we all have it. Security gets me out of worry driven planning and to strategic planning.

 

[W2R]

Must we spend every last penny? Is our appetite for consumption so urgent that we cannot possibly satisfy it? If we die with a nickel left must we regret it?

I can understand wanting some luxuries in retirement, but if a single person with a paid off home retires today on $1,000,000 plus social security plus possibly a pension or other income source, I don't think it would be a tremendous hardship to just withdraw $30,000 instead of $40,000.

This could affect whether or not we have to spend our final years depending on the charity of our children or others just to survive. Now that's an outcome that seems a lot worse to me than having an income of $60K instead of $50K (assuming SS is $20K).

Oh my. I can't believe I am posting this before coffee.

Granted, those who have pointed out that it might make a bigger difference with more meager retirement resources make sense to me. If the same hypothetical single person with a paid off house retires today on $250,000 plus social security, again assuming the latter is $20K, an SWR of 4% instead of 3% could make the difference between an income of $30,000 and an income of $27,500 and that might present more of a hardship.

Where's that coffee... I am planning on an SWR of 3% or less once SS kicks in. I probably won't need or want to spend much of it anyway. Retirement is about so much more than just spending lots of money.

 

[Focus]

And then there's this, from a Journal of Financial Planning article referenced in another thread:

Planners who most commonly use
a structured systematic withdrawal
program were asked to indicate what
they usually recommend as a sustainable
withdrawal amount. In 2009 the
average rate was 4.4 percent. In 2010,
the average rate is 4.75 percent.
Kitces admits that it’s difficult to know
what the source of that increase is, but
he says it could be a result of the growing
body of knowledge indicating that a 4.0
percent withdrawal rate with no other
adjustments may be too low.

Do I hear 5%? 5%? Going once, going twice...