4% SWR - revisited

[donheff]

ER may well be a possibility if you start at 4% and a 66 go down to 2% or even lower.

It would seem more than possible -- close to a certainty. Most "traditionalists" thought a 4% with inflation WR was good for 30 years. If you are flexible enough to cut back to 2% after an initial period it would seem you are good to go. If things work out well you could even keep up or increase the 4% down the line. The studies are arguing that greater than 4% is reasonable in the early years if you are able to cut back substantially later on.

 

[nun]

It would seem more than possible -- close to a certainty. Most "traditionalists" thought a 4% with inflation WR was good for 30 years. If you are flexible enough to cut back to 20% after an initial period it would seem you are good to go. If things work out well you could even keep up or increase the 4% down the line. The studies are arguing that greater than 4% is reasonable in the early years if you are able to cut back substantially later on.

Most ER folks are LBYM so SS may well cover a high proportion of their spending. If I project my budget into the future using 3% inflation and estimate my SS in future dollars (using todays rules) it will cover 80% of my spending. Combine that with some rental income and post 66 I have an income surplus without having to withdraw anything form savings.

 

[haha]

The studies are arguing that greater than 4% is reasonable in the early years if you are able to cut back substantially later on.

This would seem to depend very strongly on sequence of returns.

I know I am a party pooper, but overall I think all these "studies" and calculators are not very helpful. It is junk science. There used to be a member here who would challenge people by saying-"Do you think things can get worse than the great depression?!" Well, I don't know, but I can think of a lot of ways that things could be worse, from the POV of a retiree. The point is, we may be looking at a discontinuity. The OECD countries are all boirrowed up. They all have demographic problems. And we seem to running short of cheap, easily produced oil. This could be a whole new deck of cards, with more jokers and fewer aces.

Ha

 

[Chuckanut]

You can go nuts trying to figure out just how bad things can get and how to plan for everything. All we can do is our best. I remember the 70's when global COOLING was supposed to reduce our food supply. Combine that with civil disorder in our cities and the best advice was to hide out in the mountains with your food, gold guns and plenty of ammunition to defend it all.

 

[haha]

You can go nuts trying to figure out just how bad things can get and how to plan for everything. All we can do is our best.

That is my exact point. We live "on the planet of inexperience" and these calculators engender a false sense of exactitude. There is no way to really plan, because we have no way to know what is coming along. Rules of thumb like the 4% rule haven't spent many years with almost 0% interest rates, the world has never been so fully borrowed up, etc etc. Any of these issues could resolve very positively, or very negatively.
My objection is not to going on and acting, but to thinking that there is some scientific or reliable basis on which to base these actions.

The simple idea of prudence is likely the best guideline.

Ha

 

[desihopeful]

Another article on this topic in FA Magazine by Wade Pfau.


New Research Challenges 4% Withdrawal Rule

In this article Wade discusses some research by Williams and Finke.

I have been trying to figure out what would be a SWR in an emerging economy with no social security, pensions etc (except your retirement networth) to rely upon, rampant inflation to combat, and no meaningful historical data to fall back upon. Wade's been giving me some pointers on how to get started, but its been slow going so far.

 

[Surfdaddy]

I read somewhere (don't remember where) that it's foolish to worry about more than an 80% certainty of your money lasting, anyway. In the last 100 years we had two world wars, invention of nuclear weapons, move to industrialization and then an information economy, rise and collapse of numerous countries, runaway inflation, global flu pandemic, etc. On top of all that, our estimates assume significant stability (as looked at in FireCALC hindsight) in our monetary and social systems that may not continue in the future. So looking 30-40 years out is a pretty big gamble in any case.

By my own nature I'm very conservative and a worrier. But a near-death experience 4 years ago (at 51 yo) has changed my outlook quite a bit. There are NO guarantees in life. If it looks pretty good, I say go for it and adapt as necessary to the inevitable surprises that will occur.

 

[youbet]

That is my exact point. We live "on the planet of inexperience" and these calculators engender a false sense of exactitude. There is no way to really plan, because we have no way to know what is coming along. Rules of thumb like the 4% rule haven't spent many years with almost 0% interest rates, the world has never been so fully borrowed up, etc etc. Any of these issues could resolve very positively, or very negatively.
My objection is not to going on and acting, but to thinking that there is some scientific or reliable basis on which to base these actions.

The simple idea of prudence is likely the best guideline.

Ha

Well put Ha.

As I've posted on many threads, despite our FIRE plan having a 100% survival rate when FireCalc tested, DW and I expect a wild ride financially through our retirement years. We understand our final results, hopefully many years from now, may be anywhere between having just spent our last dollar or having a large multiple of our beginning FIRE portfolio amount to leave to the kids. And there isn't all that much we can do to change the variability.

 

[Nords]

I read somewhere (don't remember where) that it's foolish to worry about more than an 80% certainty of your money lasting, anyway.

The third article of Bernstein's five-article series:
http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html

 

[chinaco]

I have been trying to figure out what would be a SWR in an emerging economy with no social security, pensions etc (except your retirement networth) to rely upon, rampant inflation to combat, and no meaningful historical data to fall back upon. Wade's been giving me some pointers on how to get started, but its been slow going so far.

Good point... for those who are not very familiar with Wade, he has a nice blog with some thought provoking posts.

Here it is:

Pensions, Retirement Planning, and Economics Blog

 

[obgyn65]

I often agree with your posts, Ha, but this time I have to disagree with your statement below. I find some of the retirement calculators very helpful - and I am also convinced they are also useful to many people who, like me, are not financially savvy. Maybe you worked in finance in the past, hence your view on this, which I respect.

(...) I think all these "studies" and calculators are not very helpful.

 

[MichaelB]

I often agree with your posts, Ha, but this time I have to disagree with your statement below. I find some of the retirement calculators very helpful - and I am also convinced they are also useful to many people who, like me, are not financially savvy. Maybe you worked in finance in the past, hence your view on this, which I respect.

Online calculators can be dangerous to people not financially savvy because they may not know how to interpret the results and lead to a sense of security that is not well founded. All tools, financial and otherwise, require knowledgeable users.

 

[obgyn65]

I guess it depends on the type of calculator we are talking about. For example, I would agree that very basic calculators like this one Retirement Planning and Savings Plans - Retirement Calculator - Money Magazine - CNNMoney may be misleading since they are far too basic.

However, I find this calculator quite detailed and useful Merrill Edge| See Where You Stand

I agree all tools require some previous financial knowledge.

Online calculators can be dangerous to people not financially savvy because they may not know how to interpret the results and lead to a sense of security that is not well founded. All tools, financial and otherwise, require knowledgeable users.

 

[chinaco]

Like the old days when navigating... constant rechecking and adjustments are needed.

If one is careful and diligent.. they might be lucky and only wind up 50 or a 100 miles off.

 

[nun]

This is the early retirement thread so people on here should be planning to fund the initial work free years without SS. Conventional planners will be using a 4% SWR which amounts to a very conservative approach as when SS starts the WR will drop lower that 4%.

I've always planned to have my savings actually grow in retirement, using a 4% rate of return and a 2% initial WR as half of my expenses are covered by rental income. Once SS starts I won't need to withdraw anything from savings.

 

[Surfdaddy]

The third article of Bernstein's five-article series:
http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html

Thanks Nords for finding that! It's the one I remembered...

 

[Chuckanut]

This is the early retirement thread so people on here should be planning to fund the initial work free years without SS. Conventional planners will be using a 4% SWR which amounts to a very conservative approach as when SS starts the WR will drop lower that 4%.

I've always planned to have my savings actually grow in retirement, using a 4% rate of return and a 2% initial WR as half of my expenses are covered by rental income. Once SS starts I won't need to withdraw anything from savings.

Interesting. I will take 4% for about four years. That money is already sitting in MM funds and insured CD's. After I get full SS at 66, I can reduce the withdrawal to 2%, assuming my investments earned enough to cover the earlier 4% withdrawal rate. Even if the investments earn 0% before SS kicks in, I can still reduce my withdrawal rate to 3%.

 

[Nords]

Followup:
After reading this thread, the other thread (http://www.early-retirement.org/for...ay-be-too-high-for-todays-retirees-58220.html), and Prof Pfau's study, I did some more digging around. I also ran across his blog, which has more interesting thoughts about retirement planning: Pensions, Retirement Planning, and Economics Blog

I blogged about Pfau's "maximum utility" of the ER portfolio withdrawal rate here:
Is the 4% withdrawal rate really safe? | Military Retirement & Financial Independence

... and received the following:

From: Wade <e-mail address in Japan>
Date: Thu, Nov 17, 2011 at 8:36 PM
Subject: [Military Retirement & Financial Independence] Contact me
To: Nords
Comment: I enjoyed your article about the 4% rule, with my now
becoming increasingly non-intuitive message that the 4% rule might
fail but maybe that is okay afterall. You got it. Thanks!
Your life sounds really awesome. I love Hawaii!
Best wishes, Wade Pfau
Time: Thursday November 17, 2011 at 8:36 pm

I'm going to have to find his retirement-planning spreadsheet and dig into that, too.

And then I'm going to write it all up into more blog posts!

At this point I could add several chapters and a couple appendices to the 2nd edition of the book...

 

[donheff]

I blogged about Pfau's "maximum utility" of the ER portfolio withdrawal rate here:
Is the 4% withdrawal rate really safe? | Military Retirement & Financial Independence

I agree with Pfau - well written and organized post.

Edit: I have Pfau's blog in my RSS feed and noticed that he is complementing you there:

Just this week, Doug Nordman wrote what I thought was an excellent article combining these themes about how the 4% rule may fail but also how that may not always be so terrible at his Military Retirement and Financial Independence blog.

Looks like he may tap your post for his next article. Mutual stroking is always good motivation to keep working on the next edition.

 

[Nords]

Looks like he may tap your post for his next article. Mutual stroking is always good motivation to keep working on the next edition.

The real challenge with the second edition is selling enough of the first edition...

 

[ratto]

According to this WSJ article (How to Tap Your Retirement Accounts - WSJ.com):

"If future years see a continuation of the slow economic growth and deep market troughs of the recent past, the largest initial withdrawal a retiree could take from a balanced portfolio of stocks and bonds without running out of money for 35 years would be 2.52%, according to researchers at Ball State University in Muncie, Ind."

"Mr. MacDonald's accounts are structured so that his withdrawals go into a three-year reserve fund, so "it gives us three years' breathing time for the market to go back up," he says. Now that he and his wife are in their late 60s, "the possibility that [our savings] won't make 30 years doesn't bother me nearly as much." "

A combination of lower SWR (even bleaker 1.8%) and 3-year reserve fund might be a more pessimistic but safer bet.

 

[REWahoo]

A combination of lower SWR (even bleaker 1.8%) and 3-year reserve fund might be a more pessimistic but safer bet.

I don't think this lower SWR will be a big issue for all the "I have to keep working until I'm 80" types.

 

[clifp]

I don't think this lower SWR will be a big issue for all the "I have to keep working until I'm 80" types.

I guess it is symptom of our current national mood, but I really don't get the "I'll have to keep working until I am dead attitude. "

It is worth remembering that hundreds of millions of American have retired sometime in their 60s over the last 50 years and for the most part had comfortable retirements. The vast majority with less resources than most of us have, and the vast vast majority with less calculations.

From one of the trustee of the Social Security fund discussing this years COLA increase on the PBS Newshour.

ROBERT REISCHAUER: Well about two-thirds of recipient units rely on Social Security for over half of their income. And about 35 percent rely on it for 90 percent or more for their income, so a very significant fraction of elderly in America are critically dependent on their Social Security checks.

As Nord's blog points out as long as you got a bare bones income stream (and for many people SS fits that bill) it isn't the worse thing if you can't sustain your withdrawal rate, people do adjust.

We understandably spend a lot of time discussing portfolio income but just isn't that a big a factor for many retirees.

ROBERT REISCHAUER: Well, the interesting fact is that family income among families with 65-year-old household heads has gone up a little under 4 percent, 3.9 percent since 2007, when we had the peak of economic activity.
On the other hand, the median income -- this is all adjusted for inflation -- the median income of under 65-year-old families has gone down by about 6 percent. And, of course, the answer to that is rather simple. It's that the elderly are less affected by job loss.
MARGARET WARNER: Even though, say, their retirement accounts or savings accounts aren't kicking up as much income?
ROBERT REISCHAUER: They aren't. But they don't receive a huge amount of their income from assets, only about 11 percent overall. Many have pensions from government or private sector kicking in, and those haven't been reduced significantly.

11% of income from investments is pretty small, and as the 401K generation retires I expect to see this number raise but I doubt it will be more than double in the next decade.

I think 2% numbers that are being talked about are much to conservative because the often forget about the social security as a back stop to financial troubles. It is possible that I'll manage to blow through all my money (especially if I keep giving money to start ups) in the next 15 year at which point all I'll have left is Social Security. Still at age 66 and 10 months my SS check is $1900/month which is pretty respectable considering I only contributed to the system for 20 years. I am sure most board members have at least this much coming from SS. Assuming I still owned my house could I survive on $1900? it would be tough in Hawaii but doable with quite a few cut backs. More likely is to have SS represent 1/2 my income which would be a comfortable retirement. At age 67 I don't need plan for a 30 year retirement, 20 or 25 is sufficient and a $350-400,000 portfolio has a reasonable chance of success.

At some point you have to allow a bit of optimism. If you are planning on living to 100, not collecting social security, while assuming 0% interest rates and a flat market, than yes 2% maybe the right withdrawal rate. But in this scenario I think you really need to love your job.

 

[REWahoo]

It is worth remembering that hundreds of millions of American have retired sometime in their 60s over the last 50 years and for the most part had comfortable retirements. The vast majority with less resources than most of us have, and [-]the vast vast majority[/-] all but three with less calculations.

FIFY...

 

[W2R]

as long as you got a bare bones income stream (and for many people SS fits that bill) it isn't the worse thing if you can't sustain your withdrawal rate, people do adjust.

We understandably spend a lot of time discussing portfolio income but just isn't that a big a factor for many retirees.

That's true. I think probably the average U.S. retiree has very meager income, often SS only. Any SS fixes that affect retirees, such as change in CPI index, could be devastating for these folks. But SWR probably doesn't matter much to them.