Adjust SWR due to financial "sea change" ?

[clifp]

I do 4% of whatever my portfolio is on jan.1 so the cut backs are already built in . Like Rewahoo I'm just going to see how this plays out .

I never intended to take a 4% mostly because at my very early retirement (39) I figured I had 40-50 years, and also because I figured that 99 early 2000, was probably my peak net worth. So my actually withdrawls have been in the 2.5-3% of initial. Now that I am down to a bit more than 1/2 my
retirement. It is looking like I'll be below 4% of Jan 1 liquid net worth, but at or above my March 1 net worth.

 

[Rich_by_the_Bay]

Just wanted to add, I'm not following your "black swan" comment either...
Now, let me phrase that more applicably to ER:

A) Retiree A takes a 5% withdraw rate.
B) Retiree B takes a 3% withdraw rate.

Now, a "black swan" event is just as likely to hit either of them. I'd say that Retiree B has a better chance of surviving the black swan (or having a better or "less-bad" outcome) than Retiree A.

I do see your point.

Where the black swan comes in is when you have padded your plan to the hilt at substantial cost, covering as many bad things as you can think of; all of a sudden an unforeseen calamity strikes (as it may well over a 20-30 year period -- divorce, 9/11, disability, death, Madoff, etc.). The 3%'er and the 5%'er have the same probability of the black swan, but the 3%'er will have spent a lot more time or money for cushioning over the decades than the 5%'er. The black swan in essence negated all that additional savings and planning to get from 5% down to 3%. (I am assuming their nest eggs are the same size to start.)

I'm a big planner, but try not to let "perfect" be the enemy of "good." Get me to 95% confidence (actually probably more like 85% to 90% in my case) and I'll take my chances rather than delay or alter my decisions. But if I had a surplus of funds rather than "just enough" I'd opt for the 3% SWR, too. I'm talking about the more usual scenario where resources are not over-abundant.

So, more money and lower expenses are better. But for those who are delaying retirement, or depriving themselves of important quality of life acquisitions in order to get from 95 to 99% confidence (or 5% v 3% SWR), it may not always be the best strategy. Depends on your resources, risk tolerance, and values.

Hope I've clarified my view. I'm not implying it's "right" in any absolute sense -- it just helps me sense that "point of diminishing returns."

 

[Koolau]

We've had this discussion several times in the past IIRC. I agree that the current unpleasantness is a legitimate reason to discuss it again.

Honestly, I never actually intended to "live" by the 4% rule. That is, I never intended to calculate 4% (or some other number in that neighborhood) of "stash", spend that the first year and then up the spending by recent inflation. Rather, I used the 4% "rule" to assure myself I had a big enough stash to retire early and be financially independent.

Stated elsewhere, I'm a belt and suspenders (and maybe an elastic waistband) kinda guy. So I didn't go until I could "survive" on much less than 4%, "live" on half the 4% and feel extravagant (for my LBYM background) on 4%.

The fact that I'm currently at less than 20% equities (and worse all the time for some strange reason) makes me nervous spending much more than 2% at this point.

But, again, I don't actually sit down and multiply stash time X.x % and then spend that amount within a year. Rather, I spend within a "normal for me" pattern, check the stash from time to time to see what % I'm actually spending, and adjust if I feel a strain in my left suspender or if my belt feels loose.

If that sounds heretical, so be it. It works for me. My "fear" isn't about 3% vs 4% in bad times so much as how to prepare for the "discontinuous" possibilities. What if we have hyperinflation? What if SS or Medicare are "means tested"? What if it really is "different" this time? Those are the things that occasionally disturb my sleep.

I think what I'm saying is that I'm comfortable in a relatively wide range of WDRs. I can live on a lot less than I do now. I just don't want to find myself really "poor" or "destitute" due to something I could have seen coming and dealt with. If a meteor has my name on it, so be it. But if I (we?) can cover the foreseeable possibilities, our FI and RE status will be more secure. This discussion is a step in that direction IMO. Thanks for letting me rant.

 

[unclemick]

Hmmm - how about down and dirty - skip that silly % - as the old Norwegian widow whips out her no. 2 pencil.

Kansas City - car paid for but 30 yr mortgage(70k @6%= 534 with prop tax and insurance).

18.5k $ per yr incl. cable, taxes = toss in food, misc, entertainment maybe 25 to 30k depending on how hard we party. Rubbing nickles gets the core under 25k per yr excluding major repairs.

If I be bad to the bone but don't use the 'a' word - anywise have fixed (SS plus Pension in my case cover that) - then somewhere between SEC yield and say 5% variable of my now badly dinged portfolio is still lagniappe.

heh heh heh - I hope that long time forum members notice that 25k/yr budget has mythical properties from ancient days on this forum - sorta like that 4% SWR. . Not out on the lake in a fish camp anymore - but far be it from me to bad mouth Kansas even if I'm really in Missouri.

 

[Moemg]

. Check the book out at the library and read their explanation (Chapter 33 - Spending Down, page 250) would be a much better option than listening to me.

Good idea , I'll check it out next week !

 

[MichaelB]

I think a 4% WR today is a sustainable portfolio over 40 years – or even more.

In spite of all the doom and gloom, the real risks today to portfolio sustainability would be two:

Worldwide economic collapse (global depression)
Portfolio underinvestment (keeping it in cash)

Our economy is not on track toward depression – perhaps a full year of negative growth of around -2%., then another of very low growth. That means there is still 98% GDP around for salaries and profits. Longer term profit recovery in the finance industry look unlikely, but manufacturing and services are not being held back – and may even benefit. In addition, commodity price decreases are cycling through the business cycle. Economic collapse, while possible, is not likely.

Slow but steady profit growth, from a new lower level, looks much more sustainable.

Seems to me real portfolio growth of 4% is much more likely than a year ago – or 10 years ago. The biggest risk (IMHO) today is avoiding risk – locking in the downside and losing the upside, in both fixed income and equities.

 

[ERD50]

Hope I've clarified my view. I'm not implying it's "right" in any absolute sense -- it just helps me sense that "point of diminishing returns."

Yes, and you are correct that there are risks on all sides of this (no one ever said ER was easy ). If you have to wait extra years to manage to get to a 3% SWR, that shortens the time you can enjoy it, and an early demise may take the period to zero.

As far as the black swan, it kinda depends how you look at it. Yes, if the black swan is bad enough to wipe out either sized portfolio, you're dead meat either way. But if it was a $1M black swan (law suit?), and Retiree A had $1M, and Retiree B had $2M, well B is hurtin', but still in the game.

As you say, no right or wrong, people need to evaluate the risks and rewards for themselves.

-ERD50

 

[73ss454]

Hey Rich, by the time you retire you should be able to take at least 10% and still be safe.

 

[CuppaJoe]

Hey Rich, by the time you retire you should be able to take at least 10% and still be safe.

And at 10% retired now, you should be taking xx% already. Can anyone figure the math on that?

 

[Rich_by_the_Bay]

Hey Rich, by the time you retire you should be able to take at least 10% and still be safe.

Haven't heard that for a while -- thought I was off the hook .

And at 10% retired now, you should be taking xx% already. Can anyone figure the math on that?

10% SWR x 10% (retired from fulltime) = 1% x -45% (market drop) = 0.65% SWR before inflation = -1.5% SWR
​

That's the amount of my "SDR" (safe deposit rate). Retirement age = 108. If it feels right.

 

[youbet]

For me, the angst of a 1 in 20 chance that I'll be asking my kids to support me after I took an Early Retirement is greater than the angst of budgeting for an SWR of ~ 3% or less.

-ERD50

For me, it would depend on what I was doing to earn the money to increase my portfolio enough to allow for a 3% WR. It could take several years...... if you're miserable in your job...... already in your 50's...... could be a tough decision.

Since MegaCorp booted my sorry ass out at 58, decision making was handled automatically!

 

[youbet]

I retired at 58 and am now 61. Generally, things have gone well. Other than excessive time spent fretting over falling portfolio values and some canceled travel and home improvements this past year, it's been wonderful.

But there is a risk I'm thinking about that few seem to be mentioning. At 61, I can see the end of some recreational activities coming due to age and diminishing physical abilities. Ditto my comfort level with extensive travel. If I cut back the travel/recreational budget now to reduce the threat of an extended recession killing my portfolio but the economy recovers nicely in a couple of years, I'll have not done those things, probably forever, and I could have. To me, that's a real risk. It threatens to diminish the value of my time and current good health.

So, sit at home with a reduced WR making me feel financially comfortable but possibly delaying expenditures for activities I'll probably not be able or want to do later or just go ahead and go and trust my original FireCalc testing holds true?

The same thing could be argued for home improvements. Go ahead and do them now as planned and enjoy them. Or sit on the cash due to the economy and possibly do them later when you'll enjoy them for a shorter period of time, if you feel like doing them at all then.

 

[Rich_by_the_Bay]

I don't see 95% as a "black and white" thing. On the contrary - I see that success factor as a sliding scale along a continuum. An SWR that provides 95% is on average a more conservative withdraw rate than one that gives a 90% success rate. And an SWR that provides 100% is on average a more conservative withdraw rate than one that gives a 95% success rate.

There's nothing black/white about it, since we don't know what the future holds. But I think the trend will hold such that a 3% SWR will be more sustainable over a variety of possible futures than will a 5% SWR.

That's my point: the 95% or 99% figure (a la Firecalc) is a black and white figure, but reality is not like that. If you saw your nest egg slipping year after year after year, you wouldn't just sit there and eventually draw it down to 0. You'd make adjustments --- tighten the belt, maybe annuitize some of it, downsize, whatever.

So in the real world, 95% is not a 1 in 20 chance of zero net worth. It's an end-point preceded by a long call to action to mitigate the situation. Same with 99% (though a bit less likely) and even 100% per Firecalc. One reason I am comfortable with 90% confidence is that "failure" doesn't really mean bankruptcy, it means a mid-course correction is in order. Not good but I would take that chance along with a 90% chance of "success" and even growth.

To get $50k per year in distributions, you need a million (5% SWR). To get that withdrawal at 3% SWR you'd need 1.67 million. That is a big price tag (time or money) to pay in order to go from 95% to 99% sure in this context. Great if you've go it, not so easy to justify if you don't.

 

[REWahoo]

I retired at 58 and am now 61. Generally, things have gone well. Other than excessive time spent fretting over falling portfolio values and some canceled travel and home improvements this past year, it's been wonderful.

But there is a risk I'm thinking about that few seem to be mentioning. At 61, I can see the end of some recreational activities coming due to age and diminishing physical abilities. Ditto my comfort level with extensive travel. If I cut back the travel/recreational budget now to reduce the threat of an extended recession killing my portfolio but the economy recovers nicely in a couple of years, I'll have not done those things, probably forever, and I could have. To me, that's a real risk. It threatens to diminish the value of my time and current good health.

Is there an echo in here? Change your "retired at 58 and am now 61" to "retired at 58 and am now 62" and this could have been my post.

I too hear a 'do it now while you still can' voice whispering in one ear and a 'you'd better cut spending now' voice in the other. I'm struggling with canceling a planned 6 week RV trip to the northwest this summer - a trip we've been planning for months. Will the $5,000 I save make a significant difference in our quality of life sometime down the road? Or will I kick myself for not taking the opportunity for a wonderful trip when I had the chance?

Ain't life great?

 

[TromboneAl]

In real life you would usually see it coming a decade in advance (persistent dropping of the nest egg long before a zero balance) and make at least some adjustments.

I'm not following you here. You seem to be saying we have a crystal ball? We would not "see it coming", we would have "seen it went!".

Let's say that at the start of your retirement, you print out a chart that shows how much you should have at each age if you want to end up with a balance of zero on your presumed death day.

If, at age 70, you've found that you are below that line for the last three years, it might be time to go to plan B. That sounds reasonable, doesn't it?

 

[Martha]

That's my point: the 95% or 99% figure (a la Firecalc) is a black and white figure, but reality is not like that. If you saw your nest egg slipping year after year after year, you wouldn't just sit there and eventually draw it down to 0. You'd make adjustments --- tighten the belt, maybe annuitize some of it, downsize, whatever.

So in the real world, 95% is not a 1 in 20 chance of zero net worth. It's an end-point preceded by a long call to action to mitigate the situation. Same with 99% (though a bit less likely) and even 100% per Firecalc. One reason I am comfortable with 90% confidence is that "failure" doesn't really mean bankruptcy, it means a mid-course correction is in order. Not good but I would take that chance along with a 90% chance of "success" and even growth.

To get $50k per year in distributions, you need a million (5% SWR). To get that withdrawal at 3% SWR you'd need 1.67 million. That is a big price tag (time or money) to pay in order to go from 95% to 99% sure in this context. Great if you've go it, not so easy to justify if you don't.

Don't cancel. It really is a small amount in the scope of things. But of course I say that when I am about to leave on my own two month trip. But the cash is in the bucket.

 

[youbet]

I too hear a 'do it now while you still can' voice whispering in one ear and a 'you'd better cut spending now' voice in the other.

Exactly. I think the folks fortunate enough to have retired younger are missing out on this "risk of the ticking clock" phenomenon!

Ain't life great?

Well, yes, yes it is! Despite all the roller coaster financial events of late.

 

[unclemick]

Is there an echo in here? Change your "retired at 58 and am now 61" to "retired at 58 and am now 62" and this could have been my post.

I too hear a 'do it now while you still can' voice whispering in one ear and a 'you'd better cut spending now' voice in the other. I'm struggling with canceling a planned 6 week RV trip to the northwest this summer - a trip we've been planning for months. Will the $5,000 I save make a significant difference in our quality of life sometime down the road? Or will I kick myself for not taking the opportunity for a wonderful trip when I had the chance?

Ain't life great?

If it is renting space in my head - take the trip. Other ways to be a cheap b------ will present themselves. You can wiggle the money frugal future wise(if 'must' do penance) but you can't stop that dang clock.

heh heh heh -

 

[ERD50]

Let's say that at the start of your retirement, you print out a chart that shows how much you should have at each age if you want to end up with a balance of zero on your presumed death day.

If, at age 70, you've found that you are below that line for the last three years, it might be time to go to plan B. That sounds reasonable, doesn't it?

Yes, and I would find it interesting to hear *exactly* how people plan to put this into action. By that, I mean some predetermined formula.

Now, some have mentioned drawing no more than 4% (or whatever number) of their portfolio. That is defined, easily understood, and actionable. I'm less certain that some of those people understand that that very likely means they will need to cut their withdraws in half or more for an extended period of time. If they get a good portion of their allowance from pension/SS, that might not be so bad.


Follow a few of the squiggly lines in FireCalc for an idea. Lots of nasty dips that do recover, eventually. Like others have said, maybe they recover after you gave up that trip, and now you are too old to do it.

But, like others have said, if you don't have the money, you may have no other choice, esp if going back to work at a decent salary is a low probability event. In that case, I guess you just have to take joy in life's little pleasures. It could be worse. Heck, it could be a *lot* worse!

-ERD50

 

[Bestwifeever]

Take the trip, REW! It's an order!

 

[ziggy29]

Take the trip, REW! It's an order!

It does sound like the retiree's version of One More Year Syndrome...

 

[Bikerdude]

Is there an echo in here? Change your "retired at 58 and am now 61" to "retired at 58 and am now 62" and this could have been my post.

I too hear a 'do it now while you still can' voice whispering in one ear and a 'you'd better cut spending now' voice in the other. I'm struggling with canceling a planned 6 week RV trip to the northwest this summer - a trip we've been planning for months. Will the $5,000 I save make a significant difference in our quality of life sometime down the road? Or will I kick myself for not taking the opportunity for a wonderful trip when I had the chance?

Ain't life great?

Now we have 3. I'm 61 and retired at 52. I also see the end of my ability to do some of the things I have previously enjoyed and that's what makes this downturn so cruel at this point in my life. I guess its somewhat comforting to know I have company in this dilemma.

 

[CuppaJoe]

Is there an echo in here? Change your "retired at 58 and am now 61" to "retired at 58 and am now 62" and this could have been my post.
...
Ain't life great?

Change that to "retired mentally at age 58 but continued to work to age 61, now 62," don't know where I'm going with this yet, where'd I leave the meds?

Yes, I'll echo the others, take the trip. I spent down my PF to four weeks living expenses in 1977 for a big trip; hey, I'm still here and not living off my kids, oh, nm, I forgot to have the kids. Your trip expense is a drop in the bucket, you could always sell the house and RV later, oh, again, nm. Bon voyage.

 

[2B]

I am currently 57 years old. No one in my family has ever lived past 85 so I'm not too worried about a 30 portfolio duration. DW may be in trouble since her family rots and rots for many years after they have any funtioning parts. The good news is only one made who it to 90 and the current runner up is her father with Alzheimer's who is 87.

I keep coming back to the over analysis that goes on. I confess to being guilty of it myself but the bottom line is that we can't predict what our rate of return will be, what the inflation rate will be or how long we will live. We can only do a reasonable estimate on the high side and the low side to determine a safe spending level. On a year to year basis, we must be prepared to review our plans and determine what is essential and what represents "extras" that we choose to spend our money on.

 

[Koolau]

For those considering canceling trips to keep the spending down, I think my approach would be to cut someplace else. Whether that's cutting back on eating out or drinking a little lower cost wine or something else would depend on your particular situation. If you are already "on the edge" so to speak, then, yeah, maybe you should cancel the trip. If not, decided once again what your actual priorities are and fund accordingly. For most of us, there is ALWAYS some fat in the budget that can be cut. Heck, I'd sell one of my 2 cars rather than give up a "trip of a lifetime" situation. 2 cars to me are CURRENTLY worth the sacrifice elsewhere - for the convenience of his and hers transportation. But, bitch and moan as I do about Hawaii taxes, we've got a superior bus system (on Oahu) that (almost) makes me feel guilty about owning 2 cars. So, in a pinch, I'd flip a coin and one car would be g-a-w-n rather than a true priority in my life. I'm sure most of us have similar "luxuries" to give up rather than something we truly want to have or experience. But, YMMV