Adjust SWR due to financial "sea change" ?

[cardude]

Are any of you thinking of adjusting your SWR or doing something else radical* due to a possible financial "sea change" or are you just gonna leave it alone and not worry about it? I wonder if a 3-4% SWR will work if we are mired in a 20 year recession.



*RADICAL*
We have friends (with 3 young kids our kid's ages pretty much) living in a little surfing village in Costa Rica and I keep thinking about that as a way to REALLY reduce living expenses-- pay cash for a house and just live a super-simple, flip-flop kind of life. However, I worry about how the kids will deal with that and how it will affect them later in life (schools are not as good, lots of crazy xpats live there, overall surfer/slacker lifestyle may turn them into slackers, etc. )

 

[ziggy29]

Let's put it this way: If in 10-15 years, when I'm getting close to hanging it up, if looking back on it we can see that 4% still survived the craptastic 2000-20xx market, I'll have more confidence in it. But in reality I've been shooting for closer to 3% anyway, even before this mess started.

 

[REWahoo]

Are any of you thinking of adjusting your SWR or doing something else radical* due to a possible financial "sea change" or are you just gonna leave it alone and not worry about it?

None of the above. For now I'm going to leave things as they are...and worry about it quite a bit.

I wonder if a 3-4% SWR will work if we are mired in a 20 year recession.

Highly unlikely, but miracles do happen.

I plan on cutting back my withdrawals gradually over the next couple of years but doing nothing drastic/radical until I have a better view of how long this "thing" is going to take to play out. Financial shrapnel is still flying and secondary explosions are still going off. Once the fires die down and some of the smoke clears, I'll stick my head up and have a look around. Only then will I consider making any serious changes.

 

[Dawg52]

I'm just under 3%, hoping that it will last. If not, I'll move to some little town down in Mexico and live cheap. Looks like they super size meds.

 

[Moemg]

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 .

 

[2B]

Ziggy and REW are on opposite ends of the spectrum from me. REW is already retired so his choice is keep on keeping on or become a Wal Mart greeter. Ziggy is a good decade away so he keeps his nose to the grindstone and see how things develop - his only real choice.

I'm right in the middle. I am FI but the FI is a lot lower lifestyle than it was a year ago. I am still w*orking at an easy j*b without any significant stress and making unbelieveable money for what I do. I'm trapped in Houston for family reasons and can't image wanting to retire here in my present situation. W*orking is preferrable but, hopefully, DW and I will become more mobile in the near future.

I'm beginning to think I should write a planning to retire book using what I've come up with for my plan like ESRBob did. My premise would be to get a cash, pension and SS cushion equal to the amount needed for a decent but minimal retirement. We all have to decide what that is for ourselves. I can imagine several chapters of psychobabble covering different lifestyle choices with the financial/timing impact of retirement. The "extras" are also a matter of personal choice that would be funded entirely with equity/REIT/risk oriented elements of any AA. This would, of course, be covered in multiple chapers full of more psychobabble. No matter how bad it gets there will be some income generated so vacations may vary from a month in Europe one year to a Motel 6 for a weekend at the beach another.

Any advance orders?

 

[ERD50]

Well, the numbers have worked through previous long, drawn out down periods.

That said, I find the 4% too risky on several levels.

A) I may need money for more than 30 years.

B) 95% success isn't good enough when I have no basis to think that my future will not be as bad or worse than the past.

C) 4% will result in some deep deep drawdown in many scenarios (including failure 5% of the time). Most people could not stomach a 60% drop even if the odds are it will recover.

D) I'd like to have some buffer - who knows what individual needs I may have? Am I really going to fit some "average" profile? Will my expenses exceed inflation?

I'm under 4% now, if DW stops working before pensions kick in, I'll probably be over 4% for a few years, but them I'll be well under 3% with pens/SS. Assuming 3% inflation and a portfolio that keeps up with inflation. Assumes pensions and SS remain intact.

-ERD50

 

[Meadbh]

I am cautious by nature and was mentally planning to RE on 2-3% SWR in ~5 years. If I were to RE now I would be at ~4% SWR. So I am biding my time, building a cash cushion while DCAing into the market, and mentally preparing myself for notsoER.

 

[CuppaJoe]

...
Financial shrapnel is still flying and secondary explosions are still going off. Once the fires die down and some of the smoke clears, I'll stick my head up and have a look around. Only then will I consider making any serious changes.

Yeah, I think. I’m taking the full 4% but I’ve only been at this retirement game for six months. To take less, to my way of thinking, would be to distrust the 4% strategy. OTOH, I’m continuing a lifetime habit of saving, LBYMing and have some leeway to downsize. I’m surprised I’m still making pin money selling clutter on the net; too bad I sold my copy of “The Fire Next Time.”

 

[Bestwifeever]

We expect to be done with bucket 1 (separate $$, all our expenses in it, more than 4% of total egg) by the time DH hits 62; thereafter we should be able to take 4% plus pension plus SS.

Maybe we won't all be able to make it to the end without touching the principal, as I think many of us were hoping, but on the other hand, back in the olden days, wasn't only the tiny slice of society that was the upper class able to do that? Die broke but happy maybe should be the new mantra.

 

[unclemick]

Hmmm - I ran my CB(cheap bastard no.'s) last night and the no. 2 pencil and back of the envelope says if I don't party in New Orleans too much - I can live on SS and non cola pension without doing anything to my portfolio just reinvest dividends and give to charity when I croak.

Time and inflation AND my curmudgeony nature says that's not gonna happen. .

The first 15 years of ER were fun - even my el cheapo period. Now I need to get any exceedingly wicked stuff I can dream up done before old age not money passes me by.

You know - things like wilderness camping/fishing where you smell bad after a week, can scratch your balls, pick your nose without fear of becoming a feature on U tube or perhaps other things you might not mention on a forum.

Mardi Gras day is tuesday.

heh heh heh -

 

[ERD50]

I’m taking the full 4%.... To take less, to my way of thinking, would be to distrust the 4% strategy.

Not really a matter of distrusting the strategy at all. It could be a matter of understanding what comes with that 4% strategy:

A) A 5% chance of running out of money in less than 30 years. That assumes the future is not worse than the past.

B) The assumption thats your personal rate of inflation is no greater than the average figures in FireCalc.

C) That in many of the "success" cases, you can see a huge drop in your portfolio. Drops that make the current meltdown look like a walk in the park (just look at where ~ 1/3 of those squiggly lines go).

D) A true "ER" couple has a good chance of needing a portfolio that will last more than 30 years.

If you understand the impact of all those things, and 4% still looks good for your personal situation, great. I think far too many people just run FireCalc, see that 4% = the default 95% success rate and yell out "BINGO".

-ERD50

 

[Moemg]

I’m surprised I’m still making pin money selling clutter on the net; too bad I sold my copy of “The Fire Next Time.”

Not only am I making money I've had bidding wars on my items . Something I have not seen in a long time .

 

[Independent]

I think ERD is working the correct angle. The 4% SWR is really a 95% confidence level. Anyone who retired in 1999-2000 or 2006-07 has seen market returns that look like they belong in the 5% failure group. Therefore, some adjustment seems prudent. I expect that most people had some cushion, so they can drop their spending without moving to Costa Rica.

 

[RonBoyd]

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 .

This has , most likely, been mentioned many times before but Kotlikoff and Burns (who are not fans of the 4% SWR theory -- calling it the "four percent Rule of Dumb") in their book, "Spend 'til the End," on page 252 make this point:

Would the rule work better if it were "spend 4 percent of your remaining assets each year" instead of "spend 4 percent of your initial assets"? Many people, hearing the rule but missing the emphasis on initial assets, are likely to get the latter version into their brains instead of the former.

They then go on to explain the vastly different outcomes of this decision.

 

[CuppaJoe]

Not only am I making money I've had bidding wars on my items . Something I have not seen in a long time .

Could it be that "gambling" is one of the last things people give up in a downturn. Some years ago, I gave up bidding on eBay because it was, for me, a sort of gambling. Maybe I'll start selling the items I "won" back then. Postal scales are only $20. Hum. Nah, gotta getta grip.

 

[2B]

I've seen elderly relatives live all sorts of retirement lifestyles. Their fixed costs were modest and they would periodically splurge on that special trip (usually to see another relative ). My relatives were all pretty much lower middle class and didn't really have a taste for expensive things. They also never could have afforded them.

I'm the family "success story" but all I can claim would be the lower end of upper middle class if I lived to the full extent of my income. We've consistently been a LBYM couple so we had managed to save enough for a safe middle class retirement by my 50's. The market meltdown has given me great angst. My only saving grace is when I run my numbers on the "safe" money (retirement, SS, CDs, US Govt stuff) the spending rate is consistent with a decent middle class retirement and enough to cover my medical expenses before and after Medicare.

My questions to everyone throwing around numbers like SWR or 2% or 4% is "What does that SWR cover? Does that cover what you consider your basic lifestyle or is there travel, gifting, etc that is included? How much of a SWR do you need to cover your minimum acceptable voluntary retirement lifestyle?"

I use the word "voluntary" because it's also been my experience that a large number of "retirements" are forced upon the individuals. There are many 50-somethings that will retire during this recession that will never be able to find anything vaguely resembling their prior pay level.

 

[Rich_by_the_Bay]

Not really a matter of distrusting the strategy at all. It could be a matter of understanding what comes with that 4% strategy:

A) A 5% chance of running out of money in less than 30 years. That assumes the future is not worse than the past.

B) The assumption thats your personal rate of inflation is no greater than the average figures in FireCalc.

C) That in many of the "success" cases, you can see a huge drop in your portfolio. Drops that make the current meltdown look like a walk in the park (just look at where ~ 1/3 of those squiggly lines go).

D) A true "ER" couple has a good chance of needing a portfolio that will last more than 30 years.

If you understand the impact of all those things, and 4% still looks good for your personal situation, great. I think far too many people just run FireCalc, see that 4% = the default 95% success rate and yell out "BINGO".

Possible but sounds too gloomy to me.

First, that 95% failure rate is a statistical black-and-white parameter. 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. Even in the current chaos, you might be down 25% for the year if you were diversified, and still have 75% of your nest egg left. Not good but plenty of time to switch to plan B before reaching $0 net worth.

Second, prolonged inflation can be, but is usually not associated with a prolonged bear market. If you presume both at the same time that's a stretch, though not impossible. And a dollop of TIPs might ease the pain.

It's all about playing the probabilities against your risk tolerance. But it's easy to get paralyzed if you look to go from 95% confidence to 99.9% confidence -- too much angst for too little gain (and too many black swans).

Just my view.

 

[Bikerdude]

Are any of you thinking of adjusting your SWR or doing something else radical* due to a possible financial "sea change" or are you just gonna leave it alone and not worry about it? I wonder if a 3-4% SWR will work if we are mired in a 20 year recession.

I would think if your portfolio survives the 1966-1982 time period in FireCalc then you have a very good chance going forward with 4% and excellent odds at 3%.

 

[Moemg]

"What does that SWR cover? Does that cover what you consider your basic lifestyle or is there travel, gifting, etc that is included? How much of a SWR do you need to cover your minimum acceptable voluntary retirement lifestyle?"

.

My SWR includes travel , gifting and remodeling . To cover my basic lifestyle I need only 2% of my SWR the rest is covered by SS survivor benefit & a pension . I do write down 4% every year but I have yet to spend the total amount in the two years I've been retired .

 

[Moemg]

This has , most likely, been mentioned many times before but Kotlikoff and Burns (who are not fans of the 4% SWR theory -- calling it the "four percent Rule of Dumb") in their book, "Spend 'til the End," on page 252 make this point:



They then go on to explain the vastly different outcomes of this decision.

Well Vanguard seems to think the 4% a year is the way to be sure that your money will last especially in these markets


https://retirementplans.vanguard.co...Method.jsf?SelectedSegment=LivinginRetirement

 

[ERD50]

Possible but sounds too gloomy to me.

First, that 95% failure rate is a statistical black-and-white parameter. 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. Even in the current chaos, you might be down 25% for the year if you were diversified, and still have 75% of your nest egg left. Not good but plenty of time to switch to plan B before reaching $0 net worth.

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!". or maybe is more appropriate?

In year 5 of a bear market, do I start cutting back because it might be long and drawn out, or do I expect it to be the start of the next bull market?

So sure, we can cut back after seeing our portfolio dwindle, but I think people over-estimate the effect. It can't hurt, but it's no miracle worker either.

Second, prolonged inflation can be, but is usually not associated with a prolonged bear market. If you presume both at the same time that's a stretch, though not impossible.

But I am not "presuming" anything. The beauty of FirecCalc is that it takes into account the history of the interaction of inflation and markets and interest rates. The results are what they are - no presumptions.

It's all about playing the probabilities against your risk tolerance. But it's easy to get paralyzed if you look to go from 95% confidence to 99.9% confidence -- too much angst for too little gain (and too many black swans).

Just my view.

Yes, it is a personal decision. 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.

To each their own, but I think everyone should be aware of what the numbers are saying.


-ERD50

 

[ERD50]

But it's easy to get paralyzed if you look to go from 95% confidence to 99.9% confidence -- too much angst for too little gain (and too many black swans).

Just wanted to add, I'm not following your "black swan" comment either.

Something I hear from time to time, and I'll exaggerate to make the point clearer, goes something like: "Well, there's no point in having a plan, since our plans can get shot out of the water anyway".

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.

What say you?


-ERD50

 

[RonBoyd]

Well Vanguard seems to think the 4% a year is the way to be sure that your money will last especially in these markets

Yeah, well... Vanguard would think that way. (Whose side are they on?)

Anyway, what you said later

My SWR includes travel , gifting and remodeling . To cover my basic lifestyle I need only 2% of my SWR the rest is covered by SS survivor benefit & a pension . I do write down 4% every year but I have yet to spend the total amount in the two years I've been retired .

is in line what Kotlikoff and Burns are saying.

In any event, I am not qualified to defend their position and I was merely pointing out a dessenting viewpoint. 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.

 

[ERD50]

First, that 95% failure rate is a statistical black-and-white parameter.

Sorry, I don't mean to appear that I'm piling on, but as I re-read your posts, one more thing stuck out for me.

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.

-ERD50