Article on safe withdrawal rates

[samclem]

i cant get through to them that the 4% rule doesnt represent big gains or even average gains. it represents the worst real returns history ever threw at retirees .

Well, that should be "U.S. retirees" right? That is, we're cherry-picking the most prosperous economy in the world over the last century. And when you say "history" we really mean the period between 1871 and today, a period of explosive growth in wealth worldwide but especially in this one country.

I'm not arguing against your point, but future real returns can certainly be below 4% in the US. In most places (even in "modern times") they've historically been well below that. Economic and political conditions in the US are changing, and a bet on continuation of past performance is not a sure thing.

 

[mathjak107]

i think your confused. whats needed to have them hold true isnt 4% real returns ,according michael kitces its less than 1% REAL RETURNS .

the 4% swr is based on the worst returns any of the retiree groups had .

rolling 30 year periods are looked at and analyzed.

since the first 15 years make or break every time frame its crutial to look at the first 15 years.

for a 60/40 mix those average returns , for that worst ever group were an average of .86% real returns for a 15 year period .

the 4% swr still held true for them going out the full 30 years. .. thats less than a 1% real return and you were able to last at least 30 years and had money left over to boot.

all you need is a real return of .86% over the first 15 years of a retirement and that rule will hold.

so lets look at this very moment .bonds are at zero real return because the 15 year bond is around 2% and inflation is around 2% so assume they stay there at zero real return for the next 15 years. , so all stocks need to return is 1% by 2028 which is 15 years from now for the rule to hold because we are looking at worst case scenerios.

since stocks are pretty much where they were in 2000 now do you think the markets can return 1% real return average over 28 years? it will be 28 years in 2028 which already puts the odds of a 1% real return move in the next 15 years pretty good.

for the record the historical average real return for equites is 8% so a 1% move should be a piece of cake now.

folks miss the biggest thing about the 4% swr, and that is its based on surviving the worst returns,sequences and inflation ever to date.

if anything the swr of 4% is to low and leaves way to much on the table. over 96% of the time more then the origonal starting principal was left over at the end of 30 years.

pretty spooky that a 1% real return is all thats needed to maintain an inflation adjusted swr for 30 years.

i thank michael kitces for those most excellent points and the math to go with them..

http://www.kitces.com/blog/archives...esNerdsEyeView+(kitces.com+|+Nerd's+Eye+View)

 

[Bikerdude]

This calculator says 1% return equals 26.4 yrs. until portfolio is depleted.

How long will my money last with systematic withdrawals? | Calculators by CalcXML

 

[samclem]

i think your confused. whats needed to have them hold true isnt 4% real returns ,according michael kitces its less than 1% REAL RETURNS .

Whatever. I didn't say 4% or 1% real returns. I was just quoting your post.

the 4% swr is based on the worst returns any of the retiree groups had .

Again--no. Not "any" retiree group, but "US retirees." And not over just any time period, but over a time period that was especially generous to this specific group.

Put it another way: There's no other country in history that has experienced the extended wealth growth the US experienced during this particular period. The US enjoyed some cultural, political, geographic and economic structural advantages over much of the world (and some good luck) during that time period. Things are changing in the US on many fronts. I'm betting on this country's industries, too, but I'm not going to tell anyone that things are unlikely to get worse than they were over this especially "sweet" period in this one country.

 

[mathjak107]

This calculator says 1% return equals 26.4 yrs. until portfolio is depleted.

How long will my money last with systematic withdrawals? | Calculators by CalcXML

1% isnt the same as 1% real return

 

[mathjak107]

Whatever. I didn't say 4% or 1% real returns. I was just quoting your post.

Again--no. Not "any" retiree group, but "US retirees." And not over just any time period, but over a time period that was especially generous to this specific group.

Put it another way: There's no other country in history that has experienced the extended wealth growth the US experienced during this particular period. The US enjoyed some cultural, political, geographic and economic structural advantages over much of the world (and some good luck) during that time period. Things are changing in the US on many fronts. I'm betting on this country's industries, too, but I'm not going to tell anyone that things are unlikely to get worse than they were over this especially "sweet" period in this one country.

no question we arent the prom queen anymore as they say so true long term gains will be nothing like we had in the past.

dont forget typically those gains we saw could support a 6.5% withdrawl in 95% of our time frames.

each percent above 4% is a 25% raise over 4% so you can see historically with few exceptions you could have pulled 50% more .

well i think those days are gone in the opinions most of us have but according to michael reducing to a 4% swr is a huge cut from what we could have taken historically .

all thats need to take that worst case swr of 4% is a 1% real return and his numbers back that up.

even if we hit a new worst case scenerio its not going to be far off from the worst we had so a small adjustment perhaps to 3.5% should put you on track again.

 

[samclem]

i think your confused. whats needed to have them hold true isnt 4% real returns ,according michael kitces its less than 1% REAL RETURNS .

Here's what a 30 year FIRECALC run looks like with a 4% withdrawal rate and 1% real returns.

The failure rate is 42%.

Inputs: 10% standard deviation in returns, random returns averaging 1%, inflation rate of 0%. Starting portfolio of $100K, starting annual withdrawal of $4000

And, let's remember that a 30 year window isn't much for a hard-core ER type. Look at the slope of those lines--your portfolio would definitely be in a race with the grim reaper in most cases.

 

[NW-Bound]

I stopped worrying about my own situation when I realized the following.

1) If I manage to just keep up with inflation, meaning 0% real return, I will deplete my stash at 100%/30 years = 3.33%WR. So, for simplicity, I picked 3.5%WR.

2) I will be able to get some SS. That will help.

3) I believe I will spend less as I age, just as Bernicke observed with most people.

4) I may have some health problems in the next 30 years, and that I may not care all that much about the money that will not buy me happiness.

5) I may not even live another 30 years.

So, why don't I spend even more than 3.5%WR? The reason is simply that I like to have some margins. And then, deep down, I do not want to see my stash going down.

Until I get to the health stage that I fear, I still care about money, and I am still "Scroogy" enough to want to feel "rich". I still like to see my portfolio growing, and growing ...

PS. I just now realize after seeing samclem's post above that in the really bad scenario, my premise no. 1 above may not be achievable. Oh well! I may just die before 85 (I am 55 now), and that will take care of everything.

 

[mathjak107]

the part your missing is you only need the 1% real return for the first 15 years, your running it over 30 years..

now why is it different? if you read the article from michael you will see there is a link between low crappy stock returns over 15 years and the results that are gotten 99 % of the time on the next 15 years that seem to be like night follows day up to now.

the 2nd half seems to come up quite a bit every time saving the retirement. the reason you need the 1% real return as a minimum is you still need to maintain a decent balance in the first 15 years to benefit from the gains in the 2nd half.

if you loose to much and spend down to far in the first 15 years even the better years cant save you.

if your really into this stuff read the link i posted, i found it quite mind blowing.

im certainly not smart enough to have come up with the above but i certainly do think the likes of dr wade pfau and michael kitces can get it correct.

 

[Midpack]

No plans to leave anything.

Not really taking anything out since I just take the dividends, the capital is still in place. I really don't know what I'd spend the "residual" on, maybe I suffer from being a lifelong LBYM'er. Once pension/SS kick in "withdrawal" needs would be closer to zero.

Not sure how you reconcile these two statements. If all goes well and you "just take dividends" and eventually "withdrawal would be close to zero...once pension/SS kick in" - you will most likely end up with a pile of money that will have to go to someone. That was my original question. We all hope to have that problem of course...a nice problem to have, and it beats the alternative of course. Again, I think we all have to be prepared to spend less, or spend more at some point as the plan unfolds...

 

[rbmrtn]

Not sure how you reconcile these two statements. If all goes well and you "just take dividends" and eventually "withdrawal would be close to zero...once pension/SS kick in" - you will most likely end up with a pile of money that will have to go to someone. That was my original question. We all hope to have that problem of course...a nice problem to have, and it beats the alternative of course. Again, I think we all have to be prepared to spend less, or spend more at some point as the plan unfolds...

Yes, IF ALL GOES WELL, I could leave a pile behind but if doesn't go well then I should be covered, so I win in either case, no? I don't think I said I wouldn't spend more, I just have nothing really to spend it on. If health insurance was easily obtainable it would be it would be much easier.

My thoughts were more along the lines of what NW-Bound just posted.

 

[mathjak107]

the only flaw i see in michaels theory is he is figuring zero real return on the bonds.

if he is talking laddering bonds out to 15 years ill go with over all the returns may be zero after inflation since he can roll over those bonds into higher paying ones if rates and inflation pick up.

but if he is talking buying a bunch of 15 year bonds those may actually have negative real returns if inflation goes up above 2%. that would increase demand on the stock gains.

am i on to a possible flaw?

 

[Bikerdude]

1% isnt the same as 1% real return

4% return with 3% inflation is 1% real, is it not? Run the calculator and see what you get. I got 26.4 yrs. with the above input.

 

[mathjak107]

but read the rest of the posting as to why the 1% real return is only for 15 years not 30.

the portfolio survives because of the returns on the 2nd half of the retirement which have always been at least enough to carry the swr over 30 years when ever the first 15 years suck but dont get worse then 1% real return or to much can be lost or spent down and the 2nd half cant save the retirement.

mike kitces research has shown that there is a 99% chance of the 2nd half being up enough when ever the first 15 arent.

 

[ejman]

i think your confused. whats needed to have them hold true isnt 4% real returns ,according michael kitces its less than 1% REAL RETURNS .

the 4% swr is based on the worst returns any of the retiree groups had .

rolling 30 year periods are looked at and analyzed.

since the first 15 years make or break every time frame its crutial to look at the first 15 years.

for a 60/40 mix those average returns , for that worst ever group were an average of .86% real returns for a 15 year period .

the 4% swr still held true for them going out the full 30 years. .. thats less than a 1% real return and you were able to last at least 30 years and had money left over to boot.

all you need is a real return of .86% over the first 15 years of a retirement and that rule will hold.

so lets look at this very moment .bonds are at zero real return because the 15 year bond is around 2% and inflation is around 2% so assume they stay there at zero real return for the next 15 years. , so all stocks need to return is 1% by 2028 which is 15 years from now for the rule to hold because we are looking at worst case scenerios.

since stocks are pretty much where they were in 2000 now do you think the markets can return 1% real return average over 28 years? it will be 28 years in 2028 which already puts the odds of a 1% real return move in the next 15 years pretty good.

for the record the historical average real return for equites is 8% so a 1% move should be a piece of cake now.

folks miss the biggest thing about the 4% swr, and that is its based on surviving the worst returns,sequences and inflation ever to date.

if anything the swr of 4% is to low and leaves way to much on the table. over 96% of the time more then the origonal starting principal was left over at the end of 30 years.

pretty spooky that a 1% real return is all thats needed to maintain an inflation adjusted swr for 30 years.

i thank michael kitces for those most excellent points and the math to go with them..

What Returns Are Safe Withdrawal Rates REALLY Based Upon? - kitces.com | Nerd's Eye View

mathjak107, Thank you for an interesting post as well as the link for some perspective that I had not fully considered before. I thought I really understood what the 4% rule was all about but had not really appreciated the low return needed for the 4% rule to hold going into our (probably) low return "new normal" future. I've also subscribed to the thought that the 4% rule has worked in the US because we have had such an exceptional past compared to other countries. I'm going to have to noodle this one for a bit to see if it still makes sense to me after futzing with it but again, thank you.

But come to think of it, assuming a rate of return just enough to cover inflation (i.e. 0% real return) a portfolio will last 25 years to depletion assuming 4% withdrawals so, yeah on first blush it makes sense that a 1% real return will be fine for 30 years.

 

[haha]

But come to think of it, assuming a rate of return just enough to cover inflation (i.e. 0% real return) a portfolio will last 25 years to depletion assuming 4% withdrawals so, yeah on first blush it makes sense that a 1% real return will be fine for 30 years.

This may be tripped up by volatility and other aspects of nasty reality, but even it things proceed exactly this way, it might feel like it felt to cash poor aristocrats of the Old South, as they sold their French furniture, fine horses, silver and lace and other aspects of their lives to get something to eat, and some fuel to keep warm. Might be OK for some, for for me, suck, suck, suck!

NW is very outfront about how much being well off means to him psychically, I am the same way. Although I have not often talked about it, people who have read any of my posts likely could predict this about me. Others perhaps are different, but I suspect that anyone who has saved strenously and studied and invested carefully over a period of years, would be more than a little disturbed by a drawdown like you describe.

Ha

 

[mathjak107]

mathjak107, Thank you for an interesting post as well as the link for some perspective that I had not fully considered before. I thought I really understood what the 4% rule was all about but had not really appreciated the low return needed for the 4% rule to hold going into our (probably) low return "new normal" future. I've also subscribed to the thought that the 4% rule has worked in the US because we have had such an exceptional past compared to other countries. I'm going to have to noodle this one for a bit to see if it still makes sense to me after futzing with it but again, thank you.

But come to think of it, assuming a rate of return just enough to cover inflation (i.e. 0% real return) a portfolio will last 25 years to depletion assuming 4% withdrawals so, yeah on first blush it makes sense that a 1% real return will be fine for 30 years.

Your welcome. i too was floored by it but again its not the 1% that makes

the magic its the fact that more and more data research is showing that

15 years seems to be the flipping point time and time again after crappy returns.

even ray lucias buckets is based on a 15 year time frame before you hit

your stock bucket because we never had a 15 year period where there

wasnt at least some point we were higher.

we dont realize how low 4% really is in dollars drawn vs say 6% SO THE 60/40 MIX can really with stand quite a bit of damage and still hold true.

could it fail us at some point? sure it could.

but it puts the odds in your favor and when dealing with the unknown you want every bit of odds in your favor.

i love learning stuff like this because it reminds me how little i understand and how smart some of these guys who research this stuff really are.

 

[ejman]

This may be tripped up by volatility and other aspects of nasty reality, but even it things proceed exactly this way, it might feel like it felt to cash poor aristocrats of the Old South, as they sold their French furniture, fine horses, silver and lace and other aspects of their lives to get something to eat, and some fuel to keep warm. Might be OK for some, for for me, suck, suck, suck!

NW is very outfront about how much being well off means to him psychically, I am the same way. Although I have not often talked about it, people who have read any of my posts likely could predict this about me. Others perhaps are different, but I suspect that anyone who has saved strenously and studied and invested carefully over a period of years, would be more than a little disturbed by a drawdown like you describe.

Ha

I fully agree with you (and NW) and feel the same way. That increasing Net Worth line since I retired 10 years ago is mighty comforting. Nonetheless, from the stories I've heard from my grandpas who came from the other side of the pond at a time of great upheaval I feel that although such type of things would most definitely suck as you say and it's not something I wish for nonetheless, for most people life is what they make of it. I most certainly don't wish to be the subject of such a test but who knows?

 

[Nords]

Thanks to http://raddr-pages.com/forums/viewtopic.php?f=2&t=1208&hilit=Y2K , here's my favorite hapless Y2K ER blithely spending his way down the death spiral:

I've finally gotten around to calculating the ... year end balance of the portfolio of a hypothetical investor who retired at the end of 1999 with a 75:25 mix of S&P500 stocks and 6 mo. commercial paper. This was the type of portfolio that was being touted as "100% safe" on some investment boards based on historical backtesting at the time. The following numbers assume a 0.2%/yr. expense ratio, 4%/yr. withdrawal, and are stated in constant (real) dollar amounts:

Okay, here it is, the 2011 update:

As you can see, the poor retiree's real net worth has dropped nearly two-thirds (from $1000 to $367) in only 11 years and he is now withdrawing about 11% of his portfolio per year which is a recipe for disaster, even if the market heads up big-time from here. It looks to me like his portfolio very likely will fail in the next decade and is virtually certain to fail in the 30-year time frame which was touted as "100% safe" by many respectable market gurus and financial planners just a decade ago.

One interesting item to me is the essentially zero nominal return of T-bills which equates to a real return of -3.4% over the last year. Prior to the banking bust in 2008 the returns on cash were roughly in line with inflation but no more as the Fed tries to pump up the banks and entice investors back into financial assets and housing. This is creates an additional drag on an already severely stressed portfolio.

As many researchers have suggested lately, maybe it's the sequence of returns during those first 5-10 years of retirement that's the most important.

But, doom & gloom notwithstanding, the entire 4% SWR system runs against human psychology and American reality. It's very hard to blissfully raise your spending by the rate of inflation when the stock market was down a few percent last year, let alone years like 2008-09. It's not very realistic to ignore all Social Security benefits. However I'll agree that it's human psychology to ignore a 95% success rate to obsess over a 5% failure rate.

So use the 4% rule as an indicator that you're 95% of the way there. Then instead of trying to blindly follow it (and arguing about it on discussion boards) do something different. Annuitize 25% of your portfolio. Use a variable portfolio withdrawal system like Bob Clyatt's 4%/95%. Live off your dividends, no matter how sucky that may be some years. Or just freeze your spending during bad years and only raise it during good ones.

 

[mathjak107]

i saw that chart before but its really not accurate in my feeble mind. it uses t-bills instead of bonds.
bonds blew away stocks this decade and really ran with the ball .

my long term treasuries i had actually caused my version of the permanent portfolio to be up in 2008 -2009 actually un-doing the stock damage i had..

t-bills did squat and really offered no benefit in that chart other then they are not stocks.they didnt hurt but they didnt help either.

i dont think many retirees only use t-bills and stocks.

i understand the correlation between stocks and corporate bonds are not opposite and so the author used t-bills but i think its not really representative of a y2ker.

 

[ejman]

Your welcome. i too was floored by it but again its not the 1% that makes

the magic its the fact that more and more data research is showing that

15 years seems to be the flipping point time and time again after crappy returns.

even ray lucias buckets is based on a 15 year time frame before you hit

your stock bucket because we never had a 15 year period where there

wasnt at least some point we were higher.

we dont realize how low 4% really is in dollars drawn vs say 6% SO THE 60/40 MIX can really with stand quite a bit of damage and still hold true.

could it fail us at some point? sure it could.

but it puts the odds in your favor and when dealing with the unknown you want every bit of odds in your favor.

i love learning stuff like this because it reminds me how little i understand and how smart some of these guys who research this stuff really are.

Yes, sequence of returns has a tremendous impact. I suspect that the Great Depression immediately followed by the stagflation of the late 60's to the 70's would have been the kiss of death for most retirement plans. I'm not sure such sequence of events is even economically possibly as going directly from deflation to inflation might be pushing it a bit but who knows?

 

[JoeWras]

Yes, sequence of returns has a tremendous impact. I suspect that the Great Depression immediately followed by the stagflation of the late 60's to the 70's would have been the kiss of death for most retirement plans. I'm not sure such sequence of events is even economically possibly as going directly from deflation to inflation might be pushing it a bit but who knows?

What about Japan? Anyone look at scenarios using their numbers for say a 1990 retiree?

 

[mathjak107]

look at those who retired in the mid 1960's . they had 20 years of crappy stock market returns then went right into double digit inflation.

they jumped from a 4% withdrawal to a 10% withdrawal almost over night just to pay bills..

the 4% swr covered them too.

 

[mathjak107]

What about Japan? Anyone look at scenarios using their numbers for say a 1990 retiree?

to be fair we would need to really base it on their own worst case scenerios and not ours. only then would we be able to find their own swr.

 

[JoeWras]

Thanks to Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update , here's my favorite hapless Y2K ER blithely spending his way down the death spiral:


As many researchers have suggested lately, maybe it's the sequence of returns during those first 5-10 years of retirement that's the most important.

But, doom & gloom notwithstanding, the entire 4% SWR system runs against human psychology and American reality. It's very hard to blissfully raise your spending by the rate of inflation when the stock market was down a few percent last year, let alone years like 2008-09. It's not very realistic to ignore all Social Security benefits. However I'll agree that it's human psychology to ignore a 95% success rate to obsess over a 5% failure rate.

So use the 4% rule as an indicator that you're 95% of the way there. Then instead of trying to blindly follow it (and arguing about it on discussion boards) do something different. Annuitize 25% of your portfolio. Use a variable portfolio withdrawal system like Bob Clyatt's 4%/95%. Live off your dividends, no matter how sucky that may be some years. Or just freeze your spending during bad years and only raise it during good ones.

Thanks for the chart and the commentary. Very nice.

Unfortunately for me, the psychology of this and my reaction is to it is to consider w*rking a few more years. And of course the danger there is is w*rking until I'm dead trying to achieve 99.9% on firecalc.