Business Week's "special retirement issue"

[Nords]

Spending Safely

Business Week has managed to recycle the sound bites of Bengen & Guyton into advocating a higher withdrawal rate. Let's just say that it makes for interesting reading:

... when valuations are low (with the 10-year p-e below 12), Kitces suggests that a retiree could start with a 5.7% withdrawal, since prices are more likely to trend upward. That rate might not seem appreciably larger, but it could yield real spending that is 10% to 20% higher each year over a multi-decade retirement.

Retirees who follow an inflexible schedule could feel deprived when the markets are flush and worry when the markets are getting pummeled, he says. Guyton believes initial withdrawals can be as high as 5.2% to 5.6% for portfolios that contain at least 65% stocks.

Flexibility is factored into Bengen's revised approach, which permits withdrawals to fluctuate within guidelines. His "floor-and-ceiling strategy" suggests that an initial withdrawal rate of 5.16% would be appropriate if a retiree pares back subsequent withdrawals by as much as 10% of the initial withdrawal during hard times (the floor). On the other hand, a retiree could withdraw extra cash equaling up to 25% of the first-year withdrawal (the ceiling) when the market is strong. The starting rate would vary depending on how much volatility a retiree could stomach.

So pack up your troubles in that old kit bag and [-]smile[/-] spend, spend, spend!

Once again I'm reminded that none of the Business Week writers have any actual ER experience. But it's entertaining to read their ruminations, as long as you apply their advice with extreme caution:
The 2008 Retirement Guide – BusinessWeek

 

[Notmuchlonger]

But but I dont need to spend 5.7%

 

[d]

i was surprised that they didn't tell everyone about the "new" retirement model (i.e. keep working)

 

[Marquette]

But but I dont need to spend 5.7%

Then according to my analysis, you are currently worried with the market tanking whereas someone taking out more wouldn't be. Don't worry, though, you'll feel deprived sometime later.

 

[Notmuchlonger]

Then according to my analysis, you are currently worried with the market tanking whereas someone taking out more wouldn't be. Don't worry, though, you'll feel deprived sometime later.

Ok great I feel much better now!

 

[CitricAcid]

It pretty puts the words in your head that you are deprived if you are only taking out 4% per year. In other words, another way to make you underaccumulate for retirement and overspend.

 

[rmark]

IIRC, most of Guytons work used a fairly short time period, something like 1973 – 2000. Going from near the bottom through the best bull market ever should tend to increase withdrawal rates (if you had enough to retire on at the start).
IIRC, one of Bengens later Journal of Financial Planning articles included increasing returns due to ‘super investor’ abilities. That assumption should also tend to increase withdrawal rates. (my wife's super ability is she can smell dead things - she can sense a dead mouse a mile away. Not really a useful superpower, but you go with what you got)
The fixed 4% of initial portfolio + annual inflation resulted from chugging through past US data to see what would have survived in the past, though many authors have treated it as a ‘for sure’ thing for the future, with little reason to do so.

 

[mickeyd]

...But 4% is such a round number...

 

[Nords]

But but I dont need to spend 5.7%

Then return your ER membership card, and get back into the employee pool until you can figure out a way to spend it!

Just kidding.

Here's a more even-handed survey of the literature:
What's the "safe" withdrawal rate in retirement ?

It's almost as if Business Week talks only to financial advisors and has no idea that people discuss this on the Internet...

 

[heyyou]

At Kitces.com, referenced in the BW article, he uses starting PE/10 ratios in quintiles to determine a SWR taylored to current values. He noticed that the initial 15 years of a 30 year WD, determined the SWR, then he sorted the starting PE/10s in quintiles to match the SWR for those periods. I like that. He does have a caveat about the market run-up since 1993 as being the longest one in recent history, so current retirees may face even lower returns. Is this what *ocus based his ranting on? Kitces seems quite reasonable but those words "valuation" and "PE/10" initially set off my alarms. I recommend the Kitces paper. He has added a step to the work of Bengen and Guyton.

 

[haha]

He does have a caveat about the market run-up since 1993 as being the longest one in recent history, so current retirees may face even lower returns. Is this what *ocus based his ranting on? Kitces seems quite reasonable but those words "valuation" and "PE/10" initially set off my alarms.

This is indeed the essence of 'ocomania. It would be highly ironic if the hoc eventually had his ideas adopted-under someone else's name of course.

Ha

 

[chinaco]

Yippeee!!! Now all I have to do is spend...

I read an article that indicated that I could have a withdrawal rate of 120% (stiff somebody on a loan). It is perfectly safe from a financial point of view... everything will work out fine as long as I am willing to pass away at the end of the year.