Do you really need a lower SWR for longer retirement?

[ksr]

I took a leave of absence, the big surprise was the inflation rate on the health insurance (20% increases).

I went to lunch with my former co-workers a couple of weeks ago, and they told me that their premiums for the company-provided health insurance have doubled in the past year.

 

[jebmke]

I went to lunch with my former co-workers a couple of weeks ago, and they told me that their premiums for the company-provided health insurance have doubled in the past year.

One reason why 4% is potentially risky for many. Not all, but many.

 

[ESRwannabe]

By 45 I should have enough money to ESR, maybe even ER. Something I will consider at that point is becoming a vagabond expat. Maybe teach english in a foreign country or join peace corps for a few years.

I could do that type of thing until I get sick of it. I think it would be pretty fun for a few years and would give my investments more time to grow. When I am done with that I may be able to get part time work in IT again, or perhaps I would just do some unskilled labor. I'd probably just need to bring in $10k or so a year.

One thing I could do is move to a large college town and do math tutoring for cash. I did that in college ten years ago and charged $20 for 30 mins. Only problem with it is the demand was sporadic. Hmm, I could also apply to grad school and get a TA slot. Free tuition, and around $15k income. That would be pretty fun.

 

[M Paquette]

As the length of retirement goes up, the SWR is said to go down.

Well, purely from a portfolio lifespan view, the SWR drops for periods over 30 years, approaching a limit that would be the long term return from a perpetual endowment, the 'three percents' of Victorian literature.

A withdrawal rate of 3.6%, for example, would allow the typical balanced portfolio to have survived a 40 year retirement starting in September 1929. A 3% withdrawal rate should hold up indefinitely, that is, until the collapse of civilization, the demise of currency through hyperinflation and revolution, or the development of replicator technology in 2113 and the abandonment of monetary economics.

I wonder though if this is really necessary. With a longer retirement, one will of course be younger at age of "retirement". As such, depending on one's profession it should be easier for those 45-55 to go back to work if needed or work part time as appropriate. Most 60+ year olds would not have that option. Does the flexibility of work options at the younger retirement age cancel out the need for a lower SWR?

I hope so - my personal plan is to get to 25X expenses around age of 45 and then go back to work "as needed" - hopefully that will not be the case but I'll have the option.

The 'work, as needed' plan would have to be unskilled labor, at least for retired tech workers. The requirements for positions seem to skyrocket, and being out of the workforce for a few years would be interpreted (right or wrong) as putting me hopelessly behind.

I held a position as a senior software engineer, with some 28 years of experience and a physics degree. That position, my last job, was recently advertised as requiring a master's degree in computer science, prior experience in languages never actually used in the job, etc. I couldn't get past the HR screen for my old job! Greeter at WallyWorld? Housewares clerk in S-Mart? Yeah, I could probably handle that, but eccch.

 

[FUEGO]

accountingsucks,

I'll approach this from a different angle and disagree with the general sentiment. But take my advice with a grain of salt since I'm young and stupid (just turned 30). I'm also in a career where the technical knowledge and skills required today are roughly the same as six years ago when I entered the work force. We have newer versions of the software, but those can be learned in a 1-2 day training course if necessary.

If you are ER'ing at a very young age in your 30's or 40's I assume you are also a prodigious saver, and don't spend anywhere near 100% of your income, because you are saving a significant portion of it (hence the reason why you can ER in your 30's or 40's). So if you are seeking another job during ER to supplement income shortfalls from a floundering investment portfolio, you don't need to replace your old salary to get by, you only need to replace your then current spending needs (at a maximum). In reality, you could still fund a portion of your expenses from your portfolio, and get the rest of your spending money from a job. Maybe it is in your old field, or maybe it is some new field you are interested in.

Also, you will most likely know your 30+ year survival chances are low by looking at your portfolio values at 5 or 10 years out. If your portfolio value has taken a big hit after only 5-10 years, it will be a sign to get thee back to a job (of some sort). That initial 5-10 year period will also be the easiest time to find a relatively high paying job in your old field before your skills become completely stale. Maybe that doesn't hold true in IT or some other cutting edge technology fields. But it does in many career fields I would think. 15-20 years out?? Your odds of having current relevant skills and experience will be lower I would think. There's a bigger chance of your old industry doing things in a very different manner.

The bottom line is if you are flexible and willing to face the fate of having to return to some sort of job that will pay the bills during periods of portfolio difficulties, I would say you could offset some risk of lower portfolio survivability by planning on some earned income. Between getting some earned income, reducing expenses, deferring expenses, and cutting back on discretionary expenses, you should be able to "get by" until things get rosier in the markets.

However as I get closer to having 25x expenses (a 4% SWR), I'm thinking harder about "wouldn't I sleep better at night if I had a 3% SWR". Choices...

Edit to add: One thing I didn't fully appreciate years ago when I was making plans to have "find work" be a back up plan for poor portfolio performance. Gone4good touched on it earlier. Portfolio performance and job availability are positively correlated. Imagine if you were 3-4 years into the Great Depression and you suddenly figured out that the portfolio wasn't cutting it, so you need to go find a job. Could be hairy.

 

[Meadbh]

However as I get closer to having 25x expenses (a 4% SWR), I'm thinking harder about "wouldn't I sleep better at night if I had a 3% SWR".

As I get closer to having 33x expenses (a 3% SWR), I'm thinking harder about "wouldn't I sleep better at night if I had a 2% SWR".

 

[Dennis]

Well, they told me if I plan on a 4% SWR, i have a 29% chance it won't last till I'm 90..
So, I just went with using 3% SWR to be on the safe side..
And the Port is More Moderate vs Conservative.. ave 9.3% apy since 98'..
I think the 1st 10 yrs will determine things for you..
Keep it Moderate and Not Conservative..

Whatever 3% SWR requires.. per $10k? = $333k
Invested in a 30/70 balanced Port
Anything Extra? Put it in a Aggressive Bal port ..( 60/40 )
ie: Conservative is All Bonds, Moderate it upto 40% Equities and anything over that in equities is Aggressive to me..

Wall Street /Pro's want to Con us into believing Conservative is utp 40/60 and moderate is btwn 45-70% equities, etc.. and that's just a con game to get you to own More Equities so they can make their $ on you.. since they make their $ selling you on owning Equities, not bonds..

And Nothing Last Forever.. In 16 Million Yrs, the entire Planet is scheduled to be Wiped out as we know it.. and things can start all over again...I just hope we figure out a way to (a) Go live on other planets and (b) Learn from our Mistakes..(c) Solve our current Diseases, we created..

 

[ERD50]

Wall Street /Pro's want to Con us into believing Conservative is utp 40/60 and moderate is btwn 45-70% equities, etc.. and that's just a con game..

Well, you can run FIRECALC and use the INVESTIGATE tab and it will chart the historical success rate versus AA from 0/100 to 100/0 . When I've done this, it was pretty flat, and trailed towards poorer results at around 30/70 EQ/BONDS and below. IIRC, with the scenario I used (40 years?), a stock allocation 30% and below did worse than a 100% stock AA.

Somebody may be conning you/us, but I don't think that AA is part of it. Do some FIRECALC runs and see for yourself.

-ERD50

 

[FUEGO]

As I get closer to having 33x expenses (a 3% SWR), I'm thinking harder about "wouldn't I sleep better at night if I had a 2% SWR".

Just one more year syndrome.

My current dividend yield is 2.25% in a 100% equities portfolio. I would feel very comfortable sleeping at night knowing my expenses are paid in full by dividends that will theoretically grow at least at the rate of inflation.

 

[Dennis]

Per this chart and several others like it..
@ FundAdvice.com - 1970-2008 chart
30/70 port ave 9% apy & a 6.5 Deviation
40/60 = 9.1% & a 7.4 Dev.
50/50 = 9.2% & a 8.5 Dev.
60/40 = 9.3% & a 9.8 Dev.

Now IAD.. On wether or not you Have Enough that 3-4% will take care of you in your Retirement or you may need to make more to "MAMAUC"- MakeAsMuchAsUcan"..
And seeing as this Board is for Early Retirement types, I assume others are in the same Rich Boat of having enough to More than enough..

Thus The More Conservative approach of Investing and Why It's not worth taking on the Added Risk to just make a few more Nickels and Dimes , even at a Per $1 million Port. over the Long Term, but struggle and worry during a shorter time with such a Higher Deviation..

I, myself only had visions of Just taking out a max of 3% from my savings to fund my retirment and thus also not having to MAMAUC anymore ..and get off that Fast moving train and leave some for the next Generation... A simple Bal fund such as VWINX witha 40/60 port and with very low Index type Rtns showed at a 4% RWD one had a 90% chance of Having enough $ till age 85 and 85% till age 90.. and it lasting till 115 yrs if taking out only 3.3% apy.. And a Similar % Mix Balanced Fund of OAKBX and BERIX = about 42/58 mix, would provide 5.3% Income for over 45 yrs.

And because of this last Decade? LT Treasuries ave over 7.3% APY, -2.6% CPI Inflation ave , still left over 4.7% to take out and live on

I have a Bond Port, set up by some Bond Pro's yrs ago that has ave over 10% apy for the past 3,,5,10 and now going on 15 yrs.. and a ave yld of over 3.5% ...over that almost 15 yrs and a current 4.6% Yld for this yr..

And there is a reason Firms Like PIMCO and Bill Gross and his gang of Bond people have over $1 Trillion under management..since some of his Portfolio's have done even Better for the same periods..

Now, with the Corporatons Being Exposed of their Careless Flagerant Spending ways,it's no wonder the Public's Trust has eroded to the point that Wall Street as we know it, may not survive.. It will take only a few more Bail Outs and Wall Street maybe Burned to the Ground.. The Tea Party may see to that..

Making Double your $ for a # of yrs and then giving back 40-50% in the End all the time is only for Traders that can time it when to get out before those kinds of Losses happen. Most Savers cannot and will not Tolerate that kind of Investing and if they are being forced to either Be Active Investors and have to spend what is equal to working a Part-Time Job to do it or having to pay some marginal Accountant type FA vs just BUY & Hold in Bonds? They will take the Bond Route instead.. And Setttle to Keep their Principal In tack and just make Inflation rtns..

This is what is Scaring Wall Street and all those heavily invested in Equities..For without that new $ to support equities? it will fail.. the Depression from 29'-47' proved that..and it took a World War To change the Economy! Big Business , the Rich and paying off certain people to Relax Former Laws , were at Fault for the that Depression and as they were for this last One and Major Crash.. If you want to Put your $ at Risk to "Guess" this will not happen again? BMG..I do not have Faith nor trust in our Gov't leaders to make signifcant changes in time before I die.. Maybe they will by the time my Kids and Grandkids do..But I doubt it..

 

[ERD50]

Per this chart and several others like it..
@ FundAdvice.com - 1970-2008 chart
30/70 port ave 9% apy & a 6.5 Deviation
40/60 = 9.1% & a 7.4 Dev.
50/50 = 9.2% & a 8.5 Dev.
60/40 = 9.3% & a 9.8 Dev.

The trouble is, those are just numbers. They do not reflect context. It doesn't tell you what they did relative to inflation over specific time periods while withdrawing money along the way. You could be like the proverbial 6' tall statistician who drowned standing in the deep end of an average 4' deep pool.

FIRECALC, OTOH, adjusts your spending to match inflation (published inflation anyhow - better than nothing), and reports success based on how those allocations held up within the context of inflation as those values and yields and withdraws all fluctuated over time. Disagree if you wish, but I think that tells us far more than a static return and SDev number.

I don't seem to see the 'link to this data' feature on FIRECALC anymore, but I just ran 3.5% WD, 40 years, with this checked on the INVESTIGATE tab:

Investigate changing my allocation

__ How will changing the allocation -- putting more or less into stocks -- affect the results?

and the success rate at 40% stocks looks to be about the same as 100% stocks (~ 95% success?). The success rate is pretty flat from 40-100% EQ, with a slight plateau (also at the peak - a 'flat top') from 50-65% EQ (~ 97% success?). It keeps dropping as you lower your EQ weighting, until it looks like ~ 33% success at 5/95% EQ/Bonds. Is that really what you want? You are welcome to it.

You could measure to get a better estimate of those % success rates, but the trend is obvious. In summary, Equities have their risks, and Fixed Income has its risks. And historically, a 100% fixed portfolio was far more 'riskier' to the success rate of a retiree's portfolio than 100% Equities.

But if a 33% historical success rate makes you sleep better than a 95% historical success rate, it is your call. And just because the future performance of Equities may prove to be below their historical worst, that doesn't mean that bonds will do better (versus inflation) than stocks.

I plan to hedge my bets, I doubt I'll ever go below 50/50.

-ERD50



-ERD50

 

[jebmke]

Just one more year syndrome.

My current dividend yield is 2.25% in a 100% equities portfolio. I would feel very comfortable sleeping at night knowing my expenses are paid in full by dividends that will theoretically grow at least at the rate of inflation.

The operative word is "theoretically." Dividends declined sharply in 2009 and have recovered some in 2010. I did a quick check and it seems like the dividend rate of the US market is back on par with 2007 -- more or less.

 

[FUEGO]

The operative word is "theoretically." Dividends declined sharply in 2009 and have recovered some in 2010. I did a quick check and it seems like the dividend rate of the US market is back on par with 2007 -- more or less.

I guess I should say that I expect the long term trend to be dividend growth that at least paces inflation for a broadly diversified portfolio.