Greater than 4% Withdrawal Rate

[ScaredtoQuit]

What do some of you think about some of the current thinking that a 4% withdrawal rate might be too conservative? I found the following on MarketWatch today:

http://www.marketwatch.com/news/story/how-spend-more-money-retirement/

And not too long ago, I ran into this:

http://www.post-gazette.com/pg/06347/745514-28.stm

From the guy who came up with the concept of a 4% withdrawal no less!!

I am seriously considering raising my withdrawal (future) to 4 1/2%! Any thoughts anyone?


MODERATOR EDIT: SHORTENED URL

 

[sgeeeee]

Just a few years ago, the retirement boards were filled with posters convinced that 4% was too high. The debates got pretty heated as some people became convinced that the economy was headed for the worst tail-spin in history. Others were simply uninformed and thought that the 4% number came from average returns so that the bull market of the 90's had made this number higher than it should be. Now we have an increasing number of articles coming out claiming 4% is too low.

In reality, the 4% number comes from studies that look at a mix of S&P 500 and bond funds for 30 years. They assume you adjust your spending for CPI every year in retirement regardless of what your portfolio does or how the economy performs. They assume you have a very low expense ratio on your funds. And finally, they assume the future will never be worse than the worst case in the past.

What happens if your spending habits do not simply track the CPI regardless of the economy? This will have a significant impact on the historical safe rate of withdrawal. What happens if you diversify beyond S&P 500 and bond funds? This can also have a significant impact. What happens if the future is not as bad as the worst case in previous history?

The 4% rule should not be treated as a rigid law of retirement. It's simply a fairly conservative estimate of what you might need to retire and avoid having to eat cat food.

 

[lazygood4nothinbum]

just learning this stuff so i don't really know what i'm doing yet, but whenever i run my numbers through firecalc, including social security, noncola'd pension and then i add either future reverse mortgage at age 65 or partial proceeds from selling the house in 5 years, i get, on a 50-year retirement, a 95 to 96% success rate on anywhere from 4.92 to 6.29% swr depending on allocation.

this seems to generally correspond to a 4% withdrawal rate on my entire net worth when figured including the value of my house. as no one is financially dependent on me and so i don't require keeping a house (indeed, i plan on not keeping the house) and i don't even require having extra cash upon death, 4% of my entire net worth figured this way feels comfortable to me.

 

[REWahoo]

I am seriously considering raising my withdrawal (future) to 4 1/2%! Any thoughts anyone?

You might want to take a look at this thread from the "Best of..." board:

http://early-retirement.org/forums/index.php?topic=5572.0

 

[MasterBlaster]

Keep in mind, The studies that indicate the 4% SWR are for a 30 year retirement using a fixed withdrawal amount adjusted for inflation. They are also very conservative so that you probably will never go broke.

depending on when you retire you (theoretically) may be able to withdraw as much as 9 percent of your stash each year. If you are lucky when you start your retirement, there will be a long bull market. If you are unlucky there will be a long bear market devastating your nestegg. Since we don't know the future it just might be prudent to plan with the long bear market scenario in mind.

having said that, there are lots of studies suggesting that just maybe you can (conservatively) take out more than 4% if you adjust spending relative to the market. This is the so-called variable withdrawal approach.

For one of many discussions on thsi approach check out Gummi's method...

http://www.gummy-stuff.org/sensible_withdrawals.htm

 

[Gone4Good]

It seems like a balancing act, and one that requires discipline. Guyton is correctly saying that if you are willing to accept the greater likelihood of having to reduce your standard of living in the future, you can start with a higher withdrawal today. For most people, a 10% reduction in spending (possibly required by his "capital preservation rule") isn't chump change - especially for someone already trying to stretch their portfolio to meet income targets. These cuts were required 2-3 times on average in Guyton's study.

It may make sense for someone looking to pad a discretionary spending budget to increase their withdrawals with the understanding that they may have to jettison the extra spending if the market goes against them. On the other hand, I'd hate to be someone who needed the extra withdrawals to maintain a modest standard of living.

 

[Gearhead Jim]

Raising WR from 4.0% to 4.5% ?

"Measure it with a micrometer, mark it with a picec of chalk, cut it with an axe."

 

[teejayevans]

My simple rules are:

1.Always round down you income & assets, round up you liabilities and expenses.
2.Use the 4% as your target, if you have to bump it up, then you have some leeway.
3.Have >5 years worth of cash (MM, i-bonds, etc) available, market goes down, use
cash, market goes up, replenish the cash reserves.

Don't try to cut it close, you can always take more out later...but you can't put more
in.

Tom

 

[Sandy]

This issue has me constantly running in circles. With still 5 years to go, it is difficult to really predict expenses or where investments will be. I use the 4% for planning along with conservative projected increases. I figure I'll have to redo it all as time approaches, but for now, the 4% is a good. Maybe by then you all will have figured it out and will make it easy for me!

 

[brewer12345]

This issue has me constantly running in circles. With still 5 years to go, it is difficult to really predict expenses or where investments will be. I use the 4% for planning along with conservative projected increases. I figure I'll have to redo it all as time approaches, but for now, the 4% is a good. Maybe by then you all will have figured it out and will make it easy for me!

Seems reasonable. I view it as a bogey to hit or a rule of thumb, not the revealed word of Gawd. Ultimately you pays your money and you takes your chances, so why pretend that 4% is the be-all and end-all?

 

[Jeb-NY]

Probably a dumb question but it isn't like that hasn't happened before.

FIRECalc says I have 100% success at 4%. We don't need that much for the life style we enjoy. Do those of you that carefully decide what your safe percentage is, take that much out every year if you spend it or not? If so do you start a rainy days fund and let it build in another bucket or do you really just draw less out?

I plan to let my withdrawal rate float a bit knowing that my nature would be to tighten the belt in bad years and knowing on average what is safe.

Jeb

 

[rmark]

The 4% rule is generally based on past U.S. market returns using a 60% stock, 40% bond mix. So we have a single country sample return unadjusted for higher past investing costs and invested dollar weight. In essence, we're looking where the past record is the best and extrapolating from that optimistic sample. The recent work by Guyton and Bengen simply tortures the past data for complicated rules.

 

[haha]

The 4% rule is generally based on past U.S. market returns using a 60% stock, 40% bond mix. So we have a single country sample return unadjusted for higher past investing costs and invested dollar weight. In essence, we're looking where the past record is the best and extrapolating from that optimistic sample. The recent work by Guyton and Bengen simply tortures the past data for complicated rules.

I believe this also. It is data-mining at its most blatant. And the reason for doing it is clear. This FP/Author greatly enhances his own professional stature and earning ability by publishing a popular but fallacious "journal article".

Is he worried that he may be wrong? Of course not, it is a sales piece, and likely a successful one.

Will he suffer if he turns out to be wrong? Unlikely- as long as the world doesn't fall apart tomorrow, whatever damage there may be won't fall on him.

As LeRouchefoucauld said, "The mind is always the dupe of the heart".

Ha

 

[Rich_by_the_Bay]

While I started out as a 4%+inflation forever, I am becoming more of an advocate of using a free-floating percent of assets approach.

Flexibility in expenses and income seems to be the best defense against depletion. True, you need a bit of a cushion to pull this off without too much worry, but it embodies "go with the flow." I'd be comfortable with 4.25 or 4.5% under that scenario, making corrections here and there as needed. Maybe use ESRBob's 95% rule to smooth the valleys.

 

[Gumby]

Interesting article in the Wall Street Journal this morning. The author suggests designating 85% of the starting portfolio for the period prior to age 85. Each year, withdraw 1/n of that pre-85 portfolio, where n is the number of years remaining to age 85. So a 65 year old takes 1/20th of the pre-85 portfolio, then 1/19th of the remainder next year and so on. The author suggests annuitizing the remaining 15% of the overall portfolio, with payments commencing at 85. All this is founded on the assumption that, should you live to 85, your spending will significantly decrease.

Edit: I see that Martha has started an entirely new thread on this article.

 

[Bikerdude]

If Guyton is correctly saying that if you are willing to accept the greater likelihood of having to reduce your standard of living in the future, you can start with a higher withdrawal today.

I like the Guyton study. I think the "guardrail" adjustments make a lot of common sense and will probably keep you out of trouble in bad times and allow you to spend more in good times.

 

[youbet]

While I started out as a 4%+inflation forever, I am becoming more of an advocate of using a free-floating percent of assets approach.

Flexibility in expenses and income seems to be the best defense against depletion. True, you need a bit of a cushion to pull this off without too much worry, but it embodies "go with the flow." I'd be comfortable with 4.25 or 4.5% under that scenario, making corrections here and there as needed. Maybe use ESRBob's 95% rule to smooth the valleys.

I agree Rich but do want to point out specifically that "flexibility" is expensive. Cutting spending will be painful unless the RE budget is well padded with discretionary line items that could be temporarily cut with minimal sacrifice. A well padded budget means working longer to accumulate a larger portfolio to support that budget...... It's all about trade-offs.

 

[cute fuzzy bunny]

Oddly the "4% too high" camp started banging the drum at the end of a couple of years downturn. The "4% too low" camp is now starting to make rattling noises now that we're at the end of a couple years upturn.

Average the two. Then try to figure out what might be more pathetic...spending a little less and maybe missing out on a few bells and whistles in your 50's and 60's, or running out of money in your 80's and living another 10-15 years.

Then try whatever you think will work out and report back in 40 years how it went.

 

[rmark]

small large reits corp gov’t bills Past U.S. investor averages (up to 200 yrs.)
stock bond
12 average return (simple average)
-1 survivor bias (failed firms disappear)
-1 annual return (year to year fluctuation)
-1 weighted return (investors buy late)
9 5 nominal return (tax deferred or paid from work)
-3 -3 inflation (varied considerably)
-2 -1 investing costs (true fund costs, commissions)
5 4 3 2 1 0 u.s. domestic saver net (u.s. only)
-1 -1 lower capital gains (u.s. was a past winner)
4 3 2 1 0 -1 u.s. global saver net (u.s. ½ )
-1 -1 more dependent years (more bad runs)
3 2 1 0 -1 -2 u.s. international saver net (no u.s.)
-2 -1 average down (personal bear market)
-1 -1 taxed reinvestment (unspent withdrawals)
Late life 0% after tax net real returns from badly timed ever more conservative portfolios.

I made this chart for my own interest in average investor results (as opposed to market results), mainly from academic studies, often with somewhat conflicting results, so it is in broad terms.

 

[mickeyd]

LBYM is the answer.

We've all done it for years and that is one of the reasons that we take time to peek at this forum on a regular basis. We know that LBYM works and it is always a tool that we will not hesitate to utilize when necessary.

 

[tryan]

There are scenarios which turn the 4% rule on it's head ... like those who live off rents/dividends.

Doing taxes 06, the rentals are currently throwing off 4.5 - 5% of current market value. This is DOWN from previous years because of ridiculous property values. Previous years I'ld see 6-8%.

Now if I am living off these rents/dividends, most would agree I have a 4.5-5% SWR. And I can do this "forever" since rents are inflation adjusted (as would be dividends). Add SS and pitance of the severence in 20 years and my SWR goes even higher. All the while NEVER depleteing pricipal ... in fact I could croak and leave enough of a wad to my kids, in say 50 years, that they can repeat this indefinatley.

Note the Noregian widow has the same "problem".

So who cares about 4%?!?

 

[haha]

There are scenarios which turn the 4% rule on it's head ... like those who live off rents/dividends.

This is also my POV. I think real estate is excellent for this, but so are other traded securities which may allow more diversification and are definitely easier to manage. I know there are those who manage properties in Atlanta, say, from a far off home, but I couldn't imagine doing it.

If there is a knock on this approach, it is diversification. To me this negative is trumped by a higher yield and usually less volatility.

Ha

 

[Gone4Good]

A 60/40 portfolio consisting of the S&P 500 and the Total Bond Index yields about 3%. So with a 4% withdrawal you're only pulling out 1% of your principal (2% including the inflation premium on your bonds). That seems pretty reasonable if you're talking about a 30 year retirement period.

For longer periods FIRECalc says you need something closer to 3% which more closely approximates current yields.

 

[DRiP Guy]

I believe this also. It is data-mining at its most blatant. And the reason for doing it is clear. This FP/Author greatly enhances his own professional stature and earning ability by publishing a popular but fallacious "journal article".

Is he worried that he may be wrong? Of course not, it is a sales piece, and likely a successful one.

Will he suffer if he turns out to be wrong? Unlikely- as long as the world doesn't fall apart tomorrow, whatever damage there may be won't fall on him.

As LeRouchefoucauld said, "The mind is always the dupe of the heart".

Ha

Wow, pretty harsh. Carry a grudge much?

At least you are consistent: Seems your bias has not changed since around 2003:

"a 4% SWR, which IMO is generous to foolhardy"

If the other methods are bogus, what do you think a 'safe' SWR for planning purposes is, and on what method would you base the estimate?

 

[Corporateburnout]

A 60/40 portfolio consisting of the S&P 500 and the Total Bond Index yields about 3%. So with a 4% withdrawal you're only pulling out 1% of your principal (2% including the inflation premium on your bonds). That seems pretty reasonable if you're talking about a 30 year retirement period.

For longer periods FIRECalc says you need something closer to 3% which more closely approximates current yields.

Why so low? A balanced fund such as Wellington with a 60/40 have returned 8.5% since its inception That is about 5% over inflation.