How to calculate safe withdrawal rate for early retirement

[walkinwood]

As the previous poster shows there are many different withdrawal schemes.

I use a fixed ~4% of portfolio on Jan 1 as my annual budget. While it will never run out of money, I could be living on breadcrumbs if the market keeps going down. But we have enough headroom in our budget that we don't need the whole 4%. In any case, it has worked for us for almost 13 years.

Bob Clyatt (Live More, Work Less) presents the 4/95 method in his book. Klinger has various rules to enable a higher initial withdrawal rate. Others use the RMD method (which iirc, is what vpw is based on), yet others use a floor/ceiling method to make sure you don't end up broke or super rich.

Reading about each of these methods is good so you know what the limitations of each is.

And, as others have pointed out - no one follows their method rigorously. You will make adjustments as unanticipated events crop up and as long as you keep track of your spending and portfolio value, you should be able to make adjustments early enough not to go broke.

Good luck.

[Koolau]

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Originally Posted by braumeister I have never understood this line of thought. As long as you're happy, what does it matter that you're not spending as much as you could?

Oh, in theory, I agree. I should have been clearer. It's NOT that you leave the piles of money, but that you might feel "deprived" by doing so. IF you're happy with your spending and that leads to piles of cash at your death, I have no problem with that. Right now, Lord willin' and the creek don't rise, that's MY situation. But SOME folks (not me) may feel "deprived" at only 3% (or whatever) and then "fall back" into profligate spending (sort of like ditching the diet!) I'm setting up my estate so any extra goes where I want it. So, if there's money left over, it's like I'm spending it - from the great beyond. Also, if I feel like it, I can splurge every once in a while. All is well.

I knew 2 guys from Meagacorp who were talked into taking 8% of their nut upon retirement (by a broker) - it was the only way they would go (leave Megacorp). They both ended up doing (almost) menial j*bs to supplement their retirement. They had REFUSED to listen to me talk about the 4% rule back when they were still empl*yed. I was (and remain) no expert, but they thought I was crazy. They thought 8% made sense and they NEEDED that much to be happy, so forget 3% or even 4%. End of (their) story.

I probably said it badly, but I guess my #2 point was NOT to be so constrictive (say, using 3% rather than 4%) that you chuck the whole thing because you MIGHT leave piles on the table AND feel deprived along the way.


Hope this is more clear because YMMV.

[RunningBum]

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Originally Posted by capjak I kind of like the VPW model which insures you do not ever run out of money but you may have some swings in amount you can spend each year. https://www.bogleheads.org/wiki/Vari...age_withdrawal Variable percentage withdrawal (VPW) is a method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

Mathematically that's true, but really, you could be down to $100, and VPW will allow you to take slivers of that each year without ever going to zero. There's no magic here, VPW can fail, in practical terms. As I said earlier, I use VPW, but I don't believe it is bulletproof.

[Koolau]

Quote:

Originally Posted by RunningBum Mathematically that's true, but really, you could be down to $100, and VPW will allow you to take slivers of that each year without ever going to zero. There's no magic here, VPW can fail, in practical terms. As I said earlier, I use VPW, but I don't believe it is bulletproof.

Yeah, the "bulletproof" retirement plan still hasn't been invented. A quick thought experiment proves it could never exist. There is always SOME (maybe off the wall) situation that would wipe out even a 100 million dollar portfolio. Giving up on the BP retirement plan, the old 4% rule (especially in it's FIRECalc iteration) gives you a pretty nice BP vest to wear. Not perfect, but adequate for most of us though YMMV.

[NorthFire]

Thanks for the replies everyone. I'm finding this really helpful.

[Closet_Gamer]

Quote:

Originally Posted by Koolau Yeah, the "bulletproof" retirement plan still hasn't been invented.

They have well discussed downsides, but a way to add another layer of kevlar is an immediate (or deferred) income annuity.

Provided you buy it from the right insurer, you then need very large companies to go under AND the government to sit on its hands to lose that income. We saw part one start to come true in 2008 with the potential blast radious around AIG, but the government back stopped it and everyone was fine.

There is always the "asteroid hits the planet" scenario but a combo of income annuities & SS should be pretty bullet proof.

I'm not arguing for these types of annuities but I continue to be intruiged by them. Particulary if they allow you to rewire the remainder of assets into a more aggressive AA because the underlying core income stream is secured.

[FLSUnFIRE]

I'm about to pull the plug at 47 and will likely never have the same income opportunities (and most definitely have enough to last till I will be irrelevant/unable/unwilling to work) so need to be conservative as I walk away from golden handcuffs.


I've played around a bit and one thing I like to do since I have a long horizon is to run Firecalc back to back (more samples as there are more 20-30 year periods than 50 year periods) using a 20-30 year span and taking the lowest ending value from the preceding run to start the next. (basically seeing how I'd fare if I pulled the plug with back to back worst scenarios in the historical record)


I've also started playing around with much shorter periods with portions of my portfolio (taxable until pension, SS etc kick in). That's more of a mental game but helps to give me some confidence I can make it and "wargame" different approaches I can take to maintain liquidity/manage taxes.



Definitely play around with the "investigate" tab on firecalc as well!

[thepalmersinking]

Looking at portfoliovisualizer.com which uses real data going back to 1984 is a reliable test, you can take a real test drive. I used $3MM portfolio and took out 6% with inflation adjustment. I need with a current portfolio of $16MM. I used AWSHX, an old mutual fund with history going back to the 1950’s. Unless I am missing something, that is 37 years of boom and bust and falling interest rates. It’s real data using a crappy mutual fund. You can use the visualizer to see the ups and downs.

Is this too simplistic a backrest that 4% is too conservative?

[Dtail]

Quote:

Originally Posted by thepalmersinking Looking at portfoliovisualizer.com which uses real data going back to 1984 is a reliable test, you can take a real test drive. I used $3MM portfolio and took out 6% with inflation adjustment. I need with a current portfolio of $16MM. I used AWSHX, an old mutual fund with history going back to the 1950’s. Unless I am missing something, that is 37 years of boom and bust and falling interest rates. It’s real data using a crappy mutual fund. You can use the visualizer to see the ups and downs. Is this too simplistic a backrest that 4% is too conservative?

Well remember that the concept of the 4% is due to the worst starting time results in history to retire (1966).
IIRC, the average WR is around 6.5% , but due to sequence of returns risk, the 4% becomes the starting point.

[Markola]

Quote:

Originally Posted by NorthFire I've seen various articles suggesting a safe withdrawal rate of 3% to 4% but I presume this is on the basis you retire at 67 (or thereabouts). How do I calculate a safe withdrawal rate for an earlier retirement. For example retiring at 50? I know the rate will reduce but not sure how to calculate what to. Thanks in advance for any help.

OP, reading these many sage, experienced responses, it strikes me that you need a clearer goal. Do you want your investment portfolio to never run out or are you interested in a comprehensive plan to ensure your retirement success?

Those are two very different things, requiring different strategies and toolkits, because the former is just a component of the latter.

[DrRoy]

RE at 57. 3% is my personal max, but we're only spending about 2.5% in a mildly fat FIRE.

[chassis]

Quote:

Originally Posted by NorthFire Thanks for the replies. I'll look at the calculator

Portfoliovisualizer has a portfolio success calculator that I like better than firecalc. The interface is more usable in my view and the results are presented more clearly.

Furthermore, I like the GARCH method to model future returns. It seems more robust in my view. It addresses the much-feared sequence of returns risk better in my view. No future market pullback will be preceded, or followed, by a market exactly like any prior event. The GARCH model works this way. Historical returns are just that, a historical sequence of actual returns. Not useful in my view.

As an example, in mid-2019, a person who was modeling future portfolio success based on historical returns would likely never have thought that a 30%+ market pullback would be followed by indices at all time highs less than 12 months later. That is exactly how 2020 played out. GARCH handles this better.

GARCH: https://www.investopedia.com/terms/g...ent%20vehicles.

[Out-to-Lunch]

Quote:

Originally Posted by chassis Portfoliovisualizer has a portfolio success calculator that I like better than firecalc. The interface is more usable in my view and the results are presented more clearly. Furthermore, I like the GARCH method to model future returns. It seems more robust in my view. It addresses the much-feared sequence of returns risk better in my view. No future market pullback will be preceded, or followed, by a market exactly like any prior event. The GARCH model works this way. Historical returns are just that, a historical sequence of actual returns. Not useful in my view. As an example, in mid-2019, a person who was modeling future portfolio success based on historical returns would likely never have thought that a 30%+ market pullback would be followed by indices at all time highs less than 12 months later. That is exactly how 2020 played out. GARCH handles this better. GARCH: https://www.investopedia.com/terms/g...ent%20vehicles.

I appreciate these comments, and would like to know more. It was not clear to me if there is an accessible way to include the GARCH approach in modeling. I.e., does Portfoliovisualizer or another available tool utilize GARCH?

[chassis]

@Out-to-Lunch

Not sure if the link below takes you directly to the model, the portfoliovisualizer site behaves weird in my experience.

In case the link takes you into the weeds, you want: Examples --> Monte Carlo Simulation --> View Example --> Simulation Model:statistical returns --> Time Series Model:GARCH --> enter the rest of your data and click Run Simulation

https://www.portfoliovisualizer.com/...talStockMarket

[audreyh1]

Quote:

Originally Posted by RunningBum Mathematically that's true, but really, you could be down to $100, and VPW will allow you to take slivers of that each year without ever going to zero. There's no magic here, VPW can fail, in practical terms. As I said earlier, I use VPW, but I don't believe it is bulletproof.

Depending on the AA, I think it’s more like you might drop to 50% or 40% of your inflation adjusted portfolio value under historical worst case sequences. The VPW spreadsheet gives you this “max drawdown” value.

So yes, you might experience a large drop in income, but not likely down to $100.

[Retire2023]

I have never used the portfolio visualizer site before, but am intrigued. I started filling in the blanks, but got stuck on what to put in for the "Mean" percentages for allocation of each asset class. This is probably pretty basic, but could someone please expain what/how this is used? Many thanks!

[youbet]

Quote:

Originally Posted by RunningBum A stronger reason, IMO, to use a lower SWR when deciding when to retire is that one can't be certain they've estimated their expenses correctly. Higher medical expenses, more home repairs, an unexpected family situation, or high personal inflation are just some of the things that can cause the need for higher withdrawals. A planned 3-3.5% WR gives a lot more buffer than 4%.

But isn't using a lower WR just one part of a "safer" plan?

You really need to:

1. Aim for a sub-4% WR.
2. Overstate planned expenses by a lot.
3. Understate income such as pensions or SS by a lot.
4. Figure on living to 120.
5. Assume some black swan event (divorce, lawsuite, uninsured disaster, deserving child desperately needs financial help, etc.) hits you for all or most of your FIRE portfolio.
6. Begin with a huge "cash buffer" you don't include in portfolio survive-ability calculations.


And so on and so forth......... FireCalc will account for all the above if entered (or not entered) as appropriate. It's belt and suspenders ya know!

My own opinion is that the biggest threat to a (more or less) 4% WR turning out to be a SWR is your AA. I question how many folks really hold to the AA they enter into FireCalc. For example, some of our forum members feel they have "won the game" and hold a zero, or near zero, equity AA. In their case, the standard "4% for 30 years" advise is totally off the table. It's not wrong to hold zero equities, but be sure you understand the outcomes that would have produced historically through FireCalc and decide if you want to continue to assume the future will behave similarly to the past.

[RetiredAt55.5]

Quote:

Originally Posted by youbet My own opinion is that the biggest threat to a (more or less) 4% WR turning out to be a SWR is your AA. I question how many folks really hold to the AA they enter into FireCalc. For example, some of our forum members feel they have "won the game" and hold a zero, or near zero, equity AA. In their case, the standard "4% for 30 years" advise is totally off the table. It's not wrong to hold zero equities, but be sure you understand the outcomes that would have produced historically through FireCalc and decide if you want to continue to assume the future will behave similarly to the past.

I recall some members doing the "won the game, take it off the table", but I think some of them were older and figured they were quite a bit into their 30 years already.

Another approach since the market has been so good since some retired, is to keep their AA but only keep their original retirement amount in this AA. The gains since retirement could be put taken off the table and put in something safer. This isn't my approach, but it's something I think about since I'm up over 60% since retiring 5 years ago. I do wonder about still applying my WR to my initial retirement balance given the gains, or whether I should apply some variable logic to a portion of the current balance. Or my kids will be BTD for me someday.

[Out-to-Lunch]

Quote:

Originally Posted by chassis @Out-to-Lunch Not sure if the link below takes you directly to the model, the portfoliovisualizer site behaves weird in my experience. In case the link takes you into the weeds, you want: Examples --> Monte Carlo Simulation --> View Example --> Simulation Model:statistical returns --> Time Series Model:GARCH --> enter the rest of your data and click Run Simulation https://www.portfoliovisualizer.com/...talStockMarket

Thank you! I don't think I would have found it by myself!

[youbet]

Quote:

Originally Posted by RetiredAt55.5 Another approach since the market has been so good since some retired, is to keep their AA but only keep their original retirement amount in this AA. The gains since retirement could be put taken off the table and put in something safer .

Any scheme could work depending on how the markets go over the years. My point is that if you do something like you suggested you do need to keep in mind that your FireCalc runs are no longer relevant. FireCalc assumes you start with an AA of your choice and then you re-balance (including gains) to keep it there.

Ie., be aware of how the model works and that if you don't behave like the model (inputs or algorithms) as you go through the years, don't expect the historical outcomes to necessarily include your actual result.