How to calculate safe withdrawal rate for early retirement

[Koolau]

Well, maybe that's just me being nit-picky again. I just don't like people telling me that what I prepare for in case something bad happens is actually something I believe will happen, or that I have rules that others must follow, so I get a little defensive. Peace.

Heh, heh, as I always tell DW (with a BIG smile): "We'll let it go - this time."

 

[ncbill]

There's no need to plan to 120.

With both DW & I in our 50s, 30 years is likely all we'll have, so I don't really consider retirement in one's 50s as particularly "early."

Even though DW is the spitting image of her maternal grandmother (died age 97) she still has, IIRC, a less than 1 in 4 chance of surviving into her 90s.

 

[chassis]

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!

@Retire2023 are you on the Monte Carlo Simulation page? I don't see the option you referred to.

https://www.portfoliovisualizer.com...&asset2=TreasuryNotes&asset1=TotalStockMarket

 

[Retire2023]

@Retire2023 are you on the Monte Carlo Simulation page? I don't see the option you referred to.

https://www.portfoliovisualizer.com...&asset2=TreasuryNotes&asset1=TotalStockMarket

Yes, on the Monte Carlo Simulation. I am using the GARCH Model under Time Series Model (not sure if this has an impact). Under Asset Allocation, I am selecting the percent allocation for each of my asset classes and the far right column asks for the Mean % for each allocation I entered. I don't know what to put here, and it will not continue until this is entered.

 

[Markola]

There's no need to plan to 120.

With both DW & I in our 50s, 30 years is likely all we'll have, so I don't really consider retirement in one's 50s as particularly "early."

Even though DW is the spitting image of her maternal grandmother (died age 97) she still has, IIRC, a less than 1 in 4 chance of surviving into her 90s.

One has to weigh one’s Bullet-Proof/Good Enough Ratio, if you will, to their own circumstances at w*rk and psychological risk tolerance.

DW was coming home in tears regularly in her mid 50s, so it was finally “Good Enough” for her. It was quite unexpected for a driven person like her. She found part time work and is happy as a clam and certainly no longer cries.

I finished a multiyear project last summer in a career I was tired of and decided “Good Enough” at 54. A couple of retirement calculators tell us we have about 87% Success confidence if we change nothing. If the SHTF, which we should be able to see coming from a very long ways off, I’d rather adjust lifestyle a tad or work at the hardware store down the street that is always advertising. Small changes make big differences in those calculators.

Others feel they want 500% confidence and are willing to w*rk until they achieve it. Not me, however, and YMMV.

 

[skyking1]

I'm going for Variable Withdrawal, because we are far more apt and able to travel in the first ~8 years of retirement. That also lines up with SS at 70. Our two SS accounts will knock the WR way down at that time. SS plus two pensions cover more than expenditures at that time, with inflation.
We'll be at 6~7% for that time period, depending on the nature of that travel. I'm with @Koolau, most times splurging for business or first class would spoil some of the fun.
It sounds pretty bold because it is, but it has a finite cap at 8 years.
If we get kicked around by the market we can reduce accordingly.

 

[ProGolferWannabe]

4% was/is based on a 30 year retirement (not an age) and a 95% success rate using actual historical returns and inflation with an allocation of 50-75% stock market and the rest in bonds. Some people choose to believe historical returns won’t repeat in the future, and claim 3% is safer for the future...a separate debate. And some have calculated 3% to be the SWR for an indefinite number of years (much) greater than 30 years, you can play with the yourself using...



...FIRECALC. But you have to make your own longevity assumption, you don’t enter an age. If FIRECALC assumes a 65 yo should plan to live 30 years to be safe, you’d enter 45 years for a 50 yo - but it’s up to you.

• Enter your portfolio amount and number of years on the first tab labeled “Start Here.”
• Then go to the “Investigate” tab and click on the button near the bottom of the page labeled “Spending Level” under Given success rate, determine... and enter your desired success rate (defaults to 95%).
• Hit “Submit” at the bottom of the page.
• The “Results” page will show the initial spending level for your assumptions in $ and %SWR.

https://www.firecalc.com/

Thanks for this...I did not realize this was an option of FireCalc. Neat.

 

[bobandsherry]

Summary of all the comments here. All the models tell you:

• 4% is safer than 5% WR
• 3% is safer than 4% WR
• 2% is safer than 3% WR
• 1% is safer than 2% WR
• 0% is safer than 1% WR
• FIRE > W@RK

What is missing is actual details a significant number of people who have lived a long life, surpassing 90, and what their experience, approach and WR rates were. But then past performance is no guarantee of future performance either. So it's a crap shoot. Remain engaged with your investments, be flexible with spending, adjust as necessary. Live long and prosper.

 

[RunningBum]

My parents are 86 and 84. They will not be able to cover their expenses if my mom lives more than 3 years longer. The main culprit is increased expenses due to Mom's memory care. They retired 24 years ago with a 6% fixed WR. Until last year they always took 6% of their original account value. That plus SS covered their expenses. I don't know what they based a 6% WR on, and I don't know what their AA was but I do know that at least some has been in stock funds. I'm not sure how a fixed 6% WR compares to 4%+inflation. Probably they'd have delayed running out of money, but Dad was so stressed out about work that he really needed to retire at 62.

Neither is in good health so they may not make 3 years, but they certainly could. Medicaid options do not look to be good where they live, and nobody wants them to move away from most of their family that live in the same town. If that hasn't changed when they run out, I will cover the difference.

Lessons?

Maybe there's not much to learn except that 6% is too high, but it did work for a long time.

Those who think they will spend more while they are healthy may be in for a surprise late in life.

I'm grateful that I ER'd with a buffer, and built up more of a buffer with good investment returns and not going crazy with spending in my 10 years of ER.

 

[Markola]

^^^^^ I’m sorry to hear of their situation. What is the status of any home equity? Can it help?

 

[ExFlyBoy5]

Looking at portfoliovisualizer.com which uses real data going back to 1984 is a reliable test, you can take a real test drive.

I would disagree with this. The simple fact is that in 1984 if you wanted to make a trade, you would have to make a call to your broker. Nothing happened too quickly. Today, more people that ever have "real time" trading platforms (I read that Schwab added 3.2 retail investor account in the 1st quarter of 2021 than the entire year of 2020.) We have IPOs that drop daily, there is a crypto and SPAC craze and well....I could keep going. My point is, I don't think there is a reliable model out there to tell us what our investments might do over the next 20-30-50 years.

Nonetheless, it's a good tool to look at *possible* scenarios.

 

[RunningBum]

^^^^^ I’m sorry to hear of their situation. What is the status of any home equity? Can it help?

No, their home was sold years ago, now they are essentially paying rent in a retirement center. I don't want to sidetrack the thread on this. bobandsherry asked for real life stories, and this is one.

 

[Yipper]

I ignored the 4% Rule and had Vanguard plug in everything into their calculator, such as SS, Medicare, part time & hobby income, changing health insurance premiums, our annual budget, travel goals, car replacements, home renovations, how much we wanted to leave to heirs ($0), etc, etc.. FIREd at 54 last year with a SWR significantly higher than 4%. YMMV.

Same boat (but not YET retired)... with expected future portfolio updates like the sale of rental property our early retirement WR will be in the 5-6% range but only for those years prior to SS/Medicare, etc. After that it's a drop off and below 4% for the rest of the run.

Too many times the SWR and conversations around it seem to expect a financially static retirement which seems overly simplistic to me.

 

[sengsational]

Some things now are different than 1984, for sure, but the principles haven't changed. I'm firmly in the camp of "this time it's NOT different", so feel confident using history as a guide.

I'm not going to put 7 rules to "conservatize" calculations either. I use "most likely" on everything, and that's my maximum. Luckily that's way more than I typically spend. The idea that you need level spending until your last day doesn't work for me, but that's the way the calculators work. I figure that I can adapt if TSHTF and still be happy, so taking the max level amount indicated by historical averages is plenty good enough for me.

 

[bobandsherry]

My parents are 86 and 84. They will not be able to cover their expenses if my mom lives more than 3 years longer. The main culprit is increased expenses due to Mom's memory care. They retired 24 years ago with a 6% fixed WR. Until last year they always took 6% of their original account value. That plus SS covered their expenses. I don't know what they based a 6% WR on, and I don't know what their AA was but I do know that at least some has been in stock funds.

Appreciate you sharing and sorry to hear of their financial situation. I don't mean to sound callous, but without knowing their AA it's missing an important data point. Did they pull any other incremental withdrawal's along those past 24 years outside of the 6%? Would be interesting to see, over that period of time, what their financial position would be if their WR was 5%, what would they still have today and how much longer would that stretch the withdrawals.

I did look at FireCalc to see what it would show. With 6% WR it showed failure of 57 cycles, 52.5% success, using default scenario which includes 75% equities.

I find that these type of real life examples are useful for people to actually appreciate the consequences of long term decisions being made. And also why I feel it's important to continue to monitor your financial situation and make adjustments when necessary.

With you and your parents the best.

 

[RunningBum]

Appreciate you sharing and sorry to hear of their financial situation. I don't mean to sound callous, but without knowing their AA it's missing an important data point.

I know it is, which is why I mentioned upfront that I didn't know it. Every case is unique in many ways, so it's not like having it would answer the OP question definitively.

Did they pull any other incremental withdrawal's along those past 24 years outside of the 6%?

Not that I'm aware of.

I did look at FireCalc to see what it would show. With 6% WR it showed failure of 57 cycles, 52.5% success, using default scenario which includes 75% equities.

It looks like you didn't account for them not increasing their spending with inflation. I saw 52.5% success too, but when I removed inflation from spending, it goes to 92.5%. If I change it to 50% equities, it's 88.3%. If I had to guess I'd say they were more 50/50 than 75/25, but that's just a guess.

I find that these type of real life examples are useful for people to actually appreciate the consequences of long term decisions being made. And also why I feel it's important to continue to monitor your financial situation and make adjustments when necessary.

With you and your parents the best.

Thanks.

 

[RunningBum]

I know it is, which is why I mentioned upfront that I didn't know it. Every case is unique in many ways, so it's not like having it would answer the OP question definitively.

I was going to add a comment that they probably didn't have the kind of portfolio I'd recommend then or now, but had they been listening to me at the time 25 years ago, I'd have probably gotten them talked into overweighting the tech sector just in time for the dotcom bubble burst. So it's just as well.

 

[Koolau]

Summary of all the comments here. All the models tell you:

• 4% is safer than 5% WR
• 3% is safer than 4% WR
• 2% is safer than 3% WR
• 1% is safer than 2% WR
• 0% is safer than 1% WR
• FIRE > W@RK

What is missing is actual details a significant number of people who have lived a long life, surpassing 90, and what their experience, approach and WR rates were. But then past performance is no guarantee of future performance either. So it's a crap shoot. Remain engaged with your investments, be flexible with spending, adjust as necessary. Live long and prosper.

I agree.

And maybe it's the exception which proves the rule here. I'm sure most of us recall quite fondly imoldernu. I don't recall that he ever used Firecalc. His "plan" was a bit bizarre (in an interesting way). IIRC he retired around 51 and went to his reward around age 83 or so - RIP imoldernu. Don't recall him worrying too much about WDRs, but I'm sure he did manage them without much fanfare.

He had amazing stories to tell, traveled often between his two places in FL and IL in his two old land cruisers, had a big family who loved him, had everything he wanted, had "enough" at all times, and often made me ashamed of what I had done with my piddly 15 year retirement (so far.)

I don't recall his plan very well though anyone can go look it up, I'm sure. My point is FIRECalc (or just the so-called 4% rule) is just a plan - a relatively technical one to help one avoid running out of money. imoldernu's plan was, IIRC, much more "organic" if you can apply that word to a ER financial plan. Reading him, I quit worrying about running out of money. I have a plan, he had a plan, we "did" our plan, we're all flexible and (reasonably) smart. Assuming a mile-wide asteroid doesn't hit 100 miles off Waikiki or some other "black swan" we can all make our plans work - or alter them. IIRC, there was only one guy who ever "came back" and told us how he managed to fail - and it WASN'T by sticking to FIRECalc.

Just my humble opinion, but I'm glad I got to talk about imoldernu. He was (IS) my FIRE hero. YMMV

 

[chassis]

Yes, on the Monte Carlo Simulation. I am using the GARCH Model under Time Series Model (not sure if this has an impact). Under Asset Allocation, I am selecting the percent allocation for each of my asset classes and the far right column asks for the Mean % for each allocation I entered. I don't know what to put here, and it will not continue until this is entered.

@Retire2023 Have a look at the attached. There is no "mean" data entry required.

 

[WestUniversity]

Some things now are different than 1984, for sure, but the principles haven't changed. I'm firmly in the camp of "this time it's NOT different", so feel confident using history as a guide.

I'm not going to put 7 rules to "conservatize" calculations either. I use "most likely" on everything, and that's my maximum. Luckily that's way more than I typically spend. The idea that you need level spending until your last day doesn't work for me, but that's the way the calculators work. I figure that I can adapt if TSHTF and still be happy, so taking the max level amount indicated by historical averages is plenty good enough for me.

+1

 

[Retire2023]

@Retire2023 Have a look at the attached. There is no "mean" data entry required.

I think I attached what I see. Hope it works!

 

[Finance Dave]

You've received many good answers...I read about 1/3 of them.

One thing I consider that I did not see mentioned is how much of your budget in FIRE is discretionary. For us, we have a very high proportion of our spending that is for "fun" things like travel, hobbies, eating out, etc. Therefore, it would be very easy for us to cut out some of those things if the market were to tank or something. For that reason (and a few others I won't go into), we are fine starting with 6-7% of our balance and increasing for inflation annually...until the s&*! hits the fan...then we adjust. I think someone did mention "adjusting" along the way...but this is a slightly different way of thinking about it.

OTOH, if your a "stay at home with no frills" type person and your budget is mostly necessities, you might need to be a bit more careful with this line of thinking.

 

[Markola]

I agree.



And maybe it's the exception which proves the rule here. I'm sure most of us recall quite fondly imoldernu. I don't recall that he ever used Firecalc. His "plan" was a bit bizarre (in an interesting way). IIRC he retired around 51 and went to his reward around age 83 or so - RIP imoldernu. Don't recall him worrying too much about WDRs, but I'm sure he did manage them without much fanfare.



He had amazing stories to tell, traveled often between his two places in FL and IL in his two old land cruisers, had a big family who loved him, had everything he wanted, had "enough" at all times, and often made me ashamed of what I had done with my piddly 15 year retirement (so far.)



I don't recall his plan very well though anyone can go look it up, I'm sure. My point is FIRECalc (or just the so-called 4% rule) is just a plan - a relatively technical one to help one avoid running out of money. imoldernu's plan was, IIRC, much more "organic" if you can apply that word to a ER financial plan. Reading him, I quit worrying about running out of money. I have a plan, he had a plan, we "did" our plan, we're all flexible and (reasonably) smart. Assuming a mile-wide asteroid doesn't hit 100 miles off Waikiki or some other "black swan" we can all make our plans work - or alter them. IIRC, there was only one guy who ever "came back" and told us how he managed to fail - and it WASN'T by sticking to FIRECalc.



Just my humble opinion, but I'm glad I got to talk about imoldernu. He was (IS) my FIRE hero. YMMV

Yes, he provided an excellent example. IIRC, he said he FIREd with health concerns and with far less than $1M. I liked that he used the totality of the vast, flexible toolkit at his disposal to make the couple’s seemingly enjoyable retirement work, not just simplistically trying to make it all hang on calculating a SWR of whatever portfolio he had.

 

[HoneyBadger]

I use a variable percentage withdrawal (VPW) plan. When things go well (good returns and/or lower expenses) it allows you to spend more in the years following. If things go badly, it cuts your allowed spending in future years. Those changes are spread out over your remaining years, so you don't have to make drastic cuts.

This is my plan exactly (23 months until retiring at 57). FIRECalc is great as a rule of thumb for planning purposes, but who would blindly follow the same withdrawal rate over the financial cliff it the market crashed rather than adjusting their spending for a year or two?

 

[Markola]

This is my plan exactly (23 months until retiring at 57). FIRECalc is great as a rule of thumb for planning purposes, but who would blindly follow the same withdrawal rate over the financial cliff it the market crashed rather than adjusting their spending for a year or two?

Right, unless they were over extended in stocks. If stocks fall 50% as during the dot com and subprime crashes, or even 85% in the Great Depression, and that’s the only major asset one has, then I can see how someone would instantly be in a world of hurt.

But if someone is properly diversified, after the initial panic when people simply pull mo eh out of all markets, their bonds are going to likely rise as the Fed cuts rates to stimulate the economy. And when rates go down, home prices also rise. So diversified investors ought to have long runways to see a problem coming and adjust course.