Is 4% SWR a "no brainer" now ?

[youbet]

But I never planned to take 4%. If my memory is correct, 4% is only good for 25-30 years and then you run out of $$$, right?

You're joking of course?

 

[youbet]

Although we can debate the pros and cons of various withdrawl rates ad nauseum, nothing substitutes for a robust starting balance. I believe that many who wind up experiencing sleepless nights are those who didn't have an adequate cushion to begin with. Start out with a robust nestegg and you can adjust your WD to suit economic circumstance . . . start out with an anemic nestegg and you will likely have to push your luck.

Gosh..... what a concept! More money is better! I certainly agree with you even if your position is stating the obvious!

 

[walkinwood]

I'm a percent-of-total fan -- maybe 4.5% per annum, with Clyatt's 95% rule as a backstop. I don't see the economic fluctuations as a reason to back away from that. But it might test your ability to tighten the belt here and there, or maybe stash away a reserve in the good times (maybe a ceiling of 5% in any given year).

I like never running out of money even it it means a little pinching here and there. Heck, we've done that most of our lives.

We decided to use the 4/95 rule to ER in May 08 since it was the only one I knew would support a 40+ year ER with purchasing power intact at the end. However, I didn't fully comprehend the implications of a 27% decline in my portfolio in the very first year!

See table below. 1st year decline in portfolio is 27%, then a steady 7.5% return each year. Withdrawal is 4% of portfolio or 95% of previous year withdrawal - whichever is higher.

I don't know what Bob's model portfolio returned last year, but mine doesn't mirror his exactly - the -27% is the hit my portfolio took in 2008.

Year|Initial Value|Withdrawal|After Withd.|Return|Final Value
1|$1,000,000.00|$40,000.00|$960,000.00|-27.00%|$700,800.00
2|$700,800.00|$38,000.00|$662,800.00|7.50%|$712,510.00
3|$712,510.00|$36,100.00|$676,410.00|7.50%|$727,140.75
4|$727,140.75|$34,295.00|$692,845.75|7.50%|$744,809.18
5|$744,809.18|$32,580.25|$712,228.93|7.50%|$765,646.10
6|$765,646.10|$30,951.24|$734,694.86|7.50%|$789,796.98
7|$789,796.98|$31,591.88|$758,205.10|7.50%|$815,070.48
8|$815,070.48|$32,602.82|$782,467.66|7.50%|$841,152.74
9|$841,152.74|$33,646.11|$807,506.63|7.50%|$868,069.62
10|$868,069.62|$34,722.78|$833,346.84|7.50%|$895,847.85
11|$895,847.85|$35,833.91|$860,013.94|7.50%|$924,514.98
12|$924,514.98|$36,980.60|$887,534.38|7.50%|$954,099.46
13|$954,099.46|$38,163.98|$915,935.48|7.50%|$984,630.65
14|$984,630.65|$39,385.23|$945,245.42|7.50%|$1,016,138.83
15|$1,016,138.83|$40,645.55|$975,493.27|7.50%|$1,048,655.27

It takes 15 years to return to the original withdrawal amount - in NOMINAL dollars! And, you would have to survive on 75% of your initial withdrawal (nominal $s) in year 6.

Interestingly, if you take just the 4% (and not limit lowering withdrawals to 95% of previous year), it still takes 14 years to return to the original nominal withdrawal amount. You live with a steep 30% lowering of your spend in the first year, and then slowly get back.

We had decided that we would go back to work if the returns were bad in the initial years, which we are in the process of doing, so we're not in a bind.

 

[haha]

Nice chart, Walkinwood. Puts a little reality under all the glib assertions that "If things get tough, we'll just cut back for a while". A long while it appears.

Ha

 

[walkinwood]

Thanks Ha!

It wasn't like I was eager to start looking for work

 

[W2R]

However, I didn't fully comprehend the implications of a 27% decline in my portfolio in the very first year!

I just tried it with a withdrawal rate of 0.0% (no withdrawals). It still takes 7 years to get back to where you started, in nominal dollars again!

We sure took a hit, didn't we.

I think that probably we can take comfort in the fact that usually the market rebounds sharply after a big fall such as we have had, so instead of 7.5% we might be getting several times that return for a few years. Of course, there are no guarantees.

 

[Rich_by_the_Bay]

We decided to use the 4/95 rule to ER in May 08 since it was the only one I knew would support a 40+ year ER with purchasing power intact at the end. However, I didn't fully comprehend the implications of a 27% decline in my portfolio in the very first year!

There isn't a SWR strategy in existence that would have protected you from the unfortunate timing you ran into, and it sounds like you handled the worst-case-scenario like a champ.

Still, if you hadn't gone back to work and used the traditional withdrawal strategy, you would still be withdrawing your inflation-corrected initial withdrawal amount to this day (and beyond), despite a 27% drop in portfolio value. Very few intrepid souls would have stayed with that strategy for long given what we are going through currently.

The Clyatt plan seems to heartlessly make you adapt as conditions change -- to me a good thing. I like the idea of paying my dues in the year they are incurred, thereby reducing the drastic peaks and valleys in income over the longer term.

 

[haha]

I just tried it with a withdrawal rate of 0.0% (no withdrawals). It still takes 7 years to get back to where you started, in nominal dollars again!

We sure took a hit, didn't we.

I think that probably we can take comfort in the fact that usually the market rebounds sharply after a big fall such as we have had, so instead of 7.5% we might be getting several times that return for a few years. Of course, there are no guarantees.

The trouble with supposing that is that it would right away put most equity valuations back into meaningfully over valued. In the past when equities have fallen this much they have been very undervalued at the bottom. (Other than 2003)

Ha

 

[unclemick]

Hmmm - in 16th yr of ER - I really, really really do not to repeat 1965 to 1982.

I ain't gonna work on more (fingers crossed).

.

heh heh heh -

 

[bbbamI]

I'm 47, planning to be able to live to 100, although I don't expect to. R

I'm 51....my plan goes to 92 years old. Egads...I can't imagine living another 41 years....

 

[REWahoo]

I'm 51....my plan goes to 92 years old. Egads...I can't imagine living another 41 years....

Hey, you might end up looking like my aunt - she turned 92 last week:

 

[bbbamI]

Hey, you might end up looking like my aunt - she turned 92 last week:

Ahhhh....such a lovely lady...

My great grandmother was a beautiful woman, even in her late years. I don't think I'm going to take after her....

 

[Moemg]

Your Aunt looks good and here is my Mom who is 93 and keeps us hopping . She still does the New York Times crossword in record time .

 

[Medit8]

The trouble with supposing that is that it would right away put most equity valuations back into meaningfully over valued. In the past when equities have fallen this much they have been very undervalued at the bottom. (Other than 2003)

Ha

You are of course referring to the US stock market. There are other markets in the world where this is not necessarily so.

 

[haha]

You are of course referring to the US stock market. There are other markets in the world where this is not necessarily so.

I'm all ears. What are your favorites?

Ha

 

[Medit8]

I'm all ears. What are your favorites?

Ha

Related to the quote, "never a borrower or lender be (apropos an ongoing thread), there is a reason you won't see me in the Stockpicking Forum.

 

[haha]

Related to the quote, "never a borrower or lender be (apropos an ongoing thread), there is a reason you won't see me in the Stockpicking Forum.

You are of course referring to the US stock market. There are other markets in the world where this is not necessarily so.

Without a willingness to even mention markets where you assert that valuations are better than in the US (as you did above), your comment is difficult to evaluate.

Ha

 

[cardude]

I'm at 3.39% last month. However, one of my rental properties is due to escalate in a few months bringing in some more money and the wife was just offered a job, and those combined would bring us down to 2.39%.

 

[Medit8]

Without a willingness to even mention markets where you assert that valuations are better than in the US (as you did above), your comment is difficult to evaluate.

Ha

Okay Ha, I'll bite. Stocks-certain Swedish stocks, Hong Kong stocks and Korean stocks are undervalued and worth holding. I have invested.

Also, a number of Euro denominated bonds are yielding upwards of 14%. And yes, they are investment grade.

 

[MichaelB]

I'm all ears. What are your favorites?

Ha

You must have quite good hearingl

Personally, I prefer other body parts...

 

[bbbamI]

......I wish I could be funny in the a.m..... I'm going back to bed....

 

[free4now]

I'm spending about 5% of current balance right now. I'd be much more comfortable with 3-4%, and will likely end up taking on some work to bring my spending down to that range.

 

[MichaelB]

......I wish I could be funny in the a.m..... I'm going back to bed....

I was trying to be serious. As for bed...

 

[rmark]

My model and plan is this
Finance in retirement has two parts, withdrawals from your portfolio and cash flow within that portfolio
Near 0% net real late life return after inflation, volatility, investing costs, more bonds, poor timing, taxes
Expecting relatively level spending as rising healthcare costs offset child care and work related expenses

Expected spending need = net income – personal investing - mortgage payment + replaced benefits
Divide both after tax fixed pensions and mixed portfolios annually over single or joint IRS life expectancy
Spend up to the lesser of the new division or the previous yearly division + inflation, smoothing changes
Portfolio balance unused for annual withdrawals is used as savings for large purchases and emergencies

The result is a variable withdrawal rate of 3.3% at 30 years, 4.0% at 25 years, 5.0% at 20, etc. with a late life spend down as life expectancy shortens.

 

[Independent]

While I understand the theory behind the 4%, in actual retirement years it is not that simple a rule to enforce.

I retired at age 59. My wife was to retire the same age, but has yet felt comfortable enough to do so (even if financially, she's OK).

Currently, my withdrawal rate against our combined retirement portfolio is 2.7% (in the third year of retirement). Since my income was higher during working years, and continue to be during retirement it make sense (rather than a 2% & 2% = 4% rate). BTW, all calculations for our portfolio's are "merged" - that is our AA is based upon all holdings in our combined portfolios (I'm more agressive; my DW not so), along with witdrawl forecasts.

However, my wife is expected to retire and claim SS at age 62 (next year). I will not take SS till age 70; that's another subject, and I won't go into the reasons here.

My wife will have two small pension payments (single life) starting at age 65, in addition to her SS and portfolio withdrawals.

So what does this all mean? Simply, you can't follow the "4% rule" unless all your retirement income sources are available on day one of retirement. Additionally, if your plan is based upon a combined plan of both partners, both should retire within the same year (just to make it easier to measure that 4%).

I have/will have a total of four income sources. My wife will also have four. The important thing is that my income sources (starting at age 59) will not come "on-line" till age 70, when my SS starts. My wife? SS at age 62, two pension payments at 65. This leads to an 11 year span of increasing income, as our "sources" become available.

Projections show from the current 2.7% withdrawal, it will increase over the years till a bit over 10% at age 70. At age 71 (the first full year of my SS income) it drops to less than 4% and stays there till our late 80's, early 90's (with the plan going to age 100).

So should we spend less now, and for the next years to keep it at/under 4%? Of course not. If we did, our estate will certainly be large, but it will be at the "expense" of not having a good early retirement lifestyle, as we do now.

Again, the 4% is a good starting point, but it must be observed in your own personal life as to how rigidly you need to follow it.

I call this the "Social Security Gap" - the period from when you quit work till the time you start SS. I think it's interesting enough that I've considered a poll to see how people cover it.

I think it makes sense to carve out some money and put it into ear-marked assets. For a single person retiring at 59 with a $24k SS benefit at 66, the carve-out would be 7 x 24 = $168k. The logical assets would be CDs and TIPS, assuming the interest would just offset inflation. Note that the withdrawal plan is to spend 100% of principle and interest during the 7 years.

Then the rest of the assets go into one of the long term AA and withdrawal strategies that get discussed around here.

Maybe someone can show this isn't "optimal", but I think it's pretty good and it produces and easy-to-understand plan.

Non-COLA pensions add complexity that I'm ignoring.