Is 4% SWR a "no brainer" now ?

[Delawaredave5]

Hopefully we have the "two or three sigma" recession behind us.

If you ER'd now, does this change your SWR percentage rate ?

Kind of three possible views:
1. No Change: 4% regardless of the past and future
2. Higher SWR: worst is over, odds of going lower are low, can do higher SWR
3. Lower SWR: could be a "lost decade" like Japan, need to lower SWR

 

[bbbamI]

For now we're taking 3%. That's because the pension that will start in a month or so and the 3% SWR will pay our expenses. If things get very bleak, we'll cut back.

We should never have to go over 4% SWR.

 

[Zathras]

4. No change, taking less than 4% as we did prior to the downturn.

If drastic dividend cuts spread much beyond the financial sector we may pull back some.

 

[Moemg]

I'm taking 4% but it is from the portfolio balance on Jan.1 not the balance when I retired and I usually end up only spending 3% but I like knowing I can spend more.

 

[unclemick]

Target Retirement 2015 = 3.79% SEC yield. Plus a warm hand grenade and a few Norwegian widow stock dividends.

okie dokie via unclemick's chickenheartedness rules: ala 1 mil in 2007 4% is 40k.

3.79% SEC yield of reduced portfolio(todays value) is 32.5k end of the world bare bones.

5% variable (todays value) is 43k.

Toss in - after 15 years of ER I'm not getting any younger.

heh heh heh - Let me get back with you toward the end of the year on that. . Then there is early SS and non-cola pension. Leaning toward a 5% variable party in 2010. Let's see how the Saint's play this year.

 

[W2R]

Hopefully we have the "two or three sigma" recession behind us.

If you ER'd now, does this change your SWR percentage rate ?

Kind of three possible views:
1. No Change: 4% regardless of the past and future
2. Higher SWR: worst is over, odds of going lower are low, can do higher SWR
3. Lower SWR: could be a "lost decade" like Japan, need to lower SWR

I plan to take about 3%, although a little more for the period before 2014, when I file for SS.

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 know, Hurricane Betsy was supposed to be the worst that anyone in New Orleans would ever see in a lifetime. You never know when a Wall St. Katrina might occur. So, I would not accept our recent economic difficulties as a reason to take a greater SWR now.

 

[Lusitan]

I'm still basing my back-of-the-envelope planning on 4% SWR, but I'm pretty far from FIRE at this point. Also, whatever my planned withdrawal is, I'm sure we will have plenty of room to cutback if necessary.

 

[Rich_by_the_Bay]

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.

 

[DayDreaming]

I'm brand new at being FIREd but I plan to take 4% because that's what I need to live on. In 7 years I'll be able to collect a pension - if it weren't for that, I don't think I'd be comfortable with 4% right now.

 

[Delawaredave5]

4% is only good for 25-30 years and then you run out of $$$, right?

I think simulations show 4% would last 25-30 years with a 95% success rate. There's a distribution of outcomes - with 5% of them "bottoming out" and 95% of them having positive balances at 30 years.

I'm wondering if "starting ER at a bottom" (like now, hopefully) would give 4% SWD a higher success rate -- or allow a higher SWR if you were OK with 95% success rate.

 

[Lsbcal]

I'm going to make you all feel superior by admitting our withdrawal rate is about 6% now and won't come down for a few years unless stocks go up big time soon. But some of this depends on how you plan. In our case we pay higher taxes because we convert IRA -> Roth. Also we will be deferring SS until maybe 66. Also we our helping our son get through college.

Because of my superior investment skills I figure this withdrawal rate is not a problem . Anyone like to purchase some nice artwork?

 

[W2R]

I think simulations show 4% would last 25-30 years with a 95% success rate. There's a distribution of outcomes - with 5% of them "bottoming out" and 95% of them having positive balances at 30 years.

I'm wondering if "starting ER at a bottom" (like now, hopefully) would give 4% SWD a higher success rate -- or allow a higher SWR if you were OK with 95% success rate.

You're right. I decided at some point that I need a nice, conservative 95% success rate, and I could only get that for 25-30 years or so.

As for "starting ER at the bottom".... if you know that with enough certainty to bet your life on it, then you might as well go 100% equities. I could make some crystal ball statements but I'm sure you know what I mean.

 

[Medit8]

I'm equally new to this. I currently have a 7 year cash cushion. I intend to replenish the cash/cash equivalent position with gains up to 4 percent from the other components of my portfolio. In years with no gains, we'll spend from the cash position only. I'm 46 and have no pension .

 

[mickeyd]

4% SWR is no more than a mathematical guide. To think of it as some kind of holy edict from on high is a serious fault.

Don't get me wrong, it's a damn good guide (much better than I have ever been able to create on my own), but don't get too wrapped up in the short term aspects of it all.

 

[brewer12345]

Probably a no-brainer at this point, although I say that from the ivory tower of still being employed. I say this based on the ridiculous valuations for most assets that I look at on a daily basis (bought investment grade bonds maturing in 2013 ata 13% yield today, for example).

 

[CuppaJoe]

Still in the first year of withdrawal and find 4% to be more than enough, so am keeping track of what I don’t withdraw and calling it an emergency fund credit which may cover fun stuff like root canals, crowns, vacations and moving. So far, the under 4% amount has covered expensive eye glasses and routine (although expensive in this area) dental expenses. Had a chat with an old friend who recently turned 65 and I’m almost convinced that my health insurance premium cost may be as much as 60% less at age 65 for a medicare advantage plan. That would be a nice reduction in expenses.

Regarding OP’s question: Emphatically, No! A 4% plan takes those fluctuations into account. But I have to take history and human nature into account and remember the plague where people went out on end-of-life toots. Most of us are too frugal to figure out how to spend 96% of PF in six months, where would you start?

 

[Bikerdude]

Going forward I'll use 3.5% to 5.5% as a general rule. 3.5% in down years and 5.5% in good years. An additional 25 yrs. is all I can reasonably expect at this point. Que Sera, Sera.

 

[ERD50]

Hopefully we have the "two or three sigma" recession behind us.

If you ER'd now, does this change your SWR percentage rate ?

Kind of three possible views:
1. No Change: 4% regardless of the past and future
2. Higher SWR: worst is over, odds of going lower are low, can do higher SWR
3. Lower SWR: could be a "lost decade" like Japan, need to lower SWR

It's been discussed before, and I think the discussion goes in circles as people don't do Apples-Apples.

Here's how it makes sense for me - consider a scenario like we have seen with portfolios dropping 50% from their peak:

A) Person A retires at a market PEAK with $1M, so a 4% is 40,000 per year (adjusted for inflation going forward).

Then a few years later after a 50% drop in the market...

B) Person B retires at a market TROUGH with $1M, so a 4% is 40,000 per year (adjusted for inflation going forward).

On average, "B" should have a much higher success rate. I think if you parse the data, you'll see that most of those failures are the people who retired at a PEAK, and then experienced a big down slide in the market (and/or rise in inflation).

I think that the people who are saying that 4% is 4% regardless of the timing are not looking at FIRECALC closely enough. I *think* this is what they are missing:

If Person B had $1M after a 50% market drop, that means he had something close to $2M before the drop. So he could have retired then and the $40K would be just a 2% WR. IOW, it is not a static situation. Another way to look at that is that yes, $1M portfolio in a trough is worth much more than $1M portfolio at a peak. Seems obvious when you put it that way.

Of course, this is just all based on history. It sure doesn't mean we could not experience worse. So understand and plan conservatively enough to sleep at night, and generous enough to live well.

And at some point, you have to come to grips with the idea that it is all a crap shoot. You can work till you die, or retire too early with too little, or have higher than expected expenses and be destitute at some point. That can happen if you keep working too. No guarantees, just reasonable plans to work with.

BTW, a 4% WR leads to far more than 5% failure rate when you factor in the many people that would live beyond 30 years. And don't forget that a fair number of those "success" plans saw drop of over 50% along the way - even with a reasonably conservative 50-50 EQ/BOND ratio. I bet a lot of people would have sleepless nights and/or try to go back to work if they experienced that.

-ERD50

 

[Geoffrey]

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.

 

[Rambler]

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.

Exactly, that's why I'll be working past my June target...another 3.5 years give or take. I figure if things don't grow much more than I can add by saving, I'll still be able to live with a WR between 2.5-2.75%, but I am willing to go to 3% if things are OK. If after 8-10 years my WR has dropped to below 2.25% then I willl learn to spend more (trip to Europe, new DP RV, etc). I'm 47, planning to be able to live to 100, although I don't expect to. I do expect DW to make it past 90 though, so we have to plan for a good solid 40 years at least.

R

 

[ERD50]

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.

True, but it is just another spin on the same words.

A large starting balance (always a good thing), just means a lower starting WR.

-ERD50

 

[Robert the Red]

(1) How could one think that one of the most important decisions of your life could be a "no brainer"? Thinking is required.

(2) See http://bobsfiles.home.att.net/PrepareForRetirement.html for various charts of SWR vs duration, and vs. financial conditions at the start.

(3) Re-engage brain.

 

[rescueme]

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.

 

[ziggy29]

I think all we can say with reasonable certainty is that it's safer now, in hindsight, than it was if you started it 18 months ago.

 

[haha]

I think all we can say with reasonable certainty is that it's safer now, in hindsight, than it was if you started it 18 months ago.

True. However I can imagine that many perceive may it the opposite. Since they have seen what can happen, they feel less sanguine about withdrawal rates going forward.

Ha