Is 4% SWR too high for retiring early?

[HawkeyeNFO]

This question was asked of Bob Brinker yesterday on the radio, by a caller who was retiring at 55. Bob said he ought to lower the SWR, at least in the first few years. His rationale was that there was a greater chance of his portfolio running out of money if he took 4% out annually earlier than the 'standard' retirement age. He didn't offer his math or cite any studies, and I question the accuracy of his statement. I'd like to hear your thoughts....

 

[haha]

This question was asked of Bob Brinker yesterday on the radio, by a caller who was retiring at 55. Bob said he ought to lower the SWR, at least in the first few years. His rationale was that there was a greater chance of his portfolio running out of money if he took 4% out annually earlier than the 'standard' retirement age. He didn't offer his math or cite any studies, and I question the accuracy of his statement. I'd like to hear your thoughts....

The 4% "rule" is a liquidating strategy. It doesn't matter to the investing gods how long you plan to live off your portfolio, it only matters the amount and timing of withdrawals and the portfolio performance and path. Naturally, the longer you will be trying to withdraw, the greater the chance of failure. The only way for this not to be true is to get the withdrawal rate well below the earnings of the portfolio and the requiered volatility correction.

Who has a greater chance of failure, an 80 year old withdrawing $40,000 from a million dollar portfolio, or a 40 year old doing the same?

 

[GrayHare]

IMO the low-interest rate environment makes 4% tighter than otherwise. For one thing, the portion in the near-term bucket (savings acct, money market or CDs) isn't assisting by earning 4% these days.

 

[W2R]

It all depends on your risk tolerance. I am very risk averse and would not feel comfortable with 4% for a 35+ year retirement. I would use 3.5% at the very highest for such a retirement.

I read a very persuasive article on this topic over at the Journal of Financial Planning years ago, although I can't remember the name of the article or author. At any rate, the author said that based on market history and I believe a 70:30 portfolio? ?, a 4% SWR was pretty rock solid for 25-30 years (95%? I have forgotten). He also said that a 3% SWR was very certain (95%?) to never run out, and the idea of never running out has always stuck in my mind. Eternal money would be a huge benefit for just spending a little less.

 

[Midpack]

4% is for a 65 yr old (assuming 30 yrs) based on past history. It seems the indefinitely sustainable withdrawal rate is closer to 3% from what I've read, that's about where Otar was IIRC. There is no precise number (depends on returns, sequence of returns, lifespan, etc.), but you might enjoy this closely related thread http://www.early-retirement.org/forums/f28/is-there-an-unlimited-duration-swr-54608.html

 

[braumeister]

Otar's general advice is that a 3.6% withdrawal rate should last you for at least 30 years.

Another of Otar's lessons is "Don't confuse percentage with dollars."
Figure your initial withdrawal rate, then index that dollar amount to inflation every year.
Theoretically, you can take out 99% of your portfolio every year for the rest of your life, and never run out of money. But it's not a very practical plan.

 

[NW-Bound]

I plan to live on less than 4%, probably more like 3% once I completely stop working, even though both of us think we would not live past 85.

That low withdrawal plus SS hopefully means we will die with money left over (unless I make some really dumb investment choices). However, that is OK. I like to count my money. Would definitely not want to die broke! Would cut back expenses if necessary, but got to have cash sloshing around for real comfort of mind. Is that enough scrooginess for you?

PS. When I mentioned SS, I meant that I could cut my withdrawal rate to even below 3% to maintain the same living standards.

One can make a FIRECalc run to see the effects of cutting back withdrawal when SS starts. Big difference in my case, as I remember it. In fact, it said I would die rich!

 

[LOL!]

The 4% sustained withdrawal rate (as defined properly) is a problem for early retirees. No doubt whatsoever about it. Please read Otar's book (search forum for reviews and comments). In particular, watch out for the Red Zone!

Of course, even the four-percenters don't use 4% as their sustained withdrawal rate.

 

[pb4uski]

Interesting question. If I run a 4% withdrawal rate through Firecalc with a 30 year time horizon and a 40 year time horizon the number of failed scenarios is no different. This would suggest that a 4% SWR is ok for even a 55 year old.

That said, I would prefer 3.5%.

 

[mickeyd]

who was retiring at 55.

This guy should be preparing for a 40 year retirement (not 30) so a 3% SWR might be a better place to start rather than a 4%.

 

[JakeBrake]

Bob Brinker is one of my favorite talk radio hosts. He often speaks of reaching "Critical Mass". He defines Critical Mass as the amount of assets required for a person to be able to live off of his or her assets indefinitely. It appears to me that if you dip into your principal, there is some chance, however small, that your assets will not last indefinitely, regardless of the 4% rule. Now, what is the definition of indefinitely?

 

[Spanky]

Just be flexible - withdraw less in lean years. Variable withdrawal rate is another approach.

 

[JakeBrake]

By the way, I was amazed that Bob Brinker hosted a live show on New Year's Day. He has been taking a lot of time off lately. I turn the radio off if he has a substitute host(ess).

 

[W2R]

Bob Brinker is one of my favorite talk radio hosts. He often speaks of reaching "Critical Mass". He defines Critical Mass as the amount of assets required for a person to be able to live off of his or her assets indefinitely. It appears to me that if you dip into your principal, there is some chance, however small, that your assets will not last indefinitely, regardless of the 4% rule. Now, what is the definition of indefinitely?

Not only that, but Critical Mass must depend on market conditions over the long term as well. Last year I spent 2.2%, and no more than dividends, but I still wonder what would happen if share prices plunged and then dividends plunged too and then they stayed there for 30 years. I don't stay up at night worrying but still, market conditions in the past are no guarantee of market conditions in the future AFAIK.

To me, a nestegg that lasts indefinitely would remain robust for my lifespan (I suppose another 10-40 years?).

Just be flexible - withdraw less in lean years. Variable withdrawal rate is another approach.

Good idea and one that I plan to follow.

 

[Gone4Good]

With 10-yr bond yields at 1.88% and stock dividends around 2% it's hard to see how we can expect to draw 4% REAL indefinitely.

 

[Moemg]

Just be flexible - withdraw less in lean years. Variable withdrawal rate is another approach.

Absolutely , I retired in 2007 by 2008 my portfolio had lost a third of its value . The only way IMO my portfolio was able to recover was by doing some tweeking of my budget and spending less !

 

[Nords]

This question was asked of Bob Brinker yesterday on the radio, by a caller who was retiring at 55. Bob said he ought to lower the SWR, at least in the first few years. His rationale was that there was a greater chance of his portfolio running out of money if he took 4% out annually earlier than the 'standard' retirement age. He didn't offer his math or cite any studies, and I question the accuracy of his statement. I'd like to hear your thoughts....

I think that:
- People withdraw less during lean times. They can't help themselves.
- People spend less as they age. He'll spend less in his 70s, and in his 80s he'll spend even less.
- The 4% system at high valuations is problematic, but there are plenty of ways to monitor the portfolio's survival and to shift tactics before it's too late.

In other words, I'd go for 4% now and check back in five years.

 

[BigNick]

It appears to me that if you dip into your principal, there is some chance, however small, that your assets will not last indefinitely, regardless of the 4% rule. Now, what is the definition of indefinitely?

For people who want to be sure that their money will never run out, there's always the SPIA. OK, the insurance company might go bust, so buy 5 SPIAs with 20% of the money in each.

What's that? You don't like annuity rates? Then you either have to accept some risks with your non-annuity SWR strategy, or put in more money.

For me, the idea of the SPIA backup when DW and I get to the age where our spending will decrease substantially (our main post-retirement expense will be travel, which we aim to do a lot, but realistically not too much after age 75) is an attractive one. Someone else can maybe find the link to where the concept (which had a fancy name) that "your mission is to make your SWR strategy work until you are old enough that the SPIA rate makes it worth buying" was mentioned here.

 

[Koolau]

This question was asked of Bob Brinker yesterday on the radio, by a caller who was retiring at 55. Bob said he ought to lower the SWR, at least in the first few years. His rationale was that there was a greater chance of his portfolio running out of money if he took 4% out annually earlier than the 'standard' retirement age. He didn't offer his math or cite any studies, and I question the accuracy of his statement. I'd like to hear your thoughts....

This topic comes up regularly in one form or another. Sooner or later, someone suggests that the 4% rule may be more useful as a planning tool during the accumulation phase than as a strict withdrawal strategy during the withdrawal phase. i.e., You can set your savings and nest-egg goals based on a 4% SWR. However, when you actually retire, you need not slavishly follow the strategy. Let your instincts be your guide to a certain extent when the time comes. Also, it never hurts to build in some backups (to your backups - in my case).

Personally, my AA is too lean on stocks to ever even consider a 4% SWR strategy for withdrawal. That too is what is often missed when financial gurus throw around the 4% rule. It must be taken in the context of appropriate AA. Again, in my case, I'm happy to live with a lower (and, yes, flexible) SWR because the ups and downs of the market are a bigger concern to me than the potential to have more money via a 4% SWR. Obviously, YMMV.

 

[RAE]

Absolutely , I retired in 2007 by 2008 my portfolio had lost a third of its value . The only way IMO my portfolio was able to recover was by doing some tweeking of my budget and spending less !

+1. You have to be flexible. In the low interest rate environment we are currently in, 4% is probably too high, but that could change in a few years.....maybe. You have to re-evaluate your situation periodically (I do it annually) and make adjustments as necessary to make sure you are not drawing down your available funds too rapidly.

 

[Chuckanut]

I think 4% in this low interest environment is high. I will use it for about four years until SS kicks in. Once SS kicks in, I will lower it to about 2.5% or so. I think that is the best I can do given that I can't read minds, my crystal ball is cracked, and my time machine is broken.

Now, if the stock market goes up an average of 10% or more for the next four years, my plans may change. Or, if the space aliens invade, my plans may also change. Not sure what I'll do if both happen.

 

[Chuckanut]

One thing for sure, if I maintain a 4% withdrawal rate for more than a few years, it would be to delay SS so as to increase future benefits. In other words, I would be using the extra money i withdraw to purchase a higher paying annuity provided by Uncle Sam.

 

[Packman]

SWR for most people are quite variable by year. I use the Fidelity Retirement Income Planning tool to forecast my cash flow for each of the next 35 years. My withdrawal rate varies from just under 2% to about 4%.

My DW still works and gets health insurance, so our SWR (for me) is less than 2%. When she retires in a couple of years, we will have to pay for HI and our SWR jumps up to 4%. When we begin to collect SS, the SWR falls back down in the 3% range (and so on).

It also depends on how and when you spend. For example we will travel heavily in the next 10 years and then slowly cut back (travel will be our largest expense). And I planned health costs to get much larger as we age.

 

[Nords]

This question was asked of Bob Brinker yesterday on the radio, by a caller who was retiring at 55. Bob said he ought to lower the SWR, at least in the first few years. His rationale was that there was a greater chance of his portfolio running out of money if he took 4% out annually earlier than the 'standard' retirement age. He didn't offer his math or cite any studies, and I question the accuracy of his statement. I'd like to hear your thoughts....

Here's some more studies.

Wade Pfau is the guy who looked at international SWRs and found that the 4% rule failed in 17 of 17 other countries. Another conclusion of his article was that the "one true SWR" is only 1.8%... but only in the USA.
An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?
Pensions, Retirement Planning, and Economics Blog: Cliff Notes for "An International Perspective on Safe Withdrawal Rates" (December 2010 JFP)

But then he looked at another researcher's concept of "utility maximization" or "how far can a retiree get before game over":
New Research Challenges 4% Withdrawal Rule

First of all, what is an acceptable failure rate for retirees? Rory Terry argued in the May 2003 Journal of Financial Planning that due to the high costs of failure, even a 1 percent failure rate sounds exceedingly high. On the other hand, in the April 2011 Journal of Financial Planning, Philip Cooley, Carl Hubbard and Daniel Walz suggest that retirees might accept a 25 percent failure rate with the understanding that they may need to make mid-course adjustments to reduce their spending. Retirees are left to choose their withdrawal rate and asset allocation based on what they deem to be an acceptable failure rate.
...
Calls for low failure rates may not have properly accounted for the risk aversion or the other sources of income available for retirees who may be willing to risk higher failure for the opportunity to spend more earlier on in their retirements.

In other words, if a portion of a retiree's income is annuitized (Social Security at a minimum, perhaps also a SPIA or a deferred annuity) then they're comfortable with taking larger risks earlier in retirement. And, of course, they never run out of money so the SWR succeeds every time.

Is the 4% withdrawal rate really safe? | Military Retirement & Financial Independence

 

[nun]

If the retiree needs a WR of 4% at 55 I'd say well done go right ahead because when they take SS the required WR will fall. Of course if initial returns won't support 4% the plan needs to be modified.