Is a 4% withdrawal rate good again?

[Koolau]

OK, if it is "wrong" but beats the market, you should keep doing it.

Until the market beats you, that is.

Heh, heh, I plan to keep doing it. Of course, the downside is that when things turn around again, 100 percenters will be making a lot more than I will. All part of the rich tapestry of the personal investing game so YMMV.

 

[NW-Bound]

I am beating the market today. I am losing less than the S&P. Heh heh heh...

 

[daylatedollarshort]

Need to hold to maturity to be 'assured' of Yield To Maturity. Could go anywhere in between. Then pay capital gains tax all in one year = larger marginal tax rate.

A 'ladder' of TIPS avoids those problems.

What would be your preferred term structure?

Sovereign risk?

If you hold TIPS in a retirement account here you don't pay tax until you withdraw it, and then it is taxed as income. We usually hold to maturity in ladders within retirement accounts, though I have some some prior to maturity for a profit.

Sovereign risk seems low, as in the safety of U.S. Treasuries, but we aren't 100% TIPS for that reason and still diversify.

Because the TIPS ladders have real yields above CPI inflation, that helps offset some of the loss to inflation on the other investments, even though those are all flat or up for the year in nominal terms (dividend stock fund and CDs, Treasuries and agency bonds).

 

[Fermion]

If you hold TIPS in a retirement account here you don't pay tax until you withdraw it, and then it is taxed as income. We usually hold to maturity in ladders within retirement accounts, though I have some some prior to maturity for a profit.

Sovereign risk seems low, as in the safety of U.S. Treasuries, but we aren't 100% TIPS for that reason and still diversify.

Because the TIPS ladders have real yields above CPI inflation, that helps offset some of the loss to inflation on the other investments, even though those are all flat or up for the year in nominal terms (dividend stock fund and CDs, Treasuries and agency bonds).

I would discount sovereign risk to so low as being non existent. If bonds fail, everything else has already failed and SWR is out the door (as is anyone's safe retirement).

I would hold TIPS in a 401K or (better) Roth, then inflation gains can be mitigated by careful withdrawal (or in the Roth, there is no tax on TIPs gains).

 

[Samsung4321]

Treasury Indexed Bonds

If you hold TIPS in a retirement account here you don't pay tax until you withdraw it, and then it is taxed as income.

Aus held > 1 year capital gains tax rates:
. personally 50% discount on marginal tax rate,
. in Superannuation accumulation ('pre-retirement') account 10%,
. in disbursement ('retired' / 'pension') account 0%.

We usually hold to maturity in ladders within retirement accounts, though I have some some prior to maturity for a profit

Impoverished selection of Exchange Traded Treasury Indexed Bonds makes ladders rather rickety - they did not attain critical mass.
https://www2.asx.com.au/markets/trade-our-cash-market/equity-market-prices/bonds

Foreign indexed bonds adds exchange rate risk. Probably funds available to manage such risk but likely that skims off all the cream.

My guess is that I need to see larger real yield to justify holding indexed bonds.

Sovereign risk seems low, as in the safety of U.S. Treasuries, but we aren't 100% TIPS for that reason and still diversify.

Because the TIPS ladders have real yields above CPI inflation, that helps offset some of the loss to inflation on the other investments, even though those are all flat or up for the year in nominal terms (dividend stock fund and CDs, Treasuries and agency bonds).

Likely to be helpful to a few if you would provide a simple example of a ladder of actual TIPS.

 

[daylatedollarshort]

Likely to be helpful to a few if you would provide a simple example of a ladder of actual TIPS.

My ladder is a lot less rigid, but this is the basic idea - The 4% Rule Just Became a Whole Lot Easier - Articles - Advisor Perspectives, article by Alan Roth: "I built a 4.36% real (inflation-adjusted) systematic withdrawal portfolio using a 30-Year TIPS ladder.

In June, I wrote about safe spend rates and concluded that a balanced portfolio could only support a 3.3% real withdrawal rate for a 30 year period with a 90% chance of success. There are differing opinions on what a safe spend rate should be. For instance, Mark Hulbert recently wrote in Barron’s that a 1.9% withdrawal is more appropriate."

Current yields are here - United States Rates & Bonds - Bloomberg

Edited to add snippet.

 

[daylatedollarshort]

I would discount sovereign risk to so low as being non existent. If bonds fail, everything else has already failed and SWR is out the door (as is anyone's safe retirement

There is still the possibility of deflation, or maybe some "unknown unknowns" so we probably wouldn't go 100% on any single asset type. But deflation isn't the big retirement income killer, it is inflation, so we have enough TIPS to not have to worry about the possibility of future high inflation.

 

[Samsung4321]

My ladder is a lot less rigid, but this is the basic idea - The 4% Rule Just Became a Whole Lot Easier - Articles - Advisor Perspectives, article by Alan Roth: "I built a 4.36% real (inflation-adjusted) systematic withdrawal portfolio using a 30-Year TIPS ladder.

'I spent $98,549 to produce an average cash flow of $4,296 annually, which equates to a 4.36% real average annual withdrawal rate. I’ll get back a total of $128,882 in today’s dollars or a real annualized return of 1.83%.'

= RATE(30, 4296, -98549, 0)
= 1.827%

That is the realm of real return from government guaranteed Term Deposits, in the absence of financial repression, and life time annuities, which often have Indexed Treasury Bonds at their core.

Note that capital is spent leading to Future Value = $0 at 30 years.

'One large difference between this strategy and the 3.3% real withdrawal rate from a balanced portfolio is that there is a 90% probability that the latter will leave money after 30 years.'

 

[RetiredAt49]

I personally don’t understand all the nonsense regarding the 4% rule alternative ideas/thoughts and “well this time the market is different”… we have over a century’s worth of stock market data and Bill’s 4% guideline factored in the really bad times, SORR, etc..

 

[daylatedollarshort]

'One large difference between this strategy and the 3.3% real withdrawal rate from a balanced portfolio is that there is a 90% probability that the latter will leave money after 30 years.'

That is true, if you take out the full 4.3%, or whatever the max SWR is today's yields. You give up the possibility for bigger gains in return for the inflation adjusted security. But my goal is to just take out 1.5% real yield portion of the TIPS allocation for annual expenses, after SS, pensions and some misc income. That should preserve the TIPS part of the portfolio in inflation adjusted dollars. We're both good with that risk reward trade off. Plus we still have stocks, nominal fixed income and a house in a HCOL so we aren't worried about not having money to leave to the kids or having to worry about depleting the TIPS to zero after 30 years.

 

[Samsung4321]

I personally don’t understand all the nonsense regarding the 4% rule alternative ideas/thoughts and “well this time the market is different”… we have over a century’s worth of stock market data and Bill’s 4% guideline factored in the really bad times, SORR, etc..

Extrapolated interpolations are wonky.

Recent USA exceptional performance might become un-exceptional.

 

[Samsung4321]

my goal is to just take out 1.5% real yield portion of the TIPS allocation for annual expenses ... . That should preserve the TIPS part of the portfolio in inflation adjusted dollars.

That being our interest also. Withdrawal rate of 0.5% would result in increased real capital and, eventually, taxes > 0%. Seems we like an extra large moat and dislike spending.

 

[daylatedollarshort]

Extrapolated interpolations are wonky.

Recent USA exceptional performance might become un-exceptional.

Are 100 years worth of data enough from one country enough to predict 50 years into the future? The Triumph of the Optimists data from looking at more countries comes out with less rosy investment odds than looking at the U.S. alone. And Bill Bengen of 4% rule fame has gone mostly to cash himself and has suggested that "retirees may want to be more conservative than my research had indicated was necessary." - https://www.thinkadvisor.com/2022/0...s-4-rule-says-to-cut-stock-and-bond-holdings/

 

[marko]

Are 100 years worth of data enough from one country enough to predict 50 years into the future?

+1. I always wonder how valid looking back 100 years is. The world, finance, people and life is so entirely different from even 50 years ago that I worry that that data cannot be really relevant.

How different we are from the people of 1922! How differently companies are run today with very different tools, information, regulations. Who could have guessed 50 years ago that the likes of GE, GM and others would be where they are today?

I appreciate looking back at history, but often wonder how valuable financial data is coming from such a different world.

 

[GravitySucks]

+1. I always wonder how valid looking back 100 years is. The world, finance, people and life is so entirely different from even 50 years ago that I worry that that data cannot be really relevant.



.

Looking at my Great Grandfather's picture and I'm guessing his AA was 60 Land / 40 Swine. Is anyone including Bank Panics in their planning? There were 4 in Bengen's data and another 3 or 4 in the Trinity study's data.
I used 4.5% in my planning and stuck to it rigidly the first 5 years. Hoping to convince myself to spend 7 percent the ages 66 - 70.
All click bait.

 

[NW-Bound]

"You pays your money and you takes your choice" - American idiom

 

[Gumby]

"You pays your money and you takes your choice" - American idiom

And sometimes your chance.

 

[teejayevans]

And Bill Bengen of 4% rule fame has gone mostly to cash himself and has suggested that "retirees may want to be more conservative than my research had indicated was necessary."

His cash is worth 8% less than last year thanks to inflation (I would argue it’s higher). If you don’t need growth of your nest egg over 30 years and have enough to absorb inflation erosion, sure, go with cash.
I’ll go with history.

 

[audreyh1]

+1. I always wonder how valid looking back 100 years is. The world, finance, people and life is so entirely different from even 50 years ago that I worry that that data cannot be really relevant.

How different we are from the people of 1922! How differently companies are run today with very different tools, information, regulations. Who could have guessed 50 years ago that the likes of GE, GM and others would be where they are today?

I appreciate looking back at history, but often wonder how valuable financial data is coming from such a different world.

Looking at my Great Grandfather's picture and I'm guessing his AA was 60 Land / 40 Swine. Is anyone including Bank Panics in their planning? There were 4 in Bengen's data and another 3 or 4 in the Trinity study's data.
I used 4.5% in my planning and stuck to it rigidly the first 5 years. Hoping to convince myself to spend 7 percent the ages 66 - 70.
All click bait.

For my case the worst scenarios started before 1913, during a big boom and bust era with plenty of financial collapses. It’s because these periods are included that I feel my analysis is more robust than if we only looked at post 1920, post Federal Reserve, etc.

 

[NW-Bound]

And sometimes your chance.

Uh oh, my superior memory is slipping.

 

[Gumby]

Uh oh, my superior memory is slipping.

I've seen that phrase both ways. I've always interpreted the meanings to be:

1. "... choice" = there are many ways to achieve the same outcome.

2. "... chance" = life is uncertain and you may not achieve the desired outcome.

 

[daylatedollarshort]

His cash is worth 8% less than last year thanks to inflation (I would argue it’s higher). If you don’t need growth of your nest egg over 30 years and have enough to absorb inflation erosion, sure, go with cash.
I’ll go with history.

I'm going with TIPS and SS, which are inflation adjusted, and capped property taxes and a low rate, fixed mortgage, which are not subject to high inflation, to make my inflation adjusted income higher than my expenses impacted by high inflation.

 

[NW-Bound]

I've seen that phrase both ways. I've always interpreted the meanings to be:

1. "... choice" = there are many ways to achieve the same outcome.

2. "... chance" = life is uncertain and you may not achieve the desired outcome.

The 2nd meaning denotes unpredictability, and is more apt.

And that was what I meant to say.

 

[daylatedollarshort]

+1. I always wonder how valid looking back 100 years is. The world, finance, people and life is so entirely different from even 50 years ago that I worry that that data cannot be really relevant.

How different we are from the people of 1922! How differently companies are run today with very different tools, information, regulations. Who could have guessed 50 years ago that the likes of GE, GM and others would be where they are today?

I appreciate looking back at history, but often wonder how valuable financial data is coming from such a different world.

One of The Triumph of the Optimists authors put it this way, "Yet over the twentieth century as a whole, financial markets were kind to investors. In envisioning the future, we should consider not only more modest performance expectations, but also a wide range of possible outcomes.

While a country has only one past, there are many possible futures."

http://csinvesting.org/wp-content/uploads/2015/03/2781_triumph_of_the_optimists.pdf

 

[schellem]

Don't forget that the 4% rule is successful for the worst case scenario for the the 50 year period between 1926 and 1976. No historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in fewer than 33 years.