Pfau on the 4% SWR question - yet again

[ERD50]

I think will 95% will feel the need to adjust (either upwards or downwards). ...

I can't say what others would 'feel' or not. But I wasn't responding to a statement about 'feelings', I was responding to 'but almost all of us will have to adjust spending/withdrawals ..., no way around it.'.

That didn't make sense to me, based on history, and we don't know the future.

-ERD50

 

[Huston55]

Not sure which concerns me more - that I have a 10% chance of running out of money before I'm 90, or that I only have a 40% chance of living to 90......

Does that mean you only have a 4% chance ( 0.4x0.1 ) of having to worry about it?



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[Koolau]

no way around it[/U]. One need only look at the basic output of FIRECALC to see that clearly - anyone think the future will be more predictable?

Articles about SWR are useful, as long as you recognize it's an academic exercise by definition. There is no "right" or wrong...

This is the way I've always looked at using FIRECALC or any other retirement spending tool. A few years back someone suggested that i "...measure with a micrometer and cut with a chainsaw..." Guilty as charged and not ashamed, either. The "measuring" part is before ER, IMHO. the "cutting" takes place after ER. Each of us has our own take on all of this, so YMMV.

 

[REWahoo]

This is the way I've always looked at using FIRECALC or any other retirement spending tool. A few years back someone suggested that i "...measure with a micrometer and cut with a chainsaw..."

Most FIRECalc power users prefer an axe. Chain saws are so darn noisy.

 

[Midpack]

During the retirement spending years, SWR might be a decent rough guide on what to expect, but almost all of us will have to adjust spending/withdrawals up or down (could be substantial) as the years pass, no way around it. One need only look at the basic output of FIRECALC to see that clearly -

I don't see how you come to this conclusion.

' almost all of us will have to adjust .... no way around it' ? With the defaults, 95% of the people historically needed no adjustments. That's not 'almost all needing to adjust', it's only a small minority who needed to adjust (historically, of course).

-ERD50

Sounds like you're looking at downside only. Note I said adjust "up or down". From your position, most would end up with a residual, millions of $ in many cases - could be far more than you started with. A small residual is one thing, but I assume most people don't plan on an unlimited upside residual. They'd adjust...

 

[ERD50]

Sounds like you're looking at downside only. Note I said adjust "up or down". From your position, most would end up with a residual, millions of $ in many cases - could be far more than you started with. A small residual is one thing, but I assume most people don't plan on an unlimited upside residual. They'd adjust...

But you said: 'almost all of us will have to adjust .... no way around it' .

No one will 'have to adjust' on the upside. There is a way around it - just don't do it . They could if they want, or they may decide not to because the future is still unknown to them. Or, they may want to leave a large inheritance or charitable donation.

Based on history, I could raise my WR% right now, but I'm not because I want some buffer for the downturns.

Again, based on history (all we can really discuss in absolute terms), only 5% would have to adjust. That is not almost all, very far from it - in fact it is about the opposite from 'almost all'. My replies are based on your wording and words have meanings. That's why your statement is confusing to me. It just does not seem to match the historic reality.

Did you mean something else?

-ERD50

 

[NW-Bound]

This is the way I've always looked at using FIRECALC or any other retirement spending tool. A few years back someone suggested that i "...measure with a micrometer and cut with a chainsaw..." Guilty as charged and not ashamed, either. The "measuring" part is before ER, IMHO. the "cutting" takes place after ER...

Hence, my often looking at Quicken to monitor my "cutting", to make sure that it has not turned into a hack job.

 

[Chuckanut]

Not sure which concerns me more - that I have a 10% chance of running out of money before I'm 90, or that I only have a 40% chance of living to 90......

At 4% I have an 8% failure rate. But, what really fascinates me is all those little FireCalc lines that show me passing on with unspent millions in my bag of assets. I hope those heirs appreciate my LBYM lifestyle.

 

[Midpack]

But you said: 'almost all of us will have to adjust .... no way around it' .

OK, I should have said most of us will probably choose to adjust over the course of our years in retirement, and the FIRECALC results demonstrate why. I thought it was well established that few if any will follow SWR throughout retirement, some may have to cut spending (the 5%) and if history is any guide others will be able to spend more during retirement than initial SWR results suggest. No way around the historical fact that most will have an opportunity to adjust.

 

[Options]

According to Otar, adjusting withdrawals in the distribution phase will not help in any case when the withdrawal rate is lower than the sustainable rate. I think I read somewhere on Pfau's blog that his idea of a true safe withdrawal rate today is below 3% based on current valuations. Then you have Buffet saying he doesn't think today's markets are overvalued based on valuations. Who to believe?

The value of Pfau's work (and Otar's and Bernstein's for that matter) is their treatment of PF's owned by those who have undersaved for retirement (who use a w/r above 5%, for example).

 

[Totoro]

Sometimes I wonder if we can't just wrap up this whole debate in the following way:

If you have less than roughly 15 years saved up (WR >6%), you will go broke. Unless you die within 15 years.

If you have more than 50 years saved up (WR 2%), you'll be fine. Unless the world ends. In that case, your savings won't matter anyway.

Anything in between, it depends. So, stay flexible.

Shame you can't publish academic papers that are this short.

 

[FIREd]

Sometimes I wonder if we can't just wrap up this whole debate in the following way:

If you have less than roughly 15 years saved up (WR >6%), you will go broke. Unless you die within 15 years.

If you have more than 50 years saved up (WR 2%), you'll be fine. Unless the world ends. In that case, your savings won't matter anyway.

Anything in between, it depends. So, stay flexible.

Sounds like Otar's zone strategy.

 

[Huston55]

Sounds like Otar's zone strategy.

Yep. Good observation.


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[David1961]

If you have less than roughly 15 years saved up (WR >6%), you will go broke. Unless you die within 15 years.

If you have more than 50 years saved up (WR 2%), you'll be fine. Unless the world ends. In that case, your savings won't matter anyway.

Anything in between, it depends. So, stay flexible.

Well stated.

 

[haha]

According to Otar, adjusting withdrawals in the distribution phase will not help in any case when the withdrawal rate is lower than the sustainable rate. I think I read somewhere on Pfau's blog that his idea of a true safe withdrawal rate today is below 3% based on current valuations. Then you have Buffet saying he doesn't think today's markets are overvalued based on valuations. Who to believe?

The value of Pfau's work (and Otar's and Bernstein's for that matter) is their treatment of PF's owned by those who have undersaved for retirement (who use a w/r above 5%, for example).

Buffet has become a cheerleader for the market and for bureaucracy. THE S&P is overvalued by his own stated favorite measure, the ratio of stock prices to GDP.

Ha

 

[Totoro]

I thought, maybe US GDP / US Market Cap is now less relevant since so much of businesses these days is international.

So I looked up World GDP / World Market Cap. It's roughly 75 trillion / 62 trillion = 0.8, so quite a bit less than 1.

Sources:
Gross world product - Wikipedia, the free encyclopedia
Monthly Reports | World Federation of Exchanges

 

[David1961]

Does that mean you only have a 4% chance ( 0.4x0.1 ) of having to worry about it?

That's how I would look at it.

 

[Totoro]

Red vs. Blue

Couldn't restrain myself, so what I did is plot the Market Cap / World GDP ratio in blue (left axis) and overlay it with the global stock market return in red (right axis) for three years afterwards.

I was surprised with the results. Note that right y-axis is inverted.

Not a perfect match, but it does rhyme.

 

[GTFan]

With the extensive LBYM training most of us had to get thru to obtain the ER badge I suspect the great unwashed majority at this forum (moi included) would have absolutely no trouble adjusting the withdrawal rate way down if conditions require it. I'm probably not the only one here that basically looks at the 4% rule as THE TOP of my allowable withdrawal range.

That is exactly the way I look at it. 4% is WAY more than I spend now, and I could easily go lower than what I spend today if market conditions require it.

 

[mathjak107]

4% is a hypothetical amount in a lab like gas milage ratings used to be. they are a constant for comparing scenerios.

in the real world it has been found retirees do not need yearly inflation adjusting. retiree spending is more smile shape.

early years have lots of going and doing , then a fall off by a lot happens for a while and by 80 we ramp up again with healthcare costs.

historically 6.50% was the average safe withdrawal rate if the 2 worst time frames were eliminated.

once you remove the constant inflation adjusting and couple that with dynamic spending the picture is very different in the real world.

michael kitces thinks we need anywhere from 10-30% less savings then we predict using the 4% rule because of the drop in spending and lessening effect of needing constant inflation adjusting.

 

[Huston55]

Couldn't restrain myself, so what I did is plot the Market Cap / World GDP ratio in blue (left axis) and overlay it with the global stock market return in red (right axis) for three years afterwards.

I was surprised with the results. Note that right y-axis is inverted.

Not a perfect match, but it does rhyme.

Why 3 yrs afterward? Is it just to make the curve fit or, is there a real relationship tied to that timeframe?

 

[Totoro]

Why 3 yrs afterward? Is it just to make the curve fit or, is there a real relationship tied to that timeframe?

I just thought that three to five years is a reasonable timeframe for tactical asset allocation purposes (aka market timing ).

Since you asked, this is what five year looks like

 

[Options]

Buffet has become a cheerleader for the market and for bureaucracy. THE S&P is overvalued by his own stated favorite measure, the ratio of stock prices to GDP.

Ha

Exactly. Which is why I said, "who to believe?". Otar's work seems to validate the 4% rule, based on his sustainable withdrawal rates. Of course he uses market history ("afcasting") in all his calculations. Although he has his own calculator, in some of his statements he appears to have no issue with FIRECALC, perhaps even endorses it.

Even after reading Pfau's papers and blog, I still have trouble with using valuations as a type of forecasting. Who knows? Perhaps I'm a diehard Boglehead. That, and since my WR is around 2.6%, I'm not going to worry about valuations or try to time the market in any way. FIRECALC shows at minimum I'll have 6 figures end of PF life. I agree with Otar the best defense against the uncertainties of retirement is to maintain withdrawals below the PF SWR.

The other defense is to just never stop working, and I think I'll pass on that.