Samurai Says: 1/2% SWR...

[Mo Money]

When Financial Samurai wants to draw attention to his website, he un-ERs, or sets his hair on fire -- or cuts the 4% SWR by a factor of eight, to .5%.

Yes, Financial Samurai has pronounced that .5% is the new safe withdrawal rate. He bases it on the 10-year bond yield in 1998 (year of Trinity Study) vs. 10-year bond yield now:

In 1998, the 10-year bond yield was between 4.41% to 5.6%. Let’s say the average 10-year yield rate was 5% in 1998.

Therefore, of course you’d likely never run out of money in retirement following the 4 percent rule. Back then, you could earn 1 percent more on average risk-free! ...

With the 10-year bond yield [currently] at ~0.7%, a safe withdrawal rate is actually closer to 0.5% – 0.63%. ...

Thanks to a steady decline in interest rates, [the] 4 percent rule from 1998 has declined by over 85%. In other words, we should change the name of the 4 percent rule to the 0.5 percent rule. ...

Following the 0.5 percent rule to obtain financial independence is difficult. For example, I’ve challenged myself to generate $300,000 a year in passive income. The goal of $300,000 has been carefully calculated to pay for between $150,000 – $200,000 a year in after-tax expenses.

Therefore, in order to proclaim true financial independence using the 0.5 percent rule, I would need to amass a net worth of between $30 – $40 million.

At first, apart from guffawing, I ventured to guess that Financial Samurai was referring to someone who had a 100% bond portfolio. But in response to a comment, he noted:

The new 0.5 percent rule takes into consideration lower structural returns in stocks and real estate. And this includes a 60/40 or 50/50 portfolio.

Read it and weep:

https://www.financialsamurai.com/proper-safe-withdrawal-rate/

 

[Out-to-Lunch]

So he wants to live more than (checks notes, 1/0.5%) 200 years?

 

[Mo Money]

Out-to-Lunch: It could happen!

 

[Mr. Tightwad]

Clickbait expert.

 

[RobbieB]

I don't know any samauai. I do have a couple of swords though.

 

[atmsmshr]

What a knucklehead.

 

[Dtail]

Yes clickbait. The Trinity study didn't just analyze the 10 year rate ONLY in 1998...

 

[teejayevans]

I thought there was an “expert” that believes you should never retire? So 0.0 is the new SWR?

 

[Mo Money]

I wish him luck in having website clicks generate the target $30-40 million he feels he needs to retire.

 

[CRLLS]

I don't understand how he figures the SSA and private pensions would continue to pay out at their promised levels even when individuals can only make enough over time to withdraw 0.5%?

Isn't he the one who had to go back to work after retiring early? So much for his street cred.

 

[Big_Hitter]

Isn't he the one who had to go back to work after retiring early? So much for his street cred.

 

[njhowie]

I don't understand how he figures the SSA and private pensions would continue to pay out at their promised levels even when individuals can only make enough over time to withdraw 0.5%?

Isn't he the one who had to go back to work after retiring early? So much for his street cred.

Exactly.

Since he did an about-face a couple years ago (a few years into FIRE), he now relies on shock journalism, panning FIRE, getting the articles picked up by CNBC, Marketwatch, Yahoo, and any other outlet that will pay him...I call it "Whore Journalism".

Always, always remember - here's "an expert" who makes excuses and justifies why he is unable to get by on $265,000 a year in passive income. Does anyone not start laughing uncontrollably? Who really listens to such a person for advice?

In contrast, it's my belief that the SWR is actually higher than 4% - probably more like 6% for those who have FIREd appropriately.

 

[cyber888]

He can keep his money and withdraw .005 ... he can't bring it after he's 6 feet underground. I'm will continue to follow the 4% withdrawal rate in retirement. LIFE IS SHORT .. and you can't enjoy money when you go up to Heaven

 

[Toocold]

At one time he was all bonds (and 1 or 2 homes in the bay area). Now that interest rates are near zero, real estate is pressured in San Francisco, and he has missed the entire 2009-2020 bull market, I can understand why he is thinking of a .5% SWR. For the rest of us, 3-4% are fine.

But he does need to generate traffic since he is lives off of his blog.

 

[Mo Money]

In about two years he'll be advocating a 14% SWR.

 

[nash031]

I liked a lot of what he wrote early on, but stopped lending his blog credence when he just made up rules that suited things he wanted to buy. He changed his mind on how much he recommended spending on a car because he wanted a nicer car...

 

[nash031]

In contrast, it's my belief that the SWR is actually higher than 4% - probably more like 6% for those who have FIREd appropriately.

I think 4.5% is probably safe, but am using 3.5% as my target.

 

[Dtail]

I think 4.5% is probably safe, but am using 3.5% as my target.

~6.5%WR has been the historical safe withdrawal %, except for the worst 5 or 6 starting periods in history and thus the 4% guidance.
If you retired in 1982, it would be over 10%, but you didn't know it at that time of course.

 

[NW-Bound]

I don't really care what Financial Samurai says. But if the SWR is now 0.5%, that does not faze me.

With this pandemic, there's nothing to spend money on, and my expenses have been just for basic stuff. And I find out that my life is still OK. If I were to draw SS now, we could live on our SS just fine.

And I think that when this pandemic is past, I can draw 0.5% WR to supplement SS and that's plenty for travel and discretionary spending.

Yep, 0.5% WR would be a real problem for youngsters who want to ER, but I have grown old enough to be past that phase. See my signature line below.

 

[Chuckanut]

Forget the phake samurai. If you can find this show, and see what it means to be a real samurai.

 

[NW-Bound]

Yes, I remember that miniseries. As shown in one episode, a real samurai would not hesitate to lop off the head of a peasant who does not show respect.

And nowadays, a real samurai does not worry about any stinkin' SWR. He's always on top of the food chain.

 

[AreWeThereYet0]

Ha ha ha ha. That is amusing. Yes. I will take the advice of someone who failed spectacularly.

 

[nash031]

~6.5%WR has been the historical safe withdrawal %, except for the worst 5 or 6 starting periods in history and thus the 4% guidance.
If you retired in 1982, it would be over 10%, but you didn't know it at that time of course.

And therein lies the problem! My wife and I are fortunate enough that we have things in our professional lives we want to accomplish and those will carry us well beyond 4% (we're there) and probably even 3.5%... but if I were planning to stop working the instant we could do so financially, I'd aim for 4% at the worst. I can imagine nothing worse than being forced to go back to finding work when I thought I was dunzo.

 

[SecondCor521]

~6.5%WR has been the historical safe withdrawal %, except for the worst 5 or 6 starting periods in history and thus the 4% guidance.

Uh, not if you think FIREcalc is accurate (which I do).

The 4% rule succeeds in all but the worst 6 starting periods in history.

I believe a 6.5% WR is approximately the average safe withdrawal rate, so if you use a 6.5% WR you're about as likely to succeed as you are to fail.

If you go to FIREcalc and put in a 6.5% withdrawal rate on the first page (using $65,000 as the spending level and $1M as the portfolio level) and leave the rest default, FIREcalc will tell you that you have a 45% success rate:

"Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-4,044,946 to $3,415,537, with an average at the end of $-169,561. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 66 cycles failed, for a success rate of 45.0%."

(emphasis added)

 

[njhowie]

Uh, not if you think FIREcalc is accurate (which I do).

No matter what happens, FIREcalc will be "accurate" because everything it does is about probabilities based on history. Even if it gives 100% success, again, that is based on historical events and returns - which does not guarantee what may happen in the future and that your retirement funds may not last through the remainder of your life.

I personally do not put much "faith" in FIREcalc. It's just a bunch of formulas and calculations based on a set of assumptions. Many investment firms do exactly the same - they have their own models and systems which are similar in nature to FIREcalc. When they crash and burn, they are quick to say "Well, we just experienced a once in a 100 (or 1000) year event and we weren't prepared for that" - and neither is FIREcalc.