Smart guys question 4% SWR strategy

[Texas Proud]

If one did your plan, without the COLA, Vanguard offers about 7% right now (without surviorship).

As far as what it would take me to jump, I really think 4%, COLA'd with 100% surviorship is a pretty good deal if one can assume it is safe. The SWR of 4% assumes you could be out of money anyway in 30 years, even though it is possible it could do much better than that. I do not like risk.

Being greedy, 5% with COLA and 100% survivorship, seems pretty hard to turn down. That might be possible soon if rates back up a bit but I'm not sure how fast the insurance companies would sweeten the deal.

I doubt we'll ever see 7%.

Who is the survivor? Spouse?


My first thought was 8%..... but I guess I would do it at 7% if inflation is added... and even 5% if it covers spouse also....

 

[RockOn]

Who is the survivor? Spouse?


My first thought was 8%..... but I guess I would do it at 7% if inflation is added... and even 5% if it covers spouse also....

Yes, we are talking the spouse. SHE/he would get 100% of the same amount till the last one dies. That is what is around 4%
COLA'd right now for a mid 50's retiree. What we have been discussing assumes the spouse is about the same age.

You don't have to choose the spouse however. You could choose a child, or anyone else you like, as the survivor. The younger they are the more the percent goes down.

 

[Cb]

I must be doing something wrong with FireCalc runs. When I solve for a 4% WR I keep getting several percent failure rates. Plus a bunch of stressful near-misses.

I understand those outcomes and accept the risk and have planned accordingly. But am I entering something wrong? So many seem to feel you can withdraw an inflation adjusted 4%, never have a failure and wind up with much more than you started with, guaranteed. And, of course, as you say, if the future is no worse than the historical data.

Edited to add: Oh yeah, deltas between the CPI and your own personal inflation rate would impact annuities and SWR plans similarly.

Not trying to defend annuities, just trying to keep the facts straight ref FireCalc runs.

I think if you include any investment expenses a 30 Year 100% SWR will be a bit below 4% in FIREcalc. If you look at longer periods (as most ER's should, IMO) the 100% SWR drops closer to 3.5%

Cb

 

[samclem]

Regardless of the rating of the insurer, I'd need to fully understand their business model before springing for an annuity, and the higher the promised payout percentage, the more skeptical I'd become. For example, would anyone REALLY buy an annuity that promised a 10% payout with a COLA? That would take some real explaining to get me to buy it.

What I would expect an annuity to pay out: Expected % return on a conservative basket of investments purchased with my principal + amortized return of my principal over my expected lifespan (or joint lifespan) - profit to the insurance company.

Since I already can assess this myself, anything higher sends up a red flag, and anything at this rate or lower is (in my particular situation) a poor investment.

 

[d]

The SWR of 4% assumes you could be out of money anyway in 30 years, even though it is possible it could do much better than that. I do not like risk.

specifying a 95% survival rate, a 30 yr 4%SWR is NOT likely to leave you "out of money" in 30 years; the average balance after 30 years would be about 1.7 times the beginning balance; there is only about a 5% chance you'd be out of money.

 

[ERD50]

specifying a 95% survival rate, a 30 yr 4%SWR is NOT likely to leave you "out of money" in 30 years; the average balance after 30 years would be about 1.7 times the beginning balance; there is only about a 5% chance you'd be out of money.

He didn't say 'likely', he said 'could'. And the data says ~ 5 % of the time. That is what the 95% success rate means.


You are going to have to explain to me how I, as an individual, can take advantage of those average balances. Are you going to join a 'retiree pool'?

I'm more concerned about the bad cases that I might face. When I try to zoom in on the squiggly lines, it looks to me like about 4 of the 107 patterns hits or comes within a hair of zero at years 24~26. As we talked about in another thread, it looks like you can lose 50% of your net worth within 15 years in a fair number of cases.

So, who is going to pick up the bill for you if you are unlucky enough to hit the 5% scenario (which assumes the future patterns are no worse than the past patterns)?

-ERD50

 

[RockOn]

specifying a 95% survival rate, a 30 yr 4%SWR is NOT likely to leave you "out of money" in 30 years; the average balance after 30 years would be about 1.7 times the beginning balance; there is only about a 5% chance you'd be out of money.

That's likely true, I don't know the exact statistics. I actually thought it was more than a 5% risk of zeroing out. A couple points. In order to expect the 4% SWR, one has market risk. IMO when taking market risk, things can go very right or very wrong. Also, the 4% SWR is based upon a very specific portfolio of 60% stocks and 40% bonds, (correct me if I am wrong on that). In order to expect that the 4% rule to hold true for specifically the next 30 years (which is really the only period we care about) one has to remain fully invested in the 60/40 portfolio. One cannot be scared out in a severe downturn, easier said than done.

To each there own, and I'm not pushing either, but the annuities do not have market risk but they do have default risk. One has to weigh the risks. A annuity WR of 5%, COLA'd, with 100% surviorship, looks very appealing to me. The upside is gone, but so is the downside. (If we can assume the insurance company remains solvent.)

Two other thoughts, if only 50% of assets were put in annuities, one would be diversified between two possible outcomes.

Secondly, at 5% (which would be nice but is not really available right now for age 53, it's more like 4% I think) one could always reinvest the 1% extra in life insurance or mutual funds. Compound that for 20 or 30 years and the kids still get a pretty good deal. If the annuity doesn't default, it became a bird in the hand........

 

[youbet]

You are going to have to explain to me how I, as an individual, can take advantage of those average balances. Are you going to join a 'retiree pool'?

Excellent ERD50!

Averages, or any measures of central tendency really, can be so dangerous when expressed without a measure of dispersion. I too love to look at the average ending portfolio value when doing FireCalc runs. They look so sweet! Then I look at all those lines below average! It couldn't happen to me, wind up below average, could it? No! No! Not me!

BTW, to ensure "average" you would not only have to join a pool of other retirees, you would have to time phase your entry into RE as the average ending portfolio in FireCalc is the average ending value of a series of trials over time. So, grab a bunch of other folks and RE in 1960, 61, 62, 63.........

 

[youbet]

What I would expect an annuity to pay out: Expected % return on a conservative basket of investments purchased with my principal + amortized return of my principal over my expected lifespan (or joint lifespan) - profit to the insurance company.

Are you leaving out returns available to pay you due to the early deaths of others? (I know there is a term for that and I can't remember it, sorry.)

 

[samclem]

Are you leaving out returns available to pay you due to the early deaths of others? (I know there is a term for that and I can't remember it, sorry.)

Only to the same extent that I'm leaving out the $$ they take from my pot to pay to those who live longer than average. The term for that is "old"

 

[ERD50]

BTW, to ensure "average" you would not only have to join a pool of other retirees, you would have to time phase your entry into RE as the average ending portfolio in FireCalc is the average ending value of a series of trials over time. So, grab a bunch of other folks and RE in 1960, 61, 62, 63.........

Sounds a lot like an annuity, doesn't it?

Disclaimer - I am not a fan of annuities for a variety of reasons, but the concept is attractive. It solves many of the problems that many of us face.

-ERD50

 

[ERD50]

I too love to look at the average ending portfolio value when doing FireCalc runs. They look so sweet! Then I look at all those lines below average! It couldn't happen to me, wind up below average, could it? No! No! Not me!

I noticed that 'd' did not include a location. Perhaps 'd' was born in Lake Wobegon?

-ERD50

 

[d]

at least Lake Wobegon is on this planet.

 

[youbet]

at least Lake Wobegon is on this planet.

Well, at least Keillor places it here in his books. But I think Lake Wobegon might be only in our minds, placed there by Garrison's wonderfully expressively story telling abilities. In any regard, all the children there are indeed above average!

 

[youbet]

ERD50 - I'm starting to get a hang for what annuities are and I can vision specific circumstances where a SPIA from a low cost provider could be helpful, though I doubt I'll ever buy one. That still leaves me pondering how to solve the issue you brought up a while back where you pointed out that in addition to a 4% - 5% failure rate (at 4% WR), portfolio holders must also endure a 15% - 20% risk of having stressful close calls or steep declines in portfolio value that don't result in a failure but scare the cooties off a retiree.

So, if it's in my genes not to use annuities (and I don't really want to), what is the answer? Very conservative allocation (and ignore the risk of death by inflation), much diversification, a portfolio so complicated I can't even tell what's happening myself so I can't worry about it?

Sounds like fodder for another thread.

 

[Cb]

So, if it's in my genes not to use annuities (and I don't really want to), what is the answer?

My plan is to:

- diversify well beyond S&P500 + TBM, perhaps netting several tenths in the SWR %

- using a variable withdrawal rate. Here's a calculator (I modded one of Bob90245's SWR spreadsheets) that demonstrates the benefits of indexing at least a portion of your annual withdrawal to recent market performance:

http://gnobility.com/ER/SWR_using_Variable_Withdrawals.xls

- remain open to the idea of doing a bit of work in the event all that comes up short

Cb

 

[Independent]

ERD50 - I'm starting to get a hang for what annuities are and I can vision specific circumstances where a SPIA from a low cost provider could be helpful, though I doubt I'll ever buy one. That still leaves me pondering how to solve the issue you brought up a while back where you pointed out that in addition to a 4% - 5% failure rate (at 4% WR), portfolio holders must also endure a 15% - 20% risk of having stressful close calls or steep declines in portfolio value that don't result in a failure but scare the cooties off a retiree.

So, if it's in my genes not to use annuities (and I don't really want to), what is the answer? Very conservative allocation (and ignore the risk of death by inflation), much diversification, a portfolio so complicated I can't even tell what's happening myself so I can't worry about it?

Sounds like fodder for another thread.

I think CB is right, the answer is flexible spending.

If I absolutely, positively must have my entire 4% withdrawal to meet my "minimum spending needs", then I'm not ready to retire with a 60/40 portfolio. I need to work longer, or see what annuities are paying.

OTOH, if the 4% equals my "target" spending, and I know I could live on half that if I needed to, and I'd like to have the chance to spend a lot more, then I'm ready to retire. I can keep my money invested in diversified funds, check my portfolio balance and spending once a year, and forget the annuity (except as a bailout possibility many years in the future).

Like Rockon suggests, I could dial in any intermediate point by doing some of each.

(In theory, a payout variable annuity gives you the returns of diversified funds, but eliminates your longevity risk. That's also a topic for another thread.)

 

[ERD50]

what is the answer? Very conservative allocation (and ignore the risk of death by inflation), much diversification, a portfolio so complicated I can't even tell what's happening myself so I can't worry about it?

Sounds like fodder for another thread.

Well, I'd need to go back to that 'dips in networth' thread, but IIRC, a conservative portfolio really did not do much to improve the bad cases - it helped, but not much. A 2% SWR is the only thing that seemed to consistently help keep the dips in the first 15 years from getting scary. Not very comforting.

I think CB is right, the answer is flexible spending.

If I absolutely, positively must have my entire 4% withdrawal to meet my "minimum spending needs", then I'm not ready to retire with a 60/40 portfolio. I need to work longer, or see what annuities are paying.

OTOH, if the 4% equals my "target" spending, and I know I could live on half that if I needed to,

Well, I'll try checking out cb's calculator, but I won't have time for a while. My initial tries at doing some simple modeling of this left me with the feeling that cutting spending will not help as much as people might anticipate. But I'd still ike to analyze it more.

But it sure looks like FireCalc does not handle that 95% rule correctly. I just tried again with a 5 year time frame to make it easier to follow the lines. It cuts spending about in half in 5 years - no way that can happen with a 95% rule (unless I misunderstand the rule).

I also think people are thinking of this rule and looking in the rear view mirror. Sure, looking at a historical 5 year decline, it's easy to say 'I would cut my spending that first year', and continue for the next four. But look at all the times we have one or two bad years, followed by good years. You don't know that one or two bad years is the beginning of a long stretch until after it happens. That is going to be an awful lot of years that you cut back on. Is that really what you would do? I don't know.

-ERD50

 

[youbet]

A 2% SWR is the only thing that seemed to consistently help keep the dips in the first 15 years from getting scary. Not very comforting.

Yeah, I tried various low levels of WR's and did notice that at around 2% there were zero lines dipping down into the cellar. But gosh, 2% also really leaves a lot on the table at the end. To say nothing of the painful budget cutting it would take to get down to 2%!

I also think people are thinking of this rule and looking in the rear view mirror. Sure, looking at a historical 5 year decline, it's easy to say 'I would cut my spending that first year', and continue for the next four. But look at all the times we have one or two bad years, followed by good years. You don't know that one or two bad years is the beginning of a long stretch until after it happens. That is going to be an awful lot of years that you cut back on. Is that really what you would do? I don't know.

-ERD50

I agree with your outlook on the cut spending theory......

1. If everytime the market dips, you're going to slash the budget, you're probably going to be in for an expensive divorce. For example, I haven't changed a thing at our house during the current market dip. And I'm not sure about how much longer this would have to go on before I would act. As you say, if you wait until the dip is history, you've waited to long.

2. I also note that FireCalc doesn't respond significantly to short lived spending reductions.

3. At 60 yo, frankly there isn't much in our budget that woudn't be painful to cut. Even so-called "discretionary" items. I can just hear myself telling DW....... "hey Honey, since the market has dipped since last November, we're cutting out two vacations during the balance of the year and may cut further if things don't correct soon!"

I remember "back in the days" when I was working......... I used to think that just getting out of there would compensate me for a furgal retirement lifestyle where dining out, travel, and entertainment were rare. Now that I've been out of the harness for two years, somehow the tickets we have for entertainment both this Friday and Saturday nights, the vacation we taking in a few weeks and all that sort of "discretionary" stuff has become much, much more important to me!

The thrill of not working has lessened...... Not that I have any intention of ever working again mind you..... But the giggly, exciting, I'm so happy I could just sh*t thrill of staying home kind of fades and you want to be doing things.... and some of those things cost money.....

Cb - I agree with you on diversifying. Not so sure I agree with you on variable withdrawal unless you retire much earlier than I did.

Independent - ditto. But concerning cutting back spending by half..... DW and I know exactly how to cut back 50%. We've both lived through hard times. Yuuuuuuch...... Both of us would consider it a major pita, a major retirement dissapointment and something to really try hard to avoid. It would not be an adventure, an interesting change of pace or anything like that. It would be a sad time as we watch the opportunity to do things in retirement pass out of sight forever. Blaaaa..... So, we're trying to avoid the "variable spending" route as a solution! Again, if you RE earlier than we did, that might be different. You might have time to wait for the carousel to come around again.

 

[cute fuzzy bunny]

I don't know the exact statistics.

That greatly complicates having an opinion. I dont recommend it.

 

[brewer12345]

Before anyone gets too excited by the idea of buying a "safe" annuity, remember that these guys were an unassailable AAA from all the agencies a couple years ago:

S&P, Fitch cut AIG's ratings following big 1Q loss: Financial News - Yahoo! Finance

If you are going to pay (dearly) for a perception of safety, make sure you are really getting what you pay for.

 

[Gearhead Jim]

Before anyone gets too excited by the idea of buying a "safe" annuity, remember that these guys were an unassailable AAA from all the agencies a couple years ago:

S&P, Fitch cut AIG's ratings following big 1Q loss: Financial News - Yahoo! Finance

If you are going to pay (dearly) for a perception of safety, make sure you are really getting what you pay for.

In previous posts you have listed the (few) companies you consider to be long term safe. I recall that AIG was specifically NOT on your list, but has your list changed?

 

[Cb]

I agree with your outlook on the cut spending theory......

1. If everytime the market dips, you're going to slash the budget, you're probably going to be in for an expensive divorce.

I don't think so...a number of our expenses are fairly costly "long-cycle" items such as Hawaiian vacations, home remodeling/repairs, car replacements, etc. Simply deferring those types of expenses (whenever practical) until a 'good' year ought to cover a bear-market reduction in the WR, without sacrificing regular entertainment, meals out, parties, etc.

2. I also note that FireCalc doesn't respond significantly to short lived spending reductions.

I disagree...have a look at SG's variable withdrawal study using FIREcalc V2 (my calculator gives very similar results)

Retire Early Home Page Discussion Board :: View topic - SWR for basic vs. discretionary spending

3. At 60 yo, frankly there isn't much in our budget that woudn't be painful to cut. Even so-called "discretionary" items. I can just hear myself telling DW....... "hey Honey, since the market has dipped since last November, we're cutting out two vacations during the balance of the year and may cut further if things don't correct soon!"

I disliked working enough that that would be a easy trade-off. I'm also easily amused, am a member of 2 bands, and have a number of other relatively inexpensive hobbies I can do right here in town.

I remember "back in the days" when I was working......... I used to think that just getting out of there would compensate me for a furgal retirement lifestyle where dining out, travel, and entertainment were rare. Now that I've been out of the harness for two years, somehow the tickets we have for entertainment both this Friday and Saturday nights, the vacation we taking in a few weeks and all that sort of "discretionary" stuff has become much, much more important to me!

The thrill of not working has lessened...... Not that I have any intention of ever working again mind you..... But the giggly, exciting, I'm so happy I could just sh*t thrill of staying home kind of fades and you want to be doing things.... and some of those things cost money.....

Cb - I agree with you on diversifying. Not so sure I agree with you on variable withdrawal unless you retire much earlier than I did.

Well, I quit at age 46 two years ago, but Momma is still working. She likes her job well enough and thinks she's got a pretty good shot at a "70 Rule" ER package that would include health coverage in the next year or so.

,,

 

[RockOn]

That greatly complicates having an opinion. I dont recommend it.

Just had to dig that up, eh?

I agree on how important the safety issue is that Brewer brought up. It is extremely important on annuities. At the same time, it is hard to believe big insurers will not be around in 30 years though, maybe under a different flag, but not likely insolvent. I always think of insurance companies as money machines, just look at where Buffet made a lot of his money.

 

[d]

... At the same time, it is hard to believe big insurers will not be around in 30 years though, maybe under a different flag, but not likely insolvent. I always think of insurance companies as money machines, just look at where Buffet made a lot of his money.

you can be certain that they are more concerned with their solvency than with yours!