Sustainable Withdrawal rate opinion for a 50 year old

[RobLJ]

I'm 56, so the situation is different but I plan on drawing 5% from my chunk until SS, which I'll take between 62-67 depending on the portfolio balance/recession or 50% market decline, etc. That's actually a 3.2% withdrawal from the total portfolio. When my wife qualifies for 72t, then we'll start drawing from her section, if/when she retires and then we'll reduce to below 3.75-4% when I or both of us take SS.
Basically, there are about 10 scenarios I've modelled, depending on the market and how long she remains working.
I think 3-3.5% is probably OK at 50 but I wouldn't have been there 6 years ago.

[brewer12345]

While you are all tap-dancing on the head of a pin, you do realize that the likelihood you become an invalid or drop dead before 30 years of retirement is quite high. Spending usually drops precipitously after that...

[daylatedollarshort]

Just some food for thought. I am not trying to talk anyone out of their current AA, but for the cowards among us, this article made a lot of sense to me:

"But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."

"Yet the conventional wisdom – invest aggressively and spend defensively – persists. Financial advisors advise their elderly clients to invest a significant portion of their savings in stocks in order to pursue their greater expected returns, but – because of the risks – to live more frugally than they might if they chose a safer, less-volatile, 100%-TIPS alternative. Unfortunately, few retirees are even informed about this safer alternative."

"The conventional wisdom is better tailored to helping retirees die rich than live rich."

Safe Withdrawal Rate (SWR) with Treasury Inflation Protected Securities

[Totoro]

Quote:

Originally Posted by daylatedollarshort "The conventional wisdom is better tailored to helping retirees die rich than live rich."

True for older retirees who die young. Not for dudes like me (34), or longlived ladies.

At 50 years old you might still live 60 years.

That's the "annoying" part of financial planning with a long horizon:

• Noone can't predict the financial markets in the long term, as it is tied to the future of the world in general. Look at the world 50 years ago, look at it now.
• Most people that retire here could live 1 year more, or 60 years more.

Those two added up result in too great of an uncertainty. So you plan for the worst case.



In other words, one might also say:

Quote:

Originally Posted by Rephrased "The conventional wisdom is better tailored to avoiding retirees die poor than live poor."

[Live And Learn]

I will be retiring with a 3% WR (50/40/10 AA). Ages of 53 and 57. BUT .... my budget includes hitting the out of pocket maximum for HI every year and my portfolio excludes 7.5% for expenses that might never occur (mostly bucket list vacations and long term care), so I do have some "fudge" in there. I would not be comfortable with anything more than 3% at our ages.

[daylatedollarshort]

Quote:

Originally Posted by Totoro True for older retirees who die young. Not for dudes like me (34), or longlived ladies. At 50 years old you might still live 60 years. That's the "annoying" part of financial planning with a long horizon: Noone can't predict the financial markets in the long term, as it is tied to the future of the world in general. Look at the world 50 years ago, look at it now. Most people that retire here could live 1 year more, or 60 years more. Those two added up result in too great of an uncertainty. So you plan for the worst case. In other words, one might also say:

The article uses 30 years. If you want to ER at 34 and plan to live to 90 you have to go with a different methodology or have a very high portfolio in relation to your spending. It doesn't work for every poster here, but for some it might be a better methodology fit than the mutual fund approach because of the higher safe withdrawal rates early on in retirement, especially the posters here not concerned about leaving an inheritance.

[Katsmeow]

Quote:

Originally Posted by daylatedollarshort Just some food for thought. I am not trying to talk anyone out of their current AA, but for the cowards among us, this article made a lot of sense to me: "But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."

I'm no TIPS expert. But, isn't the yield now currently negative? That is the hypothetical given -- 1.3% real yield -- is one that doesn't currently exist?

[MichaelB]

Quote:

Originally Posted by Katsmeow I'm no TIPS expert. But, isn't the yield now currently negative? That is the hypothetical given -- 1.3% real yield -- is one that doesn't currently exist?

Only the 5 year are negative. Longer duration are a bit positive, but even the 30 year is under 1%.

Another issue is taxes. At lower inflation rates this type of approach works (in theory), but taxes are paid on the nominal interest. If inflation jumps high enough the next after tax is less than what is needed to sustain the 30 year spending.

And of course, the probability of any remaining portfolio at year 31 is 0 percent.

[RobLJ]

Quote:

Originally Posted by brewer12345 While you are all tap-dancing on the head of a pin, you do realize that the likelihood you become an invalid or drop dead before 30 years of retirement is quite high. Spending usually drops precipitously after that...

That's another scenario but one I'm not too worried about SWR.
Life is short, shorter in that scenario.

[daylatedollarshort]

Quote:

Originally Posted by Katsmeow I'm no TIPS expert. But, isn't the yield now currently negative? That is the hypothetical given -- 1.3% real yield -- is one that doesn't currently exist?

The rates vary by maturity and vary from month to month, year to year. Rates were high when deflation looked like an issue. You can get the current rates and changes from prior periods here:

United States Government Bonds - Bloomberg

The thirty years were .62% higher a year ago when inflation was less of a concern.

As for the negative yield on the short term TIPS, BB addresses that here:
http://www.bogleheads.org/forum/view...p?f=1&t=136613

[noone]

Quote:

Originally Posted by Totoro Noone can't predict the financial markets in the long term,

Yes I can.

[Katsmeow]

Quote:

Originally Posted by daylatedollarshort The rates vary by maturity and vary from month to month, year to year. Rates were high when deflation looked like an issue. You can get the current rates and changes from prior periods here: United States Government Bonds - Bloomberg The thirty years were .62% higher a year ago when inflation was less of a concern. As for the negative yield on the short term TIPS, BB addresses that here: Bogleheads • View topic - Liability Matching Portfoloio

I read the thread and I didn't see him giving a ringing endorsement of TIPS at the current time.

My point was that the other article you posted was apparently written at a time when yields on TIPs were much more favorable than they are now. So, while I found it interesting, in the current environment I don't think you could put all your money in TIPs and then confidently withdraw 4% per year.

[scrabbler1]

Pb4uski mentioned future income streams you are not eligible to receive yet. I often refer to those as my "reinforcements" which will only improve things after I turn ~60. For me they are unfettered access to my IRA, my frozen company pension, and Social Security.

My SWR for the first few years of my ER (2009-2011) was around 2.5% but has since dropped to just under 2%. That is mainly due to reduced health insurance premiums from choosing a bare-bones policy in the middle of 2011 to hold me over until the ACA went into effect this year. I also had a spike in some short-term cap gain distributions which spiked my income tax bill in 2010 (I don't see this as anything bad).

QS, I suggest you split your ER plan into 2 parts like I am doing. See what happens to your projected SWR after you can begin adding these income streams which will lower your need to use your own investments.

[daylatedollarshort]

Quote:

Originally Posted by Katsmeow I read the thread and I didn't see him giving a ringing endorsement of TIPS at the current time. My point was that the other article you posted was apparently written at a time when yields on TIPs were much more favorable than they are now. So, while I found it interesting, in the current environment I don't think you could put all your money in TIPs and then confidently withdraw 4% per year.

I think the point of what the LPM financial writers are saying if you even get a 0 real return (all but 5 year TIPS):

100% / 25 years = 4% SWR
100% / 30 years = 3.33% SWR
100% / 50 years = 2% SWR

with no worries about bear markets or sequence of returns risk. Any real return above zero is in addition to that:

" But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."

http://www.prospercuity.com/swr.htm

Here is what BB had to say to Forbes this year:

"As to inflation, I think that TIPS and short bonds will do fine over the long run; that is, their currently low real yields will, in due time, normalize towards the 2% real historical yield of, say, intermediate Treasuries."

"http://www.forbes.com/sites/phildemuth/2014/06/24/william-bernsteins-rational-expectations-plus-qa-with-author/2/

People who have been buying TIPS under this strategy do not have a portfolio made of of all TIPS bought at today's current low yields. Even if you were interested in this strategy, it probably isn't a great idea to sell your entire portfolio tomorrow and buy 100% TIPS or any other single asset class. Even with a LMP you can diversify and dollar cost average your asset class purchases. Bodie and Bernstein are just advising to have your baseline expenses covered in safe assets at retirement and then you can put as much or as little of the rest in stocks. If you can live off your Social Security income (or maybe 75% of it given its current status), you can have 100% of your portfolio in stocks using the LPM methodology.

[Katsmeow]

Quote:

Originally Posted by daylatedollarshort Bodie and Bernstein are just advising to have your baseline expenses covered in safe assets at retirement and then you can put as much or as little of the rest in stocks. If you can live off your Social Security income (or maybe 75% of it given its current status), you can have 100% of your portfolio in stocks using the LPM methodology.

To a certain extent I think this really just semantics. Let's say that it would take 25% of my portfolio to put in "safe" assets under this methodology. Then assume that of the remaining portfolio, I then put 2/3 in equity funds and 1/3 in bond funds. I don't see that that is really any different from starting out and saying I'm going to have a 50/50 AA and of the 50% going to fixed income I'm going to put half of it into "safe" assets such as TIPs.

Looking at DH and me, if I take SS at 62 (not yet determined when I will take it) then SS for the both of us would cover our most basic expenses (this would involve moving to a different house). We probably need $10k from the portfolio to cover our basic expenses if we didn't move from our current house and simply cut discretionary spending and we would need $20k from the portfolio if we included discretionary spending as part of baseline expenses (which I would not). And, if I take SS at 70 (spousal at FRA) then SS covers even more.

So assuming I think of the $10k number as the one to put into "safe" assets x 25 that would be $250k. Right now, we already have $250k in a combination of CD and short term bond fund (which to me is safe enough). Now, I don't see it as following Bernstein's new recommendation (and we didn't panic and sell during the unpleasantness a few years ago). But it gets to the same place nonetheless.

[daylatedollarshort]

Quote:

Originally Posted by Katsmeow So assuming I think of the $10k number as the one to put into "safe" assets x 25 that would be $250k. Right now, we already have $250k in a combination of CD and short term bond fund (which to me is safe enough). Now, I don't see it as following Bernstein's new recommendation (and we didn't panic and sell during the unpleasantness a few years ago). But it gets to the same place nonetheless.

It seems to me like it does follow the BB approach from what you just described, though maybe not the Bodie way since he is more of an advocate of inflation adjusted asset classes for essential expenses.

But either way there is no right or wrong. It is just a framework to consider.

[kramer]

I retired in my 40's. As a compromise against long term risk I adopted a variation of the Liability Matching Portfolio. This has the effect of reducing the chances for huge gains in exchange for reducing the risk of ending up with little or nothing.

I have some of the old good I-bonds maturing in my mid-60's (average real rate of about 3.1%) and I have several 30 year TIPs maturing in my mid-70's (average real rate of about 1.8%).

These, when combined with the social security I plan to take at age 70, would give me a base standard of living in my old age (and if I could wait until age 72, I would be fine). What makes these bonds different from other bonds in my portfolio? I would never sell them to rebalance, even if the stock market went down by 90%.

Now in my late 40's, I compute my SWR as follows. One computation is simply my overall SWR compared to my total portfolio. However, another is my SWR with my LMP and HSA (Health Savings Account) subtracted from my portfolio.

I figure catastrophic health care costs are by far the lumpiest expense people have and so I assume my HSA will be spent.

Anyway, I look at BOTH of these SWR numbers when I am evaluating my spending.

[kramer]

Quote:

Originally Posted by brewer12345 While you are all tap-dancing on the head of a pin, you do realize that the likelihood you become an invalid or drop dead before 30 years of retirement is quite high. Spending usually drops precipitously after that...

Yes, but you are just as likely to live longer than the median longevity. These possibilities cancel each other out surprisingly well.

[Animorph]

Quote:

Originally Posted by daylatedollarshort Just some food for thought. I am not trying to talk anyone out of their current AA, but for the cowards among us, this article made a lot of sense to me: "But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn." "Yet the conventional wisdom – invest aggressively and spend defensively – persists. Financial advisors advise their elderly clients to invest a significant portion of their savings in stocks in order to pursue their greater expected returns, but – because of the risks – to live more frugally than they might if they chose a safer, less-volatile, 100%-TIPS alternative. Unfortunately, few retirees are even informed about this safer alternative." "The conventional wisdom is better tailored to helping retirees die rich than live rich." Safe Withdrawal Rate (SWR) with Treasury Inflation Protected Securities

Yeah, I remember doing an Excel spreadsheet for an annuity that matched the 4% WR, roughly 1.5% real return. One big problem is that it leaves you with $0 after 30 years. Guaranteed. No way I'm planning for that. Though if you made it for the thirty years you definitely wouldn't die rich.

I much prefer to take 4% and die rich.

[TimSF]

I am planning based on a 3.5% withdrawal over 40 years. The difference between 95% and 85% FIREcalc success rate is negligible to me.