SWR

[SecondCor521]

Please expand. It did seem a bit long and wordy. Were there errors?

I (think I) can explain the 4% rule in 50 words or less (but don't hold me to it.) YMMV

Oh, OK. My criticisms:

1. Page 3 - "We're going to ignore Social Security because it's complex." Possibly fair. But then later they introduce complexity in a number of different ways (international investing, Monte Carlo-based proprietary analysis prediction of the future). They're not being consistent.

2. Page 3 - Giant strawman that is never stated is that FIRE people rely on and follow the 4% rule slavishly. Generally entirely untrue as a premise for the rest of their criticisms.

3. Page 3 - They exclusively choose a 50/50 portfolio and then later criticize longer periods. Either Bengen or Trinity looked at multiple portfolio AAs, and it's been well known and studied for decades that higher equity porfolios have better survivability over longer periods. So this is a combination of straw men and circular arguments, or simply ignorance.

4. Page 4 - "We don't want to rely on historical returns." Again, possibly fair, but I hardly think that introducing a proprietary Monte Carlo-based analysis with no visibility into how it works or the assumptions it makes is a better approach. This is a red herring fallacy (I think).

5. Page 4 - "The future may be different from the past." Because we're going to compare past history to our future proprietary guess. This is what's known as a circular argument.

6. Page 5 - Using their VCMM pessimistic guess to analyze longer historical periods. This simply ignores historical analyses like FIREcalc which analyze the historical survivability for 40- and 50-year periods. It is suspicious to me that the latter provide results that indicate better survivability than the VCMM analysis.

7. Page 5 - 50 years. Yes, FIREes in their 30s may need to look at a 50 year planning period. And I think most FIREes that I've seen do so. But the number of FIREes in their 30s are an extraordinarily small part of the FIRE population - most FIREes are in their 40s and 50s, where a 30- or 40-year plan is probably more likely.

8. Page 5 - Fees. FIREcalc accounts for fees, and I think most FIREes do as well. Just because Bengen ignored them for simplicity, it's not really a relevant argument, so it's another straw man. And I think many FIREes have portfolios that have a weighted cost much less than 20bps, much less 100bps. So a double straw man here.

9. Page 7 - Logical flaw: "For example, if the market falls substantially in a given period, the 4% rule would advise boosting spending each year to account for inflation. This can substantially increase the risk of portfolio depletion in retirement." Well, the risk is already baked into the 4% historical analysis; repeating it this way makes it seem like an additional or extra risk when it is not.

10. Page 7 - Logical flaw: "On the other hand, if the market goes up substantially, annual spending will not increase after accounting for inflation under the 4% rule, even if investors would like to enjoy a higher standard of living given the good market performance." Again, only if you're a slavish follower of the 4% rule, which nobody is. Also, this ignores the payout period reset or retire again and again approach, which has been an idea known about for two decades and rediscovered by many new FIREes on a regular basis.

11. Page 9 and 10 - Again, their footnotes show that their analyses are all predicated on their VCMM pessimistic and proprietary guess. (The larger point about variable spending being a good thing is nearly a given to anyone with half a brain.)

12. Page 11 - Figure 10 footnote, 85% success - Does anyone else think that 85% is a smart standard for FIREes facing a 50 year planning period? I do not.

13. Overall, they seem to be assuming that FIREes are blindly following 27 year old research without any additional thought or analysis, and ignoring all the additional information, research, options, and strategies that have been identified, thought of, and/or written about since then. So again, one gigantic straw man.

 

[Out-to-Lunch]

Thanks for that writeup! I am glad I only had to read a post instead of a paper!

 

[RunningBum]

7. Page 5 - 50 years. Yes, FIREes in their 30s may need to look at a 50 year planning period. And I think most FIREes that I've seen do so. But the number of FIREes in their 30s are an extraordinarily small part of the FIRE population - most FIREes are in their 40s and 50s, where a 30- or 40-year plan is probably more likely.

No issues with your other points, but I have a comment here. I FIREd at 49. While 30 years or less could certainly happen, it seems foolish to plan for the likely or average life span. I don't want to be 87 (my father's current age) and hoping I only live another two years because all I'll have left is social security. Plan for an extreme but reasonable case, whatever that means to you. My dad's brother is 8 years older than him, btw, so I don't think planning in case of a 50 year lifespan after my ER is unreasonable.

 

[daylatedollarshort]

13. Overall, they seem to be assuming that FIREes are blindly following 27 year old research without any additional thought or analysis, and ignoring all the additional information, research, options, and strategies that have been identified, thought of, and/or written about since then. So again, one gigantic straw man.

They probably were directing their comments more to the Mr. Money Mustache crowd - "Adeney believes in the 4% rule, which states that, with a balanced investment portfolio, a retiree can withdraw 4% of their portfolio's initial value each year, adjusted upward for inflation each year thereafter, with a low probability of ever running out of money." - https://en.wikipedia.org/wiki/Mr._Money_Mustache

 

[RetireBy90]

OP, I plan for 3% to 3.5% but also have 3 years of spending in CD or cash, if worst happens I can spend that and not have to liquidate at firesale prices. Probably not up to 100% but the extra in cash adds a comfort level.
Just remember your entire life you have adjusted to changes. Keep an eye on your pile and withdraws and minor adjustments can correct course if or when needed.
Posters have debated such questions for some time. 3.5-4% is a starting point but make yourself comfortable so you can sleep nights.

 

[Dtail]

They probably were directing their comments more to the Mr. Money Mustache crowd - "Adeney believes in the 4% rule, which states that, with a balanced investment portfolio, a retiree can withdraw 4% of their portfolio's initial value each year, adjusted upward for inflation each year thereafter, with a low probability of ever running out of money." - https://en.wikipedia.org/wiki/Mr._Money_Mustache

Yeah but how many folks do we all know collectively who truly follow the 4% rule as an actual withdrawal strategy?

 

[SecondCor521]

No issues with your other points, but I have a comment here. I FIREd at 49. While 30 years or less could certainly happen, it seems foolish to plan for the likely or average life span. I don't want to be 87 (my father's current age) and hoping I only live another two years because all I'll have left is social security. Plan for an extreme but reasonable case, whatever that means to you. My dad's brother is 8 years older than him, btw, so I don't think planning in case of a 50 year lifespan after my ER is unreasonable.

Agree with you completely. My point was not really about life expectancy per se; it's that the majority of the paper focuses on 50 year time frames when those time frames are applicable only to a small proportion of FIREes. In general my impression on this and other points is Vanguard is trying to scare FIREes into relying on Vanguard for advice rather than figuring it out on their own. Which is a time-tested marketing technique but one I don't agree with in this case and am sad to see Vanguard stooping to, especially when their material is full of logical holes and bad assumptions throughout.

They probably were directing their comments more to the Mr. Money Mustache crowd - "Adeney believes in the 4% rule, which states that, with a balanced investment portfolio, a retiree can withdraw 4% of their portfolio's initial value each year, adjusted upward for inflation each year thereafter, with a low probability of ever running out of money." - https://en.wikipedia.org/wiki/Mr._Money_Mustache

Possibly so. I'm a member of the MMM forums as well. They're probably younger and less affluent on average than here, and some are woefully ignorant or misconstruing fact and logic - sometimes including Pete himself. But many (some?) are intelligent, well-prepared, well-researched, and carefully assessing well-understood tradeoffs about how to live their lives.

I'd still argue that the lack of preparedness and understanding on the part of some MMM cult members is no excuse for shoddy, illogical, just-trust-our-proprietary-research scare tactics on Vanguard's part.

 

[Koolau]

Thanks for the cogent analysis. I did instinctively note that Vanguard was subtly trying to steer folks to its own "grand plan" by poking small sticks at the so-called 4% rule. I would say that most of your points are well taken. Thanks again.

 

[daylatedollarshort]

I'd still argue that the lack of preparedness and understanding on the part of some MMM cult members is no excuse for shoddy, illogical, just-trust-our-proprietary-research scare tactics on Vanguard's part.

I always keep in mind that even the no-load the 401K folks make more money from their admin and expense fees the longer we all work and the more we save. It is in their own best interest. When we had our 401K guy go over the plan it was pretty clear he had his retirement more in mind than ours. He acted like we need to keep working longer, save more and invest in stocks, even though his own retirement planner showed we'd be more than fine retiring when we did even just investing in short term bonds.

 

[DrRoy]

When I retired at 51, my views on SWR were as follows:

4%: Not comfortable
3.5%: Maximum
3%: Mostly comfortable
2.5%: Very comfortable
2%: Absolutely golden

These were just feelings and not Firecalc results.

+1

 

[indiajust]

Plan to adapt and improvise as you go. Pick a date for your official retirement 59.5 to 70 and then make a plan to get there first. Decide how splashy a retirement you want to have, say till 78. The rest is a hopefully genteel decline. Evaluate your longevity along the way to adjust your midpoint transition dates and expectations.

You have more than enough time/assets to consider part time employment at something you enjoy instead of for the money. Just set some approximate date/wealth setpoints for your transitions.

If you are too frugal for your own good, consider just buying a simple annuity to give youself a license to spend. https://www.thinkadvisor.com/2021/06/29/why-annuities-work-like-a-license-to-spend-in-retirement/

Likewise, if you are a reckless spender, you might want to consider avoiding temptation with an annuity. Of course, FI/RE is the antithesis of reckless spending and I don't expect to find those folks in these parts.

 

[Chuckanut]

If you are too frugal for your own good, consider just buying a simple annuity to give youself a license to spend. https://www.thinkadvisor.com/2021/06/29/why-annuities-work-like-a-license-to-spend-in-retirement/

I read the article. What it does not address is inflation. As the annuity payments buy fewer and fewer loaves of bread each year, the buyer will be forced to spend more of it, not on 'goodies', but on the bread.

I would think a variable withdrawal plan might be better. I would provide for increased spending if things go well, and in the case things go downhill and stay here, it will reduce spending so as to reduce the chances of running out of money.

I do like the idea of taking SS at 70. If one wishes to spend the most money and is not concerned with leaving an estate, taking SS at 70 give one more money to spend every year.

 

[I am He]

The key is to be really confident in that spending, including taxes and healthcare. .

We used to be low HC users, but cancer in mid 50s opened my eyes to max out of pocket costs for the first time. Used to only think about the premiums but it could be a combined out of pocket costing $25k/year if we both had issues.

Unlike my $10 out of pocket surgery when I was 8. Back when insurance was insurance not bankruptcy insurance!

 

[RetiredHappy]

I read the article. What it does not address is inflation. As the annuity payments buy fewer and fewer loaves of bread each year, the buyer will be forced to spend more of it, not on 'goodies', but on the basics.

I would think a variable withdrawal plan might be better. I would provide for increased spending if things go well, and in the case things go downhill and stay here, it will reduce spending so as to reduce the chances of running out of money.

I do like the idea of taking SS at 70. If one wishes to spend the most money and is not concerned with leaving an estate, taking SS at 70 give one more money to spend every year.

You can either buy annuities with inflation rider, but based on the numbers which I have run, it is not worth it. Instead you can ladder deferred fixed income annuities, where you start another one 5 or 10 years later.

 

[Chuckanut]

You can either buy annuities with inflation rider, but based on the numbers which I have run, it is not worth it. Instead you can ladder deferred fixed income annuities, where you start another one 5 or 10 years later.

I agree that laddered is probably better than inflation adjusted annuities.
But, would a ladder spread over 5-10 years fix the 'not spending enough problem' the annuity is supposed to address? I don't know.

 

[Out-to-Lunch]

You can either buy annuities with inflation rider, but based on the numbers which I have run, it is not worth it. Instead you can ladder deferred fixed income annuities, where you start another one 5 or 10 years later.

I was under the impression that there are NO cola-ed annuities available these days. If you know differently, can you point me to how to find one?

 

[FargoI]

Assess Healthcare costs very carefully

Premiums for policies, co pays, deductibles, exclusions and up charges. Vision. Dental. Pharmacy. These are unpredictable expenses for a healthy 40+ year old. Generic no cost rx may not be what one needs to enjoy quality of life or life at all. High quality rx glasses at Costco are not free and most want two pairs- including sun glasses. My point being you have a lot of years prior to being covered by an uncertain plan known as Medicare Parts A, B and D...if they even exist in twenty years or are fully privatized via the growth of Part C plans affectionately known a ADVANTAGE plans.

Whatever amount of time you have invested in assessing your investment and withdrawal rates, I recommend putting two times that effort into really understanding contemporary health care costs.

From someone who worked in HC for 45 years and watched first hand the transformation from a loving, caring profession to a full blown business model. Best of luck.

 

[FireDreamer]

When I retired at 51, my views on SWR were as follows:

4%: Not comfortable
3.5%: Maximum
3%: Mostly comfortable
2.5%: Very comfortable
2%: Absolutely golden

These were just feelings and not Fireclac results.

Ugh... Is this generally accepted, or a conservative approach? Do I need to change my plan?

I'm planning on a 3.5% WR at 47yr. Do I need to hang on longer for a lower WR?

 

[pb4uski]

Ugh... Is this generally accepted, or a conservative approach? Do I need to change my plan?

I'm planning on a 3.5% WR at 47yr. Do I need to hang on longer for a lower WR?

Perhaps slightly lower with that long a time horizon (I'm assumng 50 years).

FIRECalc suggests a 3.3% WR for 95% success over 50 years. A 3.5% WR has a 92% success rate.

 

[Midpack]

I was under the impression that there are NO cola-ed annuities available these days. If you know differently, can you point me to how to find one?

You have to provide basic personal info (or I’d have verified), but it appears you can still buy COLAd annuities. They cost about twice as much for the same starting payout.

https://www.immediateannuities.com/immediate-annuities/annuities-and-cost-of-living-adjustments.html

https://www.annuity.org/annuities/riders/cost-of-living/

 

[Gumby]

Ugh... Is this generally accepted, or a conservative approach? Do I need to change my plan?

I'm planning on a 3.5% WR at 47yr. Do I need to hang on longer for a lower WR?

I realize that this might not feel particularly helpful, but the only one who can answer your question is you. What others may find generally acceptable may not be acceptable to you. You have your own circumstances, your own willingness to continue working and your own perception of risk. The best you can do is use the various calculators and pick a point at which you are comfortable.

The only truly safe withdrawal rate is zero. That is, the only way you will never run out of money in your portfolio is not to spend any of it. However, I think it unlikely anyone is that risk averse. I'm certainly not; I wanted to stop working because I wanted time more than I wanted zero risk.

 

[FargoI]

I actually follow a very similar line of thinking. Maybe too conservative an approach but an unprecedented world wide pandemic with variants has many concerned about short term and mid term wellbeing, financials, supply chain, etc.

 

[Skitso999]

It was a gift free of tax.

I have:
401K 1M. (Small amount is Roth 401K)
Roth IRA 330K
Brokerage 771
HSA 6K
New gift/cash 610K

Currently everything that was not part of the gift/cash chunk is in mutual funds. I am not sure what I am going to do now that I have the $.

I would keep everything in low cost mutual funds. You're young enough that you could withstand some market downturns when they occur, and watch the money go back up when the market returns to normal. It is a LOT better to make 7% in funds than it is to make 3-5% in bonds, in my opinion. Some years you'll make closer to 15%, or more.

 

[The Cosmic Avenger]

I realize that this might not feel particularly helpful, but the only one who can answer your question is you. What others may find generally acceptable may not be acceptable to you. You have your own circumstances, your own willingness to continue working and your own perception of risk. The best you can do is use the various calculators and pick a point at which you are comfortable.

The only truly safe withdrawal rate is zero. That is, the only way you will never run out of money in your portfolio is not to spend any of it. However, I think it unlikely anyone is that risk averse. I'm certainly not; I wanted to stop working because I wanted time more than I wanted zero risk.

Even that wouldn't technically be guaranteed not to fail if we ever experienced Venezuela-level hyperinflation.
I'll admit, that seems incredibly unlikely now, the only reason I'm bringing it up is that inflation risk is often the only reason some people don't go all cash, and even at US 1970s or even 1980s levels it could have a huge impact for many of us, and many people want to be prepared to keep their spending level even if we experience historically bad (but not necessarily anomalous) inflation. So just bolstering your point that your strategy really depends on your priorities.

 

[RunningBum]

For that matter, continuing to work is no guarantee either. In an economic meltdown you might lose your job. You have to draw a line of reasonable worst case somewhere.