SWR

[teejayevans]

I am single, 46, expect to FIRE later this year. I will have a small pension. Not eligible for SS (worked less than 10 years in the US, the rest abroad). I am planning on SWR = 3.5%.

I'm little older, but I'm planning on 2.5% for 1 reason, health insurance, I can't get individual insurance, not sure if Obamacare will be there, since its almost a complete unknown (won't know until COBRA runs out), I'm aiming low, I can always raise it later
TJ

 

[Ronnieboy]

What I have learned from reading this forum and other retirement/finance/blogs/you name it, is that you start with what you will need and fit your portfolio to deliver the funds that you will utilize.

Find your number by building from the ground up. You will need a few years worth of budgeting numbers to figure this out. The more years the better. Then add wants and a fudge factor. Plug that number into multiple retirement calculators based on whatever SWR you want (4%) get you total portfolio number and there you go.

example:

Basic living expenses: 25k
Everything else: 10k
Fudge factor/cushion 5k

Total: $40k


The key to remember is you can adjust it however you want in retirement. When you run it through firecalc or any calculator it is basing the withdrawals on consistency no matter what the market is doing. 4% SWR plus 3% inflation on the $1million portfolio will look similar to this:
Year 1 $40k
Year 2 $41200
Year 3 $42436
Year 4 $43709
Year 5 $45020.....etc.

So if you plug $1million in to firecalc at 3% inflation and 4% SWR and you get a comfortable success rate, then you are there because what I have noticed is that even though firecalc says you will succeed with the above numbers, the human element comes into play during actual use.

I don't have any exact figures but when all hell was breaking loose in 2008/9 the majority of the online chatter seemed to be: "I am going to withdrawal less this year because of the market and because I can cut back on bacon and beaver cheese" doing this you go from a 95% success rate from your plans to >95% success rate because of how you adjust based on the current data and your fears/experience/expectations.

If year 4 was 2008 then I only took $40k out again because I am cutting back and the market was bad. In year 5 (2009) I did the same b/c I could still live comfortably and who knows if the market will ever recover?

I'm not saying that is bad, but I almost feel some people will get caught up in the 'one more year' syndrome when they could have retired earlier based on getting to a 110% success rate or such a low SWR.

In the end it is what YOU are comfortable with because no matter what gets written by which 'professionals' if it all goes to crap the're not going to bail you out.

 

[truenorth418]

I am 47 and hope to live long and happy life. So I am going with 2.5% for now. I am keeping my spending in check as best I can and living off of dividends and interest without eating into my principal.

 

[Alan]

Given that more than half of your retirement income is annuitized have you decided to concentrate your portfolio in equities. This would give you better protection against inflation and would seem relatively prudent? In a similar position and decided to do this. I am a little older than you and my DW a little younger. Cheers.

I've read about this many times and understand the logic. However, emotions come into it and I don't like volatility so I have a conservative portfolio.

The way I look it is that I need $x/year from $y in investments, and I don't want to be selling equities in down markets. So I have an AA of 35/55/10 and a target SWR of 3%.

 

[Midpack]

I've read about this many times and understand the logic. However, emotions come into it and I don't like volatility so I have a conservative portfolio.

The way I look it is that I need $x/year from $y in investments, and I don't want to be selling equities in down markets. So I have an AA of 35/55/10 and a target SWR of 3%.

Sounds like me. The approach I learned here some time ago (don't remember who)...
Our nest egg is (fortunately) larger than necessary, call it $A + $B
Our target income $X/yr can be generated with $A at 60:40 (33 X $X = $A, same as 3% WR)
So $A is invested 60:40 and $B more conservatively (not equities), net AA is less than 60% equity.
So less risk than everything invested at 60:40, but still more than adequate to generate the desired income.

If $A gross more than expected, we reduce equity exposure and increase $B.

FWIW...

 

[Danmar]

@Alan &Midpack. I understand and would agree that there is nothing wrong wih being conservative. In my case I want to spend as much as I can while not ever running out of money. This is a little different than setting a spending amount then building a very safe way to get there. My portfolio is comprised of super quality dividend payors. My pension which will start this year is from one of the largest and stongest co's in Canada and well funded. So I feel a little more risk is OK. If I only spend dividends the SWR is around 3.5%. I also keep a couple of years of dividends in cash incase of dividend cuts. Anyway, I appreciate your views.

 

[Alan]

@Alan &Midpack. I understand and would agree that there is nothing wrong wih being conservative. In my case I want to spend as much as I can while not ever running out of money. This is a little different than setting a spending amount then building a very safe way to get there. My portfolio is comprised of super quality dividend payors. My pension which will start this year is from one of the largest and stongest co's in Canada and well funded. So I feel a little more risk is OK. If I only spend dividends the SWR is around 3.5%. I also keep a couple of years of dividends in cash incase of dividend cuts. Anyway, I appreciate your views.

Thanks Danmar, I also appreciate you sharing your situation. You hit the nail on the head for me with the security of my pension. Without it I would need a 7% WR. PBGC insurance is low at present and only gets up to 90% at age 65 (in 8 years time).

 

[Danmar]

Thanks Danmar, I also appreciate you sharing your situation. You hit the nail on the head for me with the security of my pension. Without it I would need a 7% WR. PBGC insurance is low at present and only gets up to 90% at age 65 (in 8 years time).

PBGC insurance? Not sure what this is?

 

[arky]

PBGC insurance? Not sure what this is?

In the US, it is the organization that steps in if a pension fund goes under.

 

[Alan]

PBGC insurance? Not sure what this is?

In the US, it is the organization that steps in if a pension fund goes under.

Correct.

Before PBGC a lot of folks, including a retired couple we knew, ended up with greatly reduced pensions when private pension plans went bust.

PBGC insures a pension up to 90%, with a top limit ~$56k. The further you are away from 65 the lower the % of your pension is covered.

About PBGC
PBGC protects the pension benefits of 44 million Americans in 27,500 private-sector pension plans. The agency is directly responsible for paying the benefits of more than 1.5 million people in failed pension plans. PBGC receives no taxpayer dollars and never has. Its operations are financed by insurance premiums and with assets and recoveries from failed plans.

 

[Midpack]

In my case I want to spend as much as I can while not ever running out of money. This is a little different than setting a spending amount then building a very safe way to get there. My portfolio is comprised of super quality dividend payors. My pension which will start this year is from one of the largest and stongest co's in Canada and well funded. So I feel a little more risk is OK. If I only spend dividends the SWR is around 3.5%. I also keep a couple of years of dividends in cash incase of dividend cuts. Anyway, I appreciate your views.

That's not possible on the face of it, we'd all do so if it was!

An annuity might ensure you'd never 'run out of money,' but it can't also guarantee the 'spend as much as I can' too. Longevity, inflation, returns and dividends are not predictable. It appears you want the best odds of maximizing spending without running out of money, and we differ on the most probable way to do so. I hope we're both successful.

You pays your money, and you takes your chances...

 

[Danmar]

@Midpack. i understand the uncertainties involved. My point was that I started with my invested assets then set the spend to the maximum level I felt was prudent. Many people on this board seem to go about it the other way. That is they decide how much they want to spend then retire as soon as they have the assets to prudently cover this spend. When I retired I found myself with more assets than I needed to maintain our spending levels at that time. So we increased the spend up to the dividends on the portfolio plus our pensions. I suspect this would not be typical. This would,in my opinion, be sustainable indefinately, regardless of what good ole' FIRECALC says.

 

[Midpack]

Many people on this board seem to go about it the other way. That is they decide how much they want to spend then retire as soon as they have the assets to prudently cover this spend. When I retired I found myself with more assets than I needed to maintain our spending levels at that time.

I know of many here who retired with way 'more assets than needed' and contingency plans on top of that, and I tend to come at questions from that POV. Though I often remind myself that nest eggs/plans here are on a probability of success continuum from ultra conservative to conceivably borderline reckless. I also know many here who did not retire "as soon as they" reached FI.

So we increased the spend up to the dividends on the portfolio plus our pensions. I suspect this would not be typical. This would,in my opinion, be sustainable indefinately, regardless of what good ole' FIRECALC says.

If you spend only dividends plus pensions, that would most likely be sustainable indefinately. But it doesn't satisfy your stated goal "I want to spend as much as I can while not ever running out of money" in that all history suggests you could safely spend some principal and spend more overall. There is no right answer, your answer works for you - nothing else really matters. Again, hopefully we'll both be successful.

 

[Danmar]

@Midpack. My comment about spending as much as possible related to the asset allocation more than the SWR. But I note your points and generally agree. Cheers

 

[Midpack]

Cheers...

 

[Independent]

I have read many articles and utilized many calculators (including FIRECALC).

I would like opinions from the forum members as well (especially the early retirees) on what a swr would be given no pensions or social security proceeds for a couple (ages - 57 male and 54 female).

Just curious.

Thanks,
Golfnut.

I assume you want a range of responses, I'll be on the conservative side. (BTW, we retired at 59, but included SS and a pension in our plans.)

I think of our spending as "needs" and "wants". The needs portion should be funding at near 100% confidence. The wants can be less certain.

For the needs, I would note that current TIPS yields are somewhere around CPI+0%. If I'm planning for 40 years of spending, I'd feel I could start with 1/40 = 2.5% of my needs portfolio. I know there's lots of history that says US securities generated a lot more than CPI+0% in the 20th century, and that may convince me to put my needs portfolio into something other than TIPS. But, I wouldn't spend that extra yield until after it's realized, so I'd still start at 2.5%.

The wants are another story. I'd invest that in whatever seems to have a good long term average and have a flexible spending plan. In theory, I could spend 100% in the first year if I want to have all my fun when I'm "young". In practice, I'd probably start at 6% or higher, then vary in future years based on performance, not on inflation.

 

[Danmar]

@Independant. I think yours is a good way of looking at this question. What would you do if your pension covered your needs? Go 6% on the portfolio?

 

[Independent]

I'd be concerned about whether the pension is COLA'd, but yes, I agree with some earlier posters that having a base income allows you to take more chances with the rest.

In our case, deferring SS to 66 and 70 will probably cover our most basic needs. Adding even 1/3 of our non-COLA'd pension seems like enough to cover more generously defined "needs". So that means we should be more aggressive.

That said, I'm married to the most risk-averse person I know, so it's not like we're into any interesting investments. Still, we're currently spending fast enough to draw down real principle. I'm not losing sleep over it.

 

[Huston55]

I assume you want a range of responses, I'll be on the conservative side. (BTW, we retired at 59, but included SS and a pension in our plans.)

I think of our spending as "needs" and "wants". The needs portion should be funding at near 100% confidence. The wants can be less certain.

The wants are another story. I'd invest that in whatever seems to have a good long term average and have a flexible spending plan. In theory, I could spend 100% in the first year if I want to have all my fun when I'm "young". In practice, I'd probably start at 6% or higher, then vary in future years based on performance, not on inflation.

Here's another data point. This is similar to our current plan: to cover "needs" (essential) with guaranteed income and "wants" (discretionary) with a reasonable AA portfolio. In our case, the 'guaranteed' (highly reliable is probably a better term) is SSx2, a small COLAd pension, and an SPIA. The 'discretionary' expenses will be covered by an AA of ~45/45/10 (+/- on S/B), beginning with a SWR of 3.3-3.7% because it needs to last ~40 years.

That said, I'm married to the most risk-averse person I know, so it's not like we're into any interesting investments. Still, we're currently spending fast enough to draw down real principle. I'm not losing sleep over it.

Didn't know my DW had a sister.

 

[clifp]

I don't have a SWR per se. Retiring at 40 made any "fixed" SWR too risky IMO. Rather my spending is based on investment income; dividends + interest. Historically spending has been started at around 2.5% and has increased to 3% from my initial portfolio. Other than 2008 my spending has been less than my interest and dividend income. Since I retired in 99/2000 a true 4% SWR would have been pretty awful as been documented in several places in on the web. I think my SWR rate would near 10%.

 

[Chuckanut]

That said, I'm married to the most risk-averse person I know, so it's not like we're into any interesting investments. Still, we're currently spending fast enough to draw down real principle. I'm not losing sleep over it.

Does this risk-averse person understand the risk of inflation over the next 30+ years? I ask because I have met many people who claim they do not want any risk, but then remain idle while the value of a life-time of earnings is diminished due to inflation.

 

[Independent]

Does this risk-averse person understand the risk of inflation over the next 30+ years? I ask because I have met many people who claim they do not want any risk, but then remain idle while the value of a life-time of earnings is diminished due to inflation.

If you're truly risk averse, the response to understanding inflation as a risk is not to invest in more volatile assets, but to really cut spending.

 

[youbet]

Does this risk-averse person understand the risk of inflation over the next 30+ years? I ask because I have met many people who claim they do not want any risk, but then remain idle while the value of a life-time of earnings is diminished due to inflation.

I'm surprised at how infrequently methods of dealing with inflation are discussed in terms of making a portfolio last over long periods of time in the face of rising prices. While the current version of FireCalc doesn't display the graph showing which years failed, you can still do so by down loading and inspecting the spreadsheet. The period including the early 70's stands out as the worse time to begin RE, not because of retiring into a recession/depression, but because of retiring into moderately high (NOT "hyper") inflation.

My own feeling is that folks relying heavily on non-cola'd pensions and spia's coupled with conservative portfolios may find themselves in "interesting" times 10 - 20 years down the road.

 

[Danmar]

@Youbet. I agree that inflation is probably the biggest risk for a long retirement. That's why I take more "risk" with a 100% equity portfolio. If my dividends grow by say 5-6% that will likely cover inflation for my entire retirement income,including the non-cola pension. Incidently my two biggest positions each raised their dividend today by 6%