SWR and SS benefits

[MJ]

Does the 4% SWR include the monthly SS and pension payments or are SS and pension payments in addition to the 4% SWR?

MJ

 

[Bob_Smith]

4% is just a rule of thumb that essentially says that from 1871 through the 1960's or early 70's (or thereabouts) you could have withdrawn roughly 4% from a portfolio, plus inflation, for 30-40 years (depending on the allocation) without running out of money before you die. If you also had a pension, that would have been extra. Same with SS.

 

[MJ]

4% is just a rule of thumb that essentially says that from 1871 through the 1960's or early 70's (or thereabouts) you could have withdrawn roughly 4% from a portfolio, plus inflation, for 30-40 years (depending on the allocation) without running out of money before you die. If you also had a pension, that would have been extra. Same with SS.

Just to clarify the math,
absent any inflation, if one had $1,000,000 earning 4% interest and was getting $50K annually from SS and a pension plan then that person could withdraw an additional $40K (4% SWR) for a total of $90K pre-tax annually.

MJ

 

[ESRBob]

MJ,
Yes, that is how we would interpret a 4% SWR. I try to be one notch more conservative, which is to withdraw 4% of the nominal value each year, rather than inflation-adjusting your 40k every year, no matter what, and withdrawing it from your million dollar (+ or -) portfolio.

The traditional SWR analyses with annual inflation adjustments predict that the 4% will hold up over 30 or 40 years without depleting to zero, but for an early retiree, that might not be long enough, and will certainly get you to spend the rest of your life worrying whether or not you'll outlive your savings.

The adjstment we make, (called mid-course-corrections in the literature) taking 4% of the portfolio nominal value each year, seems to keep the portfolio intact in real terms, (about 90% of the time, with the shortfalls not huge) over 10 and 20 year periods and 100% of the time over 30 year and longer periods. The way you pay for this extra safety measure is with an imperfect inflation hedge: your real spending power may not match inflation, but it should be reasonably close. And intuitively it makes sense: if you're being powdered in the markets, you tighten your belt a bit (or find a little part-time income) and if the markets are treating you well, you get a little 'raise' should you want it. My gut says this will be an easier discipline to adhere to over the long run.

I had help running this study from Keith Marbach of Zunna Group, who has developed this methodology for foundations who don't want to run out of money over the long run. We used 75 year DFA data series, and a 50% bond, 50% stock mix, with value and small tilts.

ESRBob

 

[cc]

But the beauty of FIREcalc is that it's SWR results DO factor in SS and other inflows/outflows based on your individual situation...