SWR another 6.5+ million calculations

[Bigdawg]

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

I didn't see the above early December 2016 study (Part 1) on the EarlyRetirementNow web blog discussed yet on this forum. How could it not already be posted? Maybe my Google Fu could not find the thread?

Anyways, it is being discussed at bogleheads now, so some of you have already seen it. It is for the early-retired folks with 60 years to go, so the SWR is 3.5% and one needs more stocks than ever before.

I will most likely read the article but doubt I'll live to 111 so not getting too excited (worried).

 

[Dd852]

The only numbers that really matter are your spending numbers - the essentials and the discretionary. If you can make the essentials plus most or all of the discretionaries work at 4% when you retire, you should be fine as long as you have the discipline to haul back on the discretionary spending in bad years plus the super discipline not to increase the discretionary much in good times! I haven't been tested yet - FIRED in 2012 - but I feel confident I have cash in the bank and plenty of levers to pull and buttons to push if I had to ... and still have a great life and lifestyle..

 

[big-papa]

Close enough.

It is close enough if your plan can withstand 12.5% reduced withdrawals. That's the % difference between 3.5% and 4.0%. For example, if your plan was to withdraw $100K, inflation adjusted, at 4.0% then it's $87.5K at 3.5%. That might be a big haircut for some.

I tend to like variable withdrawal methods, such as VPW, described over a bogleheads. The year-to-year withdrawals are not steady, but you can't run out of money before your plan. The tradeoff to that is that there are times in history where the annual withdrawals might drop below the minimum one needs to live. Depends on how much is saved, what ones minimum expenses are, SS/Pension and of course asset allocation.

 

[Symbiotic]

I ERed at 35, 3.5%wr, 98% equities.

I suspect that most very ERs have plenty of ways to "cheat." The big one is latent human capital -- something that isn't there for traditional-age retirees. This and other hedges make it pretty easy to sleep at night at slightly under historical 30y SWRs.

 

[Bigdawg]

so basically the only person I follow who may live 60 years in re is FUEGO. If he shut down his side consulting and his blog income and blindly followed the 4% SWR then maybe he would fail?? I WILL assume that anyone who is lucky/gifted/anal enough to RE at 30 or so (60 yrs in RE) would also be lucky/gifted/anal enough to actually look at how they were doing (at least yearly) and adjust as needed. Some hypotheticals are sort of ridiculous.

 

[DawgMan]

I suppose the take away from all the responses is...

- Do your homework before you RE to understand your "needs" & "wants" budget.
- Run your calculators to find your level of comfort/risk profile for planned AA & SWR
- Anticipate financial/other bumps in the road and life surprises
- ideally have multiple contingency plans (i.e. Spending reduction plans, part time job/income producing options)
- Just be prudent and apply common sense

While I love all these calculators and I do believe they are important to be used in the overall RE analysis, there are always going to be elements of risk you cannot predict. I just don't want to be that guy who delays my RE because I freak out over the 1% chance of Firecalc not working!

 

[NW-Bound]

+1

Where's Uncle Mick with his advice to be "agile and hostile" ?

One should not think the market owes him a 4% WR that also maintains his principal. Sometimes it does, sometimes it doesn't.

 

[UnrealizedPotential]

I have never liked the 4% rule. Why would I want to take out 4% of my portfolio every year? To me it always made a lot more sense to have bond funds and receive the distributions and have any tax deferred funds in stocks. That is what I do. I get a lot more monthly income this way and I live fine and any extra income goes back in my bond funds to have even greater income in the future and let my stock allocation grow. But I am not trying to change any ones mind on the issue, just pointing out there are other ways of doing this.

 

[tmm99]

I get it that studies show 4% SWR with 30 years, and less for 40 years, and all that, but those numbers do not include social security benefits, so the SWR for most people can withstand something higher, no?

 

[NW-Bound]

I get it that studies show 4% SWR with 30 years, and less for 40 years, and all that, but those numbers do not include social security benefits, so the SWR for most people can withstand something higher, no?

With SS or pension coming online later, you can draw higher than 4% initially. Then, when these incomes start, your WR will drop, but you will maintain the same expenses.

FIRECalc is good stuff. It can figure this out for your situation. I still knock off quite a bit from its suggestion to maintain a safety margin.

PS. The above works for "geezers", meaning those having SS within reach. Youngsters who have 30 years to go till SS FRA still have to cut down on WR if they want to be safe. Early retirees will not have much SS anyway, as they worked so few years.

 

[donheff]

PS. No portfolio survived for 40 years at 4% WR. One needs to go down to 3% for 40 years.

This doesn't sound right to me. I thought the failure rate just increased to unacceptable levels over longer years (or higher SWRs). As I recall the study (and the Monte Carlo scenarios) many starting years resulted in large portfolio growth at 4% with a few failing, more coming close to failure, and others ending up somewhere in the middle but still pretty solid. I find it hard to fathom why the scenarios showing positive growth at 30 years would all wind down to zero in ten more years.

 

[bingybear]

I have never liked the 4% rule. Why would I want to take out 4% of my portfolio every year? To me it always made a lot more sense to have bond funds and receive the distributions and have any tax deferred funds in stocks. That is what I do. I get a lot more monthly income this way and I live fine and any extra income goes back in my bond funds to have even greater income in the future and let my stock allocation grow. But I am not trying to change any ones mind on the issue, just pointing out there are other ways of doing this.

taking the interest off bonds is taking $ out of the portfolio... that is withdrawing!
I tend to put bonds in that IRAs, not my taxable account (sans muni/tax exempt). I put stocks, especially (qualified) dividend payers in the taxable account since these have better tax implications. Now, I do not use MF in taxable accounts because they can really bit you in taxes (possible exception is a broad based index fund) MLPs might be good too, but I have not got my head around them yet.
The point is taking interest, dividends, capital gains etc ... is withdrawing from your portfolio. Don't fool yourself with semantics. And it is fine to withdraw as you need to get the $ somewhere. Taking interest or dividends or other distributions is a fine way to get spending $ without having to actually sell positions.
Think of your portfolio as an entity. Interest and divys should be reinvested if they are to remain in the portfolio. If they are spent, they are removed from the portfolio.

 

[NW-Bound]

PS. No portfolio survived for 40 years at 4% WR. One needs to go down to 3% for 40 years.

This doesn't sound right to me. I thought the failure rate just increased to unacceptable levels over longer years (or higher SWRs). As I recall the study (and the Monte Carlo scenarios) many starting years resulted in large portfolio growth at 4% with a few failing, more coming close to failure, and others ending up somewhere in the middle but still pretty solid. I find it hard to fathom why the scenarios showing positive growth at 30 years would all wind down to zero in ten more years.

Sorry for the bad wording. You are 100% correct.

What I should have said was that "No portfolio allocation gave 100% success rate for 40 years at 4% WR. At 3% WR, one got 100% success rate again for 40 years".

The results are reproduced in the referenced article in my post above. I was not able to locate the original Trinity article in an open Web site.

 

[Lagniappe]

This doesn't sound right to me. I thought the failure rate just increased to unacceptable levels over longer years (or higher SWRs). As I recall the study (and the Monte Carlo scenarios) many starting years resulted in large portfolio growth at 4% with a few failing, more coming close to failure, and others ending up somewhere in the middle but still pretty solid. I find it hard to fathom why the scenarios showing positive growth at 30 years would all wind down to zero in ten more years.

I just ran firecalc with a 4% withdrawal rate over 40 years, with default assumptions. The success rate was 84.9%.

 

[bingybear]

This doesn't sound right to me. I thought the failure rate just increased to unacceptable levels over longer years (or higher SWRs). As I recall the study (and the Monte Carlo scenarios) many starting years resulted in large portfolio growth at 4% with a few failing, more coming close to failure, and others ending up somewhere in the middle but still pretty solid. I find it hard to fathom why the scenarios showing positive growth at 30 years would all wind down to zero in ten more years.

+1
In statistics there really is no 100%. The old RIP calculation use to give 95% (if I recall) when it did not have a failure. Or maybe it was a little higher. If using firecalc using historical data, it can give you 100% for those cases, but not for your plan's performance in the future. Back the the RIP calculator of old, the first performance they show you is "in a down market" and this is what is usually used for planning. If you switch to "normal or typical market, 50% likelihood", you find there is lots of $ on the table. You plan for the worst and hopefully (likely) get something much better. This begs for a variable withdraw scheme.

 

[NW-Bound]

The point is taking interest, dividends, capital gains etc ... is withdrawing from your portfolio. Don't fool yourself with semantics...

+1

People really think the various researchers did not know that stocks generate dividends+cap gains, and bonds generate interests?

 

[Huston55]

I tend to like variable withdrawal methods, such as VPW, described over a bogleheads. The year-to-year withdrawals are not steady, but you can't run out of money before your plan. The tradeoff to that is that there are times in history where the annual withdrawals might drop below the minimum one needs to live. Depends on how much is saved, what ones minimum expenses are, SS/Pension and of course asset allocation.

We also use a VWR (but, not VPW---too much potential volatility for us). We use G-K, a 'guard rails' approach that enables larger beginning WD, if one is willing to reduce spending in down markets. This works well for us because, we retired @ 57/58, have small pensions, and will collect SS in ~10yrs, at which point all essential expenses will be covered by guaranteed income streams, and the 'risk' portfolio can then be used for strictly discretionary/catastrophe spending.

 

[LOL!]

so basically the only person I follow who may live 60 years in re ….

But what about your 2nd and 3rd wives? When you are 80, aren't you going to marry a 25 year-old cutie who will live another 60 years off your portfolio?

The blog articles have lots more in them than living 60 years in retirement. And there is more to come. And be careful about attributing things to the articles when they are just reactions from posters who did not read them. That's how Fake News gets going.

PS: Please invite me to your future weddings!

 

[Carpediem]

We also use a VWR (but, not VPW---too much potential volatility for us). We use G-K, a 'guard rails' approach that enables larger beginning WD, if one is willing to reduce spending in down markets. This works well for us because, we retired @ 57/58, have small pensions, and will collect SS in ~10yrs, at which point all essential expenses will be covered by guaranteed income streams, and the 'risk' portfolio can then be used for strictly discretionary/catastrophe spending.

@Huston55, This will be our situation exactly when I RE. How long have you been retired (and taking larger WDs) and how has the portfolio held up?

Thanks for posting.

 

[FIREd]

We are in our 40s and using 3% of initial portfolio adjusted for inflation, with 50% in equities. So it looks like we should still be good to go for 60 years (well our portfolio should, our bodies not so sure). Plus there will be some SS and non-retirement assets that can be disposed of to relieve the pressure on the portfolio later on, and no heir to endow so we can allow the capital to be depleted. And I am sure that we will not blindly adjust our withdrawal for inflation in bad years.

 

[Huston55]

@Huston55, This will be our situation exactly when I RE. How long have you been retired (and taking larger WDs) and how has the portfolio held up?



Thanks for posting.

FIREd ~2yrs now. AA=60/25/15. G-K says we can take 5.1%/yr but, so far, we've taken a bit less. NW is up slightly.

Hope your plan works well for you.

 

[haha]

Hence me typing?
Well I don't think anyone can guarantee anything 100% but my understanding was with 4% you could withdraw without touching the principal which makes sense if your principal can generate 4% for its life. Sequence of returns and such things can throw this off hence no 100% guarantee.

This is then a misunderstanding.

Ha

 

[haha]

+1

People really think the various researchers did not know that stocks generate dividends+cap gains, and bonds generate interests?

People often think whatever suits them.

Ha

 

[Carpediem]

FIREd ~2yrs now. AA=60/25/15. G-K says we can take 5.1%/yr but, so far, we've taken a bit less. NW is up slightly.

Hope your plan works well for you.

Thanks! One final question - what is "G-K"?

 

[2017ish]

Thanks! One final question - what is "G-K"?

Guyton-Klinger decision rules