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Old 07-17-2020, 04:40 PM   #21
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There's one other aspect to failure with a 4% WR. Someone can say, I project a need for $40K (on top of SS), I have $1M, so I'm safe, right? While it's true that history says that market returns and inflation rates make this plan safe (assuming the future isn't worse than ever this time), it doesn't cover someone underestimating their expenses. A combination of running over budget with bad sequence of returns or runaway inflation can sink a 4% plan.

Right. Seems like a lot would have to go wrong for 4% to go wrong. I also read that 2/3 of the time not only does 4% work , but the balance is like 2x the original balance. Not sure what the source was though.
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Old 07-17-2020, 04:47 PM   #22
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Right. Seems like a lot would have to go wrong for 4% to go wrong. I also read that 2/3 of the time not only does 4% work , but the balance is like 2x the original balance. Not sure what the source was though.
IIRC, Kitces article is one source of this statement.
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Old 07-17-2020, 04:50 PM   #23
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One of the things seldom mentioned in these discussions is that historical outcomes are all based on holding a specific AA with rebalancing. I think, in reality, few folks actually do this. For example, currently many folks are posting changes to their AA due to current economic conditions. Once you do that, you can be assured your back-testing no longer holds. You may have improved things. You may have made things worse. But you absolutely changed the parameters on which the back-testing was done.

Another issue would be the composition of the fixed portion of our AA. I check the 5 year treasury box in FireCalc. But, I don't a single 5 year treasury! I own a mix of funds, TIPS, CD's, MM's, etc.

If it turns out that if whatever you hold in your FIRE portfolio performs differently than what you said you had when setting up FireCalc (or any other tool based on history), then your results are inaccurate. You might turn out better. You might turn out worse. But it will be different.

Just other reasons to be conservative.
Agree, plus it was always meant to be a guidance, not an actual WR%. I don't know one person who strictly uses this concept.
However when calculating am I good to go for retirement, it is one historical source which can assist in the decision making process.
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Old 07-17-2020, 05:47 PM   #24
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I put together a graph of historical 30 year 60/40 SWRs vs the P/E 10 for the S&P 500 (a measure of how pricey the market is). The data is from a portfolio that has small cap and international stocks, so its lowest historical SWR was 4.5%. At a P/E 10 of 30 (about what it is today), it suggests a SWR of 4.05, with a 50% chance of success. If you want an 84% chance of success, the SWR drops to 3.3%. There is reason to believe that even this withdrawal rate is too high because we have an aging population and slowing growth rate in the US, which indicates we will have slowing increases in GDP going forward. The bogleheads seem to be correct: a 3% fixed withdrawal rate seems to be reasonable for a 30 year retirement with fixed withdrawals.
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Old 07-17-2020, 06:37 PM   #25
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I put together a graph of historical 30 year 60/40 SWRs vs the P/E 10 for the S&P 500 (a measure of how pricey the market is). The data is from a portfolio that has small cap and international stocks, so its lowest historical SWR was 4.5%. At a P/E 10 of 30 (about what it is today), it suggests a SWR of 4.05, with a 50% chance of success. If you want an 84% chance of success, the SWR drops to 3.3%. There is reason to believe that even this withdrawal rate is too high because we have an aging population and slowing growth rate in the US, which indicates we will have slowing increases in GDP going forward. The bogleheads seem to be correct: a 3% fixed withdrawal rate seems to be reasonable for a 30 year retirement with fixed withdrawals.
Itís true that those historical returns are for the USA market which was expanding dramatically due to demographics. The question is, are there other markets, elsewhere in the world, that might grow more quickly than the USA, because they have a younger demographic?

Personally, Iíve invested into some global equity index funds, under the thought that just because the USA has been so good in the past, doesn't mean it will be so good in the future. But, so far, these global funds havenít performed that well.
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Old 07-17-2020, 07:16 PM   #26
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Itís true that those historical returns are for the USA market which was expanding dramatically due to demographics. The question is, are there other markets, elsewhere in the world, that might grow more quickly than the USA, because they have a younger demographic?

Personally, Iíve invested into some global equity index funds, under the thought that just because the USA has been so good in the past, doesn't mean it will be so good in the future. But, so far, these global funds havenít performed that well.
Yup, that is a never ending concept of how much of equity allocation towards International.
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Old 07-17-2020, 08:08 PM   #27
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Itís true that those historical returns are for the USA market which was expanding dramatically due to demographics. The question is, are there other markets, elsewhere in the world, that might grow more quickly than the USA, because they have a younger demographic?

Personally, Iíve invested into some global equity index funds, under the thought that just because the USA has been so good in the past, doesn't mean it will be so good in the future. But, so far, these global funds havenít performed that well.

Itís a good question. Birth rates are going down all over the world, even in places we once thought of as growing quickly. There are some countries with higher birth rates, mainly in Africa and Southeast Asia, but they tend to be in places where economic growth is uncertain due to a variety of reasons. Perhaps emerging market stocks will do well.
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Old 07-18-2020, 06:25 AM   #28
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What has happened in the past may not be predictive of what will happen in the future.

I'm not saying the 4% rule of thumb is dead; however, both equities and bonds are very expensive right now. It's not unreasonable to expect returns to be muted for the next 10 years.
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Old 07-18-2020, 07:10 AM   #29
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I put together a graph of historical 30 year 60/40 SWRs vs the P/E 10 for the S&P 500 (a measure of how pricey the market is). The data is from a portfolio that has small cap and international stocks, so its lowest historical SWR was 4.5%. At a P/E 10 of 30 (about what it is today), it suggests a SWR of 4.05, with a 50% chance of success. If you want an 84% chance of success, the SWR drops to 3.3%. There is reason to believe that even this withdrawal rate is too high because we have an aging population and slowing growth rate in the US, which indicates we will have slowing increases in GDP going forward. The bogleheads seem to be correct: a 3% fixed withdrawal rate seems to be reasonable for a 30 year retirement with fixed withdrawals.


What was the interest rate on your 40%? Most of the 70ís, the CD interest rate was 2X your SWR. Who in their right mind would not adjust holdings when guaranteed money is more than withdrawal rates.
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Old 07-18-2020, 08:32 AM   #30
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I read a article by Wade Pfau that made the point that there was a SWR and OWR (optimal withdrawal rate) . His data showed the OWR would be 7% if the retiree had a stable income source of a pension or SS.

I have a family member that has had 7% withdrawal rate for over 30 years.
Iím not saying that is repeatable going forward but it gives me something to ponder.
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Old 07-18-2020, 08:46 AM   #31
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Bank failures, 25% unemployment, no social security, and a world war?
Things are never as bad (or as good) as we think.
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I tend to agree with this article. Look at at graph in it that shows all years.

We are now economically/politicly in the middle of 1930s-1940s. SWR is 2%-3% (less if you are under 60)
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Old 07-18-2020, 08:51 AM   #32
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... I have a family member that has had 7% withdrawal rate for over 30 years.

I’m not saying that is repeatable going forward but it gives me something to ponder.
No need to ponder much, it's right there in the graphs. Some people could retire on a 7%, 8%, even 9% WR. It works many times. But you won't know that until it is too late. The lower SWR is planning for the bad cases, which is what most of want/need to do.

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I read a article by Wade Pfau that made the point that there was a SWR and OWR (optimal withdrawal rate) . His data showed the OWR would be 7% if the retiree had a stable income source of a pension or SS. ...
I don't see the sense in that. The math on the portfolio is independent of outside income. Unless you are talking about a variable WR that falls back on SS/pension in bad years? Something's missing.

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Old 07-18-2020, 09:08 AM   #33
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Bank failures, 25% unemployment, no social security, and a world war?
Things are never as bad (or as good) as we think.
That's why WR is a personal decision. Some people are more than fine with a 95% probability of success based on past history (which BTW includes WW's, depressions & recessions, etc.) AND adjusting over the course of retirement. And some people want a virtual guarantee of a portfolio that will survive anything short of an apocalypse. Most of us probably fall somewhere in between. There's no reason to expect what works for one will work for all.

SWR is just a benchmark, it was never intended as a hard and fast withdrawal strategy. Unless you can see the future precisely, you have to choose what you're comfortable with.
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Old 07-18-2020, 09:13 AM   #34
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No need to ponder much, it's right there in the graphs. Some people could retire on a 7%, 8%, even 9% WR. It works many times. But you won't know that until it is too late. The lower SWR is planning for the bad cases, which is what most of want/need to do.

Some people win by betting #17 in roulette.




I don't see the sense in that. The math on the portfolio is independent of outside income. Unless you are talking about a variable WR that falls back on SS/pension in bad years? Something's missing.

-ERD50


Thatís exactly what The data suggests, a variable WR, and then fall back to pension during during bad times (2001 or 2008) then return to OWR. My mother does this instinctively.
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Old 07-18-2020, 09:24 AM   #35
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Thatís exactly what The data suggests, a variable WR, and then fall back to pension during during bad times (2001 or 2008) then return to OWR. My mother does this instinctively.
OK, but then it's not a 7% (or whatever) WR. Maybe on average, but it's not apples-apples. Context is important.

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Old 07-18-2020, 09:45 AM   #36
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What if your COLA income @ 71 covers all expenses? Would it be ok to use a more aggressive WR from 55 to 70? My plan has 8% from 55-70 and 0% from 71 on.
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Old 07-18-2020, 09:53 AM   #37
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What if your COLA income @ 71 covers all expenses? Would it be ok to use a more aggressive WR from 55 to 70? My plan has 8% from 55-70 and 0% from 71 on.
Of course all else equal. There's no way we can evaluate your 8% then 0% WR plan without the portfolio and spending inputs (not asking you to share). Enter your numbers in FIRECALC with a 15 year duration if you are certain you won't need anything from your portfolio after age 71. Solve for spending level on the Investigate tab, and there's your pre-71 $ spending and SWR.
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SWR and Glide Paths (regular and reverse)
Old 07-18-2020, 09:53 AM   #38
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SWR and Glide Paths (regular and reverse)

As was previously stated in an earlier reply, the SWR calculations shown in the OP's chart assume a constant 60-40 AA and will provide misleading results if the individual changes their AA based on market conditions or other factors.

However, many if not most retirees take a different approach, namely increasing their percentage in fixed income investments as they get older.

Some folks (including myself) are taking the opposite approach called a 'reverse glide path' in which they let their allocation to stocks increase as they age. The thinking is that as you age, your exposure to sequence of returns risk diminishes and you can 'afford' to take more risk in other areas such as AA.

However, I'm not really familiar with rigorous published analyses that show how the regular or reverse glide path approaches affect SWR with clear charts documenting the comparisons. Anyone have anything on this?

Thanks in advance!
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Old 07-18-2020, 09:55 AM   #39
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Iím no expert on early retirement as Iíve only been doing it a short time but I think itís my nature to spend more during flush times and less during lean. I probably will be more likely to spend even more freely when my pension/SS begins.

I have to encourage my mother to spend money on things that would add value to her life. She has a very low cost of living and at her age has very few wants.
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Old 07-18-2020, 10:02 AM   #40
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OK, but then it's not a 7% (or whatever) WR. Maybe on average, but it's not apples-apples. Context is important.

-ERD50
Agree.
7% WR was the general thinking before Bengen came along and introduced effectively the concept of sequence of returns risk into the formula.
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