SWR failures from history

[Dtail]

It’s 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, I’ve 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 haven’t performed that well.

Yup, that is a never ending concept of how much of equity allocation towards International.

 

[Navigator]

It’s 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, I’ve 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 haven’t performed that well.

It’s 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.

 

[mrfeh]

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.

 

[thepalmersinking]

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 70’s, 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.

 

[Olbidness]

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.
I’m not saying that is repeatable going forward but it gives me something to ponder.

 

[GravitySucks]

Bank failures, 25% unemployment, no social security, and a world war?
Things are never as bad (or as good) as we think.

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)

 

[ERD50]

... 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.

Some people win by betting #17 in roulette.

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.

-ERD50

 

[Midpack]

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.

 

[Olbidness]

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

That’s 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.

 

[ERD50]

That’s 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.

-ERD50

 

[corn18]

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.

 

[Midpack]

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.

 

[jeroly]

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!

 

[Olbidness]

I’m no expert on early retirement as I’ve only been doing it a short time but I think it’s 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.

 

[Dtail]

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.

 

[Sunset]

That’s 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.

If a person can survive on a pension or SS, then really their withdrawal rate can be nearly anything, example 20%, and when savings get too low, just live on pension until savings are back up.

Far different from someone without a pension and not on SS.

 

[flyingaway]

Reading Kitces' original article makes me think that I should have retired yesterday.

 

[Midpack]

If a person can survive on a pension or SS, then really their withdrawal rate can be nearly anything, example 20%, and when savings get too low, just live on pension until savings are back up.

Far different from someone without a pension and not on SS.

Some readers don’t recognize the difference between FIRE and SIRE (and anywhere between) - very different circumstances...

 

[Perryinva]

Also, dying with $1 left is a “success”. Is it though?

 

[jimbee]

Also, dying with $1 left is a “success”. Is it though?

It can be, but it depends on your goals.

 

[Aramis]

Does this say to you that no one below 5% SWR failed?

I can count 13 clear failures below the 5% line.

There are 0 failures below the 4% line

 

[Navigator]

What was the interest rate on your 40%? Most of the 70’s, 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.

The figures I use are real returns, so inflation is taken out of the picture.

 

[corn18]

The figures I use are real returns, so inflation is taken out of the picture.

I do the same thing, but I was frustrated when I ran my data through Firecalc. I use real returns in my model (2%) and there is no input for inflation. My pension is COLA'd so this works great. But when I run Firecalc with my numbers, inflation has a huge impact because of the way Firecalc uses inflation. The returns on my portfolio don't change in Firecalc if I change inflation. This makes sense because Firecalc uses nominal return and simply subtracts inflation from the returns. This has the effect of reducing probability of success for me even though I have supposedly have no inflation risk.

This really got me thinking about my model and using real returns with no inflation input. So I did some research on returns vs. inflation. What I found was the market does not do well during inflationary periods. So the way Firecalc models it seems to reflect reality. But then I look at my model and it does not. The fix I put in was to add an inflation input and then drop my real returns as inflation goes up. Right now I drop the real returns 0.25% for every 1% of inflation. This is completely counterintuitive, but I felt I needed a way to account for inflation and the reality of what the market does during inflationary periods. Maybe not the best solution, but it works for planning.

Inflation does have a huge impact in my model if I carry a mortgage into retirement. My 2.75% mortgage is basically free money if inflation is 2.75%. That's one of the big reasons I am seriously considering keeping the mortgage for a full 30 years. If inflation goes above 2.75%, I am making money on my mortgage. And if I get 2% real return on my portfolio with 2.75% inflation, the NPV of my mortgage is less than the mortgage balance. We'll see how long I hold onto that, though. Best laid plans and all.

 

[Koolau]

Probably important to have this discussion every year or so. Still, I always come back to the "4% rule" (or its more rigorous treatment) as STRICTLY a planning tool. To me it is (was) a "goal" that said, "Okay, you can stop worrying and retire now." I never considered "living" the 4% or SWR life. Never did anything other than a backwards glance to say (for instance) Hey, I spent 3.8% last year.

Once you retire, you aren't going to slavishly spend according to the "plan" you made 5 or 10 years ago. You're going to spend according to your current situation. The 4% rule got you here, now you will adjust as needed to avoid the dreaded return to w*rk.

Not saying we shouldn't discuss this. Not saying that at all. Just sayin' the "rule" is for planning retirement, not for actually living retirement. As always, YMMV.

 

[compounder]

Caveat that this ama is a few years old now, but I found it to be a valuable thread with lots of interesting questions and answers. I learned a lot that I did not know.

https://www.reddit.com/r/financiali..._bill_bengen_and_i_first_proposed_the_4_safe/

The first reply is that Bengen states that he later found out that it should actually have been a SWR of 4.5% vs. the 4% he initially reported. For someone with longer retirement plans over the traditional 25-30 years he offers alternative SWR rates.

I was shocked that he felt one could live in perpetuity on a 4% w/d rate.

He does also point out what his research indicated is the sweet spot of an AA to maximize the SWR. This which was 45-55% equities and the remainder in bonds/cash ("According to my research, I would have a well-diversified portfolio with probably 50% equities, 40% fixed-income, and 10% cash")