Upside of SORR

[USGrant1962]

Kitces, with his usual optimism, has posted a great discussion of the upside of SORR.

https://www.kitces.com/blog/url-ups...eturn-risk-in-retirement-median-final-wealth/

He demonstrates that the 30-year annualized return is not highly correlated with the SWR. Cases with up to 9.5% 30-year returns and 5.5% 30-year returns were able to sustain the 4% SWR regardless of SORR. So IMO all the gnashing of teeth regarding current valuations/interest rates is probably noise. He notes that:

By contrast, while the retiree has only a 10% chance of finishing with less than 100% of their starting principal, they have an equally likely chance of finishing with more than 6X their starting principal as well! In other words, the retiree who starts out with $1M in a portfolio at a 4% initial withdrawal rate is equally likely to finish with less than $1M, or more than $6M, after 30 years! And just as the portfolio winds down to $0 in the one worst scenario… it also finishes at more than $9M in the one best historical scenario!

He goes on to suggest dynamic spending rules to mitigate SORR risk, a suggestion that many here would endorse.

But overall, this article is an antidote to the pessimism I see regarding Early Retirement. That pessimism is occasional here, but endemic on bogleheads.org. Most of us will end up with multiples of our ER portfolio for our heirs.

There is a really good rationale for the 4% rule. And if you want to be conservative use the 3.8% rule (100% success in 30 years). For 40 years (typical ER planning) 3.5% might make sense, if you are pessimistic enough to ignore SS. But we should leave the 2% and 2.5% and 3% SWR nonsense to the Bogleheads*.

We are early-retirement.org!


* I love John Bogle, may he rest in peace.

 

[pb4uski]

Great point.... as much as we fret about eating cat food in our old age because SORR torpedoed out retirement financing, it is much more likely than not that we will retire with a lot.... just look at a FIRECalc output graph.

 

[audreyh1]

There is a really good rationale for the 4% rule. And if you want to be conservative use the 3.8% rule (100% success in 30 years). For 40 years (typical ER planning) 3.5% might make sense, if you are pessimistic enough to ignore SS. But we should leave the 2% and 2.5% and 3% SWR nonsense to the Bogleheads*.

We are early-retirement.org!


* I love John Bogle, may he rest in peace.

Hear hear!!

 

[RobbieB]

Told ya!

Don't worry, be happy -

 

[samclem]

From the Kitces article, edits are mine:

After all, at a 4% initial withdrawal rate, the odds of nearly depleting the portfolio [-]are[/-] have historically been equal to the odds of growing it by more than 800%(!), and even at a 5% withdrawal rate, the odds of depleting the portfolio early [-]are[/-] have historically been equal to the odds of tripling the retiree’s starting principal on top of taking an initial withdrawal rate of 5% with 30 years of annual inflation adjustments.

Michael, that's a rear-view mirror, not a windshield. It's all we've got, but let's keep reminding ourselves just the same.

Yep, it's been a good run. We're looking back at the world's most successful national economy over a period of tremendous growth. Perhaps it will continue. If not, the dynamic spending (withdrawal) rules Kitces mentions, along with many other variations of them that people use, might prove very useful. Spend that dough if fortune continues to smile on our investments, but be ready to tighten the belt if we hit a rough patch--maybe for decades.

 

[brucethebroker]

Interesting read. thanx.

 

[DrRoy]

The problem that I have with these analyses is that they assume that future returns will look like the past. Stock returns are driven by earnings growth. The drivers of that growth are set up to be weaker than over past decades. Interest rates are historically low. Bonds cannot provide the returns that they used to from that starting point.

 

[foxfirev5]

React, adapt and proceed. Exactly what most of us have been doing for decades. I never looked at SWR percentages or myriad of formulas out there while working. Just save and invest until it hurts. Now I just take what my portfolio gives me and find its more than enough. If it's ever not enough I'll do something else.

 

[Col. Klink]

Good read, thanks. The chances of increasing wealth is that if you have a diversified basket of stocks and bonds, the majority of the businesses within the basket will grow over time and the majority will also be able to pay the coupon on the bond. Businesses want to stay in business and grow by the very nature of capitalism. As shareholders and bondholders we profit and FIRE.

 

[kgtest]

Good read, thanks. The chances of increasing wealth is that if you have a diversified basket of stocks and bonds, the majority of the businesses within the basket will grow over time and the majority will also be able to pay the coupon on the bond. Businesses want to stay in business and grow by the very nature of capitalism. As shareholders and bondholders we profit and FIRE.

+1 This is my longview as well. Shareholders speak with there purchases, and sales. Money talks, BS walks.

 

[Spock]

Meh. The article assumes a lot... historical return vs inflation rates, how much buffer one had when they retired, etc.
A fat fire won't notice SORR. A lean fire, where the 4% rate is just covering essential expenses with no room to cut most definitely will be damaged by a bad SORR event.

Most of us got here by LBYM. Some of us lean fires will have to continue to LBYM to stay here and not have to sell pens on the street corner.

 

[marko]

I wonder if this also reinforces the position that cutting back a bit during down times really doesn't change the long range result by any dramatic fashion?

Dying with $2MM or $6MM doesn't make much difference.

 

[haha]

Great point.... as much as we fret about eating cat food in our old age because SORR torpedoed out retirement financing, it is much more likely than not that we will retire with a lot.... just look at a FIRECalc output graph.

Perhaps the role of internet discussion boards is to augment fretting?

Ha

 

[audreyh1]

The problem that I have with these analyses is that they assume that future returns will look like the past. Stock returns are driven by earnings growth. The drivers of that growth are set up to be weaker than over past decades. Interest rates are historically low. Bonds cannot provide the returns that they used to from that starting point.

Weaker than 100 years ago? It's not just a few past decades that are included in these historical models.

 

[GravitySucks]

But overall, this article is an antidote to the pessimism I see regarding Early Retirement. That pessimism is occasional here, but endemic on bogleheads.org. Most of us will end up with multiples of our ER portfolio for our heirs.

There is a really good rationale for the 4% rule. And if you want to be conservative use the 3.8% rule (100% success in 30 years). For 40 years (typical ER planning) 3.5% might make sense, if you are pessimistic enough to ignore SS. But we should leave the 2% and 2.5% and 3% SWR nonsense to the Bogleheads*.

We are early-retirement.org!


* I love John Bogle, may he rest in peace.

Thanks for the link. Always enjoy Kitces work.

E-R.org is a bunch of optimists? Maybe as in we better stay under 4% because we may live forever sense, but I don't see it as an optimistic group regarding high WR for hedonism sake. (Afraid I include myself.) Explains why I never much enjoyed the Bogleheads site though.

 

[RobbieB]

I live for hedonism!

 

[Cut-Throat]

He goes on to suggest dynamic spending rules to mitigate SORR risk, a suggestion that many here would endorse.

Once I studied VPW, I no longer had to 're-think' my Withdrawal Plan...



Also, this article by Kitces was one of my favorites to put things in perspective.


https://www.kitces.com/blog/What-Returns-Are-Safe-Withdrawal-Rates-REALLY-Based-Upon/

 

[marko]

Once I studied VPW, I no longer had to 're-think' my Withdrawal Plan...



Also, this article by Kitces was one of my favorites to put things in perspective.


https://www.kitces.com/blog/What-Returns-Are-Safe-Withdrawal-Rates-REALLY-Based-Upon/

A good article but it was written in 2012 and starts out with:
As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future.... Hmmmm.

 

[audreyh1]

A good article but it was written in 2012 and starts out with:
As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future.... Hmmmm.

That was a very dominant attitude back then. It was good for Kitces to point out recency bias and that history already included low growth periods.

Read the entire executive summary:

As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn’t that imply safe withdrawal rates must be below average as well? In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today’s retirees will result in a “new record low” safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000! On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!

 

[Dawg52]

I could easily step up spending based on all these studies but the old fear of the unknown still lingers. Don't know what I would blow it on anyway. Perfectly happy as is......

 

[FREE866]

Interesting. Does Kitces have numbers that are NOT based on 60/40?

 

[USGrant1962]

Interesting. Does Kitces have numbers that are NOT based on 60/40?

Most of his stuff seems to be centered on 60/40, so no. But FIRECalc does!