when to reset SWR basis

[Major Tom]

If one is repeatedly re-calibrating the 4% rate would they not also have to shorten their survival horizon? If I am 8 years into ER and due to goodie-good-goodie returns leading to a fatter than expected bank account, now I only have to worry about it lasting 22 more years, not thirty. You are always burning the candle from one end but not always from the other end.

In theory, yes. At this point, I think I'm probably going to live about another 30 years (I'm 54). Trouble is, I've a feeling I'll still be thinking that in 10 years from now

 

[RunningBum]

Exactly. The 4% rule doesn't give a hoot if the owner is retiring for the first time or is ratcheting after being retired for a while.

True. But it does care if you retire or ratchet up into a bear market, which often follows a big market run-up.

Having a shortened life span from when you first retired certainly is a positive factor.

 

[REWahoo]

Having a shortened life span from when you first retired certainly is a positive factor.

As someone in that position, I don't necessarily see it that way.

 

[RunningBum]

As someone in that position, I don't necessarily see it that way.

Hey, every day you get out of bed is a win, right?

 

[USGrant1962]

Yes. In theory you can reset your SWR to take advantage of higher portfolio values. John Greaney, at Retire early home page, explains the process in this article, The Payout Period Reset Method. He argues that the 4% SWR still holds, but on average you will decrease your terminal portfolio value compared to the original model.

And, if you think about it, this has to be true. Otherwise someone retiring today with your same current portfolio value would not be able to use the 4% rule.

There is quite a bit of effort in financial research to determine how to squeeze out all the excess money for the vast majority of cases where 4% is too low. Michael McClung uses mathematical constructs like Harvesting Ratio and Withdrawal Efficiency Rate to analyze different withdrawal strategies in his book "Living Off Your Money". He analyzes fixed percent withdrawals, the 95% rule, decision rules, floor/ceiling, mortality-based rules, etc.

His bottom line is that the variable methods that incorporate mortality tables work best. Those are all more complicated than a 4% rule. BTW, I don't believe that he analyzes Bogleheads VWP directly.

 

[Chuckanut]

FWIW, I run my numbers through a Guyton-Klinger spreadsheet for use as a guideline to what I can withdraw. The SS implements a number of GK rules. The idea is to generally increase spending by the inflation rate, but when the market is very good, increase spending a bit more to enjoy the prosperity. And, if things go bad, reduce spending a bit so as to ensure capital preservation in the portfolio. It will slowly ratchet spending up and down in sustained good and bad times. The idea is to smooth out the withdrawals over the long run, rather than to have them swing up and down based upon just a year or two of good or bad returns.

So, far, despite the great market, the GK rules tell me to simply increase my withdrawal amount by inflation. It seems to be telling me "Keep the same inflation adjusted spending for now, and stash the rest of the gain to buffer a future downturn". However, another good year like 2017 (good market and relatively low inflation) and the prosperity rule may kick in.

Keep in mind that I use it as a guideline, not an absolute rule I must follow or risk financial ruin or sustained under-spending. This method has its limits.

https://finalytiq.co.uk/guyton-klinger-sustainable-withdrawal-rules/

A good discussion of the limits of the GK rules:

https://howmuchcaniaffordtospendinr...2015/04/revisiting-guyton-decision-rules.html

 

[audreyh1]

Yeah, I’m taking a fixed percent of the Dec 31 value each January.

I didn’t want to adjust by inflation, and if my portfolio increased a lot I wanted to increase income.

I also felt more secure letting my income decrease after a bad market year. We have a lot of discretionary spending so we have the flexibility to reduce spending if needed.

In the last few years the portfolio has increased a lot, and I keep taking the same percent out even though I don’t spend it all as the portfolio growth has way exceeded my spending growth. I never know when we’re going to hit a bad year which will reduce my income. Things can go “poof”.

I’ve been pretty happy with this approach.

As we age I might start increasing the withdrawal rate. There are several possible approaches.

Like pb4uski I don’t want to leave a huge portfolio behind.

 

[pb4uski]

True. But it does care if you retire or ratchet up into a bear market, which often follows a big market run-up.

Having a shortened life span from when you first retired certainly is a positive factor.

True, but the 4% rule by definition succeeds for all sequence of returns other than the worst 5%... so I like the odds.

Besides, the increase would most likely be spent on splurges (like travel) rather than things that irrevocably increase our spending base (like another home or a grander home).

 

[Danmar]

Would VPW be more appropriate for your financial situation and preferences than a flat SWR?

I would think so. But given the market over the last 9 years coupled with a well funded starting position, who wouldn’t be?

 

[RunningBum]

True, but the 4% rule by definition succeeds for all sequence of returns other than the worst 5%... so I like the odds.

Besides, the increase would most likely be spent on splurges (like travel) rather than things that irrevocably increase our spending base (like another home or a grander home).

Yeah, I just feel like the 95% success is with a random starting point. If you choose to start it as a market high (which we may or may not be, but certainly are more likely than average to be at right now), I suspect there may be more failure cases, or more than 5% chance of failure.

I get the point about the increase may be spent on extras, though some people get used to those pretty quickly, and may not react quickly enough to a downturn.

I still feel like VPW is the way to go to react to up or down markets, but I understand that different methods make sense to different people.

 

[big-papa]

The 4% rule is based on a 30 year retirement. If 10 years into it you reset your basis, unless you've found some magical elixir that still lets you live 30 years, then 4% no longer applies.

Here's a systematic way to increase your withdrawals if things are looking rosy, if you're a 4%-rule fan (I'm not - prefer VPW from bogleheads).

https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/

 

[big-papa]

Yeah, I just feel like the 95% success is with a random starting point. If you choose to start it as a market high (which we may or may not be, but certainly are more likely than average to be at right now), I suspect there may be more failure cases, or more than 5% chance of failure.

I get the point about the increase may be spent on extras, though some people get used to those pretty quickly, and may not react quickly enough to a downturn.

I still feel like VPW is the way to go to react to up or down markets, but I understand that different methods make sense to different people.

The 4% rule comes from backtesting 30 year rolling starting dates and choosing the worst case starting year in history - which turns out to be the late 1960's due to inflation increasing, along with some bear markets. All other starting years in history were better than that - meaning that in all other cases, you would have died with money left over, often quite a lot.

Today, we have high market valuations and low interest rates - is that as bad as the situation starting in the late 1960's? No way to know before hand.

 

[DawgMan]

I'm 2 years from RE so cannot speak from experience yet, but I can't say I have heard any horror stories from any of you who have been retired for 10+ years and made it through a market correction (or 2)?? If anything, your portfolio balances have grown. So after taking in all the vast experience of many on this site, here is the plan I think I will run with...

- Using the 4% as my initial SWR based on my "desired" budget which will be fat with discretionary spending (no pensions, all me)
- Have 3 basic budgets... 1) desired budget as noted above (4% SWR), 2) all my basic expenses are covered with still some goodies (+/- 3% - 3.5% SWR), 3) SHTF budget (<3% SWR)
- Use common sense and stay flexible
- Aside from potential later life medical need costs, I sort of buy into spend more sooner while healthy (maybe higher SWR now if desired) than later. My personal experience watching those in their 70s + is often spending goes down. I have not heard of many on this site actually employing this strategy, but just something in theory I am kicking around.
- Probably stay a total return investor with my 60/40 AA long term, but can see some merit in the dividend & bucket strategies.


I have come to the opinion that while all of these calculators are great, its easy to analysis paralysis yourself into OMY mode. At some point, you just jump into the pool and start swimming! I just hope I am not the kid who holds onto the side!

 

[kcowan]

Our lawyer is innumerate and he said: "Take your stash and divide by the number of years you expect to live. Spend no more than that amount every year on average." So I am thinking we could live for 40 more years.

 

[GrayHare]

Here's a systematic way to increase your withdrawals if things are looking rosy, if you're a 4%-rule fan (I'm not - prefer VPW from bogleheads).

https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/

Excellent link, thanks. Kitces does an great job explaining the Ratcheting 4% Rule.

 

[flyingaway]

I think withdrawal 4% of the current balance takes care of the up and down factor of the portfolio.

 

[dallas27]

If I’m ever in OPs situation, I wouldnt snap back to 4%, I would instead set a floor of 2% of assets and keep adjusting as my assets grew. Why 2% ? Because if the market dropped 50% i would only be withdrawing 4% in that situation and that seems like a reasonable strategy on its face to keep increasing spending while being very safe.

 

[Independent]

I would think so. But given the market over the last 9 years coupled with a well funded starting position, who wouldn’t be?

Yes, if I retired 9 years ago, and followed VPW while the market went up sharply, then I would have spent more in those 9 years by following VPW vs. SWR, and I would still have enough today to weather future storms.

But, if the market had gone down sharply, VPW would tell me to cut my spending (almost) proportionately. That's fine for many of the people here. They figure they've got that much "fun" spending in their budgets that they will be quick to cut.

SWR is for people who don't want to cut spending just because the market goes down. They have to start more conservatively to make that work.

 

[Independent]

Yes. In theory you can reset your SWR to take advantage of higher portfolio values. John Greaney, at Retire early home page, explains the process in this article, The Payout Period Reset Method. He argues that the 4% SWR still holds, but on average you will decrease your terminal portfolio value compared to the original model.

And, if you think about it, this has to be true. Otherwise someone retiring today with your same current portfolio value would not be able to use the 4% rule.

Exactly. The 4% rule doesn't give a hoot if the owner is retiring for the first time or is ratcheting after being retired for a while.

Note that Greaney starts with a payout rate that he considers 100% safe. In his case, he can ratchet to another 100% safe payout without generating new potential failures.*

The "4% SWR" that gets thrown around here usually means a 95% success rate.
If you don't ratchet up with good early performance, you move your 95% success to 100% success.
If you do ratchet up, you give up your 100% success and go back to 95% success.

I'm not saying that one is better for everyone than the other. I'm saying that the decision to ratchet up is not "free", it involves trading away something of value.


* This assumes, of course, that there is such a thing as a 100% safe withdrawal rate.

 

[marko]

Theoretically, yes, but that seems to be asking to set yourself up for a failure scenario where you start a sequence at a market high and hit a bad sequence of returns.

This is what I understand even though I do readjust just a bit every few years.

Seems to me the 4% portfolio is supposed to get fat in fat times and you live off of that in lean times when you 'should' have a WR of 2%.

I'm eager to learn more from this thread however.

 

[audreyh1]

I agree that the traditional 4% SWR, increasing each year with inflation, is for folks who feel they must have a steady income, and certainly don’t want to deal with drops in income. As such it is super conservative for most scenarios.

 

[dallas27]

The "4% SWR" that gets thrown around here usually means a 95% success rate.

If you don't ratchet up with good early performance, you move your 95% success to 100% success.

If you do ratchet up, you give up your 100% success and go back to 95% success.

I disagree with this bit, you are not resetting to 95% chance, you are resetting to something less than 95%.


Why? because you are resetting in a only a certain direction, upward, which is not leaving you with random behavior. If you reset infinitely with this method, you will be guaranteed to reach the failing 5% level over time.

This is somewhat like drawing an ace from a deck of cards. 4 in 52. If you don’t put the card back in the deck, your chances have changed and you have changed them.

 

[REWahoo]

I disagree with this bit, you are not resetting to 95% chance, you are resetting to something less than 95%.

Why? because you are resetting in a only a certain direction, upward, which is not leaving you with random behavior. If you reset infinitely with this method, you will be guaranteed to reach the failing 5% level over time.

This is somewhat like drawing an ace from a deck of cards. 4 in 52. If you don’t put the card back in the deck, your chances have changed and you have changed them.

[-]Isn't this true only if you do not take into account you are now using a survival target of less than the original 30 years?[/-]

^ After thinking about it, I disagree with myself. The reset doesn't change the odds. The odds are 95% because you are using historical market returns and those returns don't change simply because you made your first withdrawal from your retirement stash. Example:

I have $1M, run FIRECalc and it says I can withdraw $40,000. If, a year later my portfolio has grown, I have $1.1M and run FIRECalc, it says I can withdraw $44,000.

How is this any different from my friend Bill who retired a year later than I did with $1.1M? FIRECalc says he can withdraw $44,000 so why should I be limited to $40,000 plus inflation?

 

[REWahoo]

Seems to me the 4% portfolio is supposed to get fat in fat times and you live off of that in lean times when you 'should' have a WR of 2%.

Then how do you explain all those runs in FIRECalc that never get fat yet survive?

 

[pb4uski]

I agree with you REWahoo. Let's say that I retire at 60 with a 30 year time horizon and use a 4% WR... my risk of failure is 5%. Then 3 years later... I reset/ratchet to 4% of my then higher portfolio.... at that point my risk of failure is less than 5% because my time horizon is only 27 years... so the failure rate might be something like 4.5% or something like that, but it would be less than 5%.

I'm guessing that one could probably "prove" this with Firecalc if one cared enough to bother to do so.