Article on safe withdrawal rates

[Dwhit]

As a relative newb to the FIRE subject, I ran across this article on safe withdrawal rates. I thought it was a good base explanation, with some interesting ideas on top of the basics. I had not seen anything on using the PE ratio to help pick a SWR, but this made some sense.

Do most FIRE 'ers use a set withdrawal rate, or do you tend to vary each year depending on how your savings grow for the year?

http://www.kitces.com/assets/pdfs/Kitces_Report_May_2008.pdf

 

[Tyro]

Do most FIRE 'ers use a set withdrawal rate, or do you tend to vary each year depending on how your savings grow for the year?

As a noob myself, I haven't seen much consensus on this perennial topic. Maybe that's a good thing(?)

Tyro

 

[Midpack]

I suspect there are almost as many withdrawal strategies as there are members here, and many that will work in the long run. However, I doubt there are many people who blindly follow the 4% withdrawal methodology, and the various authors really weren't recommending it. 4% SWR was/is a statistical benchmark or rule of thumb, not an absolute recommendation - by definition 4% was conservative historically (95% chance you'd have money left). What the future brings is for each of us to contemplate and act on.

As FIRECALC results show, the range of outcomes is considerable (example below). If you're fortunate, you will find as your retirement proceeds you'll have to spend (or leave) more - a nice problem to have. If your timing proves to be 'unlucky,' you'll be faced with a decision to reduce spending or more risk you could run out of money later in life. Most people probably rerun FIRECALC (or an equivalent) periodically and adjust accordingly throughout retirement.

As you might suspect, your question is often discussed here, lots of discussion already posted that might interest you, hopefully some you'll be comfortable with, best of luck...http://www.early-retirement.org/forums/search.php?searchid=2398703

 

[W2R]

As a relative newb to the FIRE subject, I ran across this article on safe withdrawal rates. I thought it was a good base explanation, with some interesting ideas on top of the basics. I had not seen anything on using the PE ratio to help pick a SWR, but this made some sense.

Do most FIRE 'ers use a set withdrawal rate, or do you tend to vary each year depending on how your savings grow for the year?

http://www.kitces.com/assets/pdfs/Kitces_Report_May_2008.pdf

Personally, I have a set withdrawal rate that I compute based on my portfolio size each December 31st. This is different from the standard method of increasing according to inflation each year. If I spend less than 3.5% of my Dec.31st portfolio size during the year, I return it at the end of the year. Or, you might say that I have a flexible, but capped, withdrawal rate. My spending does vary, and I found that I spent less during 2008-2009, for example.

Overall I am somewhat of a security junkie and spending quite a bit less than what FIRECalc would have me spending, makes me very blissfully happy.

 

[rescueme]

Do most FIRE 'ers use a set withdrawal rate, or do you tend to vary each year depending on how your savings grow for the year?

For my situation, I do not base my increasing withdrawls based upon my growth of retirement assets, but rather based upon my PROI (Personal Rate of Inflation).

As my expenses go up each year (as they have in the last 5+ years of retirement), I'll increase my monthly withdrawl, as required in order to cover the increasing expenses.

My total retirement assets have slightly grown from the original amount I had invested on the first day of my retirement, even though I do not have a pension (made my own, with the purchase of an SPIA) and will not be drawing SS till age 70 (just over 5 years from today).

Any investment gain for the year (over expenses) stays invested. That dosen't mean I don't harvest gains as they occur to add to my cash bucket (for current expenses, and to protect myself from a down market), but I don't pull profits just for the sake of doing so.

Just what I do, since you asked...

 

[Loving Life]

OK, since I am in the writing mood – long time reader, my 1st and 2nd posts today.

I have been fired for about 5 years. First 2 years I was very, very careful to think abount what I spent in reference to the SWR and I checks balances on a weekly basis – now, I do not worry about it - spending about 4 to 5 percent depending on the activities and/or years. Here is what I ended up doing --

I created 2 buckets

1 -- Current cash/ST bonds - funding for 10 years of 4% Withdrawls (about 600K)

2. -- Long term assets - (MF, STk) (1.2 M)

3. – Emergency or safety net - 2 homes debt free. (about 1M)


I know that we need to enjoy life while we can, we do/go where we want, do what we to because, we know one day in the future, we may not want to or can not contunue to do the travel and adventure as we age.

 

[Tyro]

If I spend less than [x.y%] of my Dec. 31st portfolio size during the year, I return it at the end of the year.

I was thinking of doing something similar, but instead of reinvesting it into the "pot" I was thinking of putting budget surpluses (What am I, a freakin' GOVERMENT? ) into a separate "slush fund" (that would be invested the same as if in the pot -- the slush fund might just be on [-]paper[/-] electrons) that we could draw from during lean years or for incidentals without worrying about draining the main nest egg ahead of schedule.

Does anyone do this or something similar? I can't believe no-one has thought of it (though I can believe I haven't thought of glaring pitfalls).

Tyro

 

[marko]

My SWR is about 4%. If for some reason, I only need 3% that year, I keep the extra 1% in my head as gravy. Then if I need to WD 5% one year, I'm whole.

 

[rbmrtn]

My plan is to only spend what I need to cover expenses with a max limit of the SWR ( 4% ), not to take as much as I can. Current expense covered by dividends/interest at about 1.7% SWR.

 

[Midpack]

My plan is to only spend what I need to cover expenses with a max limit of the SWR ( 4% ), not to take as much as I can. Current expense covered by dividends/interest at about 1.7% SWR.

A very smart/conservative plan, but no matter how large your 'residual' becomes? Unless leaving a large bequest is a primary goal, at some point I'd think you might take more than 4%. Here's hoping we all have that problem in time...

 

[W2R]

I was thinking of doing something similar, but instead of reinvesting it into the "pot" I was thinking of putting budget surpluses (What am I, a freakin' GOVERMENT? ) into a separate "slush fund" (that would be invested the same as if in the pot -- the slush fund might just be on [-]paper[/-] electrons) that we could draw from during lean years or for incidentals without worrying about draining the main nest egg ahead of schedule.

Does anyone do this or something similar? I can't believe no-one has thought of it (though I can believe I haven't thought of glaring pitfalls).

Tyro

That sounds like it might be a workable plan. Right now, I withdraw 3.5% but for some reason I feel completely content and happy continuing my present low key lifestyle and spending less than 2.0%. So, during lean years I have that difference to lean upon.

However, I see nothing wrong with handling the excess in the way you are suggesting. In an emergency, or if I should decide to incur a big expense such as upgrading my house or moving, I suppose I could always do a look-back and recompute in that way.

In a sense, that excess is income just like any other excess income, from working for example. As income, we can do whatever we want to with it. Putting it back in the nestegg just happens to be what I want to do with it.

 

[Gearhead Jim]

We have a moderate pension + S.S. that cover basic living expenses, so our IRA's are for everything else.

Each December 31, I look at the value of the IRA's and plan to take out 4% of that amount over the next year.
That way, if the investments do well over the long term, we get to spend more.
If they do poorly, we are automatically reducing our spending by using 4% of the smaller number.

 

[RetireBy90]

As a relative newb to the FIRE subject, I ran across this article on safe withdrawal rates. I thought it was a good base explanation, with some interesting ideas on top of the basics. I had not seen anything on using the PE ratio to help pick a SWR, but this made some sense.

Do most FIRE 'ers use a set withdrawal rate, or do you tend to vary each year depending on how your savings grow for the year?

http://www.kitces.com/assets/pdfs/Kitces_Report_May_2008.pdf

Thanks for the post. Interesting read and has brought some new ideas to me. Imagine my surprise to find it almost 5 years old. I found interesting the relationship between PE and SWR. It certainly makes sense. I'm planning on 4 to 4.5% draw, but when I'm 70 and start SS draw, pensions and SS will exceed my budget needs so I can take more earlier if we want.

 

[truenorth418]

I was thinking of doing something similar, but instead of reinvesting it into the "pot" I was thinking of putting budget surpluses (What am I, a freakin' GOVERMENT? ) into a separate "slush fund" (that would be invested the same as if in the pot -- the slush fund might just be on [-]paper[/-] electrons) that we could draw from during lean years or for incidentals without worrying about draining the main nest egg ahead of schedule.

Does anyone do this or something similar? I can't believe no-one has thought of it (though I can believe I haven't thought of glaring pitfalls).

Tyro

In addition to a current year spending account of 2.5% of year end assets, I set aside a "cache" originally equal to one years spending to use in emergencies and long term capital-type expenses such as a future car purchase. I add a few thousand to the cache each year from the spending account so it will keep growing. This cache is in addition to a designated safety fund consisting of lots of iBonds. I got the cache idea from the Work Less Live More book.

 

[pb4uski]

I'm in my first year of ER so withdrawals are a bit new to me. Since my reinforcements of pension and SS are years away, we are essentially living on interest, dividends and principal reductions. Our current WR is between 3.5% to 4.0% but that will decline once the reinforcements arrive.

I keep about 1-2 years of spending in a cash/short term investments bucket that is part of my overall 57 equities/37 fixed/6 cash AA and would add to the bucket when market returns are good and draw from the bucket in a bear market. In addition, we could easily tighten our belts a little on spending if we needed to.

 

[Alan]

I was thinking of doing something similar, but instead of reinvesting it into the "pot" I was thinking of putting budget surpluses (What am I, a freakin' GOVERMENT? ) into a separate "slush fund" (that would be invested the same as if in the pot -- the slush fund might just be on [-]paper[/-] electrons) that we could draw from during lean years or for incidentals without worrying about draining the main nest egg ahead of schedule.

Does anyone do this or something similar? I can't believe no-one has thought of it (though I can believe I haven't thought of glaring pitfalls).

Tyro

This is what I have done this last 3 years and because of good returns that fund is doing very well. We plan on making a big dent in the slush fund next year with a 4 month European vacation.

 

[mathjak107]

A very smart/conservative plan, but no matter how large your 'residual' becomes? Unless leaving a large bequest is a primary goal, at some point I'd think you might take more than 4%. Here's hoping we all have that problem in time...

most folks dont have a clue what the 4% rule even represents. on another forum you and i frequent they are so ignorant of these things that they argue all the time with me about how risky equities are.

i cant get through to them that the 4% rule doesnt represent big gains or even average gains. it represents the worst real returns history ever threw at retirees .

if anything like you said its toooo conservative and to much money usually goes unspent if you follow it to the letter of the law.

the answer the mis-informed give you all the time is "oh im not gambling in equities in retirement " and so they sit in the bank and get zero and complain.

they dont realize they are picking the riskiest investment there is as cash has failed more ofton then anything else.

as michael kitces wrote ,things would have to get to the point that you got under a 2% real return for 15 years to do damage and get that return for 30 years to totaly fail before the 4% rule is in danger.

thats a whole lot worse then now thats for sure.

about the worst group now may be those who retired in 2000 depending on allocations as they are facing the perfect storm.

they retired at a time of low rates,low dividends ,poor market performance and a poor outlook based on valuations.

its still to early though to even pass judgement on them as the danger point is around 15 years in.

i havent retired yet so im in better shape than those in 2000 as there is already just about 13 years of history behind me of crappy years so perhaps i will be closer to an improvement in 2 years when i retire. .


as it looks now ill only need about a 2% withdrawal rate because we have other income so im going to be one of those who break the rule and maintain very low equities allocations because i can meet goal .

but its all going to be dynamic and fine tuned under battlefield conditions as time goes in retirement.

 

[audreyh1]

I was thinking of doing something similar, but instead of reinvesting it into the "pot" I was thinking of putting budget surpluses (What am I, a freakin' GOVERMENT? ) into a separate "slush fund" (that would be invested the same as if in the pot -- the slush fund might just be on [-]paper[/-] electrons) that we could draw from during lean years or for incidentals without worrying about draining the main nest egg ahead of schedule.

Does anyone do this or something similar? I can't believe no-one has thought of it (though I can believe I haven't thought of glaring pitfalls).

Tyro

That's what I do. Surpluses get put away in a separate kitty to be there to smooth out a rough year, for an unexpected large expense, or as it accumulates maybe just a big splurge! I mean, I "saved up for it" after all. I do NOT return unspent money to my long term portfolio, because I might need it in the short term, and I don't want to subject excess to the volatility of the long-term portfolio (or leave it for heirs ).

 

[nun]

This is what I have done this last 3 years and because of good returns that fund is doing very well. We plan on making a big dent in the slush fund next year with a 4 month European vacation.

I LBYM and I expect to do that in retirement as well. I plan never to spend more than my annual fixed income, dividends, interest and capital gains. Amounts left over will be reinvested, so that's my slush fund. If there are down years I'll try to live just off fixed income and cash reserves. So I hope to stay in the accumulation phase in retirement, but at a slower rate than pre-retirement.

 

[RitaR551]

I LBYM and I expect to do that in retirement as well. I plan never to spend more than my annual fixed income, dividends, interest and capital gains. Amounts left over will be reinvested, so that's my slush fund. If there are down years I'll try to live just off fixed income and cash reserves. So I hope to stay in the accumulation phase in retirement, but at a slower rate than pre-retirement.[/QUOTE]

This is my plan also. The stocks I have invested in raise their dividend each year, so will hopefully keep up with inflation. At this pre-retirement point I reinvest any capital gains I may harvest. Have a cash reserve for emergencies (which would have to be a MAJOR emergency before I would tap into it). One small IRA which was inherited requires I take yearly withdrawals. 2/3 of that is reinvested in my personal account. Dividends from two other small IRA's are reinvested at this point. The time will come that we will have to take withdrawals and since they are my husbands, I suspect they will be spent on whatever.

Social Security will make up what dividends won't cover.

Retiring in three months and one week!

 

[rbmrtn]

A very smart/conservative plan, but no matter how large your 'residual' becomes? Unless leaving a large bequest is a primary goal, at some point I'd think you might take more than 4%. Here's hoping we all have that problem in time...

No plans to leave anything. I-ORP says I can spend subtantially more than what I need to cover current expenses. Not really taking anything out since I just take the dividends, the capital is still in place. I really don't know what I'd spend the "residual" on, maybe I suffer from being a lifelong LBYM'er. Once pension/SS kick in "withdrawal" needs would be closer to zero.

 

[Chuckanut]

I currently have an 'unsafe' withdrawal rate of about 5%. I do this because my [-]solid gold platinum lined jewel encrusted[/-] polished brass on stained pine pension is not enough to live on. I also want to delay SS until 70 and use it as a form of long life insurance. And, most infamously, I want to travel a lot over the next 8 years. That takes money.

Once SS kicks in at 70, my pension and the pumped-up SS benefits should provide enough to live on. At that time I can reduce my rate to under 3% and most likely near 2%.

That's my plan and I am sticking to it.

 

[rescueme]

That's my plan and I am sticking to it.

That makes two (really three, including DW).

If I would base current retirement fund withdrawl's at 4%, what happens when my DW's two small DB plans, along with our respective SS income starts (along with my 50% of DW's SS in just over a year)?

Heck, even at the age of 70 (in five years, when my SS starts), we'll be withdrawing well below 4%.

I/we would rather spend it in ER, rather than just adhere to a withdrawl plan that has nothing to do with us, at this time in our retirement.

 

[longinvest]

about the worst group now may be those who retired in 2000 depending on allocations as they are facing the perfect storm.

Shouldn't a 2000 retiree that had been plugging money away for years in the stock markets have had a huge pile of money? If so, they should have been able to survive through the decade on much less than 4%.

I think that the 4% rule is too simplistic; it doesn't take into account the current inflation/deflation of stocks. My impression, paying with FireCalc, is that if one invests the appropriate ratio of income regularly into the stock market for 30 years, then enough will have been put aside to cover retirement expenses. Whether the expense to pile of money ratio is 5+% or 3-% depends on the specific state of the market on the day of retirement. I think that it is a mistake to only look at the retirement date to select expense level based on a fixed ratio. I think that expenses should be based on the amount of money invested over the years, not on the accumulated amount on retirement date.

Maybe I'm wrong? Anyway, that's my current thinking.

 

[mathjak107]

the part you missed is if someone retired in 2000 that 4% withdrawal is based on that pile of money they accumulated. they get 4% of a larger number inflation adjusted.

in reality i think most foks adjusted spending downward when thinks fell apart so in practice they are in much better shape .

the studies assumes they just continued right on business as usual so in theory they may be the worst group.

the current inflation or deflation of stocks is accounted for in the sense the correlation between their relative value and performance seems to be very high.