Article on safe withdrawal rates

[ejman]

What about Japan? Anyone look at scenarios using their numbers for say a 1990 retiree?

Wade Pfau wrote this article on safe withdrawal rates in other countries:
An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?

The safe withdrawal rate for Japan (table 3) was 0.47%!!!!

Note that the only safe conclusion from this depressive study is: work until you die!

 

[ejman]

Thanks to Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update , here's my favorite hapless Y2K ER blithely spending his way down the death spiral:


As many researchers have suggested lately, maybe it's the sequence of returns during those first 5-10 years of retirement that's the most important.

But, doom & gloom notwithstanding, the entire 4% SWR system runs against human psychology and American reality. It's very hard to blissfully raise your spending by the rate of inflation when the stock market was down a few percent last year, let alone years like 2008-09. It's not very realistic to ignore all Social Security benefits. However I'll agree that it's human psychology to ignore a 95% success rate to obsess over a 5% failure rate.

So use the 4% rule as an indicator that you're 95% of the way there. Then instead of trying to blindly follow it (and arguing about it on discussion boards) do something different. Annuitize 25% of your portfolio. Use a variable portfolio withdrawal system like Bob Clyatt's 4%/95%. Live off your dividends, no matter how sucky that may be some years. Or just freeze your spending during bad years and only raise it during good ones.

Very sensible and probably what most of us actually do. (except for the annuity bit haven't done that yet)

 

[Major Tom]

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?

I've only been ER'ed for 18 months and am living off a 2.5% WR as calculated from the starting value of my portfolio. As I'm relatively young (48) and hope to be around for several more decades, the plan is to keep the withdrawal amounts the same for the next few years, without even a cost-of-living raise. I'll re-evaluate in a few years and maybe give myself a modest raise if I'm feeling confident.

I'd rather be conservative in the early years of retirement than run out of money when I'm older. Besides, the biggest luxury to me is not travel, fine restaurants, or other pricey consumer goods, but being able to roll out of bed whenever I want and have the entire day to myself, every day.

As I get older, and closer to being able to claim SS, I'll probably feel more cavalier about rewarding myself with a bigger income. The trick will be to do it soon enough so that I can splurge it on fun things before I'm too old to enjoy such frivolity

 

[JoeWras]

Wade Pfau wrote this article on safe withdrawal rates in other countries:
An International Perspective on Safe Withdrawal Rates: The Demise of the 4 Percent Rule?

The safe withdrawal rate for Japan (table 3) was 0.47%!!!!

Thanks for digging that up! This was the perspective I was looking for.

Japan came to mind as a worst case, and the study supports it, although the study also includes WWII.

The other thing from the study is that an SWR of 3% seems to be more in line with global perspective taken into account. Most of the countries that fell below 3% were smack in the middle of WWI and/or II. The USA and Canada really ruin the curve for this century long look back, since they relatively prospered during the wars.

 

[samclem]

Unfortunately for me, the psychology of this and my reaction is to it is to consider w*rking a few more years. And of course the danger there is is w*rking until I'm dead trying to achieve 99.9% on firecalc.

Sometimes I think I'm in this boat, too. Still, I know that being able to flex my annual withdrawals will buy me a LOT more long-term safety (including some defense against that black swan that is outside the present historical data set) than piling up a few more thousands of dollars in the nestegg. A "fixed" 4% WR (or even 3%) with inflation adjustments is a risky thing, it seems to me. And as Nords points out, it's just not the way people will really behave if their spending plan provides any room to cut spending in the face of unplanned market adversity.

 

[Nords]

Sometimes I think I'm in this boat, too.

"But... but... but just one more year!"

You'll know when the time is right.

For me, the most recent incidence of having the point driven home (with a five-pound sledge) was the Facebook photos of the USNA '82 reunion. At least that's who they claim was in the photos, but every one of them was filled with a bunch of geezers.

 

[steelyman]

For me, the most recent incidence of having the point driven home (with a five-pound sledge) was the Facebook photos of the USNA '82 reunion. At least that's who they claim was in the photos, but every one of them was filled with a bunch of geezers.

Wow, that's rude.

 

[Major Tom]

Wow, that's rude.

I thought it was quite funny. Wikipedia says,

"Geezer is a term for a man. It can carry either the connotation of age and eccentricity or, in the UK, that of self-education such as craftiness or stylishness."

Doesn't sound too rude to me.

 

[Nords]

Wow, that's rude.

I'm sorry, are you a member of USNA '82 also?

If I'd been at the reunion, I would've been in the photos with my fellow geezers...

 

[steelyman]

I'm sorry, are you a member of USNA '82 also?

If I'd been at the reunion, I would've been in the photos with my fellow geezers...

No, I was until recently an academic, not military. But I admire, respect, and am grateful for those who did/do serve.

Not the end of the world, but I learned a long time ago that words are important.

 

[obgyn65]

I am about the same age as you are (47), not FIRE'd yet, and I am planning to the same as you do : use about 3% SWR, and possibly readjust on a regular basis. I will make use of annuities.

I've only been ER'ed for 18 months and am living off a 2.5% WR as calculated from the starting value of my portfolio. As I'm relatively young (48) and hope to be around for several more decades, the plan is to keep the withdrawal amounts the same for the next few years, without even a cost-of-living raise. I'll re-evaluate in a few years and maybe give myself a modest raise if I'm feeling confident.

 

[mathjak107]

Thanks to Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update , here's my favorite hapless Y2K ER blithely spending his way down the death spiral:


As many researchers have suggested lately, maybe it's the sequence of returns during those first 5-10 years of retirement that's the most important.

But, doom & gloom notwithstanding, the entire 4% SWR system runs against human psychology and American reality. It's very hard to blissfully raise your spending by the rate of inflation when the stock market was down a few percent last year, let alone years like 2008-09. It's not very realistic to ignore all Social Security benefits. However I'll agree that it's human psychology to ignore a 95% success rate to obsess over a 5% failure rate.

So use the 4% rule as an indicator that you're 95% of the way there. Then instead of trying to blindly follow it (and arguing about it on discussion boards) do something different. Annuitize 25% of your portfolio. Use a variable portfolio withdrawal system like Bob Clyatt's 4%/95%. Live off your dividends, no matter how sucky that may be some years. Or just freeze your spending during bad years and only raise it during good ones.

heres an interesting chart :

since i thought the use of stocks and t-bills was unrealistic for a retiree and stocks and bonds more appropriate i wanted to look at it from that angle.

look at 2000 to 2011 for stocks and bonds.

the intermediate bond was up 97% , the s&p with dividends reinvested 15% .

thats an amazing return on bonds.

that decade certainly played out better for someone with a balanced portfolio thats for sure.

Historical Returns

 

[rbmrtn]

Interesting comparison between kitces and raddrs. I have previously read both of their sites but haven't been there in while, nice to refresh.

Kitces is correct in that he is dealing with average and not worst case. We know the 4% SWR is for worst case, average would be closer to 6%. The average by design, smooths or covers up the volitilty. On average, air travel is much safer unless you are the statistic on the crash. I think it would be more like running firecalc with 80% success instead of 100. Also I don't think kitces included the last decade, maybe wrong about that. But if you want take a little more risk on success rate vs SWR then he's probably correct.

raddrs table shows how devastating back to back losses can be, they compound, even worse with 3 in a row. Also the importance of understanding percentages. If you take a 50% loss, it takes a 100% gain ( not 50% ) just get back to even. Compound that with the amount taken out for SWR. Maybe the last decade was the perfect storm for ER, will the hapless Y2K ER survive ? In 2008 the only asset that worked was cash, so even diversification didn't help. Did raddr do a sheet for '30s retiree, I'll have to look. One difference in 30's dividends were much higher, closer to 6% whereas by 2000 they were almost nil, that probably helped survivability.

I'm a timer ( not a day trader ) but I do it to control losses not maximize returns. From quicken my IRR for 2000-2002 was +1.5% so it does help to mitigate losses. Loss control is more important for a ER living off portfolio vs a younger person still working and recoup the loss with income+time.

very interesting discussion.

 

[audreyh1]

Thanks much, Mathjack, for a clear and detailed presentation of the facts. The 15 year window is a crucial piece of the puzzle.

It's tempting to redo raddr's chart using t-bonds rather than t-bills. I'm pretty sure the studies on 4% withdrawal used intermediate govt bonds.

I'm a living, breathing Y2000 retiree (8/1999 actually), so the only case I really care about is my own. My investment profile was not like any of the examples or studies, and I would never blindly give myself CPI raises anyway. My NW increased about 33% since start of 2000, which basically means I've been able to keep up in real terms more or less.

So, I'm 13 years in, only two more years to get through? Of course I'm invested as if the 15 year clock begins again right now LOL! I tend to assume more hard slogging ahead, but I honestly find it hard to imagine more than another 10 years of economic struggles. A lot excesses have been wrung out of the system and things do eventually recover. Well, maybe not for Japan, but investors there have the rest of the world to invest in (and do!).

Audrey

 

[rescueme]

look at those who retired in the mid 1960's . they had 20 years of crappy stock market returns then went right into double digit inflation.

Most/many in that era had pensions and didn't have to worry about investing via IRA/401(k)'s, nor did they have to worry about investing for the future, after they retired.

The original IRA plan (e.g. ERISA) only started in 1974 with contributions capped at $1500. TIRA plans for those with pensions did not start until 1982 (law passed in 1981) which allowed the initial $2000 contribution.

As far as 401(k) plans? The law (of which the term 401k was a sub-section) came about in 1978; however, actual plans (if offered at all) did not come about until years later.

You can't go too far back in history to discuss investment history/returns based upon "tools" (IRA/401(k)'s) that were actually not available, nor in wide spread use for folks to prepare for retirement. None of our relatives ever invested in the market. At the most, if they had "investments", they were CD's.

Heck, DW/me did not start our first IRA until 1982 (the first year they were offered). Our respective 401(k)'s were not available from our respective employers until years later, when our pension plans were discontinued/eliminated.

Our respective pensions were converted to cash (under then ERISA rules) and rolled over to our respective IRA's; they were not worth more than a couple thousand dollars at that time.

The year we started our directed investments for retirement? 1982. How old were we? Both 34.

We certainly got a late start, but then again we (like our parents/grandparents before us) never had to save for retirement until that age. We had pensions along with SS, and any other savings we had over the years (the "three legged stool"). Why save/invest for retirement?

Things change (as they always do, in life) Even though we started late, we made up for lost time by both being agressive in our contributions (33% of our gross income, over the years) along with high equity holdings (90-95%) during our accumulation years. That level of contributions was what drove us to live an extreme LBYM lifestyle, since we realized quickly that our financial future was in our hands, not in the hands of our respective companies as it had been for us (and our parents/grandparents) but was directly our responsibility.

BTW, I had a j*b from 1971-1979 that had a pension (before the period of IRA's/401(k)'s). However, that was lost due to federal rules that had pension vesting only after 10 years. I had eight years in when I left. That was just more "lost time - lost benefits".

 

[audreyh1]

look at those who retired in the mid 1960's . they had 20 years of crappy stock market returns then went right into double digit inflation.

they jumped from a 4% withdrawal to a 10% withdrawal almost over night just to pay bills..

the 4% swr covered them too.

Most/many in that era had pensions and didn't have to worry about investing via IRA/401(k)'s.

Why are you ignoring the fact that the Safe Withdrawal Rate studies covered that time period? It has nothing to do whether most retired people had pensions. IF you had retired then and invested yourself and followed the safe withdrawal rules, you would have made it for 30 years even though it was a really horrible sequence.

 

[rescueme]

Why are you ignoring the fact that the Safe Withdrawal Rate studies covered that time period? It has nothing to do whether most retired people had pensions.

I was responding to mathjak107, when speaking of market returns during a period that most folks did not invest in the market with the goal of retirement, due to having pension (e.g. defined benefit plans) and not investing in IRA's/401(k)'s for the future.

Sure, market history can certainly be used as an artifact to see how withdrawal rates would be affected in the "new retirement funding" of IRA/401(k);s of the current time, but if you're not in the market to accumulate or depend on it for retirement income, it makes little sense to consider it. Those who retired in the mid-60's (the point of time under discussion) were not necessarily concerned with safe withdrawl rates nor widely invested in the market.

Sometimes (rarely, IMHO) the old days were better. Your (financial) future was ensured in most cases, with no action on your part.

BTW, not all folks in those days had pensions - just as not all folks have 401(k)'s offered at their w*rkplace, today.

 

[NW-Bound]

Sometimes (rarely, IMHO) the old days were better. Your (financial) future was ensured in most cases, with no action on your part.

Yes, those good ole days. However, more and more people are agreeing that they cannot continue forever. When the economy is expanding and with a higher ratio of workers to retirees, financing retirees' pensions was a lot easier.

Pensions have been abolished all around the world or severely cut back, private as well as public ones. Even Communist China abrogated its pensions in a reform in the 90s. Greek pensioners have had their pensions cut to 40c on the dollar.

So, back to the topic of the safe WR, if something fundamental has changed to cause the above belt-tightening around the world, then how do we expect the 4%WR rule to continue as in the past?

Not that I have an answer, but am just wondering...

 

[Bikerdude]

heres an interesting chart :

since i thought the use of stocks and t-bills was unrealistic for a retiree and stocks and bonds more appropriate i wanted to look at it from that angle.

look at 2000 to 2011 for stocks and bonds.

the intermediate bond was up 97% , the s&p with dividends reinvested 15% .

thats an amazing return on bonds.

that decade certainly played out better for someone with a balanced portfolio thats for sure.

Historical Returns

I retired March 2000 with a balanced portfolio and currently am at all time highs. I have exceeded 4% in several years. Your research is correct.

 

[MooreBonds]

Sure, market history can certainly be used as an artifact to see how withdrawal rates would be affected in the "new retirement funding" of IRA/401(k);s of the current time, but if you're not in the market to accumulate or depend on it for retirement income, it makes little sense to consider it. Those who retired in the mid-60's (the point of time under discussion) were not necessarily concerned with safe withdrawl rates nor widely invested in the market.

Also, keep this in mind regarding the 4% SWR:

(from the global study by Pfau)

3. Portfolio administrative fees. This assumption is rather vexing, but to be consistent with most studies (Ameriks, Veres, and Warshawsky (2001) and Pye (2001) are two notable exceptions), we assume that mutual fund companies and financial planners do not deduct any fees from the portfolio.

So imagine how Japan's SWR of 0.60% would then be impacted after taking out for investment fees. In addition to the US 4% SWR.

True, Vanguard's funds are outstanding...but even those .25% bond fund expense ratios add up over 20-25 years.

And don't forget that not only were mutual funds not that prevalent in the 60s, but that was back before discount brokers, when you paid 3% or whatever ungodly fee to buy/sell.

 

[rescueme]

Yes, those good ole days. However, more and more people are agreeing that they cannot continue forever.

Of course, retiring in the mid 60's (say 1965) at the FRA age of 65 means you would be 112 years old, today ...

Nope, those days, and a vast majority of those people are long gone .

 

[NW-Bound]

Nope, those days, and a vast majority of those people are long gone .

There are a lot of octogenarians still strutting around though, as well as even the older people. It was reported that "the number of nonagenarians has nearly tripled -- from 720,000 in 1980 to 1.9 million in 2010".

See: More Americans Living to 90, U.S. Census Finds - US News and World Report.

Moreover, have you seen the recent thread about how some Greek islanders have found the fountain of youth? And that olive oil might have something to do with that, except that a lot of olive oil consumed throughout the world has been fake? But then some posters have found a way to get genuine EVOO, made right here in the US? Here we go.

Soon, we will see geezers everywhere. In our home too! In fact, just look in your mirror.

 

[rbmrtn]

For the folks that retired around 2000, do you have additional sources of income to support your portfolio ?

The returns from Mathjak do not take into account the impact of SWR drawdown, correct ?

I think this can be modeled with firecalc. 1MM start value, use 11yrs, and set it to provide spreadsheet data under the investigate tab, then look at sheet results the last line starts in 2000 showing portfolio value. With 4% SWR it looks close to what raddrs table shows. I agree with using longer dated bond yields instead of cash. At the current time though I wouldn't expect much support from bonds going forward.

 

[rescueme]

Soon, we will see geezers everywhere. In our home too! In fact, just look in your mirror.

Everytime I look, I think it's Halloween; somebody wearing an old codger mask, staring back at me ...

 

[Nords]

Why are you ignoring the fact that the Safe Withdrawal Rate studies covered that time period?

It's interesting to watch our confirmation biases at work here.

I guess people who are still working and not close to ER aren't even on the board. People who retired at a traditional age would have no reason to be here either. This thread's population is likely split between ERs already retired and Young Dreamers.

Of the former group, we largely agree that the 4% SWR concept has its flaws and shortcomings, but that we're also smart enough (or at least flexible enough, or frugal enough) to handle the possibility (or probability, or eventuality) of problems. On the other side are the latter group, who don't want to quit their jobs until the 4% SWR is "fixed". For a few of you, that fix will apparently have to come with a money-back warranty. And for one or two of you, that warranty must need to be backed by gold bullion or black helicopters or divine intervention. Just one more year should do it!

I'm glad to be on my side of the fence. I hope you Young Dreamers can find peace and sleep well at night. To help with that goal, let me re-introduce* you to William Bernstein's "Calculator From Hell" concept:
http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html

* [Nearly five years ago I wrote "Maybe this will be found more easily if it's broken out from the Bernstein FAQ." Guess I was optimistic...]