verygoodthings
Dryer sheet aficionado
- Joined
- Feb 4, 2011
- Messages
- 34
Yes, I think this is true. I did some research on this exact issue a few years ago and posted the results here.
Basically, if your portfolio is suffering severely 5 or 10 years into your withdrawal period, you need to do something to slow the bleeding. Work part time, reduce your withdrawals, etc.
I personally plan on having a significant portion of my withdrawal be a variable amount based on portfolio value each year, and the rest of my withdrawal would be inflation indexed. Empirically, this will let me pull out around 4% starting out, and there is a 95% chance my withdrawals won't decrease below about 3% in the first 10 years or so. By year 10, I am virtually guaranteed to meet or exceed the 4% SWR.
In practice, this would look like the following: 2% withdrawal indexed to inflation each year plus a 2% withdrawal that is 2% of the actual portfolio balance each year. The former part of the withdrawal dampens the volatility of the latter part of the withdrawal (in good years and bad). Over time, odds are very good that my withdrawal will grow. If, say, I had a million bucks in my portfolio, and I needed $25000 as my absolute bare bones living expenses, then I could take $40,000 a year per my 2%/2% strategy and have a very good chance (95%+) my withdrawals would never dip below $28,000-30,000.
The advantage of this method (the hybrid method I call it) is two fold: you don't annually increasing amounts blindly as your portfolio craters and you get to enjoy spending more in the vast majority of scenarios where your portfolio appreciates over the decades. I think the hybrid method more closely approximates what you will want to do anyway: conserve money when you get poorer and spend more when you get richer.
This is all assuming that the past is prologue for the future.
This is a good post. And this is what most people do. All of this 4% rule nonsense, people may understand it as explained to them by their advisors year 1, but they just spend according to portfolio value down the line.