6% a year seems pretty fool proof, any thoughts?

[joeea]

Lots of good advice. I've been exploring different withdrawal strategies and I still like the using a fixed percentage as a baseline. But after reading the comments and perusing other threads I've decided to take a more conservative approach. I'm going to cut the yearly withdrawal to 5% and switch the AA to 95% equities and 5% cash. If the market tanks , I can use the cash to tide me over for a year. Worst case , we can dip into SS early or god forbid take a consulting job. I'm an engineer so there is always something going on.

You read a couple of responses here and you go from 6% to 5% just like that? And from 100% equities to 95% equities and 5% cash?

You may want to spend some time and think this plan over more until you get a real handle on what you need in retirement and how you can get there. A good fiduciary financial advisor can help you.

 

[marko]

You read a couple of responses here and you go from 6% to 5% just like that? And from 100% equities to 95% equities and 5% cash?

My thought exactly. Wondering.

 

[euro]

You read a couple of responses here and you go from 6% to 5% just like that? And from 100% equities to 95% equities and 5% cash?

You may want to spend some time and think this plan over more until you get a real handle on what you need in retirement and how you can get there. A good fiduciary financial advisor can help you.

Why not? I'd venture the guess that in the eyes of the vast majority of posters on this board, he is going in "the right direction" with this action. I certainly agree with "study more and re-adjust", but the OP isn't likely to cause himself any harm by pursuing the proposed adjustment.

 

[Sunset]

Why not? I'd venture the guess that in the eyes of the vast majority of posters on this board, he is going in "the right direction" with this action. I certainly agree with "study more and re-adjust", but the OP isn't likely to cause himself any harm by pursuing the proposed adjustment.

+1
Perhaps OP will also consider recording every penny he spends to know precisely his expenses per year.
I've been doing this for 1.5 years after reading posts and realizing I only had a guess of my expenses compared to others.
There are apps for smart phones that make it easy, since most folks always have the smart phone with them.

Also perhaps OP will consider having 2 years worth of spending (minus 80% of divs per year) in a cashable CD, as market downturns can easily last more than a year.

 

[SecondCor521]

No, because the rate of return is not higher. They key to a more balanced allocation is that it provides consistency of return with less risk. The key is the amount of risk in the return. As most are aware, higher risk can lead to higher returns (on average), but with much higher volatility.

I disagree, and would say yes to the question, but it does depend on one's time horizon.

For short time horizons, say 10 years, an 80/20 portfolio has a historically higher SWR than a 100/0 portfolio. The reason is that the volatility of stocks over the short run (or, if you like, the stability of bonds) is more likely to hit a rough spot and inflation doesn't have enough time to compound ruinously.

For time periods of longer than about 30 years, 100/0 tends to have the best SWR because the higher average returns of stocks and the corrosive power of inflation can be evidenced.

Personally I look at my life expectancy to determine my time horizon, then use that horizon as an input to FIREcalc to find the efficient frontier in terms of asset allocation. I then try to stay around that AA. Currently I am 47 and use a 40 year time horizon, which points me to a roughly a 90/10 AA to maximize my SWR.

You can see this by using the investigate option in FIREcalc and letting the tool vary the AA.

 

[SecondCor521]

Why not? I'd venture the guess that in the eyes of the vast majority of posters on this board, he is going in "the right direction" with this action. I certainly agree with "study more and re-adjust", but the OP isn't likely to cause himself any harm by pursuing the proposed adjustment.

Statistically there really isn't much difference between 100/0 and 95/5. There is a fairly big difference in survivability by dropping from 6% to 5% if one is using the traditional Trinity inflation-adjusted withdrawal approach. Not as much if one is using a constant percentage withdrawal approach, as it seems the OP might be doing.

 

[Texas Proud]

Why not? I'd venture the guess that in the eyes of the vast majority of posters on this board, he is going in "the right direction" with this action. I certainly agree with "study more and re-adjust", but the OP isn't likely to cause himself any harm by pursuing the proposed adjustment.

I also agree... the adjustments will make any swings less...


And if the portfolio goes up he can spend more in later years as the stash grows...

 

[ESRwannabe]

I haven't read any of the posts yet. I'm just commenting on the thread title.

I think the standard 4% rule is way too cautious. So, yes I do think 6% is reasonable.

If you are willing to deviate from using broad market indexes and AAA bonds, then its easy to achieve reliable income greater than 4%. For example:

(1) You could invest in domestic stocks like AT&T just a week or so ago when it had a 5.50% dividend yield and a 32 year history of raising the dividend every year. There are always good opportunities if you are patient and wait for bargains to come along.

(2) Another example would be buying preferred stock from a mega bank like JPMorgan Chase, where you can get over 6%.

(3) Other examples would be buying a mortgage REIT like Starwood Property Trust with a 8.78% yield, or Annaly Capital Management with a 9.43% yield.

(4) Then there are Master Limited Partnerships like Magellan Midstream Partners (4.86%) or Enterprise Product Partners (6.32%).

(5) Next you could look at Business Development Companies like Main Street Capital (5.56%) or BlackRock Capital Investment (10.34%).

(6) You could then look over seas where you can easily find yields 5% or higher in areas like finance, utilities, telecom, energy, etc. All from blue chip companies in stable countries.

(7) If individual stocks are too risky then there are tons of options in Closed End Funds (CEFs), and leveraged ETN/ETFs.

(8) You could also make good income selling cash covered puts on things you would like to buy if the price declined, or covered calls on stuff you wouldn't mind selling if the price went up enough.


Anyway...... I absolutely think that you can make 6% while still being extremely diversified and bringing in reliable cash flow that goes up every year enough to offset inflation.

 

[mathjak107]

So if one didn't have 100% equities, but say 80% equities, wouldn't one be able to have a slightly higher expected success rate? That is, if one accepts the risk of failure with 100% equities and 0.5% a month, could one accept the same risk of failure and get a higher withdrawal rate with a different asset allocation?

there seems to be a balance point . 100% equities clocked in over 30 years with a 93% success rate vs 96% for 50/50 .going out 40 years 100% equities did better than 50/50

 

[Senator]

I'm an engineer so there is always something going on.

After a year or two, you may have to mow grass, rather than work as an engineer. Things change. Software versions change, new ones get implemented, after a few months, let alone years, you get rusty. Younger kids have more enthusiasm.

And always remember that your tolerance for a boss exponentially decreases the longer you are retired.

 

[pb4uski]

I haven't read any of the posts yet. I'm just commenting on the thread title.

I think the standard 4% rule is way too cautious. So, yes I do think 6% is reasonable. ......

Anyway...... I absolutely think that you can make 6% while still being extremely diversified and bringing in reliable cash flow that goes up every year enough to offset inflation.

Forget reading about posts then.... start reading up on sequence of returns risk.

The main problem with a 6% WR are the scenarios where investments go sideways or worse for the first decade of the scenario and withdrawals deplete the portfolio so that it can't survive the remaining two decades.

While there are some opportunities to generate ~6% income it is hard to gather enough of them together to provide reliable income with adequate diversification and not introducing other risks.... also, such a portfolio would not provide the growth necessary to cover inflation in the long run. Trust me, if 6% were truly possible as you contend, someone would have suggested it before you and there would be products out there to address such a need.

Can I interest you in a free lunch?

 

[teejayevans]

Lots of good advice. I've been exploring different withdrawal strategies and I still like the using a fixed percentage as a baseline. But after reading the comments and perusing other threads I've decided to take a more conservative approach. I'm going to cut the yearly withdrawal to 5% and switch the AA to 95% equities and 5% cash. If the market tanks , I can use the cash to tide me over for a year. Worst case , we can dip into SS early or god forbid take a consulting job. I'm an engineer so there is always something going on.

As an engineer myself, I spent a lot of time with a spreadsheet going through different scenarios, what ifs. You seem to be just winging it, I suggest you start looking at this as an engineering project. I used flexible retirement calculator and firecalc as well.

 

[marko]

After a year or two, you may have to mow grass, rather than work as an engineer. Things change. Software versions change, new ones get implemented, after a few months, let alone years, you get rusty. Younger kids have more enthusiasm.

+1
Been there. Despite a stellar resume, 30 years in the industry and industry-wide name recognition I never worked again after two years off. To say the least, it was an eye-opener.

I was "overqualified" (age 53 = too old), kids coming up could be hired for a lot less (despite my insistence that I didn't care about the compensation) and the concern that I was "A rich guy who just wanted to take clients golfing all day".

 

[ESRwannabe]

Forget reading about posts then.... start reading up on sequence of returns risk.

The main problem with a 6% WR are the scenarios where investments go sideways or worse for the first decade of the scenario and withdrawals deplete the portfolio so that it can't survive the remaining two decades.

While there are some oortunities to generate ~6% income it is hard to gather enough of them together to provide reliable income with adequate diversification and not introducing other risks.... also, such a portfolio would not provide the growth necessary to cover inflation in the long run. Trust me, if 6% were truly possible as you contend, someone would have suggested it before you and there would be products out there to address such a need.

Can I interest you in a free lunch?

pb4uski,

You are very certain about things. So, maybe you will know the answer to a question for me. I don't know the answer. So you could make it up and I would not know.

Anyway, has anyone taken the Trinity study or better yet whatever new slice and dice Boglehead variation is used today (REITs, small value tilt, whatever the new fad is, etc) and found out if their strategy would have worked in Japan?

Thanks!

 

[Sojourner]

Worst case , we can dip into SS early or god forbid take a consulting job. I'm an engineer so there is always something going on.

At the age of 60, if I were you I would not count on being able to find steady work as an engineer after being out of the game for a couple years. Except for maybe in certain highly specialized fields, virtually all engineering job openings are going to be filled by people in their 20s, 30s, and 40s. Consulting work is great if you can build up a reliable client base, but the work is rarely steady and, IMHO, shouldn't be counted on when considering your FIRE budget.

 

[pb4uski]

pb4uski,

You are very certain about things. So, maybe you will know the answer to a question for me. I don't know the answer. So you could make it up and I would not know.

Anyway, has anyone taken the Trinity study or better yet whatever new slice and dice Boglehead variation is used today (REITs, small value tilt, whatever the new fad is, etc) and found out if their strategy would have worked in Japan?

Thanks!

What in the world does whether the Trinity study or some new variation would have worked Japan have to do with this thread (or with the price of eggs in China)?

If you can't stand the heat then change the subject?

OP is in the US.

 

[Huston55]

+1
Been there. Despite a stellar resume, 30 years in the industry and industry-wide name recognition I never worked again after two years off. To say the least, it was an eye-opener.

I was "overqualified" (age 53 = too old), kids coming up could be hired for a lot less (despite my insistence that I didn't care about the compensation) and the concern that I was "A rich guy who just wanted to take clients golfing all day".

And, what's wrong with that!?!?

BTW, if you ever need a 4th, I'm there for you; although, you might have to put the air fare from Cali on your expense report.

 

[ESRwannabe]

Pb4uski

You shot my recommendation down with so much confidence I merely wanted to find out if whatever the current variation of boglehead method still only applies when using US data from the recent past few decades.

 

[pb4uski]

It is pretty easy when there are no credible studies or publications on the face of the earth that support a 6% WR.

 

[ESRwannabe]

It is pretty easy when there are no credible studies or publications on the face of the earth that support a 6% WR.

No studies that's probably true. That doesn't mean it isn't possible.

As an example investing in real estate has been a successful way to retire for thousands of years and that often has withdrawal rates higher than 6%.

I am certain more people have retired off of real estate than bogleheads method.

 

[W2R]

my plan is to take 0.5%per month which works out to 6% per year with a 100 % equity allocation. This plan is guaranteed to never run out of money. Our base expenses are low enough that could easily survive a 50% drop in the stock market.

I just finished skimming/reading the thread. This is probably a little off topic, but if your base expenses are less than 50% of what you plan to withdraw, then you are planning for 50% of your annual 6% withdrawal to go to discretional (fun) spending, and I am simply floored.

What in the world do you plan to spend the other 3% on? I guess I am lacking in imagination. To me, that's a huge amount to allocate for discretional spending; figuring out what to blow an additional 3% on (beyond base expenses) sounds to me like a lot of work.

 

[Huston55]

there seems to be a balance point . 100% equities clocked in over 30 years with a 93% success rate vs 96% for 50/50 .going out 40 years 100% equities did better than 50/50

I think this is the 'Efficient Frontier' at work.

The EF is the basis of most of the posts on this thread recommending an AA <100% equities. IMHO, the OP would do well to take that advice.

 

[SecondCor521]

A 6% withdrawal rate is way above what everyone else recommends for a 30-year withdrawal rate.

FWIW, there is a person (sol, I think) over at the MMM boards who recommends a 6% withdrawal rate. I think he is even targeting that number for when to retire himself (and he's fairly young - 30s or 40s).

The usual logic with the 4% rule is that it is historically safe 95% of the time. His argument is that you are more likely than not to oversave with the 4% rule.

He claims - and I haven't checked his math, but it seems reasonable - that 6% is historically safe for 30 years about 50% of the time. So you are as likely to be OK as you are to be not OK.

He's more willing to go back to work if things don't pan out than I am.

 

[mistermike40]

I think OP's 6% is different than the typical 3-4% SWR.

The SWR gets adjusted for inflation each year... I believe OP's plan (from what I've read) is to take 0.5% per month (6% annually), each month... no adjustment (always taking the 0.5%/6%) except his nest egg increasing as his assets hopefully appreciate over time. This means his annual increase (or decrease) would be dependent on market performance and not inflation.

I don't think there's a direct correlation between the two values (I could be mistaken and I haven't read every post in the thread).

 

[pb4uski]

No studies that's probably true. That doesn't mean it isn't possible.

As an example investing in real estate has been a successful way to retire for thousands of years and that often has withdrawal rates higher than 6%.

I am certain more people have retired off of real estate than bogleheads method.

You don't really have a withdrawal rate with real estate so your post is a bit of an odd point. The big risk with a real estate only funding approach is that it is very hard to get adequate geographic and property-type diversification in directly owned real estate. I have a neighbor friend who has a commercial property in Flint, MI that he can't sell... he may ultimately hand the keys to the bank.... I'm guessing a similar story in some areas of Detroit and Chicago too.

DMother is another example... a commercial property that she owns and I manage for her provides more than she needs when combined with her SS... but it is a single tenant in an area where it would be hard to replicate those lease cash flows if that single tenant were to leave so it would be very risky to rely on that property or even a number of like properties for retirement funding... fortunately she has other resources if that should happen.

While your certainty that more people have retired off of real estate than off of stocks/bonds is interesting, it would be even more interesting if you had facts to back it up... but alas...