According to Dave Ramsey, SWR is 10%

[azanon]

See: http://nashville.about.com/library/blank/davesays/bldavesays66a.htm

Looks like 10% SWR and that's even if you're only 18 years old. I guess he forgot about the taxes that person's cousin is going to have to pay as well... or maybe he didnt and he's actually pushing 20% SWR, hehe.

 

[HFWR]

That's "stupid withdrawal rate", I take it...

 

[BigMoneyJim]

I think Dave's ignoring taxes, too. Usually people name their gross prize, windfall income, and I assumed the $500k was a before tax figure. That money'll be gone in 1-5 years I'm afraid. After all, the cousins and Ramsey are likely to be on the saner end (cough cough--very relatively speaking) of the scale of the winner's advisors. And when I was 18 the coolest things in the world were bolt-on shiny things for cars. I shudder to think what my car would've looked like had I won the lottery at 18.

(Although bolt-on car parts will sadly be some of the better offered investment options I fear.)

 

[SteveR]

I think you can say that SWR in this case will be...
Soon Without Resources.

 

[Dawg52]

I believe he usually projects stock funds to grow at an average of 10% rate per year. Prior to the tech crash he used 12-14%. Now it may very well grow at a 10% rate over the next 20-30 years, but I sure wouldn't count on it.

 

[Danny]

Oct 31 Issue Fortune Interview with Buffet & Gates, not that they are experts.


FORTUNE: Back to the lightning round: Make a call on the market. Seven years from now, will the S&P 500 have returned over or under 10% annually?
BUFFETT: More likely to be under than over. You're not going to have the GDP in nominal terms grow 5% a year and everybody make 10% a year.
GATES: I'd say under, most likely. The notion that returns will continue to be superhigh—there are some clouds out there.

 

[wildcat]

Dave should stick with personal finance (pay off debt, save money and invest in index funds) and not venture off into retirement withdrawl rates, in other words I hope he doesn't quit his day job.  

 

[wabmester]

See:  http://nashville.about.com/library/blank/davesays/bldavesays66a.htm

Looks like 10% SWR and that's even if you're only 18 years old.

Well, if you think about it, FIREcalc says something similar.     What Ramsey is saying is that you can take 10% of your initial nest egg with no inflation adjustment, and leave the principal untouched.

FIREcalc tells you that you can take 4% of your *initial* portfolio and increase that for inflation each year.    So, if the market drops and cuts your portfolio in half one year after retirement and inflation was high, FIREcalc could be telling you that 10% is OK in year-2.

Ramsey's approach is nuts.    But FIREcalc's approach is implicitly telling you that after a big drop, you can count on strong upward reversion to the mean.    That might not be quite as nutty, but it still is a bit dubious (and requires nerves of steel in any case).

 

[maddythebeagle]

You have to give Brother Dave credit (just not of the platic kind ). He has carved out a demagogue/guru status in good niche.  

 

[Cut-Throat]

But FIREcalc's approach is implicitly telling you that after a big drop, you can count on strong upward reversion to the mean.    That might not be quite as nutty, but it still is a bit dubious (and requires nerves of steel in any case).

FireCalc only tells you what has happened in the past. There are no tools to tell you what the future will be. FireCalc does not tell you to take 4% or any number. You decide based on the life of your portfolio, and your mix of investments.

While it does not predict the future, it is the best planning tool that I have ever seen. Discussing Dave Ramsey's approach and FireCalc in the same thread is what is truly nutty!

 

[wabmester]

FireCalc only tells you what has happened in the past. There are no tools to tell you what the future will be. FireCalc does not tell you to take 4% or any number. You decide based on the life of your portfolio, and your mix of investments.

While it does not predict the future, it is the best planning tool that I have ever seen. Discussing Dave Ramsey's approach and FireCalc in the same thread is what is truly nutty!

Both "tools" simply tell you what would have worked in the past. My point was that you can't really compare somebody who says 8-10% with no inflation adjustments, and FIREcalc's 4% SWR with inflation adjustments.

For example, if you use FIREcalc to give you an 80% survival with no inflation adjustments, the SWR it gives you is 7.12%, which isn't that much different than Ramsey's lower bound of 8%.

 

[BigMoneyJim]

It did occur to me after my earlier post that he didn't mention adjusting for inflation. I'm not sure how that would work, but I suspect it'd be dangerous for portfolio survivability the first few years and then dangerous to comfortable survivability (steak vs. cat food) in later years given inflation.

The "taking year (x)'s withdrawal" this year has been hashed over before, if I recall. (I try not to. <cough> 6.21% for 26 years <cough> ) (Then again, maybe another such discussion will bring Gummy back and JG and I will avoid the Canada jokes and he'll stay this time...or maybe not.)

 

[azanon]

Its a decent point wab, but 10% not inflation adjusted is still >>>> than the risk of 4% inflation adjusted. I dont even need to put a pen to paper to realize that. Inflation's what, 3% or thereabouts? That's 3% of the 4% added to next year's withdrawal (iow, peanuts).

 

[sgeeeee]

You can run FIRECalc with inflation shut off. I looked at the case of a 75/25 portfolio for 30 years using TIPS at 2.5% with no inflation. I assumed an expense ratio of 0.18%

A 6% withdrawal rate (ie. $60,000 for a $1M portfolio) had a 91.7% success ratio.

At a 10% withdrawal rate, the success rate was 36.4%.

You could play around with other stock/bond balances, but I don't think you could get anywhere close to 10%.

 

[justin]

At a 10% withdrawal rate, the success rate was 36.4%.

A success rate of 36.4% is great for most lottery winners. Many end up in bankrupcty starting with a much larger pot. I wonder if the $500,000 amount is an annuity itself? Like $20,000/yr for 25 years?

 

[azanon]

A success rate of 36.4% is great for most lottery winners. Many end up in bankrupcty starting with a much larger pot. I wonder if the $500,000 amount is an annuity itself? Like $20,000/yr for 25 years?

One of the reasons I'm going to go with at least a 5% SWR (and maybe 6 or 7%) when i retire is because i'll have guaranteed monies in the form of a pension and SS for both me and my wife. Thus, worst case, disaster scenario, would still have us receiving enough income to survive on. So i wouldnt be gambling everything.

I would only recommend being so conservative as to use the 4% figure if the money you're withdrawing from constitutes more than 80% of your total income source in retirement. So basically, if you're married and have two SS's coming in, i'd say wth, be more risky.

 

[justin]

I would only recommend being so conservative as to use the 4% figure if the money you're withdrawing from constitutes more than 80% of your total income source in retirement. So basically, if you're married and have two SS's coming in, i'd say wth, be more risky.

That is a good point. If you're ER'ing close to receiving SS, then that is your safety net. I don't know if SS can be as much of a safety net if you're ER'ing at, say, 40-50. Your SS will be reduced significantly due to less years in the work force, and you'll have 12-22 years (at least) before you are eligible for SS given today's SS rules. Then there's the "what if" of SS being severely reduced/nonexistent in 12-22 years.

 

[BigMoneyJim]

That is a good point. If you're ER'ing close to receiving SS, then that is your safety net. I don't know if SS can be as much of a safety net if you're ER'ing at, say, 40-50. Your SS will be reduced significantly due to less years in the work force, and you'll have 12-22 years (at least) before you are eligible for SS given today's SS rules.

On the other hand, you're less likely to have physical health issues with (*gasp*) going back to work if you bust an ER started at age 40-50, and there's always the chance that you won't live long enough to enjoy a later retirement if you wait until you feel very safe retiring.