higher SWR

[G-Man]

As I think about variations on the 4% rule the more I come back to a different way to think about readiness for retirement.

Start with the expected number of years to live in retirement.

Multiply that by current expenses/spending.

The result is how much you need in retirement funds (across all sources to include pension, SS and investment, etc.). Reality may be more or less, depending on inflation, investment returns, and actual spending. All of these are unknowns, but we can use the same simple arithmetic (expenses x years) to evaluate the situation each year.

This approach works both before retirement, and in the middle or end of a long retirement where the 4% doesn't really apply.

I like your thinking. This is a great back of the envelope math.

 

[Gumby]

Given that our income from pensions and social security covers all of our expenses and a 4% draw on our portfolio would also cover all our expenses, I'm sure we over saved. However:

1.) We certainly did not deprive ourselves of anything while we were saving that money. We went out to dinner whenever we liked, took fancy vacations overseas, and generally bought whatever we needed or wanted. And we have the same lifestyle now that we had when working, just with more free time.

2.) I am happy not to worry about money for the rest of my life, even if that means we leave a big pile on the table (as all the calculators say we will).

 

[GravitySucks]

I did a firm 4.5% spend the first 5 years.
The portfolio grew a bit over 150% in those 5 years so I reset to 4.5% of the new value.
Then Covid hit. 2020 spend was close to the original withdraw + inflation. Spending is still below what is be comfortable with.
At the 10 year mark I'll reevaluate and raise the withdrawal again if the portfolio has grown. At the 15 year mark SS will be kicking in and trigger another reevaluation.
Replotting my course every 5 years seems reasonable.

 

[GenXguy]

Under one of my more conservative plans that I have built a spreadsheet for, I was looking at 2.5% WR until age 65. But due to inflation, going through my expenses, it looks like I'm going to have to bump that up to 3% WR in order to maintain the same value of discretionary spending to account for inflation, maybe a bit lower than 3% since I decided to work at least OMY due to soaring inflation, unless it continues out of control as it has to this point.

At age 65, my expenses will change with Medicare and possibly taking SS benefits, which could see 25% cuts across the board, and my stash will likely be down a ways with the coming economic times ahead, so I'll probably still have a similar withdrawal rate, despite SS kicking in.

I guess the good news for me is that I have quite a bit of discretionary in my budget, roughly equal that of my required expenses, that I can cut back on, with about 1.2% WR required to pay my barebones expenses until age 65. That wouldn't be too much of a stretch for me because my discretionary spending during my recent years of working has been quite low while maintaining about 80% savings rate. I was hoping and planning to cut loose more when I retired, though, with all the extra time to enjoy doing different things, so I hope I never have to cut back that much and that 2.5% WR or higher will work out.

 

[livingalmostlarge]

If you only withdraw less than 4% is it to preserve principal for your heirs?

What if you only wanted to do 6% and use everything? I was contemplating what if you do want to draw down the principal?

But what if you live on $72k and have $1.2M = 6% and then 16 years. Assuming no returns. If you retire at say 50 that takes you to 66

 

[Dtail]

IIRC, the AVERAGE WR that one take for 30 years is 6.5%, but due to the SORR, that number gets bumped down to ~4% due to 5 or 6 bad starting years sequential returns.
Some early thinking was the stock market returns are ~10% with 3% inflation, so 7%WR would be safe.
Bengen and the Trinity study proved this rate to be not safe.

 

[Magus]

I think a lot depends on your age, the size of your SS vs spend and what % of your budget is fully discretionary. The younger you are, the smaller your SS check is/will be and the less your budget is discretionary the more risky going over 3.5%-4%. For example, retiring at 30 you’d have to plan for up to 65 years. You’d also have a very small SS check since you don’t have anything remotely close to the 35-40 years you need to get full allotment. On the flip side, if 2/3 of your budget was fine dining and first class international travel that was easy to trim back if your portfolio got hit hard, the less worried you should be.

 

[SecondCor521]

You’d also have a very small SS check since you don’t have anything remotely close to the 35-40 years you need to get full allotment.

Not necessarily.

The formula that calculates SS benefits is based on average earnings. While averaging in zeros does hurt, averaging in high earnings helps.

People who are able to retire early, especially in their 30s or 40s, are probably high earners. So they might hit the second bend point based on just 15 or 20 years of earnings. While one can get a larger SS benefit by continuing past the second bend point, it doesn't really make that much of a difference due to the way SS benefits are calculated.

It's been a while since I've looked at it, but my SS benefit will be enough to cover pretty much all my spending needs at age 70, even though my working career was only 23 years long.

Of course, one does need to get the minimum 40 credits to get any SS, but for FIRE types that happens after 10 years.

 

[Closet_Gamer]

I know I keep banging on about it in various threads, but I think the last 20-30 years should be treated as highly suspect when thinking about the next 20-30 years.

We've lived through a shocking bull market in bonds and pleasant inflation.

In 1990 the 10 year treasure rate was 8.2%-ish.
Right now its up (up!) to 2.8%.

While there were ups and down along the way, the trend has been very consistent over those years.

This has served to float asset prices of everything. Low interest rates have allowed:

- more leverage on equity inside of companies.
- massive private equity activity driving equity values
- stock buy backs
- more leverage to drive house prices.
- governments to spend on services and infrastructure without raising taxes.
- bond portfolios to rise, generating total return support rather than high yield

We've also had pretty charming inflation rates during this period. 1.5 - 3.0% for the most part.

All of the WR strategies -- SWR, variable, ascending, descending, inflation-linked, astrology charts, tea leaves, whatever -- and the results of nearly everyone in this community have been influenced by this backdrop.

A decade long reversal of that trend to normalize rates would toss all of "recent" experience out the window.

Over the long-long haul normalized rates should benefit retirees by de-risking the portfolio needed to generate income.

But particularly for those of us looking to start of retirement, we could see a quite difficult, and sustained SOR that will create very different remaining portfolios & yields at years 10-20 of retirement.

Toss in some substantial inflation? Ouch.

I think all of that says that WR caution is warranted and ensuring a large part of your spending plan is discretionary are particularly good ideas right now.

 

[Magus]

Not necessarily.

The formula that calculates SS benefits is based on average earnings. While averaging in zeros does hurt, averaging in high earnings helps.

People who are able to retire early, especially in their 30s or 40s, are probably high earners. So they might hit the second bend point based on just 15 or 20 years of earnings. While one can get a larger SS benefit by continuing past the second bend point, it doesn't really make that much of a difference due to the way SS benefits are calculated.

It's been a while since I've looked at it, but my SS benefit will be enough to cover pretty much all my spending needs at age 70, even though my working career was only 23 years long.

Of course, one does need to get the minimum 40 credits to get any SS, but for FIRE types that happens after 10 years.

I'm 40 and have 24 years of W2 income and 9 at max payments (to be 10 once 2022 entered) and I was surprised at how much my benefits were reduced (~40%) if I retired now vs if I kept working another 15-20 years and I believe was ~33% lower assuming I retire in mid 2025 (my latest planned retirement date), which will be 4 more years added at max tax. At age 30, it would have been much worse. Those zeros really do hurt quite a bit till you get ~20+ years of max payments.

I'm planning assuming zero SS payments for retirement so its somewhat an academic exercise for me.

 

[Magus]

Closet gamer - agreed 100% - nice post. Add in the fact that GDP has grown significantly lower over the last 30 years than the prior 30, 100 or 200 years, with the headwinds you mentioned, and I'm assuming lower real equity returns than historical going forward. Toss in a curve ball like a nuclear war and all bets are off. My biggest fear is a between 2 and 3 std dev left tail event occurs RIGHT after I retire.

 

[Sunset]

Closet gamer - agreed 100% - nice post. Add in the fact that GDP has grown significantly lower over the last 30 years than the prior 30, 100 or 200 years, with the headwinds you mentioned, and I'm assuming lower real equity returns than historical going forward. Toss in a curve ball like a nuclear war and all bets are off. My biggest fear is a between 2 and 3 std dev left tail event occurs RIGHT after I retire.

We haven't seen too many nuclear wars, but we have seen many countries with sky-high inflation.
Inflation robs people of their savings when the cost of things dramatically increases every year.
When it's over 50% per month, (12,875% per year) savings are quickly lost.

https://finance.yahoo.com/news/12-countries-highest-inflation-rates-180545361.html

"However, history tells us to expect the unexpected. Some of the cases of the highest inflation rate ever, or the worst hyperinflation in the world were recorded in Hungary during 1945-1946, with a monthly rate of 4.19 x 1016%, Zimbabwe in 2007-2008, with a monthly inflation rate of 7.96 x 1010%, and (former) Yugoslavia during the period 1992-1994 with a monthly inflation rate of 313,000,000%. Hyperinflation is considered to occur when monthly inflation exceeds 50% (or 12,875% per year). In today’s economy, the worst example of hyperinflation is Venezuela, which was among the top countries with the highest inflation in 2018. The data on the precise percentage differ, with Forbes reporting a rate of 80,000% per year in 2018, and CNN Business announcing a figure of 130,060% for 2018."

 

[livingalmostlarge]

https://www.financialsamurai.com/the-best-decumulation-age/

has anyone read this? deaccumulation? I just ask.

DH has been working now for 17 years maxed out every year and I believe we're past the second bend point for him it doesn't matter when he decides to stop with 0

 

[youbet]

Some early thinking was the stock market returns are ~10% with 3% inflation, so 7%WR would be safe.
Bengen and the Trinity study proved this rate to be not safe.

The studies did not prove that a 7% WR would not be safe going forward, but it wouldn't take much of a leap of faith to draw that conclusion. They back tested WR's vs historical investment return and inflation data and at a 7% WR found there were a significant number of "failures." At a 7% WR, you would have run out of money about 60% of the time vs. about 5% of the time with a 4% WR. At 6%, you'd have approximately a 50/50 chance of your portfolio surviving if the future is reasonably predicted by the past.

The distribution of values of ending portfolios has a large standard deviation and is skewed sharply to the right. You don't know how long you're going to live or what spending surprises might jump into your life. You have to maintain an AA close to what you used in the testing. And "sequence" of inflation and investment return data is very important. Therefore, unless you unload much of this variability off on an insurance company and buy an annuity or similar, I think it's pretty close to impossible to plan to spend your last nickle as they lower you into the ground. Historically, to reduce the probability of running out of money you have to have a financial plan that will most likely leave a bunch of dough unspent. It's very hard to get around that IMHO

Good luck to OP on figuring it out!

 

[youbet]

If you only withdraw less than 4% is it to preserve principal for your heirs?

At 4% WR, historically there would have been 5% of the time where there would have been no residual for heirs to inherit. At less than 4% WR, the probability of leaving some dollars unspent when you croak increases and the amount increases as well.

BTW, money is fungible. No particular dollar in your portfolio can be identified as "principal."

What if you only wanted to do 6% and use everything? I was contemplating what if you do want to draw down the principal?

At a 6% WR you will definitely draw down below your original portfolio value in most cases. You'd have about a 50/50 chance of running out of money before 30 years.

But what if you live on $72k and have $1.2M = 6% and then 16 years. Assuming no returns. If you retire at say 50 that takes you to 66

You're forgetting to increase the $72 by inflation. Again, if you start with $1.2M and withdraw an inflation adjusted amount each year, beginning with $72k, you'll run out of money half the time (more or less). And that assumes historical levels of returns, not zero.

You're really optimistic!

 

[Koolau]

I think someone brought up how the "4% rule" is actually "supposed" to be applied. You know - start with your first year's stash, take 4% (actually your SWR as calculated by FIRECalc) and beginning the next year, adjust for inflation. Several years down the road, of course, your percent withdrawal of ORIGINAL stash may change dramatically due to inflation. I guess the hope is that your stash has also risen dramatically.

SO, with that in mind, I've never really done it that way. I just look at what I've pulled from the stash each year and divided by the (I forget) year start stash or maybe year end stash or maybe whatever the stash is when I think about it (real precise!) If I'm 4% or under, I figure I'm golden.

So I don't worry about inflation (well, I do, but you know what I mean.) So each 4% calc. is based on this year's stash and has nothing to do with the original number from almost 16 years ago. It's as if it's always the first year of ER. That's a way to never run out of money, but it doesn't encourage BTD levels of spending perhaps. I think my real problem is that I've run out of stuff to buy or my age-appropriate experience-spending has become limited. (Don't let this happen to you! BTD while you can.) YMMV

 

[youbet]

I know I keep banging on about it in various threads, but I think the last 20-30 years should be treated as highly suspect when thinking about the next 20-30 years.

That's one reason I like FireCalc and other similar tools. The back-testing includes various scenarios that are very different from the last 20 - 30 years.

 

[Dtail]

That's one reason I like FireCalc and other similar tools. The back-testing includes various scenarios that are very different from the last 20 - 30 years.

Good point that many forget. The 4% WR concept was developed with the worst 30 year historical sequencing periods in mind.
Will the next 30 years be worse than a beginning retirement in 1966?
So far, if one retired starting in 2000 or 2008, it is still not one of the 6 worst starting scenarios, which conceptually give us the reciprocal 95% success rate.

 

[F.I.R.E User]

We use 4% SWR till we expire but leave 96% of wealth on the table?

 

[Gumby]

We use 4% SWR till we expire but leave 96% of wealth on the table?

That's not the way it works. According to Bergen and the Trinity Study, you can spend 4% of your initial portfolio balance, increased for inflation every year thereafter for 30 years. You may have more or less than 96% of your initial balance at the end of those 30 years, but you most probably won't have zero.

 

[KarenF]

We are at 5%, but only because when our pensions kick in when we are 65 our expenses will almost be covered and then we will also have SS whenever we decide to take it. We will not need to withdraw anything after that, and then RMDs kick in. DH and I are both 61.

 

[Koolau]

That's not the way it works. According to Bergen and the Trinity Study, you can spend 4% of your initial portfolio balance, increased for inflation every year thereafter for 30 years. You may have more or less than 96% of your initial balance at the end of those 30 years, but you most probably won't have zero.

Just curious if anyone here 1) Calculates the inflation adjustment 2) Spends the inflation adjustment.

I don't because I don't need it to buy everything I really want. Yes, I could buy new cars, fly 1st class, etc., I just somehow find that wasteful. I guess it's the curse of being born poor, working hard, being richly blessed and wanting to share rather than consume. BTD is fun and often appropriate. I just find it more of an occasional thing than a way of life.

Heh, heh, full disclosure: DW and I sprung for the economy plus seats on our annual sabbatical to the frozen tundra of the midwest. We did it last year and it really is the sweet spot (for us) in terms of comfort vs cost. 1st class was 3x economy but I think we're paying about 15% more for 4 inches of extra room. As my Dunlops Disease has not gone into remission, that extra 4 inches is a little bit of heaven. (Dunlops Disease: Dat's where da belly dun lops over da belt, mon.) YMMV

 

[NanoSour]

We are at 5%, but only because when our pensions kick in when we are 65 our expenses will almost be covered and then we will also have SS whenever we decide to take it. We will not need to withdraw anything after that, and then RMDs kick in. DH and I are both 61.

I'm in the same boat, but have trouble spending at our current 3% withdrawal rate. I'm sure my kids could help me with that problem.

 

[Koolau]

I'm in the same boat, but have trouble spending at our current 3% withdrawal rate. I'm sure my kids could help me with that problem.

Indeed. We are giving our kids their inheritance while we are alive. We can enjoy watching it make a difference now rather than wonder what they will do with it after we are gone. YMMV

 

[RobLJ]

Has anyone been drawing on their portfolio whether early or not at a higher rate than 4%? I assume 4% is to never run out of money. But with the bull market which we can't count on I know, many retirees have ended up with more money than they started.

So I'm curious has anyone modelled or actually drawn say 6% or 8% from their portfolio or planned on taking large amounts so the idea is that they end life without any inheritance for anyone?The post cut out my response, but I was taking out 5.5% a few years ago, assuming it would continue for another 5 years until full SS for me, then go down to about 3.5%, even further when my SW took SS 4 years later. In the meantime, the portfolio went up (even at 55% stocks) and cut the withdrawal to a much more safe 4.5%. I'm not suggesting people do but I wonder if it's being too conservative to assume that you need 25x expenses if SS will be here in some shape or form? Or to assume a higher WR?

I took out 5.5% a few years ago after I stopped teaching online, assuming that would continue for 6 years and that I would reduce it below 4% (actually 3.5%) when I drew SS at 66.5 and then my wife's SS 4 years later would drive the rate (probably) further down. And.... the portfolio continued to go up, so the withdrawal rate is now 4.5%. This modelled fine, pre the portfolio booming (and I had reduced it to 55% stocks). Of course if the market goes down another 25%, then it may not model so well, but if you throw out travelling and other luxuries, our SS combined will pretty much pay for necessities. We would have to draw from the portfolio for big house repairs and cars, and perhaps a few other emergencies. For the last 3 years we have been camping in the Sierras/around Nevada, but I guess at some point, I'll want a better mattress than a camp pad and sleeping bag in a tent.

Best laid plans of mice and men gang aft awray, as Bobby Burns wrote.