In defense of 4% withdrawal strategy.

[Mulligan]

You have to hand it to Yahoo to be "fair and balanced". I noticed the article from OP was last week. Now this week, they have put this article in their financial section. The article goes into the 4% rule and is suggesting it is not viable, now. I know everyone's situation is unique, but the articles defiantly contrast each other.

The old rule of thumb that allowed retirees to withdraw 4 percent of their savings per year should be thrown out the window in today's low-yield world, a study released in January found. Using the traditional 4 percent withdrawal rate, portfolios will run dry at a higher rate than ever before, found researchers Michael Finke, Certified Financial Planner professional; Wade D. Pfau, Certified Financial Analyst; and David Blanchett, CFA and CFP. Based on the real yields offered on five-year Treasury Inflation Protected Securities as of January 2013, the failure rate for retirement account withdrawals, or when they run out of money, using a 4 percent per year schedule is as high as 57 percent.

The original study that arrived at the 4 percent withdrawal rate was done by William Bengen and was based on a real return on bonds of 2.6 percent. The asset-allocation mix necessary to successfully draw down a portfolio in Bengen's study required that a portfolio devote at least 50 percent to stocks.

The study released this year used a 50-50 allocation between stocks and bonds and concluded that under current market conditions, "Even a 3 percent withdrawal rate has a more than 20 percent failure rate for all asset allocations," according to the paper, "The 4 percent rule is not safe in a low-yield world."

http://finance.yahoo.com/news/retiring-on-cds-not-viable-183331108.html

 

[JoeWras]

The study released this year used a 50-50 allocation between stocks and bonds and concluded that under current market conditions, "Even a 3 percent withdrawal rate has a more than 20 percent failure rate for all asset allocations," according to the paper, "The 4 percent rule is not safe in a low-yield world."

Retiring on CDs Not Viable - Yahoo! Finance

The article kind of wanders about. Talks about CDs, TIPS and then 50-50 allocations, and ends with a question of whether we are entering the "the age of annuities."

No wonder people get confused and have to pay a FA 1% a year.

 

[ER Eddie]

Based on the real yields offered on five-year Treasury Inflation Protected Securities as of January 2013, the failure rate for retirement account withdrawals, or when they run out of money, using a 4 percent per year schedule is as high as 57 percent.

.... and concluded that under current market conditions, "Even a 3 percent withdrawal rate has a more than 20 percent failure rate for all asset allocations," according to the paper, "The 4 percent rule is not safe in a low-yield world."

I'm pretty ignorant when it comes to financial matters, but to me, a study based on bond yields "as of Jan 2013" and "current market conditions" is kind of flawed. As I understand it, SWR are based on the whole history of the market, not current conditions. But maybe I'm missing something.

 

[haha]

Not arguing with what you say, just that many here are far too gloomy about the future. <>Sorry if I've been too optimistic for some. But please consider that the possibilities may be better than what "the new normal" assumes.

It isn't that you are too optimistic, it is that you seem certain about things that no one can be certain about. What you are selling is faith. I think faith is often a good thing to have, but selling it is more a job for politicians and generals.

In a earlier post you said

Certainly 4% was a valid SWR for them. And for the vast majority of people on this forum.

With regard to your parents, the information is all or mostly in, so you can deem their 4% adequate. But as to "the vast majority of people on this forum", I'd say that might be hard to know. First what their situations are, and second, what the future holds in store, no matter what your opinions about energy and nanotechnology might be.

Why would you want to sway the presumably well considered opinions of strangers participating on a discussion board?

Ha

 

[JoeWras]

I'm pretty ignorant when it comes to financial matters, but to me, a study based on bond yields "as of Jan 2013" and "current market conditions" is kind of flawed. As I understand it, SWD are based on the whole history of the market, not current conditions. But maybe I'm missing something.

Totally agree. It is as if they took the situation today and straight line extrapolated it -- but only for the fixed/bonds. Never mind in today's world over the last 3 years or so would be awesome at 50/50 due to the equity element.

It is almost as if the assumption is equities will do what they do over the long term, but bonds and fixed are doomed forever.

 

[Mulligan]

The article kind of wanders about. Talks about CDs, TIPS and then 50-50 allocations, and ends with a question of whether we are entering the "the age of annuities."

No wonder people get confused and have to pay a FA 1% a year.

That is exactly what I thought... I opened the link expecting a read an article about seniors who have all their money in CDs and quickly draining their accounts. Instead it became an article about withdrawal rates and hardly anything about the headline. I have read that at websites such as MSN and Yahoo oftentimes, the person who writes the article, does not have any control over the title.

 

[photoguy]

I think most people look at SWR studies to see what will succeed in the future. I think this is the wrong way of thinking about the data / studies. I see them as more useful to define what will likely fail (if it didn't succeed in the past I don't think it will work going forward).

 

[Onward]

And during the time we were rising as a global economic superpower.

Since I often see this argument made to justify the view that "this time it's different," I want to remind you that the U.S. was already the world's largest economy by 1900.

So it really was in 1900 that the argument should have been made that "we've just finished growing to global preeminence. Where is there left to go?"

For an investor, that would have been very, very costly reasoning then, as I suspect it is now.

 

[enjoyinglife102]

What's interesting to me about all these discussions about "safe" withdrawl rates is that they have little relevance to what people actually do. Who on earth takes 4% from their portfolio and then that plus inflation for the next 30+ years? I get so much more out of discussions around real world strategies and approaches. My parents never invested in stocks, lived responsibly, had a good and happy life and a comfortable retirement. More to learn from them than a hypothetical spread sheet analysis.

 

[bUU]

I think the point that cannot be overlooked is that very well-respected experts are making it clear there are strong indications that what worked in the past - financially - will no longer work. So while we may be able to learn from the past with regard to health, attitude, and other matters of perspectives, this one specific aspect of life very likely requires a change in thinking.

 

[donheff]

I think the point that cannot be overlooked is that very well-respected experts are making it clear there are strong indications that what worked in the past - financially - will no longer work. So while we may be able to learn from the past with regard to health, attitude, and other matters of perspectives, this one specific aspect of life very likely requires a change in thinking.

As I said, for spending purposes I take this pessimistic view and probably would have taken it even if the financial community was optimistic. But my optimistic head still questions their conclusions about the long range. These same folks were yapping about 20%+ average annual gains as far as the eye could see in 1999. They exhibit recency bias in both directions.

 

[bUU]

I doubt that everyone making the point that the market has fundamentally changed were touting 20%+ average annual gains back in 1999. Perhaps a few people were, but that leaves the rest of the experts still saying that things have changed. How would one differentiate between a fundamental change in the nature of markets and recency bias?

 

[donheff]

How would one differentiate between a fundamental change in the nature of markets and recency bias?

I wouldn't, thus my pessimistic withdrawal rate. I just don't buy that they are right even though I wouldn't bet my future against them. Better safe than sorry.

 

[bUU]

So effectively, because they are rationally predicting doom, we believe their predictions because rational predictions of doom need to be heeded more than comparably rational predictions of glory.

Sounds good, but I don't think my spouse and I are going to be able to come to consensus on that, because it would tend to lead down a path that my spouse simply cannot abide.

 

[Midpack]

While there have been "experts" saying "this time it's different" once again, I am not aware of a consensus. We all remember the 1979 Businessweek 'Death of Equities' cover story, and I am sure there were similar POVs in the 1930's - all seemingly convincing at the time.

I'm not advocating all is well, and we will withdraw conservatively. But we don't know what the future will bring - we've been positively surprised generation after generation (PCs, Internet, mobile) and there may be breakthroughs in healthcare, energy or who knows what else despite a more global economy.

 

[bUU]

I think it is unlikely that we'll ever see consensus with regard to any major issues, for the rest of our lives.

 

[heeyy_joe]

I think it is unlikely that we'll ever see consensus with regard to any major issues, for the rest of our lives.

Oh, I doubt that.

 

[ERD50]

What's interesting to me about all these discussions about "safe" withdrawl rates is that they have little relevance to what people actually do. Who on earth takes 4% from their portfolio and then that plus inflation for the next 30+ years? I get so much more out of discussions around real world strategies and approaches. My parents never invested in stocks, lived responsibly, had a good and happy life and a comfortable retirement. More to learn from them than a hypothetical spread sheet analysis.

Why is this so incredible to you? Historically, it could be done and 95% of the time it would be successful. And the average retiree would have come out with about as much buying power as they went in with.

Now, 95% isn't comfortable enough for me, and I figure the future, on average, won't likely be as good as the past averages, but it seems that very many people could have done just fine on a 4% WR, no?

-ERD50

 

[Katsmeow]

Why is this so incredible to you? Historically, it could be done and 95% of the time it would be successful. And the average retiree would have come out with about as much buying power as they went in with.

Now, 95% isn't comfortable enough for me, and I figure the future, on average, won't likely be as good as the past averages, but it seems that very many people could have done just fine on a 4% WR, no?

-ERD50

I don't disagree with you that it would have worked. But I think the point is that in the real world that is not how people decide their withdrawal rate.

I mean how many people really look at how much they had when they retired (say, $1,000,000 for sake of argument), then say that year one I can withdraw $40,000 then when year 2 arrives go look up the inflation rate then increase that $40,000 by the rate of inflation, then the next year increase it by the rate of inflation again. And do that for 30 years never even paying any attention whatsoever to the size of the portfolio?

I mean people - in my experience - just don't commonly do it that way in the real world. I'm not saying it wouldn't work historically. And they don't do it that way with a 3% withdrawal rate or a 2% rate, etc.

My sense is that most people who actually have a withdrawal plan, get a general sense when they start out of how much they think that they can afford to spend (that sense may or may not be right). If they don't get SS yet, there is a good chance they will start out with a higher rate planning to reduce it later. As time goes on, they pay attention to their portfolio and how it is doing. If it, say, reduces 25% then most people are going to reduce their withdrawal rate. If it goes up significantly beyond what they expected, then they might increase it. I think that even those setting up a percentage (say 4% or 3% or whathever) are more likely to loosely base it upon the percentage of the existing portfolio rather than basing it as an inflation adjusted percentage of the original portfolio.

 

[M Paquette]

I'm pretty ignorant when it comes to financial matters, but to me, a study based on bond yields "as of Jan 2013" and "current market conditions" is kind of flawed. As I understand it, SWR are based on the whole history of the market, not current conditions. But maybe I'm missing something.

Nope. I speculate that somewhere around 2017 the 4% withdrawal rate plans will magically start working again, as the current 'if this goes on forever' assumption becomes invalid. I expect to see the 10 year Treasury rate rise above 5% in that time frame, as the ongoing liquidity trap and consequent de-leveraging activity wraps up. But that's just me.

 

[imoldernu]

Hope this isn't too far off topic.
When I was born, life expectancy was 56.6 yrs.
Those born today have a life expectancy of 75.4 yrs.
At my current age, my remaining life expectancy is 9.4 years
Genetics projection was 58 yrs.

Under my current $$$ plan, I'm good for age 90.
Don't use SWR, but it works out to about 4% w/ $5,000 estate.
Gives a cushion of five years.

Will join Hemlock Society @ age 87.

 

[bo_knows]

Excuse the ignorance of the young here, but what exactly is the thought process with how you determine your SWR? I know that for periods of 30 years, 4% is pretty safe. When you start ERing earlier and earlier, 3% or lower becomes the comfort level.

What I mean to say is... don't you usually have an idea of how much you spend each year, and you save up until your SWR on your portfolio matches that? Or, do any of you literally sit down on Jan 1, calculate exactly 3% of your portfolio and say "Welp honey, looks like we need to take another vacation this year!"

I can see trying to lean out your spending during tremendous downturns, but I fail to grasp the concept of these very exact SWR's.

 

[bUU]

We're not there yet, but I see it working the other way. We'll calculate whatever our SWR dictates, and if that's less than expected budget, we'll implement our own sequester.

 

[Midpack]

What I mean to say is... don't you usually have an idea of how much you spend each year, and you save up until your SWR on your portfolio matches that? Or, do any of you literally sit down on Jan 1, calculate exactly 3% of your portfolio and say "Welp honey, looks like we need to take another vacation this year!"

I can see trying to lean out your spending during tremendous downturns, but I fail to grasp the concept of these very exact SWR's.

Few if any of us consider SWR %'s exact, but they're a good benchmark for setting a portfolio goal IMO. Like you, I consider 4% pretty safe for 30 years, or 3% for longer duration. But beyond using it as one input to set a nest egg accumulation goal, I am sure we won't follow the withdrawal methodology much if at all. And I don't think Bengen, Greaney, the Trinity folks or the others meant for anyone to do so.

 

[bo_knows]

Few if any of us consider SWR %'s exact, but they're a good benchmark for setting a portfolio goal IMO. Like you, I consider 4% pretty safe for 30 years, or 3% for longer duration. But beyond using it as one input to set a nest egg accumulation goal, I am sure we won't follow the withdrawal methodology much if at all. And I don't think Bengen, Greaney, the Trinity folks or the others meant for anyone to do so.

This is what I though, but I've seen some people reference very specific numbers like "3.3%" or "2.8%". Not to pick on anyone, but it was just mucking with my notion of SWRs and how people decided on their spending levels.