Morningstar declares 4% safe once again

[LateToFIRE]

This thread has given me lots of food for thought, especially as I just recently FIRE'd (early 60's so not all that E). The upshot is that mostly has supported my thinking around WD rates, especially the commentary from mathjak107. I've read everything I can get my hands on with respect to the topic and run dozens of models, including my own detailed custom-built Excel spreadsheet. That and discussions like this one have gone a long ways to me getting comfortable I have "enough" despite some fairly lofty assumptions around "the number" I had previously set for myself. For the record, here's my key observations:

(1) I'm in the camp of the 4% rule being ridiculously conservative, though recognize its probably best for most folks to err to the side of caution rather than excess.

(2) I've seen credible analysis to suggest that 6-7% can deliver high +90% confidence over a 25-30 year period IF you are willing to forgo inflation increases in down years. In other words, where there is some flexibility in budget, much higher WD rates can be safely utilized.

(3) What's also clear is that the first decade of retirement will largely drive the financial risk profile of the journey - the proverbial SORR. So, one would be wise to balance the desire to BTD early on while one is fit and energetic vs the desire to preserve the portfolio in the avoidance of SORR.

(4) I suspect that if you are drifting towards a SORR iceberg, you'll probably see it coming for quite a distance and be able to take corrective action. Or if you encounter a black swan big bang, well that will hit you over head quite sharply and you'll be inclined to pull back immediately. Again, the key is having enough flex to make meaningful modifications.

In summary, I believe a high degree of caution is warranted when expenses are relatively fixed and financial resources are relatively thin (i.e. little margin for error). Where there is higher flexibility, higher risk can be responsibly taken.

 

[Sojourner]

Just attempting to explain my perspective, and I don't have the slightest problem with your 3.4% WR. Each to his own, different strokes, etc etc. We all have different long-term outlooks and varying tolerances for volatility/risk.

Sure, totally agree with this. While I might wish I could convince you to spend a bit more than 2.3%—because I think that's unnecessarily conservative—I know you're happy and very set with your plan... and that's perfectly okay!

 

[MichaelB]

Mathjak, once again, and just to confirm, is your point some people retire with less than adequate budgets or spending levels below what they really would like? They would look to increase their % rate of withdrawal after some years of high portfolio returns? I’m just trying to understand what exactly you are proposing.

 

[mathjak107]

Mathjak, once again, and just to confirm, is your point some people retire with less than adequate budgets or spending levels below what they really would like? They would look to increase their % rate of withdrawal after some years of high portfolio returns? I’m just trying to understand what exactly you are proposing.

yes many are living on an amount that was determined a safe withdrawal rate many years ago , but markets have grown that savings far more then inflation adjusting . they may want to add things back in they gave up


as well as many want to improve and upgrade their lifestyle …

i like where we live in queens in nyc ..

but if my budget was much greater i would move to manhattan by central park .

we just bought a new car for 80k since i like fine autos and why not , we can now afford it.

so we like a bigger budget to live better then we did

our idea of retirement was to live better then we did while struggling to save and raise a family

 

[LateToFIRE]

yes many are living on an amount that was determined a safe withdrawal rate many years ago , but markets have grown that savings far more then inflation adjusting . they may want to add things back in they gave up


as well as many want to improve and upgrade their lifestyle …

i like where we live in queens in nyc ..

but if my budget was much greater i would move to manhattan by central park .

we just bought a new car for 80k since i like fine autos and why not , we can now afford it.

so we like a bigger budget to live better then we did

Similarly, DW and I have enjoyed a very nice lifestyle. And expect to continue that in retirement, albeit with some amount of downsizing on the housing front (as much for simplicity as expense). I would not have retired if I thought we'd be unhappy with a 4%-style budget. Question then becomes, what else can we afford? Could we maintain a city apt? Could we spring for a Florida condo? How many big vacations should we book? Should we add on to the house? Should I buy that Porsche 911 I've been eying?

Maybe this is a New Yorker thing - always thinking about the bigger, better fill_in_the_blank.

 

[mathjak107]

Similarly, DW and I have enjoyed a very nice lifestyle. And expect to continue that in retirement, albeit with some amount of downsizing on the housing front (as much for simplicity as expense). I would not have retired if I thought we'd be unhappy with a 4%-style budget. Question then becomes, what else can we afford? Could we maintain a city apt? Could we spring for a Florida condo? How many big vacations should we book? Should we add on to the house? Should I buy that Porsche 911 I've been eying?

Maybe this is a New Yorker thing - always thinking about the bigger, better fill_in_the_blank.

this is the last down of our lives .. i don’t want to live it doing the same ole same ole

 

[LateToFIRE]

this is the last down of our lives .. i don’t want to live it doing the same ole same ole

Personally, I'd like to add flying private to my new lifestyle

 

[GravitySucks]

I’m missing the logic here. If we plan for a 4% withdrawal rate, and that level of expense represents our target budget level on retirement, why is a “raise” compelling? If the portfolio has performed better than planned the 4% we are withdrawing is already gives us more cash more than we planned for, so we have surplus cash. We still don’t know what the future holds so why would we increase the withdrawal %?

I started with a fairly lean fire. Five years in the portfolio was up substantially so I gave myself a raise. Then Covid and some health issues hit and I didn’t spend that raise so at ten years in I had an even bigger stash so I’m giving myself another raise.

I’m gifting more to my daughters now. Let them enjoy it now when it helps more.

 

[MichaelB]

yes many are living on an amount that was determined a safe withdrawal rate many years ago , but markets have grown that savings far more then inflation adjusting . they may want to add things back in they gave up


as well as many want to improve and upgrade their lifestyle …

i like where we live in queens in nyc ..

but if my budget was much greater i would move to manhattan by central park .

we just bought a new car for 80k since i like fine autos and why not , we can now afford it.

so we like a bigger budget to live better then we did

The point you make is fine as it applies to you. I don’t agree it can be expanded to apply to most people.

If my portfolio grows more than the sum of withdrawals + inflation and I continue to withdraw the same fixed % while my budget grows at inflation, I will have unspent money left over, which I can choose to spend or save. So, I can keep the same % withdrawal rate and still spend more. This is (IMHO) the preferred way to increase spending in retirement.

The risk of running out of money may be low for you, but others have different risk tolerance, and while the risk may be low the consequences are severe, especially for those of us with no other source of income. Even a 10% level of risk is probably unacceptably high for most people. Running out of money is a worst case no one is willing to face.

Is there a time when my risk of running out of money falls so low that I can increase my current spending? I don’t think so. Like most people, we have chosen to self fund long term care and end of life care. This can be such a great expense it takes priority over any inclination I might have to spend more today.

 

[mathjak107]

raises are built in to other withdrawal methods automatically. no one has to take them , but the conventional constant dollar method as it is called is the most conservative as far as allowable spending .

key word being allowable , not mandatory.

firecalc also allows you to switch to the other methods as well , they are just not as popular or even known.

we much prefer 95/5

you probably have more posters that responded here who enjoy increasing spending and the added things they can do or enjoy then not

 

[Chuckanut]

i rather spend it on women. ha ha

+1

I spent most of my money on wine, women and song. The rest I wasted.

 

[ERD50]

Originally Posted by MichaelB View Post
I’m missing the logic here. If we plan for a 4% withdrawal rate, and that level of expense represents our target budget level on retirement, why is a “raise” compelling? If the portfolio has performed better than planned the 4% we are withdrawing is already gives us more cash more than we planned for, so we have surplus cash. We still don’t know what the future holds so why would we increase the withdrawal %?

why ? because 4% is a conservative starting point based on the remote chance we are the poster child for a worst case outcome .

inflation adjusting only keeps the same WORST CASE spending power .

on the other hand over 90% of all 30 year outcomes end with more then we started , 67% end with 2x what we started with , and 50% of the time end with 3x what we started with . in fact it’s the same odds of ending with 6x what you started as being the worst case outcome .

so most of us want to be rewarded by not being restrained to the same worst case budget .
....

Agreed. This is kind of a re-statement of the "Retire Again and Again" scenario.

For simplicity, let's assume a 3.3% WR as "historically 100% safe". With "Retire Again and Again", you find that if at any time in the future, your portfolio has grown beyond what is needed for a 3.3% Inflation Adjusted Withdrawal, you can boost your withdrawal amount to that 3.3% level, and inflation adjust from there . And you will still be 100% safe (historically).

Since the future tends to rhyme, not strictly repeat the past, you might want to be conservative and keep that 'raise' a bit below the full historical allowable. But it pans out when you review the data.

-ERD50

 

[ERD50]

+1

I spent most of my money on wine, women and song. The rest I wasted.

I thought it was "Fast Cars, Old Whiskey, Young Women".

Have I been doing it wrong?

-ERD50

 

[audreyh1]

I just let our portfolio decide our available spending each year. If our portfolio doesn’t keep up with inflation, then neither does our spending.

I was never comfortable with the classic approach initial portfolio value 4% (or whatever) increased by inflation every year.

Besides, we didn’t need that kind of guaranteed same income every year. We have a large amount of discretionary spending and we’re very flexible.

 

[Tetto]

I just let our portfolio decide our available spending each year. If our portfolio doesn’t keep up with inflation, then neither does our spending.

I was never comfortable with the classic approach initial portfolio value 4% (or whatever) increased by inflation every year.

Besides, we didn’t need that kind of guaranteed same income every year. We have a large amount of discretionary spending and we’re very flexible.

Your approach makes the most sense to me. I’m cautious by nature and need only what we need to be comfortable. That’s it.

 

[USGrant1962]

My view is that most of us spent 30 or 40 years increasing our standard of living to a standard that we enjoy enough to pull the plug "early". But if our means continue to increase after that, why would one not continue to increase one's standard of living?

The "have enough" crowd suggests that some fixed standard of living is enough and anything above that is excess, wasted, unneeded, whatever. But with that mindset excess returns are "wasted" in the sense that they are never realized/recognized and go to heirs, charity or the government after death. For 4% SWR or FIRECalc folks, 95% of the time you have excess returns - why waste them?

IMO, the retire-again-and-again approach (say rerunning a FIRECalc model each year) or the 4% (or 5%) of current portfolio approach safely defines what you can spend. If you want to spend that on home improvements, better golf courses, longer trips, business class upgrades, or charitable donations with a warm hand is up to you. But restricting yourself to some fixed spending amount when your portfolio exceeds some conservative baseline forecast is overly conservative.

 

[Major Tom]

Sure, totally agree with this. While I might wish I could convince you to spend a bit more than 2.3%—because I think that's unnecessarily conservative—I know you're happy and very set with your plan... and that's perfectly okay!

I will almost certainly be spending more at some point in the future. I'm just not quite there. Perhaps it's the withdrawal version of OMY syndrome

 

[mathjak107]

I just let our portfolio decide our available spending each year. If our portfolio doesn’t keep up with inflation, then neither does our spending.

I was never comfortable with the classic approach initial portfolio value 4% (or whatever) increased by inflation every year.

Besides, we didn’t need that kind of guaranteed same income every year. We have a large amount of discretionary spending and we’re very flexible.

a healthy percentage of discretionary spending makes a big difference in things .

when we looked in to backing in to a retirement budget , we wanted a big percentage of discretionary spending in it which our current lifestyle gave us .

for the same budget we could have moved to manhattan but that budget would be mostly non discretionary.

both lifestyles cost the same , but if push came to shove and we needed to cut back on spending there was no slack in the plan .

our plan has developed lots of slack thanks to not only good markets the last almost 9 years but the fact our withdrawal method allows higher spending capabilities.

we use bob clyatts 95/5 …we CAN take up to 4% of the actual balance or in a down year we take the higher of what we took the previous year or 5% less .

so far only one cut because we were down in 2022 .

but even with the cut the draw was higher then had we followed the traditional constant dollar method.

so having slack in a budget makes for a financially less stressful life

 

[Dtail]

I am also a fan of the retire again and again concept with Firecalc. Once I start taking SS, I will use either the fixed % of the current portfolio, or the Clyatt 95/5 methodology.

 

[mathjak107]

I am also a fan of the retire again and again concept with Firecalc. Once I start taking SS, I will use either the fixed % of the current portfolio, or the Clyatt 95/5 methodology.

a fixed percentage draw can be tough in down markets…you may get to much of a cut …it makes the portfolio to variable in down markets .

the whole idea of a safe withdrawal rate is to provide a safe , secure , CONSISTENT income …a fixed percentage may swing a lot up and down

 

[Dtail]

a fixed percentage draw can be tough in down markets…you may get to much of a cut …it makes the portfolio to variable in down markets .

the whole idea of a safe withdrawal rate is to provide a safe , secure , CONSISTENT income …a fixed percentage may swing a lot up and down

My fixed percentage concept would be lower than 4%, plus any unused monies would be put into a separate pool to be used to supplement the down years.
So conceptually, a little closer to the Clyatt methodology.

 

[mathjak107]

My fixed percentage concept would be lower than 4%, plus any unused monies would be put into a separate pool to be used to supplement the down years.
So conceptually, a little closer to the Clyatt methodology.

why not just go 95/5?

like i say 4% is just the capability, one can draw what they want

 

[marko]

Why would you "take a raise" if you're not spending the money now? Why not leave it invested so it can compound? I currently don't need the money in my portfolio to do everything I want to do. If I do want to do or have something more and need money for it, I'll take some from the portfolio. But I'm not planning to spend money just because I can.

+1. But I do believe that we are headed for higher levels of taxation. My state just implemented a millionaires tax and after two years there's already rumblings about making it to include those making $750k. And in five years? "High net worth" is relative and is a sliding scale.

At a smaller level aren't we going to lose many tax cuts next year? Sixty years ago, we had a top marginal tax rate of 91%. Could we revert to something like that? Not likely, but it wouldn't surprise me.

So, do you spend it now and have less to be taxed or do you save it so that you can maintain your lifestyle after new, higher taxes?

 

[audreyh1]

a fixed percentage draw can be tough in down markets…you may get to much of a cut …it makes the portfolio to variable in down markets .

the whole idea of a safe withdrawal rate is to provide a safe , secure , CONSISTENT income …a fixed percentage may swing a lot up and down

I had decided early on that I could live with the annual income variability due to spending flexibility.

Turns out that in practice it’s hasn’t been a big deal and wasn’t in 2022 either. It turns out that taxes owed create quite a bit of smoothing. After a tough year like 2022 income taxes usually drop quite a bit. There are opportunities for tax loss harvesting plus the mutual fund distributions drop a lot. Since our actual spending is after taxes - we may have a lower $ withdraw but taxes lower the net doesn’t drop as much. So that helps.

But a bigger reason is that after several years of up markets, withdrawals outpace spending for a while so a drop isn’t as painful as you might think.

We’ve been lucky overall - long periods of up markets in spite of some nasty bear markets mixed in. Knock on wood!

 

[mathjak107]

down turns don’t have to be steep to be retirement hurters , they just have to be extended enough .

what is interesting is every failure for 40 to 60% equities has had normal returns over 30 year periods

but the first poor 15 years did them in so bad that even the best bull market in history couldn’t save them later .

a perfect example of sequence of returns going wrong