Opinions on SWR

[Major Tom]

You're missing two key variables
- time frame for the SWR
- Asset allocation
Most SWR studies allocate 40-60% in US large cap equities (S&P) and 60-40% in broad bond index. Time frame is 30 years.

Agreed, and it's good that you pointed it out. I think many of us assume the portfolio and time frame that you stated above but for the sake of people who are less familiar with these studies (and also for the sake of simply being accurate), it's good to note it.

 

[audreyh1]

We're comfortable with 3.33% of remaining portfolio, which exceeds our current budget and lets us put some extra by for a rainy day, or that extra toy/splurge, or maybe for that inevitable year our remaining portfolio takes a hit. We're in our mid-50s now. I anticipate increasing the percentage when we think our timeframe is less than 30 years remaining.

 

[Rothman]

I am ok with 3 -4% WR, more on where in the range later. I'll add one point I don't see so far in the thread, that is the critical importance of early retirement year's market performance. It's really those first years that cause risk. my thought planning for ER at 53 is I'd go back to work and reduce withdraws. This allows me to avoid OMY syndrome, I have a contingency.
Now to decide between 3 or 4%, I look at market performance at time of retirement. This concept tries to account for market cycles. If you are retiring today at time of high market a lower range near 3% is appropriate, if you retire at a market low a 4% is ok. This concept makes sense to me, for example I have $1m fund if I was to retire when markets at a high my SWR is 3% = $30k next month markets take a 25% correction, fund is now $750 my SWR is 4% = $30k. My Withdraw amount in dollars is constant, Alternatively with constant SWR, if I used 4% in December withdrawing $40k per year for 30 years, or unlucky to retire one month later and take only $30k. That month of timing allows me to withdraw $10k (33%) more per year for 30 years, what sense would that make? Did I mention the $1m was in a Roth?, oh that's another thread

 

[mathjak107]

Why SWR at all, certainly not the only game in town? The originators specifically recommended that no one should just follow SWR come what may.

You can always do % of remaining portfolio (presumably increasing the % as you get much older) with a cash reserve to smooth annual income, or take out distributions only (forever, or until much later in the plan).

I will probably use % of remaining portfolio (with a cash reserve) for the first 15-20 years, and then I may go to SWR. There is no universal bulletproof plan (not that the OP claimed there is), not even cash only, not annuities/pension only, none...

the biggest issue with using a new balance each year as your guide is an unstable income stream.

the idea of finding that swr is so your income remains unscathed and it is relatively safe , secure and consistant. keyword being consistant and adjusting every year can be anything but consistant.

it seems the plans that keep the income steady and vary the pile left at the end are the most consistant.

of course you can do all kinds of modifications to that idea like bob clyattss 95/5 and that works fine .

 

[audreyh1]

Absolutely no problem with variable annual income here. It's very easy to manage it via "income smoothing" by not spending all your withdrawal after a "good" year and setting some aside to help cushion a "bad" year.

 

[jollystomper]

Absolutely no problem with variable annual income here. It's very easy to manage it via "income smoothing" by not spending all your withdrawal after a "good" year and setting some aside to help cushion a "bad" year.

+1

Currently my expected SWR, on top of my pension, is 2.2% based on a desired annual retirement income of $100K. From Firecalc, Quicken Planner, and Fidelity Retirement income planner, a SWR up to 3.6% give me 95% odds over 40 years. I can see in any year when my investment income exceeds 2.2%, moving some of that excess into cash to cushion the "bad" years. Though not retired I have done it this year, moving the equivalent of a target 2% SWR for a year from my stock/fund gains into my stable value fund.

 

[ERD50]

Absolutely no problem with variable annual income here. It's very easy to manage it via "income smoothing" by not spending all your withdrawal after a "good" year and setting some aside to help cushion a "bad" year.

+1

Currently my expected SWR, on top of my pension, is 2.2% based on a desired annual retirement income of $100K. From Firecalc, Quicken Planner, and Fidelity Retirement income planner, a SWR up to 3.6% give me 95% odds over 40 years. I can see in any year when my investment income exceeds 2.2%, moving some of that excess into cash to cushion the "bad" years. Though not retired I have done it this year, moving the equivalent of a target 2% SWR for a year from my stock/fund gains into my stable value fund.

Yes, but a regular inflation adjusted WR does this too. In good years, the excess rolls over into the portfolio, and you maintain your AA.

Of course you can decide to modulate your WR in addition. Historically, it would not be required @ 2.2% WR. I am curious what formulas people are using to modulate their WR - I hope to do some analysis of this in the future, but my gut and a few initial stabs at it says it won't help much w/o some very significant adjustments very early in the downturn.

-ERD50

 

[ER Eddie]

I was reading one of the free e-books recommended by a poster here last night*, and he made a decent point about personal comfort level and SWR. He said that the rate you're comfortable would depend on whether you are 1) intent on never working again, ever; 2) okay with working PT, especially if some of the more dire predictions about SWR come true. For the former, he recommended 3%, in light of some of the more recent, worrisome research. For the latter, 4%.

The numbers are debatable, of course, but what I thought was helpful was his distinction between people who never, ever want to work again and those who have some type of part-time work in mind, at least as a possibility, in their ER. I'm in the latter camp.

*Darrow Kilpatrick, Retiring Sooner (which, I should point out, is not a finance book or an analysis of SWR, but a book on accelerating the pace toward retirement).

 

[jollystomper]

Yes, but a regular inflation adjusted WR does this too. In good years, the excess rolls over into the portfolio, and you maintain your AA.

Of course you can decide to modulate your WR in addition. Historically, it would not be required @ 2.2% WR. I am curious what formulas people are using to modulate their WR - I hope to do some analysis of this in the future, but my gut and a few initial stabs at it says it won't help much w/o some very significant adjustments very early in the downturn.

-ERD50

That makes sense. I just decided via a "gut feel" to start with a conservative approach. I just feel more comfortable planning things this way, but will happily increase if things turn out better than expected.

I was reading one of the free e-books recommended by a poster here last night*, and he made a decent point about personal comfort level and SWR. He said that the rate you're comfortable would depend on whether you are 1) intent on never working again, ever; 2) okay with working PT, especially if some of the more dire predictions about SWR come true. For the former, he recommended 3%, in light of some of the more recent, worrisome research. For the latter, 4%

This also makes sense, I realize that I am setting my comfort level at never having to work again (unless of course someone wants to play me for one of my hobbies. )

 

[ERD50]

That makes sense. I just decided via a "gut feel" to start with a conservative approach. I just feel more comfortable planning things this way, but will happily increase if things turn out better than expected. ...

That's another area I want to investigate. If I am lucky enough to see my portfolio grow and grow, at what point would I decide to increase spending?

My gut tells me it will be a lot like the OMY (one More Year) syndrome.

-ERD50

 

[roger r]

I have not made a science of it, but probably fall into the percent of remaining savings in investments. I have been using 3% as a benchmark, but have had years when I am below this and years when I exceed the 3% at 6 years into things. When I start on S.S., in addition to a very small pension, I will almost meet very basic needs and any savings and withdrawals at that point will be for discretionary and hopefully fun spending and am also adding a cushion for any weird changes happening with medicare. So I guess it really isn't a hard percentage for me, but 3% is my starting point.

 

[AndrewJackson]

I am young (only 23) and my naive goal as of now is to have 100% in equities and only require 1.5%-2% to cover all my expenses. My ultimate goal is to have my portfolio reach escape velocity where my expenses are not enough to hold it back from growing over time.

 

[ER Eddie]

One more idea from the book I mentioned above. SWR includes an adjustment for inflation; however, the author points out that his (and others') expenses in retirement do not rise the way the nationally calculated inflation figures would predict, for a variety of reasons (I won't go into these, but the book is free, so you can check them out yourself if you like). So the SWR calculations may be overly cautious in that regard. His point pertains especially to early retirees who are careful with their purchases.

 

[RunningBum]

I was reading one of the free e-books recommended by a poster here last night*, and he made a decent point about personal comfort level and SWR. He said that the rate you're comfortable would depend on whether you are 1) intent on never working again, ever; 2) okay with working PT, especially if some of the more dire predictions about SWR come true. For the former, he recommended 3%, in light of some of the more recent, worrisome research. For the latter, 4%.

I haven't read that book yet, but I'd think there's a factor 3) if you have assets such as a 2nd home or larger home than needed that you could sell/downsize to raise more funds. I don't factor my home into my SWR but I certainly can do with less.