The "Father" of 4% SWR doesn't recommend it...

[samclem]

WnW,
The SWR is simply a percentage of the retiree's starting portfolio -- how one does the Withdrawal is up to them. The theory then is that the beginning Withdrawal amount is adjusted for inflation. AND, if you are following the 95% rule, in a down year, your withdrawal will be no more than 95% of the prior year's amount.

Rita,
I think you may be confusing two different withdrawal paradigms. At the risk of using the wrong terms, I'll give it a shot:
- The "conventional" strategy that I think most folks start with is a X% of the portfolio's beginning balance adjusted each year for inflation. After the first year, your withdrawal amount each year is simply the amount you took out the previous year plus an inflation adjustment.
- The "95% rule" you mentioned is from Bob Clyat's book. Using this method, you take out X% of your portfolio's value at the beginning of the year. There is no inflation adjustment: If your investments do well, you take out more money. If the investments go down 30% in value, you get 30% less money the next year. The 95% rule is a slight modification to this method--it says that even f your investments go down in value a lot, you still withdraw 95% of the amount you took out in the previous year, rather than the normal (lower) X% of your portfolio amount. Historically, using the 95% rule has not reduced overall success of these portfolios, and it's a more acceptable approach for many folks (who can't absorb a 10-20% rapid reduction in their "take" from year-to-year).

 

[unclemick]

Unclemick's exceedingly complicated lefthanded unified general theory of chickenheartedness - jan 2006 version.

Note this is 60% of retirement income nowadays with 40% being a non cola pension plus early SS.

1. If I feel ok - take 5% of 12/31 portfolio balance into Prime MM and live the following year.

2. If I'm scared - take the SEC yield of my portfolio 12/31 and use that.

3. If I'm totally panicked - live off my one year or so petty cash float while I resurrect my cheap bastardhood notes and relearn how to live on less than 27k in current $(SS plus pension) - reinvesting everything else.

heh heh heh - And if this gets too complicated in my old age - Pssst Wellesley and party. .

P.S. If I realize that I was too cheap - take a little more one year and remodel/take some extra trips/eat out a little more/ a little more for charity, etc.

 

[chinaco]

Unclemick's exceedingly complicated lefthanded unified general theory of chickenheartedness - jan 2006 version.

I suspect that your model is followed by more people than the 4% rule. Which may elevate it from theory to unified general law of chickenheartedness.

 

[2B]

I suspect that your model is followed by more people than the 4% rule. Which may elevate it from theory to unified general law of chickenheartedness.

I'm planning on a similar version. I will have very little pension and plan on delaying SS until age 70 so I have a double budget.

Budget 1 will be a nice lifestyle but without travel or luxuries. That will require a SWR of about 2%. This could be cut even further but I'd probably start SS early before I did.

Budget 2 adds to the basic living expense budget and can grow or contract as my fear does. Right now, I estimate Budget 2 equals Budget 1. If the "bull" returns, I might not know what to do with all the extra.

I have 40% of my portfolio in cash/fixed income. That is enough for about 7 or 8 years of both budgets. If I went to Budget 1 only, it's enough for over 20 years. I've been playing with the idea of separating my funds where the cash/fixed goes only to Budget 1 with equities funding Budget 2. That may make my lifestyle too dependent on the stock market but it would certainly keep me from running out of money. It would automatically increase my cash level in a falling market. I would never move money from cash to equities. If the market moves up, that's when I'd replenish my cash position and have more for luxuries and travel.

Ah yes, the endless philosophical debates. Unclemic has the right idea. Just live.

 

[audreyh1]

Unclemick's exceedingly complicated lefthanded unified general theory of chickenheartedness - jan 2006 version.

Note this is 60% of retirement income nowadays with 40% being a non cola pension plus early SS.

1. If I feel ok - take 5% of 12/31 portfolio balance into Prime MM and live the following year.

2. If I'm scared - take the SEC yield of my portfolio 12/31 and use that.

3. If I'm totally panicked - live off my one year or so petty cash float while I resurrect my cheap bastardhood notes and relearn how to live on less than 27k in current $(SS plus pension) - reinvesting everything else.

heh heh heh - And if this gets too complicated in my old age - Pssst Wellesley and party. .

P.S. If I realize that I was too cheap - take a little more one year and remodel/take some extra trips/eat out a little more/ a little more for charity, etc.

Give the man another medal! He's brilliant!

Audrey

 

[ESRBob]

SteveR,
Nice post. As you say, doing this ER thing over the long run requires getting comfortable first with all the data/studies/issues of withdrawals, and then cycling repeatedly through your situation, the markets, your spending, your needs, your performance. It isn't necessarily easy or stress-free, but it beats the heck out of working for 20 or 30 extra years in a job you dislike!

 

[Gotadimple]

What Bob said x 1000!

-- Rita