What SWR% would you suggest?

[firewhen]

Consider this scenario:

- middle aged with young children (and the typical expenses that entails)
- no sources of income except what will be generated from portfolio (dividends/selling investments) and whatever SS will pay 2 decades from now
- no health care benefits (will need to self-pay for private family coverage)
- potentially could be in retirement for 50 years, without any possible advances in longevity between now and then

So there is no safety net whatsoever besides our investments.

Through LBYM, 2 incomes living as cheaply as one, etc., our portfolio is already able to fund 4%, probably even 3% depending on what future expenses turn out to be.

I am shooting for 2%. Given the above, would you chance 3 or 4%? Firecalc says yes. If portfolio falters, or expenses creep, could be faced with hard choices, when w*rking a while longer when still at a relatively youthful age would have prevented all that.

Thoughts?

 

[OKLibrarian]

we're in a very similar position to you (though not nearly as close to FI). DINK couple, live on half our take-home, the calculators say we should be able to retire in our mid 40s. Right now we're going for a 4% SWR, though a lot depends on how much we (dis)like our jobs when the time comes--it's well within the realm of possibility that we stick it out for another year or two to increase the padding a bit. Worse comes to worst, we give our church and the humane society nice endowments when we go belly-up. IMHO I think 3% is pretty darned bulletproof. That said, it isn't my financial future, and you've gotta do what will let you sleep well at night.

 

[citril]

If you are considering going as low as 2%, why not put the whole thing in TIPS, withdraw the 2.4% yield and don't touch the principle. In future decades, when you are more comfortable increasing your WR you could change over to a normal portfolio with a normal WR.

 

[FIRE'd@51]

I like the 2% number if you can do it, since you can achieve it with a broadly diversified portfolio of stocks and live off the dividends, likely in perpetuity. Since dividend growth rates have outperformed inflation by a significant margin, you will likely be able to maintain your standard of living (or maybe even increase it). I am a firm believer that to "live well" you have to grow your income stream faster than the CPI, especially over very long periods of time. What point is there in ER if you have to just "make ends meet"?

 

[firewhen]

Citril,

Thanks for your thoughts, but I am thinking more in line with FIRE'd@51. Moving into TIPS would end any future real growth, which could be substantial with any growth at all. My thinking with the 2% is that we could live off the dividends, while the market bobs around, but ultimately heads northward. Even with a major market reversal, dividend rates should not drop that much, at least for a few years.

The tradeoff is that I will be w*rking for x number of years longer to get there. I was wondering if folks thought this was a crazy goal, and what they would do in our situation. With reasonable market returns, we should get there in a few years anyway.

I need some sort of goal, because there is no magic age for FIRE for me, since I have no reason to wait until a certain age to get any pension/health care, since none is coming.

 

[youbet]

I certainly wouldn't want you to assume any significant amount of risk going into RE due to your young age and responsibilities. On the other hand, you can put such extremely conservative goals in front of yourself that you'll wind up working long beyond what you needed to. You need to make some decisions.

The hardest part will be understanding how much you'll need in absolute dollar terms.....not percentages. My personal belief (admittedly subjective) is that in a situation such as yours, there is a higher probability of unforeseen expenses cropping up than in the economy not supporting a 4% WR.

Construct a budget for the next couple of decades. With the kids, there could be significant variability and I'd suggest tossing in lots of contengency funding. Then estimate the portfolio you'll need and how you'll invest it. To determine portfolio size, you'll need to assume a WR and withdrawal period. If you've done a good job at accounting for contengencies in your budget, I don't see why you would need to assume a WR of less than 3.5%. But instead of the normal default survival rate of 95%, why not use 100% since there are kids involved? For a withdrawal period, use 50 years.

That should get you into the ballpark.

Of course, there are a zillion other things to considrer. Do you or DW have skills where you could easily return to the workforce if necessary? Do you already have a medical plan that will continue into RE or do you need to go find one? Could either of you go to part time or periodic contract work for the first few years? Etc.

 

[wabmester]

Ah, another EER (extreme ER). 50 years is a lonnnng time, and frankly there is no right answer. A 2% SWR seems like it should provide plenty of cushion, but the reality is that there are no guarantees.

If you look at the EERs on this site, you'll find that a few of them are authors and at least one more is planning to become an author. Whatever their motivations, this kind of secondary almost-passive income stream is not a bad idea. Have a plan B. And that might include maintaining a skill that could potentially yield an income if your investments are confiscated by the Chinese when they invade us in 2025.

 

[Zipper]

I take 5% of my year end balance along with Canada Pension. I will get Old Age Security in 2 more years.

But I'm 63.

At your age I wouldn't go over 2.5% of the year end balance.

It's doable with a big stash.

 

[Bikerdude]

I would ask myself, how will I respond to a "gut check". With a 50 yr retirement you will experience one or more market disasters. Firecalc results show times when your portfolio would have been cut in half prior to eventually turning around. I would think of how I would handle that before setting a SWR that's too high.

 

[Cut-Throat]

I would ask myself, how will I respond to a "gut check". With a 50 yr retirement you will experience one or more market disasters. Firecalc results show times when your portfolio would have been cut in half prior to eventually turning around. I would think of how I would handle that before setting a SWR that's too high.

The 'Gut Check' should cause you to reduce spending in down years. That is probably all that is needed. If your 'Gut Check' causes you to sell all your equities in those down times, you will really be on the short end of the stick.

 

[Gone4Good]

My plan is to call it quits a couple years before turning 40 on an initial withdrawal rate around 3%. I've done a lot of back test modeling on various portfolio allocations and flexible withdrawal scenarios and concluded 3% is the right trade off for me. Notwithstanding that, I still have a few "safety valves" built into the plan to feel more secure with the higher withdrawal strategy. 1) More than 50% of the budget is discretionary 2) We plan on having some modest freelance income that could be ramped up if needed (not included in the 3% WR) 3) We live in a very high cost area and could probably cut 30% from expenses by moving (something we're considering doing anyway). All of which, when combined, provides a lot of financial flexibility - although exploiting this flexibility would not provide for the kind of retirement we're hoping for.

 

[Ed_The_Gypsy]

firewhen,

For a 50-year run, your portfolio should be heavy in good equities with low costs. Even average equities (e.g., index funds--average by definition, but never BELOW average!). What do you own?

 

[wabmester]

although exploiting this flexibility would not provide for the kind of retirement we're hoping for.

And don't forget the law of unintended consequences! Portfolio gets cut in half, so invoke Plan B: trout-bum in the trailer park. Oops, wifey doesn't like plan B. Assets get cut in half again from divorce.

 

[firewhen]

We are about 90% equities, all in index funds, all with Vanguard, except for 401ks, but those are similar. I know people complain here and there, but I think Vanguard is the best company out there. When they introduced Admiral shares, they got even better, because the expense ratio is almost as low as the ETFs.

As far as a gut check, while I did not enjoy 2000-2002, I did not sell anything and was not tempted to. Part of why I want the 2% is that even if the portfolio loses half its value, we still would be pulling out at a 4% ratio, until things hopefully corrected and started moving up again.

Our biggest problem will be health care, in that we will not have access to any group plans. My biggest hope is that this gets pushed onto the 2008 election agenda and we finally get some kind of national health plan. I do think that if middle-aged folks could buy into Medicare for a family, even if it cost something like 10 grand a year, I would be more serious about ER. Right now I would have to give up the corporate plan, which is pretty good, and deal with the private market. It is costs like these, that youbet alluded to, that have me concerned.

My biggest concern is the kids. If I am going to do something that I consider extreme and selfish (give up our regular income), I want to be pretty sure that it is sustainable over the long haul.

As always, everyone has been very helpful.

 

[tryan]

If you keep lowering the bar you'll NEVER retire .... we planned 3% SWR and got out at 43. With 2 young kids the rate has been closer to 4%. Healthcare is ~1000/month and that's with no dental coverage.

Yup, 50 years is a LONG time ... but at our age taking a jjjjjj-ob if things go to hell in a hand-basket would not be the end of the world. One thing for sure, I am enjoying my time alot more than all my friends back in the cube-farm.

 

[wabmester]

Our biggest problem will be health care.... My biggest concern is the kids.

Two advantages to EER:

1) Health care expenses are fairly low while you're young (we're paying about $300/mo for a family of 3 w/HSA).

2) You're young enough that you can more easily rejoin the rat race workforce than somebody who retires at, say, 65.

While the long-term risks are potentially high, recovery from early failure is relatively easy. I started out with a 50-year retirement. Yikes! But now that I'm 5 years into it, it's only a 45-more-years retirement and my portfolio has grown enough to give me a larger margin of safety. Amazing how that works, eh?

 

[Gone4Good]

And don't forget the law of unintended consequences! Portfolio gets cut in half, so invoke Plan B: trout-bum in the trailer park. Oops, wifey doesn't like plan B. Assets get cut in half again from divorce.

1) It's extremely important to get full buy-in from the significant other before any life-altering changes. No guarantees, but there should be no surprises either.

2) At a 3% initial WR, a 50% portfolio hit would require a 33% expense reduction to get back to 4% and 25% to get back to 4.5%. We could do that by moving a little further south - we'd get an improved climate and a bigger living space to boot. We wouldn't even have to give up the travel budget. If we wanted to stay put, we'd give up some extravagances and cut the travel budget in half . . . not exactly trout-bum territory.

 

[Spanky]

The tradeoff is that I will be w*rking for x number of years longer to get there. I was wondering if folks thought this was a crazy goal, and what they would do in our situation. With reasonable market returns, we should get there in a few years anyway.

I think the goal of 2% SWR is ambitious, but if you think it is necessary you can continue to work until you are tired of it. Most people are way too conservative in their retirement planning. They worry too much about the possibility of running out money. A lot of people plan for expenses as if they were to live up to 100 years of age or more. What are the odds? When we reach a certain age, say 60s to 70s, we could be gone unexpectedly.

 

[Spanky]

2) At a 3% initial WR, a 50% portfolio hit would require a 33% expense reduction to get back to 4% and 25% to get back to 4.5%.

That's the main reason that you do not want to have a 100% concentrated equity portfolio. I do not think a properly designed diversified portfolio can suffer a 50% decline.

 

[Zipper]

Die at 55 and all your problems will be solved.

 

[Rich_by_the_Bay]

Not sure I understand the OP's focus on SWR. I'd focus first on what kind of lifestyle would make you happy and what expenses would it take to meet that goal?

Given those priorities, the SWR would reflect how great a chance you are willing to accept that you will run out of money and therefore how much you need to save.

Focusing on the SWR primarily is upside down to me.

 

[Spanky]

I think he wants to know if he should pursue a 2% SWR (for added safety/insurance) even though a 4% SWR would support his lifestyle fully.

 

[curanderotk]

I tend to agree with #20. Instead of taking the time to figure if you can "live" on
2-3-4% SWR. I believe it would take the same amount of energy, and would probably result in a higher quality of life, to sit down and add up, the actual
dollar amounts needed. Look at the real costs that one needs to survive happily on a daily,weekly,monthly or annual basis, then add 10-15% cushion onto that, for fun and emergencies. Once you have a realization of true costs, for the type and quality life you,your spouse and family are ready to accept, you can compare your annual dollar needs to your total Nest-Egg capital, and surmise more maturely
whether your SWR should be 2 or 3 or 4%...Living for 30-50 years counting every single penny...seems to lose its luster for me...I would rather find an interesting part-time/full-time job, that I enjoyed...and have a good time enjoying life...
Only another humble opinion...and in no way a criticism of your own life-style
planning...for all I know, you may already have done the numbers...
Good luck and warmest wishes...
Curanderotk

 

[TargaDave]

1) Health care expenses are fairly low while you're young (we're paying about $300/mo for a family of 3 w/HSA).

Wab, Is that just insurance cost or total expense including all deductables and out-of-pocket?


Here is my novice calculation on all this. For a given annual expense budget (I wouldn't squeeze it down), a 2% WR requires twice the stash as 4%. How long does it take to double a portfolio? [Example from simple comp interest calc: $1M stash, 6.5% avg annual gain, $50k added per year ==> 7 yrs to $2M]. I realize this is a gross over simplification given the uncertainties, but you can get a reasonable idea of the time it might take to get to that extra SWR comfort level for your particular #'s.

If it was me; bail at ~2.5% WR and fill in with part time work so total income is greater than the planned budget. Perhaps one spouse with a job that could qualify for a group plan. You'd have several different safety valves available as "3-yrs-to-go" mentioned. I think that a part time work schedule would work well if your kids are still in school with their own structured schedules . The WR and work hours could be tweekable. You could always jump off (or retreat) from there. Good luck.

 

[jIMOh]

Consider this scenario:

- middle aged with young children (and the typical expenses that entails)
- no sources of income except what will be generated from portfolio (dividends/selling investments) and whatever SS will pay 2 decades from now
- no health care benefits (will need to self-pay for private family coverage)
- potentially could be in retirement for 50 years, without any possible advances in longevity between now and then

So there is no safety net whatsoever besides our investments.

Through LBYM, 2 incomes living as cheaply as one, etc., our portfolio is already able to fund 4%, probably even 3% depending on what future expenses turn out to be.

I am shooting for 2%. Given the above, would you chance 3 or 4%? Firecalc says yes. If portfolio falters, or expenses creep, could be faced with hard choices, when w*rking a while longer when still at a relatively youthful age would have prevented all that.

Thoughts?

I'd look for 4 25% legs to sustain income stream, each with different functions/features.

1) I would look for 25% of income needed from TIPS (~2% yield). The pro is this stream is "indexed to inflation". The con is the real return is quite low (relative to alternatives).

2) I would look for 25% of income needed from dividends. Dividends tend to go up faster than inflation historically. Plan for a 2% yield and live off the 2% (for the 25%)... any yield above 2% reinvest.

3) bonds/money markets. I would suggest 25% of income come from bonds and money market instruments. This stream of income is constant. Could even be an annuity (immediate annuity). Not indexed for inflation, but a guaranteed stream of income which does not go away.

4) growth of principal (stocks). I would suggest 25% of the portfolio be well diversified. This portion would be "drawn down", so with this portion, I would look for a 4% SWR.


I would then "work backwards" to build this. FOR EXAMPLE If you need 60k to live on (60k is an assumption), 15k needs to come from each "leg". 15k from TIPS (yielding 2%) is $750,000. 15k from dividends suggests another $750,000. 15k from an immediate annuity would have another cost ($500,000??) and 15k from a diversified portfolio is $375,000.

SS adds a fifth leg once you reach normal retirement age.