Is 3% the new safe withdrawal rate for retirees?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Is 3% the new safe withdrawal rate for retirees?

Postby garlandwhizzer » Mon Feb 11, 2013 9:21 pm

Morningstar research on the topic of safe withdrawal rates taking into account the current low interest environment for bonds.

<www.morningstar.com/cover/videocenter.aspx?id=582877>
garlandwhizzer
 
Posts: 641
Joined: Fri Aug 06, 2010 4:42 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby ourbrooks » Mon Feb 11, 2013 9:53 pm

Sounds like they've finally discovered Wade Pfau's papers.

Yup, 3% sounds about right to me for a portfolio with somewhere between 30% and 70%.
People doing "age in bonds" probably should keep it below 2%
ourbrooks
 
Posts: 1172
Joined: Fri Nov 13, 2009 5:56 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Mon Feb 11, 2013 10:19 pm

I don't buy it. Remember that 4% was a worst case historical withdrawal rate that included the Great Depression and the ultra high inflation of the 70's where the stock market was declared dead. They keep talking about 'average returns', which mean very little when talking about the 4% rule. The 4% is not about averages. It is about severe down turns, crashes, ultra high inflation, and no bond returns for 40 years. Also, it has a lot to do with the sequence of returns, the first 10 years being the most important. You are only concerned with YOUR 30 year Data Point, not that it will survive all Data Points in stock market history.

And I also think, talking about an inflation adjusted withdrawal at the beginning of someones retirement is pretty ridiculous anyway. My advice is to take your 4% on remaining portfolio balance the first 10 years of retirement, use age in Bonds until you get to 30% and stay the course. After 10 years see how it goes, and you'll probably want to up your withdrawal percentage.
Last edited by Cut-Throat on Mon Feb 11, 2013 10:44 pm, edited 1 time in total.
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby 555 » Mon Feb 11, 2013 10:27 pm

4% is fine. More if you buy SPIAs.
555
 
Posts: 4235
Joined: Thu Dec 24, 2009 8:21 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby steve roy » Mon Feb 11, 2013 10:28 pm

How about: "Nobody knows what a safe withdrawal rate is. Might be 2%. Might be 4.8%. Come back in 43 years and find out."

You make a calculated guess and hope the guess is right.
User avatar
steve roy
 
Posts: 893
Joined: Thu May 13, 2010 6:16 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Mon Feb 11, 2013 10:35 pm

steve roy wrote:How about: "Nobody knows what a safe withdrawal rate is. Might be 2%. Might be 4.8%. Come back in 43 years and find out."

You make a calculated guess and hope the guess is right.


That's why you don't use a SWR, You use a variable withdrawal rate and adjust every year!
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby larryswedroe » Tue Feb 12, 2013 10:20 am

The safe harbor withdrawal rate should relate to the real rate of interest on bonds, which theory says should also impact the real return on stocks (after all the risk premium is above the risk free rate)
So yes the SWR is now lower IMO, both because bond returns are now lower and expected stock returns likely lower (certainly if you buy the Shiller CAPE measure, now predicting very low real returns over next ten years)
Denial is not a river in Egypt
Larry
larryswedroe
 
Posts: 12188
Joined: Thu Feb 22, 2007 9:28 am
Location: St Louis MO

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Hexdump » Tue Feb 12, 2013 10:37 am

Cut-Throat wrote:
steve roy wrote:How about: "Nobody knows what a safe withdrawal rate is. Might be 2%. Might be 4.8%. Come back in 43 years and find out."

You make a calculated guess and hope the guess is right.


That's why you don't use a SWR, You use a variable withdrawal rate and adjust every year!


And what would the VWR be ?
For my numbers I need a withdrawal rate of 3.2 % to provide enough income.
So how do you calculate what the VWR is ?
thanks
User avatar
Hexdump
 
Posts: 1482
Joined: Fri Oct 10, 2008 8:28 am
Location: Houston, Texas

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Grt2bOutdoors » Tue Feb 12, 2013 10:43 am

ourbrooks wrote:Sounds like they've finally discovered Wade Pfau's papers.

Yup, 3% sounds about right to me for a portfolio with somewhere between 30% and 70%.
People doing "age in bonds" probably should keep it below 2%


Why not just make it 1% while we are at it? :oops: All this talk about safe withdrawal rates - will anybody at all be able to retire or are we back to the old days - work til you die? It's enough to make people neurotic. Just save and invest what you can - you do the best you can, you can't work miracles.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10344
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Is 3% the new safe withdrawal rate for retirees?

Postby BBL » Tue Feb 12, 2013 10:51 am

Grt2bOutdoors wrote:
ourbrooks wrote:Sounds like they've finally discovered Wade Pfau's papers.

Yup, 3% sounds about right to me for a portfolio with somewhere between 30% and 70%.
People doing "age in bonds" probably should keep it below 2%


Why not just make it 1% while we are at it? :oops: All this talk about safe withdrawal rates - will anybody at all be able to retire or are we back to the old days - work til you die? It's enough to make people neurotic. Just save and invest what you can - you do the best you can, you can't work miracles.


Sounds good to me :happy . If we're going to go totally off the rails then let's all follow a perpetual distribution strategy and stop worrying about it.

Good luck to most ever having the $$ to fund it.

Here's a white paper that Mr. Otar did in case you haven't ever seen it:

http://retirementoptimizer.com/Whitepapers/PerpDist.pdf

Now everyone has a worry-free approach to follow - just remember that pesky capital requirement. :D
To win without risk is to triumph without glory. Pierre Corneille
User avatar
BBL
 
Posts: 716
Joined: Sat Aug 06, 2011 8:01 am
Location: Location: Location

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Mitchell777 » Tue Feb 12, 2013 10:54 am

As I recall the 4% was based on 30 yrs in retirement, at least from the Trinity Study. Ma be wrong but think Trinity was 3% for 40 yrs
Mitchell777
 
Posts: 596
Joined: Mon May 21, 2007 7:32 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby PR101 » Tue Feb 12, 2013 10:57 am

I believe these studies are based on starting with a fixed withdrawal percentage (e.g., 4%) and then increasing the resulting amount by inflation each year, regardless of what is happening to your portfolio, which is not realistic. If you instead use a variable withdrawal strategy (that is, multiply your withdrawal percentage (4%, 3.6%, or whatever) by the portfolio balance at the start of each retirement year), you should never run out of money (assuming you have enough cushion/spending reduction ability to handle a significant swing to the downside).
PR101
 
Posts: 27
Joined: Wed May 04, 2011 8:56 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Grt2bOutdoors » Tue Feb 12, 2013 11:04 am

Mitchell777 wrote:As I recall the 4% was based on 30 yrs in retirement, at least from the Trinity Study. Ma be wrong but think Trinity was 3% for 40 yrs


In my next life, I will be born at zero, fly through school and be done at age 16, work for 30 years in government or other job with a defined benefit plan and healthcare parachute, followed by 50 years in retirement. 3% at 40 years - how many do you know short of a few on this board who've had a 40 year retirement? The most I've seen is 35 years - with the benefit of the employer doing most of the heavy lifting (defined benefit and health plan). Those retirees are making more in retirement than they were employed. A misallocation of resources in economic terms. How realistic is that for the newer generations to emulate? Not looking too good given the 5 year drought of employment, low interest rates, flood of liquidity.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10344
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Is 3% the new safe withdrawal rate for retirees?

Postby dbr » Tue Feb 12, 2013 11:11 am

The SWR estimate unconditionally is still 4% because current conditions are included among the worst case estimates.

SWR conditional on some specific knowledge of expected returns over the next thirty years may have a different estimate. Note that arguments from present conditions may be pretty good for next year but contain zero information about the progression over all of thirty years except that we will start out with lower than average real returns.

The uncertainties in estimating SWR for the unconditional case are large. I think the uncertainties in trying to estimate an SWR based on uncertain knowledge of the conditions today are even larger and large enough that one cannot make a certain distinction between 3% and 4%. It is a plausible presumption that starting today there is a greater chance of running out of money at 4% than there has been on average over the last 100 years, but I sure wouldn't be pinning that down to 4% before and 3% now.

In any case, I think it is crazy to found a retirement entirely on "safe" withdrawal from a highly variable portfolio without annuitized income streams.
dbr
 
Posts: 14324
Joined: Sun Mar 04, 2007 10:50 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby ResNullius » Tue Feb 12, 2013 11:20 am

I love all these SWR discussions. Why do folks try to make something that's reaonsably simple into something that is so complex that nobody can understand it? Reason? Because it drives folks crazy with worry so they'll beg "financial advisors" to take huge fees in return for making them feel safe and secure. By the time retirees realize that they've been taken for a ride, they'll be too old and demented to care.
ResNullius
 
Posts: 2090
Joined: Wed Oct 24, 2007 4:22 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby ourbrooks » Tue Feb 12, 2013 11:21 am

The Trinity studies use a 30 period and a rolling historical returns methodology. The problem with this methodology is that there aren't enough 40 year periods to get meaningful results. Wade Pfau has used a Monte Carlo approach and gone out to 40 years; see the Wiki for his results.

The 30 year period sounds like a lot, given the median 17 year life male life expectancy, but half of all men will live longer than that; about 10% will live past 30 years. If you look at couples, 30 years looks even worse; it's close to the median for couples. Forty years is probably a better choice for planning purposes.

Let me stress Larry Swedroe's point: If bond returns are lower, stock returns are likely to be lower as well. History is not a good guide here; current low interest rates are almost unprecedented and there are no strong arguments as to why they won't continue for 20 or 30 years. Wade Pfau has done safe withdrawal rate studies in which he used lower interest rates; those studies are the basis for the Morningstar article.

Variable withdrawal rates do let you withdraw more without running out of money, but lower returns mean fewer good years in which to up your withdrawals and more bad years in which to cut back. Also, there's a limit to how flexible most retirees can be. When your tax bill comes due or you need to make your Medicare Advantage payments, they won't accept the answer that the market is down so you can't pay.

Even though SPIAs also yield lower payouts when interest rates are low, most of the payout in later years are due to mortality credits. Even now, a 75 year old man can get an SPIA with a 9.24% payout rate. If future nominal bond returns are in the 3% range and future nominal stock returns are 6%, that's going to look very attractive.
ourbrooks
 
Posts: 1172
Joined: Fri Nov 13, 2009 5:56 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby dbr » Tue Feb 12, 2013 11:31 am

ourbrooks wrote:Let me stress Larry Swedroe's point: If bond returns are lower, stock returns are likely to be lower as well. History is not a good guide here; current low interest rates are almost unprecedented and there are no strong arguments as to why they won't continue for 20 or 30 years. Wade Pfau has done safe withdrawal rate studies in which he used lower interest rates; those studies are the basis for the Morningstar article.



Wade doesn't know what margin of uncertainty to put around his results because he doesn't know how uncertain his MC inputs are. That said, it is interesting to ask and attempt to answer the question. Again, it is plausible that people retiring today should be a little less optimistic about their chances than average. On the other hand, a study that has not been done is how bad the chances really were for people that did retire in known bad times such as 1965-1966. Those cases were included in the worst cases of the 4% "rule," but there is a difference between displaying the extremes of an unconditional case and actually calculating a conditional probability. It is correct that you have to go to MC because the historical record is minimal on the overall case and completely insufficient to do conditional probabilities. The strength in the historical method is that one does not have to make guesses regarding the inputs of return distribution and inflation.
dbr
 
Posts: 14324
Joined: Sun Mar 04, 2007 10:50 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Rodc » Tue Feb 12, 2013 12:13 pm

Hexdump wrote:
Cut-Throat wrote:
steve roy wrote:How about: "Nobody knows what a safe withdrawal rate is. Might be 2%. Might be 4.8%. Come back in 43 years and find out."

You make a calculated guess and hope the guess is right.


That's why you don't use a SWR, You use a variable withdrawal rate and adjust every year!


And what would the VWR be ?
For my numbers I need a withdrawal rate of 3.2 % to provide enough income.
So how do you calculate what the VWR is ?
thanks


If you can take a low enough percentage you can probably take a fixed inflation adjusted amount. This really is a topic of what to do if you only have a marginal amount (the wealthy can do most any more or less rational thing, and the poor will remain poor) where you want not just a safe amount, but something close to the maximum safe amount. Depending on who you ask 3.2% might be on the boundary between you have plenty and you have a marginal amount.

But this is not rocket science. There is no one right answer with 2, 3, or 4 significant digits of accuracy; by its very nature whatever you do will have at least a little and maybe a lot of uncertainty. Life is just like that. When the market is down you tighten your belt and when good you can let it out a little, thus it has always been.

If one can't do this, or is not comfortable doing this, a series of SPIA's to add to SS and/or pensions (if one is so lucky) to generate enough income to cover needs is in order. Then how you choose your withdrawal rate based on your remaining funds does not matter very much; you can either do a fixed withdrawal or variable with the remaining money without much danger.

One simple variable strategy is to just take a fixed percentage of remaining balance. Say 4% or 5%. You never run out, most likely will grow the portfolio and thus withdrawals, but may find you are taking out too much and have to cut back until markets recover from time to time. You can couple this with SS, pensions, SPIAs to reduce the variability to something you can handle.

Or, decide on a portfolio growth you desire, say adjust up by CPI each year and don't take more than your headroom above that amount. Again, you can couple with fixed income sources to reduce variability.

The fallacy of the entire (max) SWR discussion is that people can/should/will continue on a set path for 30 years or more with no regard for what is going on in the market and their portfolio balance. Come hell and high water they will just plunge ahead spending money as their portfolio goes to zero. No one should do that.

(Max) SWR is just a guideline written in pencil, a rough ballpark planning number. The reality is we should all plan on having a variable income stream from our variable return portfolio. If you can't handle a variable income stream for some reason, you need something other than a variable return portfolio.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Rodc
 
Posts: 10367
Joined: Tue Jun 26, 2007 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Mitchell777 » Tue Feb 12, 2013 1:02 pm

Grt2bOutdoors wrote:
Mitchell777 wrote:As I recall the 4% was based on 30 yrs in retirement, at least from the Trinity Study. Ma be wrong but think Trinity was 3% for 40 yrs


In my next life, I will be born at zero, fly through school and be done at age 16, work for 30 years in government or other job with a defined benefit plan and healthcare parachute, followed by 50 years in retirement. 3% at 40 years - how many do you know short of a few on this board who've had a 40 year retirement? The most I've seen is 35 years - with the benefit of the employer doing most of the heavy lifting (defined benefit and health plan). Those retirees are making more in retirement than they were employed. A misallocation of resources in economic terms. How realistic is that for the newer generations to emulate? Not looking too good given the 5 year drought of employment, low interest rates, flood of liquidity.

You're a real funny guy. How do I know how many people will be in retirment 40 years? I do know many, many people who have retired before the age of 60, some with pensions, some without. Those with pensions, in my circle, have no indexing for inflation so that pension may be worth little in the far out years. So, unless one knows how long they will live, I'd want to plan for 100. Yes, few will make it but I'd prefer not approaching that age and be running out of money because I planned to live only to 90
Mitchell777
 
Posts: 596
Joined: Mon May 21, 2007 7:32 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby hicabob » Tue Feb 12, 2013 1:39 pm

Mitchell777 wrote:
Grt2bOutdoors wrote:
Mitchell777 wrote:As I recall the 4% was based on 30 yrs in retirement, at least from the Trinity Study. Ma be wrong but think Trinity was 3% for 40 yrs


In my next life, I will be born at zero, fly through school and be done at age 16, work for 30 years in government or other job with a defined benefit plan and healthcare parachute, followed by 50 years in retirement. 3% at 40 years - how many do you know short of a few on this board who've had a 40 year retirement? The most I've seen is 35 years - with the benefit of the employer doing most of the heavy lifting (defined benefit and health plan). Those retirees are making more in retirement than they were employed. A misallocation of resources in economic terms. How realistic is that for the newer generations to emulate? Not looking too good given the 5 year drought of employment, low interest rates, flood of liquidity.

You're a real funny guy. How do I know how many people will be in retirment 40 years? I do know many, many people who have retired before the age of 60, some with pensions, some without. Those with pensions, in my circle, have no indexing for inflation so that pension may be worth little in the far out years. So, unless one knows how long they will live, I'd want to plan for 100. Yes, few will make it but I'd prefer not approaching that age and be running out of money because I planned to live only to 90



I thought the living to 100 thing was extremely unlikely so I looked it up ... it seems many of us will!
This is from the UK where they have the advantage of better medical care for the average person so a longer average life but the US should be close ...

http://www.guardian.co.uk/news/datablog ... 100-likely
hicabob
 
Posts: 1737
Joined: Fri May 27, 2011 6:35 pm
Location: cruz

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Browser » Tue Feb 12, 2013 2:33 pm

The opinion of Dr. Bill Bernstein:
Below the age of 65, a 2% spending rate is bulletproof, 3% is probably safe, and 4% is taking chances. Above 5%, you’re taking an increasingly serious risk of dying poor. (For each five years above 65, add perhaps half of a percentage point to those numbers.)

Bernstein, William J (2012-06-18). The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) (Kindle Locations 698-700). Efficient Frontier Publications. Kindle Edition.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
Browser
 
Posts: 3075
Joined: Wed Sep 05, 2012 5:54 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Grt2bOutdoors » Tue Feb 12, 2013 2:39 pm

Browser wrote:The opinion of Dr. Bill Bernstein:
Below the age of 65, a 2% spending rate is bulletproof, 3% is probably safe, and 4% is taking chances. Above 5%, you’re taking an increasingly serious risk of dying poor. (For each five years above 65, add perhaps half of a percentage point to those numbers.)

Bernstein, William J (2012-06-18). The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) (Kindle Locations 698-700). Efficient Frontier Publications. Kindle Edition.


I'm going to go out on a limb and say 2.5% is likely safe as well - providing the portfolio provides some level of positive return. A zero interest rate policy will not help.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10344
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Grt2bOutdoors » Tue Feb 12, 2013 2:42 pm

Mitchell777 wrote:
Grt2bOutdoors wrote:
Mitchell777 wrote:As I recall the 4% was based on 30 yrs in retirement, at least from the Trinity Study. Ma be wrong but think Trinity was 3% for 40 yrs


In my next life, I will be born at zero, fly through school and be done at age 16, work for 30 years in government or other job with a defined benefit plan and healthcare parachute, followed by 50 years in retirement. 3% at 40 years - how many do you know short of a few on this board who've had a 40 year retirement? The most I've seen is 35 years - with the benefit of the employer doing most of the heavy lifting (defined benefit and health plan). Those retirees are making more in retirement than they were employed. A misallocation of resources in economic terms. How realistic is that for the newer generations to emulate? Not looking too good given the 5 year drought of employment, low interest rates, flood of liquidity.

You're a real funny guy. How do I know how many people will be in retirment 40 years? I do know many, many people who have retired before the age of 60, some with pensions, some without. Those with pensions, in my circle, have no indexing for inflation so that pension may be worth little in the far out years. So, unless one knows how long they will live, I'd want to plan for 100. Yes, few will make it but I'd prefer not approaching that age and be running out of money because I planned to live only to 90


I think looking at family history will help in that regard. The longest I've seen is 95 with the average being in the mid to late 80's. Right now, I'm planning on 90 - if medical advances get better perhaps I'll raise it. If I work until normal retirement age - that will be around 25 years.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10344
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 2:52 pm

Hexdump wrote:
Cut-Throat wrote:
steve roy wrote:How about: "Nobody knows what a safe withdrawal rate is. Might be 2%. Might be 4.8%. Come back in 43 years and find out."

You make a calculated guess and hope the guess is right.


That's why you don't use a SWR, You use a variable withdrawal rate and adjust every year!


And what would the VWR be ?
For my numbers I need a withdrawal rate of 3.2 % to provide enough income.
So how do you calculate what the VWR is ?
thanks


Why don't you take a 4% of remaining portfolio balance every year and see how it goes. No one knows the future.
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 2:58 pm

larryswedroe wrote:The safe harbor withdrawal rate should relate to the real rate of interest on bonds, which theory says should also impact the real return on stocks (after all the risk premium is above the risk free rate)
So yes the SWR is now lower IMO, both because bond returns are now lower and expected stock returns likely lower (certainly if you buy the Shiller CAPE measure, now predicting very low real returns over next ten years)
Denial is not a river in Egypt
Larry


SWR usually left a lot of money on the table. No one can predict what the SWR is today.
Having a financial cushion and an ability to adapt to changing conditions and variable spending in retirement is your best chance.

Taking an inflation adjusted 3% or 4% every year no matter what market conditions there are, well that is the definition of real "Denial".
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby rj49 » Tue Feb 12, 2013 3:27 pm

Other interesting distribution methods I've read about/considered:

Gummy's Sensible Withdrawal Rate: http://www.financialwebring.org/gummy-s ... rawals.htm (warning: his site is like crack for spreadsheet addicts)
Floor of fixed income/pensions/annuities for basic needs and then invest the rest for discretionary spending: read Michael Zwecher, Zvi Bodie, Michael Kitces, Wade Pfau, Moshe Milevsky
Withdrawals based on IRS mortality tables: Bud Hebeler, http://www.analyzenow.com drawback is that the withdrawals are highest later in retirement
William Sharpe's Lockbox: provide a floor of safe fixed income for each year, then add stocks for each year, sell each year's lockbox
Withdraw shares instead of SWR: invest in diversified portfolio of your choice, instead of withdrawing percentage, sell constant number of shares for each fund, based on expected mortality date (avoids problem of leaving money on table, unless you die before projected mortality date--good for frugal retirees afraid to touch principal or run out of money too soon)
Managed Payout Funds average of balance of last 3 years, then withdraw 3-5% (or simply invest in the Managed Payout Funds yourself, perhaps switching from 3 to 5 to 7% payout funds as you age).
Age-based variant of Bernstein's comment: 2% in your 50s, 3% in your 60s, 4% in your 70s, etc.
Buckets investing and its variations: Lucia, Frank Armstrong, Harold Evensky, Grangaard
Buy Wellesley, live off distributions, sell some if it grows beyond a certain point--good if you want to leave a simple solution for a spouse.
Fidelity Income Replacement funds--they invest in a glide path portfolio with the account gradually paid out and fully distributed at a year of your choice; Pimco has a similar all-TIPS fund

my current preference: floor of military pension/social security/TSP G fund/ibonds, then invest everything else in TSM/TI, withdraw set number of shares each year until age 90
rj49
 
Posts: 275
Joined: Wed Feb 23, 2011 1:22 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Clearly_Irrational » Tue Feb 12, 2013 3:32 pm

Grt2bOutdoors wrote:Why not just make it 1% while we are at it? :oops:


I would argue that the natural return of your portfolio (dividends + interest) would be the lowest number you'd have to use. If that rate isn't sustainable then basically we have a negative growth economy and we're all doomed anyways.
User avatar
Clearly_Irrational
 
Posts: 2608
Joined: Thu Oct 13, 2011 4:43 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Levett » Tue Feb 12, 2013 3:54 pm

"In any case, I think it is crazy to found a retirement entirely on "safe" withdrawal from a highly variable portfolio without annuitized income streams."

And so do I.

And I think it's a bizarre use of the word "safe." :annoyed

Lev
Levett
 
Posts: 3346
Joined: Fri Feb 23, 2007 3:10 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby YDNAL » Tue Feb 12, 2013 3:55 pm

garlandwhizzer wrote:Morningstar research on the topic of safe withdrawal rates taking into account the current low interest environment for bonds.

<www.morningstar.com/cover/videocenter.aspx?id=582877>

With 0% real growth or adjustment, a portfolio will last 25 years if you take out 1/25 annually (4%).

Begin to make assumptions until your fingers hurt from writing (going back to the time of manual spreadsheets), and you can arrive at whatever number you wish.

Do you believe "studies" have it right? see below Image
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13695
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Is 3% the new safe withdrawal rate for retirees?

Postby KyleAAA » Tue Feb 12, 2013 4:01 pm

Safe withdrawal rates are not useful because actual spending patterns don't at all match their assumptions. People spend more early in retirement than later on, even taking into account medical expenses. A better strategy would be "start at 4%, reevaluate every year or two."
KyleAAA
 
Posts: 5428
Joined: Wed Jul 01, 2009 6:35 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby allsop » Tue Feb 12, 2013 4:05 pm

YDNAL wrote:Do you believe "studies" have it right? see below Image


I got "Server not found" :shock:
allsop
 
Posts: 1046
Joined: Sun Jun 15, 2008 8:08 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby dbr » Tue Feb 12, 2013 4:08 pm

Grt2bOutdoors wrote:Why not just make it 1% while we are at it? :oops: All this talk about safe withdrawal rates - will anybody at all be able to retire or are we back to the old days - work til you die? It's enough to make people neurotic. Just save and invest what you can - you do the best you can, you can't work miracles.


The answer to that, actually a serious one, is that withdrawing little enough to be "safe" against the worst case ensures that almost all actual outcomes are going to leave very large amounts of money on the table. In short, most of what the retiree worked and saved for will go unspent and wasted, except perhaps by the heirs. This is a legitimate dilemma and is the whole point in why financial experts will point out that a variable investment is a totally inappropriate way to finance a fixed requirement.
dbr
 
Posts: 14324
Joined: Sun Mar 04, 2007 10:50 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby dbr » Tue Feb 12, 2013 4:11 pm

KyleAAA wrote:Safe withdrawal rates are not useful because actual spending patterns don't at all match their assumptions. People spend more early in retirement than later on, even taking into account medical expenses. A better strategy would be "start at 4%, reevaluate every year or two."


This is why a lot of models have been written that use the methodology of 4% studies but incorporate variable scenarios for adding and removing assets, starting and stopping income streams, adding expenses etc. There is a big difference between a study and a plan.

Now, how valid those plans are is also a question in itself, but failing to cope with possible spending patterns isn't really one of them. It is possible that various tools are still not flexible enough, of course.
dbr
 
Posts: 14324
Joined: Sun Mar 04, 2007 10:50 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby YDNAL » Tue Feb 12, 2013 4:19 pm

allsop wrote:
YDNAL wrote:Do you believe "studies" have it right? see below Image


I got "Server not found" :shock:

It means check the signature! :)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13695
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Is 3% the new safe withdrawal rate for retirees?

Postby allsop » Tue Feb 12, 2013 4:25 pm

YDNAL wrote:
allsop wrote:
YDNAL wrote:Do you believe "studies" have it right? see below Image


I got "Server not found" :shock:

It means check the signature! :)


Clear as mud, as a familiar poster might say :twisted:
allsop
 
Posts: 1046
Joined: Sun Jun 15, 2008 8:08 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby nisiprius » Tue Feb 12, 2013 4:38 pm

1995:

Sucker looking for certainty where there is no certainty: So, how much can I safely withdraw?

Guru: Well, right now things look great. This year you could certainly--

Sucker: No, no, no. Tell me more than "this year." I want to plan ahead. I want to know a nice, safe rate, with a good safety margin built on. One that will be sustainable into the future under varying market conditions.

Guru: OK, here's a Worth magazine article by Peter Lynch who had a colleague run numbers, and he says a portfolio of 100% stocks--preferably individual selections from among Moody's Dividend Achievers but an S&P 500 index fund will do--has safely sustained 7% withdrawals under all market conditions that have ever occurred.

1998:

Sucker: So, 7%, right?

Guru: Oh, no, no, no. Things do not look so good any more. This study by three Trinity University professors says that the sustainable withdrawal rate is only 4%.

Sucker: But, but, but... I specifically asked for a number that would work under all future market conditions.

Guru: Well, in 1995 we thought 7% would work under all market conditions. But, that was then, this is now.

Sucker: So 4% is the right number? A good planning number? One that doesn't make any false optimistic assumptions but allows for the full range of things that typically occur? A number that will work even if the markets runs its normal cycles of good and bad times?

Guru: Yes. Some experts think a bit more, but, yes, 4% is a good number.

Sucker: So, this is not some false-optimism 7%. This has the safety margin built in, right? This has the allowance for normal wear and tear. This is a number good for the next three decades, right?

Guru: That is what every expert and every sophisticated computer analysis is telling us. Yes.

2013:

Sucker: So, I can withdraw 4%, eh?

Guru: Oh, no, no, no. It seems things are not turning out as well as we expected. Gordon equation... interest rates... Try 3%....
Last edited by nisiprius on Tue Feb 12, 2013 4:42 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 25758
Joined: Thu Jul 26, 2007 10:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 4:41 pm

nisiprius wrote:1995:

Sucker looking for certainty where there is no certainty: So, how much can I safely withdraw?

Guru: Well, right now things look great. This year you could certainly--

Sucker: No, no, no. Tell me more than "this year." I want to plan ahead. I want to know a nice, safe rate, with a good safety margin built on. One that will be sustainable into the future under varying market conditions.

Guru: OK, here's a Worth magazine article by Peter Lynch who had a colleague run numbers, and he says a portfolio of 100% stocks--preferably individual selections from among Moody's Dividend Achievers but an S&P 500 index fund will do--has safely sustained 7% withdrawals under all market conditions that have ever occurred.

1998:

Sucker: So, 7%, right?

Guru: Oh, no, no, no. Things do not look so good any more. This study by three Trinity University professors says that the sustainable withdrawal rate is only 4%.

Sucker: But, but, but... I specifically asked for a number that would work under all future market conditions.

Guru: Well, in 1995 we thought 7% would work under all market conditions. But, that was then, this is now.

Sucker: So 4% is the right number? A good planning number? One that doesn't make any false optimistic assumptions but allows for the full range of things that typically occur? A number that will work even if the markets runs its normal cycles of good and bad times?

Guru: Yes. Some experts think a bit more, but, yes, 4% is a good number.

Sucker: So, this is not some false-optimism 7%. This has a safety margin built in, right? This allows for normal wear and tear. This is a number good for the next three decades, right?

Guru: That is what every expert and every sophisticated computer analysis is telling us. Yes.

2013:

Sucker: So, I can withdraw 4%, eh?

Guru: Oh, no, no, no. It seems things are not turning out as well as we expected. 3%....


+1
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Clearly_Irrational » Tue Feb 12, 2013 5:44 pm

nisiprius wrote:1995:

Sucker looking for certainty where there is no certainty: So, how much can I safely withdraw?

Guru: Well, right now things look great. This year you could certainly--

Sucker: No, no, no. Tell me more than "this year." I want to plan ahead. I want to know a nice, safe rate, with a good safety margin built on. One that will be sustainable into the future under varying market conditions.

Guru: OK, here's a Worth magazine article by Peter Lynch who had a colleague run numbers, and he says a portfolio of 100% stocks--preferably individual selections from among Moody's Dividend Achievers but an S&P 500 index fund will do--has safely sustained 7% withdrawals under all market conditions that have ever occurred.


That projection doesn't take the great depression into account or number of other poorly performing periods that occurred prior to 1995, it looks like it uses a simple CAGR approach which for 100% stocks after inflation 1871-1995 was 7.02% I'd call that a pretty simplistic analysis not to mention bad allocation advice even for the 90s. Even in the heyday of the boom you should have gotten a 90/10 or 80/20 recommendation. However, having said all that I think you make a good point that it's hard to predict the future and that a "safe" rate is merely an educated guess.
User avatar
Clearly_Irrational
 
Posts: 2608
Joined: Thu Oct 13, 2011 4:43 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby midareff » Tue Feb 12, 2013 6:27 pm

larryswedroe wrote:Denial is not a river in Egypt
Larry


That's funny Larry. Reminds me of the time I was touring Egypt a few years ago and having a cold one (local brew) on the top deck of the cruise ship on "denial" and a dead cow floated by in the river. What can I say, it's Egypt. :beer
User avatar
midareff
 
Posts: 2431
Joined: Mon Nov 29, 2010 11:43 am
Location: Biscayne Bay, South Florida

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Levett » Tue Feb 12, 2013 6:40 pm

"it's hard to predict the future"

Uh. Yeah.

Yogi Berra: "The future ain't what it used to be." :oops:

Lev
Levett
 
Posts: 3346
Joined: Fri Feb 23, 2007 3:10 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 6:49 pm

Levett wrote:"it's hard to predict the future"

Uh. Yeah.

Yogi Berra: "The future ain't what it used to be." :oops:

Lev


"It's difficult to make predictions, especially about the future."

Yogi Berra
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby 555 » Tue Feb 12, 2013 7:08 pm

The fundamental principle is that you can spend your principal.
555
 
Posts: 4235
Joined: Thu Dec 24, 2009 8:21 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 7:12 pm

555 wrote:The fundamental principle is that you can spend your principal.


+1 .... Which a lot of people lose sight of.

A few decades ago, there was a mantra......."Never spend Principle"......Those people used to complain "All I got was a pension and a Gold Watch"......All I got was a boot in the ass!
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby nisiprius » Tue Feb 12, 2013 7:26 pm

Clearly_Irrational wrote:
Guru: OK, here's a Worth magazine article by Peter Lynch who had a colleague run numbers, and he says a portfolio of 100% stocks--preferably individual selections from among Moody's Dividend Achievers but an S&P 500 index fund will do--has safely sustained 7% withdrawals under all market conditions that have ever occurred.
That projection doesn't take the great depression into account or number of other poorly performing periods that occurred prior to 1995...
Peter Lynch said that it did.

No, I'm wrong, I take it back, he did NOT actually say it had been tested against historical data.

The article was entitled "Fear of Crashing" and asserted that the only reason why people didn't invest 100% in stocks was unwarranted fear of crashing. He said that his plan could survive an event in which "the market has its worst session in history and loses 25 percent of its value over night," and he also said that it could survive "a recession that lasts 20 years [with] the country in its worst slump since the Great Depression. But, no, he did not say it would have survived the Great Depression.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 25758
Joined: Thu Jul 26, 2007 10:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Clearly_Irrational » Tue Feb 12, 2013 8:50 pm

For me, one of the methods I use is to compare vs. the worst prior periods we've experienced. The U.S. market has never gone done for four years in row (yet) so our worst combined events are as follows:

DURATION AMOUNT PERIOD
1YR* -37.28 2008
2YR -49.17 1973-1974
3YR -54.28 1929-1931

*The 1931 return was -38.47 but that was part of a three year event so I'm using the 2008 number as the biggest one year event

If your portfolio can't handle any of the above then your withdrawal rate is too high. Using 30 year historical tracks or monte carlo simulation are also good checks. Does any of that make you "safe"? No, but it's at least a reasonable sanity check to make sure you're not totally off base.
User avatar
Clearly_Irrational
 
Posts: 2608
Joined: Thu Oct 13, 2011 4:43 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 9:10 pm

Clearly_Irrational wrote:If your portfolio can't handle any of the above then your withdrawal rate is too high.


Or your Stock Allocation is Too High !
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Clearly_Irrational » Tue Feb 12, 2013 9:20 pm

Cut-Throat wrote:
Clearly_Irrational wrote:If your portfolio can't handle any of the above then your withdrawal rate is too high.


Or your Stock Allocation is Too High !


A fair point since bonds are less volatile. The chance of treasuries taking an absolute nose dive while stocks stay flat or negative is low barring a sovereign or currency crisis in which case they'd both crash and you have a new "worst case". None of the models I use predicts either of those any time soon and it would be fairly easy to see it coming macro wise.
User avatar
Clearly_Irrational
 
Posts: 2608
Joined: Thu Oct 13, 2011 4:43 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby 555 » Tue Feb 12, 2013 9:23 pm

Just registered with incomesolutions.com, and checked. A 65 year old can get an Inflation Adjusted Annuity with annual payment starting at 4.5% of principal for a male (4.2% for a female), and increasing with inflation. Perhaps better quotes can be found.

So 4% (inflation adjusted) is still easy, even in this low interest environment.
555
 
Posts: 4235
Joined: Thu Dec 24, 2009 8:21 am

Re: Is 3% the new safe withdrawal rate for retirees?

Postby reggiesimpson » Tue Feb 12, 2013 9:26 pm

The Latest News! We are all going to die. Spend accordingly.
reggiesimpson
 
Posts: 1271
Joined: Mon Dec 19, 2011 1:47 pm

Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 9:27 pm

555 wrote:Just registered with incomesolutions.com, and checked. A 65 year old can get an Inflation Adjusted Annuity with annual payment starting at 4.5% of principal for a male (4.2% for a female), and increasing with inflation. Perhaps better quotes can be found.

So 4% (inflation adjusted) is still easy, even in this low interest environment.


How about an Inflation Adjusted annuity that also covers a spouse?
User avatar
Cut-Throat
 
Posts: 2011
Joined: Sun Oct 17, 2010 10:46 am

Next

Return to Investing - Theory, News & General

Who is online

Users browsing this forum: b767capt, bs010101, CABob, Chan_va, hitlist, IlikeJackB, investor-man, ladders11, lapuce, Tanelorn, Taylor Larimore, vencat, zaboomafoozarg and 80 guests