Is 3% the new safe withdrawal rate for retirees?

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

Postby freebeer » Tue Feb 12, 2013 9:36 pm

Cut-Throat wrote: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. ...


To quote Inigo Montoya from The Princess Bride: "You Keep Using That Word, I Do Not Think It Means What You Think It Means".

"historical" is not just 80 years. And it definitely isn't just U.S.-only especially not for the period that happened to be coincide with the rise of the American Empire. And remember 4% of Trinity Study was a back-testing exercise not a recommended real-world withdrawal strategy.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 9:39 pm

freebeer wrote:"historical" is not just 80 years. And it definitely isn't just U.S.-only especially not for the period that happened to be coincide with the rise of the American Empire. And remember 4% of Trinity Study was a back-testing exercise not a recommended real-world withdrawal strategy.


Of course, we knew that already.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby mickeyd » Tue Feb 12, 2013 9:40 pm

My SWR will be whatever the RMD rate is at age 70, 71, 72 etc.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby hq38sq43 » Tue Feb 12, 2013 9:41 pm

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!


Exactly.

Why not just use IRS's RMD schedule, i.e., withdrawal the first year year slightly under 4% of the previous year's ending balance, with subsequent yearly withdrawals at slightly increased percentages? This has been discussed in previous threads, with, I believe, general agreement that it might not work for everyone, but is probably a very good formula for most. Sure, it guarantees varied withdrawals from year to year, but it also virtually guarantees never fully depleting the portfolio.

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

Postby freebeer » Tue Feb 12, 2013 10:04 pm

Cut-Throat wrote:
freebeer wrote:"historical" is not just 80 years. And it definitely isn't just U.S.-only especially not for the period that happened to be coincide with the rise of the American Empire. And remember 4% of Trinity Study was a back-testing exercise not a recommended real-world withdrawal strategy.


Of course, we knew that already.


If you knew that already, just why don't you "buy" that 4% inflation-adjusted withdrawals is no longer safe?
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 10:06 pm

freebeer wrote:If you knew that already, just why don't you "buy" that 4% inflation-adjusted withdrawals is no longer safe?


I don't think you can say it was safe, or is no longer safe. No one knows whether it's safe or not.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Browser » Tue Feb 12, 2013 10:07 pm

reggiesimpson wrote:The Latest News! We are all going to die. Spend accordingly.

This is often overlooked. Death can cover up a lot of mistakes in your retirement withdrawal plan...
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby umfundi » Tue Feb 12, 2013 10:12 pm

Cut-Throat wrote:
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?

Easy. Delay SS for a year and you get 8%. Did I mention survivor benefits to boot?

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

Postby Cut-Throat » Tue Feb 12, 2013 10:17 pm

umfundi wrote:
Cut-Throat wrote:
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?

Easy. Delay SS for a year and you get 8%. Did I mention survivor benefits to boot?

Keith


Yeah, I'm sold on that. I was wondering what kind of price he would get for the annuity that he mentioned.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby umfundi » Tue Feb 12, 2013 10:23 pm

Cut-Throat wrote:
umfundi wrote:
Cut-Throat wrote:
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?

Easy. Delay SS for a year and you get 8%. Did I mention survivor benefits to boot?

Keith


Yeah, I'm sold on that. I was wondering what kind of price he would get for the annuity that he mentioned.

According to Wade Pfau's recent paper, 3.875%.

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

Postby freebeer » Tue Feb 12, 2013 10:31 pm

Cut-Throat wrote:
freebeer wrote:If you knew that already, just why don't you "buy" that 4% inflation-adjusted withdrawals is no longer safe?


I don't think you can say it was safe, or is no longer safe. No one knows whether it's safe or not.


Well I'll certainly agree with that! It's just that:

Cut-Throat wrote: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.


didn't sound to me like "No one knows whether it's safe". And again I zero in on that word "historical" which is IMO mis-applied in covering too short a time period and too constrained a slice of the global economy.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Tue Feb 12, 2013 10:38 pm

freebeer wrote:didn't sound to me like "No one knows whether it's safe". And again I zero in on that word "historical" which is IMO mis-applied in covering too short a time period and too constrained a slice of the global economy.


You're a nitpicker! .....The 4% is still just as safe historically as it always has been......The 'Historical Period' is now 10 years longer than it was 10 years ago when people were talking about SWRs......Todays yields do not prove or disprove anything.

I don't do SWRs nor do I trust anyone that says it is now 3% or 2% or 1%.......4% is just as good as it always was. It looks backward.... I'm sorry you don't think we have a long enough history. That's Life......
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby gkaplan » Tue Feb 12, 2013 11:06 pm

mickeyd wrote:My SWR will be whatever the RMD rate is at age 70, 71, 72 etc.


That's my plan, as well.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby rj49 » Wed Feb 13, 2013 1:16 am

hq38sq43 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!


Exactly.

Why not just use IRS's RMD schedule, i.e., withdrawal the first year year slightly under 4% of the previous year's ending balance, with subsequent yearly withdrawals at slightly increased percentages? This has been discussed in previous threads, with, I believe, general agreement that it might not work for everyone, but is probably a very good formula for most. Sure, it guarantees varied withdrawals from year to year, but it also virtually guarantees never fully depleting the portfolio.

Best regards,



For a younger retiree, RMD withdrawal ends up back-loading most of the withdrawal until much later in life, when most studies and anecdotal evidence tends to show lower spending, and as death becomes more likely, it means more money is likely to be left on the table. The other issues with spending a percentage based on previous year's balance is that after good market years it can deplete a lot of principal, and then if it is followed by a bear market, result in some wild swings in spending and depletion of principal. For instance, a retiree in the early 1990s taking out 4% of the balance each year would have exceeded withdrawals over those who used SWR and only increased each year for inflation. The same is true in the pre-2007 period, where a retiree would have taken out large amounts and then suddenly had it drop off steeply. In such cases, taking a 4% of the previous year's balance could be more dangerous to portfolio survivability than a 4% SWR.

The easy solution is to set a floor and ceiling on subsequent year withdrawals--perhaps taking 25% of increases from the previous year, and perhaps not cutting withdrawals more than 25% from the previous year
in case of a stock swoon. All of it is part of consumption smoothing, something Larry Kotlikoff has written about and sold software to manage. Fewer wild swings in withdrawal amounts also make it psychologically much easier to stomach market volatility and avoid panic-selling out of stocks (or bonds, as the case seems to be now).

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

Postby umfundi » Wed Feb 13, 2013 3:15 am

I used to think about this a lot, but I don't any more. There are a number of ways to figure out a system for withdrawal that protects you against market declines and guarantees you will never run out of money. It also smooths out the fluctuations over the remainder of your plan, to minimize year-to-year changes.

OK, so 3% might be a "fire and forget" SWR that is robust against a market that drops 40% early in your retirement. But, what if it doesn't (which is by far the most likely scenario)? What if your personal SWR, as seen in your rear view mirror, does turn out to be 7%? Well, your nest egg will spiral up in value to many times its starting value, and you will be living as a relative pauper.

The other reason that the idea of a fixed SWR makes no sense is that your income needs may fluctuate wildly (but not necessarily unpredictably) during retirement. Retiring early, enjoying stuff like travel during your 60s when you are most physically capable, and delaying Social Security (the best deal on the planet) are all reasons that your withdrawals will be front loaded. Spending it forward is a very hard thing to get your head around, and requires a good plan.

I am a firm believer that you should have a plan, but that you should recalculate it every year as though this is always the first year of the rest of your retirement.

Edit: If you require a fixed, predictable income, get an SPIA. You can't have it both ways.

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

Postby 555 » Wed Feb 13, 2013 5:36 am

Cut-Throat wrote:
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?"


4% if survivor continues getting full payment.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby YDNAL » Wed Feb 13, 2013 7:37 am

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

Yes. :thumbsup

Actually, with no real growth or increased annual withdrawal (nada, nil, ничто) one can consume the portfolio buried in the backyard for 25 years (1/25 = 4%) or 30 years (1/30 = 3.33%).
  • Academia and some others alike need something to do, so they introduce unknowns to publish papers and use history as a proxy for the unknown... right?
  • I like to think in terms of accumulating NEED x 30 = 3.33% since 3 is my daughter's favorite number. :) But, I don't know if buring the portfolio in the backyard is a good idea.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Wed Feb 13, 2013 7:56 am

rj49 wrote: The other issues with spending a percentage based on previous year's balance is that after good market years it can deplete a lot of principal, and then if it is followed by a bear market, result in some wild swings in spending and depletion of principal. For instance, a retiree in the early 1990s taking out 4% of the balance each year would have exceeded withdrawals over those who used SWR and only increased each year for inflation. The same is true in the pre-2007 period, where a retiree would have taken out large amounts and then suddenly had it drop off steeply. In such cases, taking a 4% of the previous year's balance could be more dangerous to portfolio survivability than a 4% SWR.



Not True !...And I can tell you are guessing and haven't run the numbers.

We had a thread a few years ago that was put on Bob's Financial Website, that showed you could take not only 4% of the gains, but ALL of them and the portfolio would still survive 4% Historically. Bob came up with a calculator that proved this historically.
The link to this thread is http://www.bogleheads.org/forum/viewtopic.php?f=10&t=63343&p=874627#p874627

Unfortunately Bob's Financial Website disappeared last year and the calculator is no longer available AFAIK.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Hexdump » Wed Feb 13, 2013 9:35 am

Cut-Throat wrote:
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.


I will happily do that cut-throat but I will still need to know how to measure "How it is Going".
Is a measure of the safety of the withdrawal rate that the principal continues to increase, stays the same, decreases by less than 4% ?
I don't want to run out of money nor do I want to deprive myself unless absolutely necessary.
My budget excluding Social Security is $65,000.00. If I spend $100,000.00 and the principal remains the same, was that safe ?
I have no idea but it feels risky.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Rodc » Wed Feb 13, 2013 9:50 am

Hexdump wrote:
Cut-Throat wrote:
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.


I will happily do that cut-throat but I will still need to know how to measure "How it is Going".
Is a measure of the safety of the withdrawal rate that the principal continues to increase, stays the same, decreases by less than 4% ?
I don't want to run out of money nor do I want to deprive myself unless absolutely necessary.
My budget excluding Social Security is $65,000.00. If I spend $100,000.00 and the principal remains the same, was that safe ?
I have no idea but it feels risky.


What level of precision are you looking for in the determination of how it is going.

That is one of the crux issues it seems to me. Naturally people want rather accurate assessments. Just as naturally they aren't going to get it if they are using any sort of significant amount of risky assets.

If you use 4% and take out $100,000 then you have $2.5 million in your portfolio. If you want $65,000 in addition to SS, you want $1.6 million in your portfolio, so you can lose about $900,000 and still be ok. With a 50/50 portfolio, if bonds hold up you can withstand a loss of 70% in your stocks. If that happens and you have high quality bonds, there will in all likelihood be a flight to safety and bonds will do well, so you can take a greater than 70% hit to stocks and still be ok. Of course if stocks bounce back in a few years you will do much better than this.

If you only desire $65,000 (in addition to SS this might be in the ballpark of $90K-$100K depending on one or two SS incomes which is a pretty solid upper middle class retirement income) and can get by ok on less, you could lose 100% of your stocks and generate $50K from TIPS for 30 years if you can get a little over 1% real yield, which added to SS is still a decent middle class retirement income. Or possibly more if you annuitize.

That skims over a few details, but to some fair approximation is correct.

Whether or not that seems safe enough is a personal decision.
Last edited by Rodc on Wed Feb 13, 2013 9:52 am, edited 1 time in total.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Wed Feb 13, 2013 9:52 am

Hexdump wrote:I will happily do that cut-throat but I will still need to know how to measure "How it is Going".
Is a measure of the safety of the withdrawal rate that the principal continues to increase, stays the same, decreases by less than 4% ?
I don't want to run out of money nor do I want to deprive myself unless absolutely necessary.
My budget excluding Social Security is $65,000.00. If I spend $100,000.00 and the principal remains the same, was that safe ?
I have no idea but it feels risky.


Well, most of the 'How's is it Going", is actually built in automatically. When your portfolio is down, you spend less, when it's up, you spend more. Exactly what you should be doing. You are selling more of your portfolio when it is high and selling less, when it drops. Again, no ones knows the future, and this plan reacts every year to market conditions. Unlike the take an Inflation adjusted WR and march right into the teeth of a Bear Market.

The Manual 'See how it's going' is after 5-10 years, when you are thinking about increasing your percentage.

This withdrawal method was written about by Stein and Demuth. One of their books gives the study and details. Not sure which one. It starts out with 4%WR in your 60's, 5% in your 70s, 6% in your 80's, etc. etc (Not sure of the exact percentages, but you get the drift).......The idea is that your spending amounts do not necessarily increase with increased percentage, Because of 1.) Inflation and 2.) Your portfolio's principal is being consumed.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Browser » Wed Feb 13, 2013 12:45 pm

If only there were a secure investment whose returns matched the inflation rate year-by-year. It would provide an income flow that pretty much smoothly stayed even with the cost of living without having to live through all the wild gyrations of stocks. If I wanted to provide a steady inflation-matched income for the next 25 years with this investment, I could withdraw 4% adjusted for inflation every year. If I wanted it to last for 30 years, I could withdraw 3.3%. I wish there were such an investment. I would probably put most of my retirement nestegg in this investment. But I guess that's too much to hope for. I wonder what that Trinity study would have shown had such an investment existed in the past? Oh, Well...
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby chaz » Wed Feb 13, 2013 12:51 pm

2% is safer.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby allsop » Wed Feb 13, 2013 12:55 pm

chaz wrote:2% is safer.


-2% is even safer :P
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby BBL » Wed Feb 13, 2013 2:31 pm

umfundi wrote:I used to think about this a lot, but I don't any more. There are a number of ways to figure out a system for withdrawal that protects you against market declines and guarantees you will never run out of money. It also smooths out the fluctuations over the remainder of your plan, to minimize year-to-year changes.

OK, so 3% might be a "fire and forget" SWR that is robust against a market that drops 40% early in your retirement. But, what if it doesn't (which is by far the most likely scenario)? What if your personal SWR, as seen in your rear view mirror, does turn out to be 7%? Well, your nest egg will spiral up in value to many times its starting value, and you will be living as a relative pauper.

The other reason that the idea of a fixed SWR makes no sense is that your income needs may fluctuate wildly (but not necessarily unpredictably) during retirement. Retiring early, enjoying stuff like travel during your 60s when you are most physically capable, and delaying Social Security (the best deal on the planet) are all reasons that your withdrawals will be front loaded. Spending it forward is a very hard thing to get your head around, and requires a good plan.

I am a firm believer that you should have a plan, but that you should recalculate it every year as though this is always the first year of the rest of your retirement.

Edit: If you require a fixed, predictable income, get an SPIA. You can't have it both ways.

Keith


Keith,

I ran into this paper when looking around for something else the other day and meant to insert it in a different thread of similar topic. Anyhow I thought you (and others) would find it interesting assuming you haven't seen it before...

Managing a retirement portfolio: Do annuities provide more safety?

"Even with the generally recognized “safe” withdrawal amount of 4% of the retirement portfolio starting
balance, more than 5% of retirement portfolios will run out of money over a 30-year period. Bootstrap
simulations were used to estimate the probability of outliving a retirement portfolio as increasing proportions
of a tax-deferred account are annuitized. The impacts of Required Minimum Distributions and taxable Social
Security income were incorporated into the analysis. Results indicate that annuities significantly extend the
length of time the portfolio lasts, but the expected balance remaining (estate size) will decrease substantially,
a trade-off of security versus a legacy..."

http://www.afcpe.org/assets/pdf/john_j._spitzer.pdf

More SWR fodder.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby LH » Wed Feb 13, 2013 2:52 pm

The current period we are in, is but a small slice of time.

Things have likely not changed expectationally.

4 percent SWR is still the rule of thumb for 30 year intervals.

The caveat, if things look dicey, lower it. this has not changed.

This may well apply now. So yeah, make it 3, 3.5 percent if things look bad, that's only commonsense, as you may be personally on one of the 5 percent of failure paths of a 4 percent SWR..........

Reality sucks sometimes, as anyone rolling over a TIPS ladder into negative yields (which they will then be taxed on the nominal "gains" when they decumulate, resulting in an even more negative yield of the "riskless" tips that "guarantee" your money back in real terms).

But for me, at 43, I see no reason to expectationally go away from the 4 percent SWR.

There is always SPIA, which can be great, giving you the money from dead people, the enhance your return if you live. The caveat is if you can trust a private company for 30 years to pay back your money as promised, backed by vague state governments guarantees with states having 1T assets, and 3T liabilities pensionwise alone...... Also, hope they do not cure cancer for SPIA for 30-40 years going forward, because that will blow the SPIA model of people dying and giving up thier money to the fund out of the water : )

There is no guarantee, only different risks which one can try and diversify. There also is no matching possible really, as a single persons life needs are just too variable/uncertain.

For the better safety, heck go 2 or even one percent SWR. But at some point, "retirement plan" then becomes 1) delay retirement indefinitely, 2) "retire" but work another career(ie dont retire), etc....

Pay low fees as possible, diversify your portfolio, maintain/dont capitulate, rebalance, keep your eyes open, if things look bad, lower consumption. This goes the same if you are cruising along on a TIPS ladder, and the rollover goes negative, or if you are 20 years into SPIA, and your SPIA looks "enron-ish" and your guarantee state, assuming the guarantee even exists per se, is having protests over failing to pay its pensions, or if you are 43, and the government tells you your SS you have paid into for 20 years is only projected to be 67 percent of whats was promised.

Guess what, time to cut back consumption a bit.

Variable uncertain world.

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

Postby HomerJ » Wed Feb 13, 2013 3:06 pm

freebeer wrote:
Cut-Throat wrote:
freebeer wrote:"historical" is not just 80 years. And it definitely isn't just U.S.-only especially not for the period that happened to be coincide with the rise of the American Empire. And remember 4% of Trinity Study was a back-testing exercise not a recommended real-world withdrawal strategy.


Of course, we knew that already.


If you knew that already, just why don't you "buy" that 4% inflation-adjusted withdrawals is no longer safe?


Why do you say "no longer safe"? You mean to say it was never safe, right?

I disagree with that... 80 years of data is enough for me... If 4% covered the "worst-case" in years including the Great Depression and the 40 years before 1982 where bonds did terrible, then I see no reason why it won't work today...

You can make 4% last for 25 years with ZERO PERCENT real return. It's not a stretch to think that over 30 years, we'll see some real return; even just a tiny bit is all one needs to make that money last 30 years. 4% is not crazy.. You are all just diseased with recency basis (yes Larry Swedroe, professional finance guy who should know better, I include you in this).

4% is fine...
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby LH » Wed Feb 13, 2013 3:14 pm

HomerJ wrote:
freebeer wrote:
Cut-Throat wrote:
freebeer wrote:"historical" is not just 80 years. And it definitely isn't just U.S.-only especially not for the period that happened to be coincide with the rise of the American Empire. And remember 4% of Trinity Study was a back-testing exercise not a recommended real-world withdrawal strategy.


Of course, we knew that already.


If you knew that already, just why don't you "buy" that 4% inflation-adjusted withdrawals is no longer safe?


Why do you say "no longer safe"? You mean to say it was never safe, right?

I disagree with that... 80 years of data is enough for me... If 4% covered the "worst-case" in years including the Great Depression and the 40 years before 1982 where bonds did terrible, then I see no reason why it won't work today...

You can make 4% last for 25 years with ZERO PERCENT real return. It's not a stretch to think that over 30 years, we'll see some real return; even just a tiny bit is all one needs to make that money last 30 years. 4% is not crazy.. You are all just diseased with recency basis (yes Larry Swedroe, professional finance guy who should know better, I include you in this).

4% is fine...


Well, you can make it work nominally yeah, but implicit in the

"4 percent SWR"

discussion is that its 4 percent adjusted every year for inflation, ie that 4 percent SWR percentage is REAL, not nominal. You start out at year one, with 4 percent withdrawal based on your portfolio amount, then every year you withdrawal 4 percent adjusted by cpi-u. The percentage you can withdrawal, marches upward. say 2 percent inflation, first year 4 percent, second year 4.08 withdrawal rate based on initial portofolio amount, then 4.01616, etc.

So with zero real return, and the 4 percent going up in real terms, you will run out of money before 25 years, assuming any amount of inflation.

Only in the case if inflation is zero or negative, over that 25 years, will a 4 percent SWR work for 25 years with zero return.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Grt2bOutdoors » Wed Feb 13, 2013 3:14 pm

[quote="HomerJYou can make 4% last for 25 years with ZERO PERCENT real return. It's not a stretch to think that over 30 years, we'll see some real return; even just a tiny bit is all one needs to make that money last 30 years. 4% is not crazy.. You are all just diseased with recency basis (yes Larry Swedroe, professional finance guy who should know better, I include you in this).

4% is fine...[/quote]

Just to be safe though, I have 3 lifestyle plans in mind.....

a) 2.5% + 75% of Social Security - be able to keep a roof over my head, two light bulbs including one for the bathroom and 2000 calories a day

b) 3.0% + 80% of Social Security - all of the above, plus cable tv, a computer with internet access and some new clothes each year

c) 4.0% + 100% of Social Security earned- all of b; plus an occasional vacation and a small sum for my heirs.

C is optimal, however I will take A (barebones) if need be.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Grt2bOutdoors » Wed Feb 13, 2013 3:18 pm

LH wrote:
HomerJ wrote:Why do you say "no longer safe"? You mean to say it was never safe, right?

I disagree with that... 80 years of data is enough for me... If 4% covered the "worst-case" in years including the Great Depression and the 40 years before 1982 where bonds did terrible, then I see no reason why it won't work today...

You can make 4% last for 25 years with ZERO PERCENT real return. It's not a stretch to think that over 30 years, we'll see some real return; even just a tiny bit is all one needs to make that money last 30 years. 4% is not crazy.. You are all just diseased with recency basis (yes Larry Swedroe, professional finance guy who should know better, I include you in this).

4% is fine...


Well, you can make it work nominally yeah, but implicit in the

4 percent SWR

is that its 4 percent adjusted every year for inflation, ie that 4 percent SWR percentage is REAL, not nominal.

So with zero real return, and the 4 percent going up in real terms, you will run out of money before 25 years, assuming any amount of inflation.

Only in the case if inflation is zero or negative, over that 25 years, will a 4 percent SWR work for 25 years with zero return.


Somehow I get this feeling that your expected retirement income is far higher than what you are living on today? If you save $1 million and you get $30K in social security - you will have $70K in retirement income. Do you think you will really need more than $5-6K in monthly gross income at retirement? Key word - need, not want.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby MathWizard » Wed Feb 13, 2013 3:19 pm

For me, the 4% SWR is for planning purposes.

Until I can meet my needs with SS (I plan on 75% of estimated benefits) and
a portfolio which is 25 times (expenses-SS) I cannot retire.

After that is met, then I am working/saving for discretionionary funds, and this
grows quite fast, since I'm not only contributing, I am also not drawing down the portfolio.

If I am forced to retire, then I will take whatever my base expenses are, and the
portfolio will last as long as it lasts. After that, I do what I can on SS, and maybe
use a reverse mortgage. Remember, this is a worst case scenario, where I have no
control over either income or expenses.

I also plan to discount the portfolio if the P/E ratio is well above historical norms.
This way you don't get the anomoly of widely varying 30 year SWRs of two families one retiring
at the end of 1999 versus the end of 2003, or end of 2007 vs. end of 2008.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby LH » Wed Feb 13, 2013 3:23 pm

Grt2bOutdoors wrote:
LH wrote:
HomerJ wrote:Why do you say "no longer safe"? You mean to say it was never safe, right?

I disagree with that... 80 years of data is enough for me... If 4% covered the "worst-case" in years including the Great Depression and the 40 years before 1982 where bonds did terrible, then I see no reason why it won't work today...

You can make 4% last for 25 years with ZERO PERCENT real return. It's not a stretch to think that over 30 years, we'll see some real return; even just a tiny bit is all one needs to make that money last 30 years. 4% is not crazy.. You are all just diseased with recency basis (yes Larry Swedroe, professional finance guy who should know better, I include you in this).

4% is fine...


Well, you can make it work nominally yeah, but implicit in the

4 percent SWR

is that its 4 percent adjusted every year for inflation, ie that 4 percent SWR percentage is REAL, not nominal.

So with zero real return, and the 4 percent going up in real terms, you will run out of money before 25 years, assuming any amount of inflation.

Only in the case if inflation is zero or negative, over that 25 years, will a 4 percent SWR work for 25 years with zero return.


Somehow I get this feeling that your expected retirement income is far higher than what you are living on today? If you save $1 million and you get $30K in social security - you will have $70K in retirement income. Do you think you will really need more than $5-6K in monthly gross income at retirement? Key word - need, not want.


I do not follow? The discussion above as I read in terms of your reply seems independent of your reply about feelings about what I am living on today? My reply is just math really? Just points out subtle conflation of issue.

"Need" is a fascinating topic with tons of conflation, heh, any reply I would make would be off topic : ) Will try to make it obtuse.

I would just say do not conflate personal "need" with average need in a statistical sense. You and I will likely not experience the average. This conflation is where matching goes off kilter.

Also, for fun, look up what the average person in the world lives on per day, I know in egypt its about 2 dollars a day, so roughly 730 dollars a year, try it, take 730 to egypt, and live there on it, why do some need 70,000, one hundred times as much?..... hmmmmmm. Also, consider what happens in Britain if you get kidney failure at age 55-65. "Needs" can be highly variable.

My point was a mathematical point that dealt with conflation between nominal and real in the Bergen "4 percent SWR", that 4 percent SWR is inflation adjusted is not often specified but its implied.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Grt2bOutdoors » Wed Feb 13, 2013 3:41 pm

What relevance does kidney failure in Great Britain have on someone who is residing in the U.S.? Unless you are trying to point out the costs of socialized medicine.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby LH » Wed Feb 13, 2013 3:44 pm

Grt2bOutdoors wrote:What relevance does kidney failure in Great Britain have on someone who is residing in the U.S.? Unless you are trying to point out the costs of socialized medicine.


Have no idea what you are talking about. Need is just highly variable. There are treatments in US that are hugely expensive now, I just do not know of them specifically, and would result in death/disability if not done, you would need it, I just do not know of them offhand as example. My post was a mathematical one, got a reply about needs, and posted two extreme examples of variable needs. complete change of topic by you.

I dont now follow the initial post, now you make another. I am getting a feeling here too. What is your purpose?

Grt2bOutdoors wrote:
LH wrote:
Well, you can make it work nominally yeah, but implicit in the

4 percent SWR

is that its 4 percent adjusted every year for inflation, ie that 4 percent SWR percentage is REAL, not nominal.

So with zero real return, and the 4 percent going up in real terms, you will run out of money before 25 years, assuming any amount of inflation.

Only in the case if inflation is zero or negative, over that 25 years, will a 4 percent SWR work for 25 years with zero return.


Somehow I get this feeling that your expected retirement income is far higher than what you are living on today? If you save $1 million and you get $30K in social security - you will have $70K in retirement income. Do you think you will really need more than $5-6K in monthly gross income at retirement? Key word - need, not want.


There is my reply again. Basic math, you do not reply to it, bring up needs and wants, and I reply with two examples of needs that are far apart, the whole need/want thing is very variable. That is KEY, needs are highly subjective, variable, uncertain. I replied to need, because you brought it up, now you bring something else up. You are off topic at best.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby LH » Wed Feb 13, 2013 4:18 pm

Browser wrote:
reggiesimpson wrote:The Latest News! We are all going to die. Spend accordingly.

This is often overlooked. Death can cover up a lot of mistakes in your retirement withdrawal plan...


heh, always a bright side : P

There is link to trinity study on wiki. Good to refer back to it again intermittently, its easy to lose sight of exactly what is being talked about.

http://www.bogleheads.org/wiki/Safe_Wit ... nity_study


could not get Bengen link to work on wiki page, here is Bengen study:

http://www.retailinvestor.org/pdf/Bengen1.pdf
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby allsop » Wed Feb 13, 2013 4:36 pm

Grt2bOutdoors wrote:What relevance does kidney failure in Great Britain have on someone who is residing in the U.S.? Unless you are trying to point out the costs of socialized medicine.


The point is that UK's "socialized medicine" has far lower costs than in USA with at least the same quality.

On this forum health care costs is a very big concern, but not that important in Europe.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby umfundi » Wed Feb 13, 2013 5:38 pm

BBL wrote:
Keith,

I ran into this paper when looking around for something else the other day and meant to insert it in a different thread of similar topic. Anyhow I thought you (and others) would find it interesting assuming you haven't seen it before...

Managing a retirement portfolio: Do annuities provide more safety?

"Even with the generally recognized “safe” withdrawal amount of 4% of the retirement portfolio starting
balance, more than 5% of retirement portfolios will run out of money over a 30-year period. Bootstrap
simulations were used to estimate the probability of outliving a retirement portfolio as increasing proportions
of a tax-deferred account are annuitized. The impacts of Required Minimum Distributions and taxable Social
Security income were incorporated into the analysis. Results indicate that annuities significantly extend the
length of time the portfolio lasts, but the expected balance remaining (estate size) will decrease substantially,
a trade-off of security versus a legacy..."

http://www.afcpe.org/assets/pdf/john_j._spitzer.pdf

More SWR fodder.

BBL,

Thank you. My bias is: If you really need some level of income, assure it by annuitizing part of your lump sum.

I guess, I don't understand much of this wrangling. If you can go out and buy an SPIA that is inflation protected and has survivor benefits that returns 4%, what's to discuss whether 4% is safe or not?

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

Postby Cut-Throat » Wed Feb 13, 2013 6:04 pm

umfundi wrote:Thank you. My bias is: If you really need some level of income, assure it by annuitizing part of your lump sum.

I guess, I don't understand much of this wrangling. If you can go out and buy an SPIA that is inflation protected and has survivor benefits that returns 4%, what's to discuss whether 4% is safe or not?

Keith


Exactly, Hence my original statement that I did not buy the 4% is dead, and the new SWR is 3%......The past has not changed. The only thing that has changed is recency of low returns in interest rates.

I am not annutizing, because I understand the past Investment History and my returns will probably yield more than 4%, and am confident in my own plan. But an annuity is a real option for someone that needs 4%.....Much Better than Increasing Stock Allocation or other 'Stretching for Yield' scenarios that I've seen discussed here recently.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby HomerJ » Wed Feb 13, 2013 7:17 pm

LH wrote:
HomerJ wrote:
freebeer wrote:
Cut-Throat wrote:
freebeer wrote:"historical" is not just 80 years. And it definitely isn't just U.S.-only especially not for the period that happened to be coincide with the rise of the American Empire. And remember 4% of Trinity Study was a back-testing exercise not a recommended real-world withdrawal strategy.


Of course, we knew that already.


If you knew that already, just why don't you "buy" that 4% inflation-adjusted withdrawals is no longer safe?


Why do you say "no longer safe"? You mean to say it was never safe, right?

I disagree with that... 80 years of data is enough for me... If 4% covered the "worst-case" in years including the Great Depression and the 40 years before 1982 where bonds did terrible, then I see no reason why it won't work today...

You can make 4% last for 25 years with ZERO PERCENT real return. It's not a stretch to think that over 30 years, we'll see some real return; even just a tiny bit is all one needs to make that money last 30 years. 4% is not crazy.. You are all just diseased with recency basis (yes Larry Swedroe, professional finance guy who should know better, I include you in this).

4% is fine...


Well, you can make it work nominally yeah, but implicit in the

"4 percent SWR"

discussion is that its 4 percent adjusted every year for inflation, ie that 4 percent SWR percentage is REAL, not nominal. You start out at year one, with 4 percent withdrawal based on your portfolio amount, then every year you withdrawal 4 percent adjusted by cpi-u. The percentage you can withdrawal, marches upward. say 2 percent inflation, first year 4 percent, second year 4.08 withdrawal rate based on initial portofolio amount, then 4.01616, etc.

So with zero real return, and the 4 percent going up in real terms, you will run out of money before 25 years, assuming any amount of inflation.

Only in the case if inflation is zero or negative, over that 25 years, will a 4 percent SWR work for 25 years with zero return.


No, zero real return (not zero nominal return) includes inflation... It assumes your investments return equal to inflation. Which means, even if you you raise your 4% by inflation every year, your money will still last 25 years.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby EyeYield » Wed Feb 13, 2013 8:08 pm

SWR's are based on what has happened in the past, no? If one believes that 1929, two world wars, the tech crash, 9/11 and the housing bubble are examples of worst case scenarios, then 3-4% should be fine. However, if the ultimate worst case scenario (one that dwarfs all others) hasn't happened yet, but will happen in your lifetime, then fugget about it.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby nisiprius » Wed Feb 13, 2013 9:48 pm

The problem with "flexible" withdrawal plans is that there's no way to measure how good they are, compare them, or judge their suitability. Consider these simple flexible plans:

a) Spend 1% of your portfolio every year.
b) Spend 2% of your portfolio every year.
c) Spend 4% of your portfolio every year.
d) Spend 6% of your portfolio every year.
e) Spend 50% of your portfolio every year.

ALL of these plans have these elements in common:
a) They are flexible; they adjust your withdrawals according to how well or poorly your investments did.
b) They cannot fail. Your portfolio never reaches zero (although if you round to pennies plan e might).

But how do we decide which ones are acceptable, or which one is best?

We might say that b is better than a, because both of them are virtually certain not only to grow, but to leave huge amount of unused "money on the table" or "money left as a legacy," but plan b) lets you spend more.

We might say that e is unacceptable because even though it never fails, it is virtually certainly to send you "flexibly" down into poverty.

But c versus d? We have to compare two infinite sets of possible fluctuations in income. d will, I think, give you more to spend than c if the market does OK, but less--maybe dangerously less--if the market does poorly. Which is acceptable? Which is better? It's some crazy-complicated personal utility function of how you feel about feast-or-famine existence.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby ObliviousInvestor » Wed Feb 13, 2013 11:39 pm

umfundi wrote:My bias is: If you really need some level of income, assure it by annuitizing part of your lump sum.

I'm not sure that's much of a bias. Seems analogous to a bias that, if you want less volatility in your portfolio, you should own more bonds and less stocks.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Leesbro63 » Thu Feb 14, 2013 3:09 am

555 wrote:
Cut-Throat wrote:
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?"


4% if survivor continues getting full payment.


And what happens if we get a few years of huge inflation like the 1970s or worse....a larger and larger portion of each payment becomes taxable. So much of the inflation protection serves to protect Uncle Sam while hurting you!
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby umfundi » Thu Feb 14, 2013 4:53 am

ObliviousInvestor wrote:
umfundi wrote:My bias is: If you really need some level of income, assure it by annuitizing part of your lump sum.

I'm not sure that's much of a bias. Seems analogous to a bias that, if you want less volatility in your portfolio, you should own more bonds and less stocks.

Mike,

Yes, but it gets at the paradox: The less you have, the more conservative you need to be. (The more you have, the less conservative you need to be.)

Let's say you have a $1,000,000 nest egg. $40,000 a year would be nice, but you absolutely must have $20,000, or your standard of living will seriously suffer. Well, I think you should take the $20,000 off the table by purchasing an annuity or bond ladder or ... But, it does not matter that much. You can probably get $20,000 per year no matter what.

On the other hand, if you have a $1,000,000 nest egg, and you absolutely must have $40,000 a year, you have a serious issue. There are some hard choices to make. Annuitize the whole thing and guarantee your needs for life but with no legacy is one option (my bias). Or, there are various flavors of rolling the dice which are probably OK, but not certain.

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

Postby LH » Thu Feb 14, 2013 5:55 am

HomerJ wrote:
LH wrote:
HomerJ wrote:
freebeer wrote:[quote="Cut-ThroatIf you knew that already, just why don't you "buy" that 4% inflation-adjusted withdrawals is no longer safe?


Why do you say "no longer safe"? You mean to say it was never safe, right?

I disagree with that... 80 years of data is enough for me... If 4% covered the "worst-case" in years including the Great Depression and the 40 years before 1982 where bonds did terrible, then I see no reason why it won't work today...

You can make 4% last for 25 years with ZERO PERCENT real return. It's not a stretch to think that over 30 years, we'll see some real return; even just a tiny bit is all one needs to make that money last 30 years. 4% is not crazy.. You are all just diseased with recency basis (yes Larry Swedroe, professional finance guy who should know better, I include you in this).

4% is fine...


Well, you can make it work nominally yeah, but implicit in the

"4 percent SWR"

discussion is that its 4 percent adjusted every year for inflation, ie that 4 percent SWR percentage is REAL, not nominal. You start out at year one, with 4 percent withdrawal based on your portfolio amount, then every year you withdrawal 4 percent adjusted by cpi-u. The percentage you can withdrawal, marches upward. say 2 percent inflation, first year 4 percent, second year 4.08 withdrawal rate based on initial portofolio amount, then 4.01616, etc.

So with zero real return, and the 4 percent going up in real terms, you will run out of money before 25 years, assuming any amount of inflation.

Only in the case if inflation is zero or negative, over that 25 years, will a 4 percent SWR work for 25 years with zero return.


No, zero real return (not zero nominal return) includes inflation... It assumes your investments return equal to inflation. Which means, even if you you raise your 4% by inflation every year, your money will still last 25 years.


Ah, I conflated it. You are correct, you said ZERO PERCENT real return, and I made it into zero nominal return mentally. I am diseased with money illusion : )
So when there is inflation, in the case of nominal return with zero real return, the nominal increase in the portfolio exactly matches the inflation step up in the 4 percent withdrawal by definition, so it lasts 25 years. Its a real to real comparison.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Cut-Throat » Thu Feb 14, 2013 7:34 am

nisiprius wrote:The problem with "flexible" withdrawal plans is that there's no way to measure how good they are, compare them, or judge their suitability. Consider these simple flexible plans:

a) Spend 1% of your portfolio every year.
b) Spend 2% of your portfolio every year.
c) Spend 4% of your portfolio every year.
d) Spend 6% of your portfolio every year.
e) Spend 50% of your portfolio every year.

ALL of these plans have these elements in common:
a) They are flexible; they adjust your withdrawals according to how well or poorly your investments did.
b) They cannot fail. Your portfolio never reaches zero (although if you round to pennies plan e might).

But how do we decide which ones are acceptable, or which one is best?

We might say that b is better than a, because both of them are virtually certain not only to grow, but to leave huge amount of unused "money on the table" or "money left as a legacy," but plan b) lets you spend more.

We might say that e is unacceptable because even though it never fails, it is virtually certainly to send you "flexibly" down into poverty.

But c versus d? We have to compare two infinite sets of possible fluctuations in income. d will, I think, give you more to spend than c if the market does OK, but less--maybe dangerously less--if the market does poorly. Which is acceptable? Which is better? It's some crazy-complicated personal utility function of how you feel about feast-or-famine existence.


Yes. Life is uncertain.

I think any withdrawal plan has the same uncertainties. So far my whole life has been uncertain, I don't expect the rest of my retirement to be any different.

With that said, the withdrawal of portfolio balance is similar to the RMD as the percentage ramps up as you age. Also, I set my AA so that I can withstand a drop of my portfolio to about 15% worst case. I am perfectly able to ratchet my spending down by 15%, 1f need be. I have tweaked my annual budget every year I have been alive. My retirement life is no different.

So, the answer to your question is none of the above for myself. 3% of Portfolio Balance in my 60s, because that is a very safe historical number and will give me more money than i have spent in my life. Stein and Demuth in one of their books had Monte Carlo and historical simulations for percentages as you age. You have the same decisions with every Withdrawal Plan, except the percentage of portfolio balance has yearly feedback into every withdrawal amount. None of the studies of Variable withdrawals had your choices of 1%, 2% or 50% (So eliminate those immediately).....So were back to all the old studies of 3-6%. More as you Age.

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

Postby mickeyd » Thu Feb 14, 2013 7:51 pm

No one knows nuthin.


I disagree. Bogleheads know summun.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby Rodc » Thu Feb 14, 2013 8:26 pm

But how do we decide which ones are acceptable, or which one is best?


There are many satisficing approaches, good enough. You may never know which is optimal. Given we know 4% + inflation is more or less the historical maximal safe static rate, 4% will be a pretty decent fixed rate against the balance. If the balance grows you get more, maybe rather more than inflation, you live large, if the balance shrinks you tighten your belt.

You don't know any less with this approach than with the 4%+inflation rule, indeed you know more: your portfolio will shrink less and last longer if we get a bad bear and you will do better if the market stay strong.

I don't see how this complaint matters since it is a universal fact of trying to draw an income from a variable portfolio.

I don't know the optimal asset allocation. I don't know the optimal job to take. I don't know the optimal balance between enjoying life now vs saving to enjoy life later. But we all manage these uncertainties.

Added: Merriman on his site has a comparison of 4% vs 5% of balance using historical returns for different stock bond splits. Both tended to work rather well, but differently. With 4% you get more portfolio growth, obviously, so you get more growth income over time. But that means you get less when you might enjoy it more and you get more when you might be too old to really be able to spend it (or you leave it to heirs). With 5% you get more earlier, but of course you also get less later. A not surprising trade-off.
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby EyeYield » Thu Feb 14, 2013 10:04 pm

mickeyd wrote: I disagree. Bogleheads know summun.

I agree, of course they do. The one thing that all Bogleheads know is that nobody knows nothing.

“Nobody knows nothing.” And of course that’s true. - Jack Bogle

I figured this would be the one place on earth where I could use that phrase in a playful way. :beer
"The stock market is a giant distraction from the business of investing." - Jack Bogle
EyeYield
 
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Re: Is 3% the new safe withdrawal rate for retirees?

Postby ResNullius » Fri Feb 15, 2013 11:50 am

It's interesting to me how much effort goes into figuring out what a 100% successful withdrawal rate might be, when 95% to 99% allows for a much higher withdrawal rate. In life, there isn't anything that 100% certain other than death. We all have lived our respective lives pursuing education, jobs, saving and investing, getting married, having kids, and everything else without anywhere close to a 100% certainty on any of our choices. Why now?
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