Safe Withdrawal Rate as it relates to Size of Portfolio
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Safe Withdrawal Rate as it relates to Size of Portfolio
Does the size of the portfolio influence the chosen withdrawal strategy? For example, do safe withdrawals tend to change up or down if the portfolio is 10mil instead of 1mil?
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
This is debated weekly around here, so you will no doubt get different answers.
My feeling is a SWR is short-hand for your retirement budget. I consider it to be two numbers: my ideal budget with all discretionary spending included, and my bottom-line budget with no discretionary spending. My actual withdrawals are somewhere between those two limits. I set those numbers at the beginning of my retirement and try to stick to them.
I would not recommend changing your budget based on your level of assets in the middle of your retirement. Most people's retirement budget is closely aligned with what it was pre-retirement, perhaps a fraction of it, like 60, 70, or 80% of it.
My feeling is a SWR is short-hand for your retirement budget. I consider it to be two numbers: my ideal budget with all discretionary spending included, and my bottom-line budget with no discretionary spending. My actual withdrawals are somewhere between those two limits. I set those numbers at the beginning of my retirement and try to stick to them.
I would not recommend changing your budget based on your level of assets in the middle of your retirement. Most people's retirement budget is closely aligned with what it was pre-retirement, perhaps a fraction of it, like 60, 70, or 80% of it.
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Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Welcome to the forum.
I always viewed the SWR as it related to how long would the money last if you took out X% + inflation each year and the portfolio was invested with an AA of y% stocks and z% bonds. The size of the portfolio, per se, didn't enter the equation. http://www.bogleheads.org/wiki/Safe_withdrawal_rates
Now, if you had 10 mil vs 1 mil, the withdrawal rate from your portfolio may change but that would be due to personal reasons.
In the extreme case, think of lottery winners. In some cases the withdrawal rates from their portfolios go by several orders of magnitude and in those cases the portfolio doesn't last as long as it may have if it were invested with an appropriate AA and had a lower withdrawal rate.
I always viewed the SWR as it related to how long would the money last if you took out X% + inflation each year and the portfolio was invested with an AA of y% stocks and z% bonds. The size of the portfolio, per se, didn't enter the equation. http://www.bogleheads.org/wiki/Safe_withdrawal_rates
Now, if you had 10 mil vs 1 mil, the withdrawal rate from your portfolio may change but that would be due to personal reasons.
In the extreme case, think of lottery winners. In some cases the withdrawal rates from their portfolios go by several orders of magnitude and in those cases the portfolio doesn't last as long as it may have if it were invested with an appropriate AA and had a lower withdrawal rate.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Withdrawal rates are usually discussed as an annual percentage of the portfolio. So, the size of the portfolio does not matter,
However, as the percentage increases, there may be a need for differing investment strategies.
L.
However, as the percentage increases, there may be a need for differing investment strategies.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Just to preempt any confusion:
The 4% rule comes from a study that showed if one withdrew 4% of his portfolio in his first year of retirement, then continued to withdraw this dollar amount adjusted for inflation in subsequent years, he would not outlive his money in 95% of 30-year historical scenarios starting back 100 years or so. It assumed a standard 60-40 portfolio.
People often misinterpret the rule as being "withdraw 4% of your portfolio each year". People also forget that its scope was only 30 years. If one adjusted it to a "3.71% rule" and following all the above assumptions he would succeed in 99% of historical scenarios. Don't forget that past results don't guarantee future results.
Source: http://www.firecalc.com/
The 4% rule comes from a study that showed if one withdrew 4% of his portfolio in his first year of retirement, then continued to withdraw this dollar amount adjusted for inflation in subsequent years, he would not outlive his money in 95% of 30-year historical scenarios starting back 100 years or so. It assumed a standard 60-40 portfolio.
People often misinterpret the rule as being "withdraw 4% of your portfolio each year". People also forget that its scope was only 30 years. If one adjusted it to a "3.71% rule" and following all the above assumptions he would succeed in 99% of historical scenarios. Don't forget that past results don't guarantee future results.
Source: http://www.firecalc.com/
I'm just a fan of the person I got my user name from
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Day9 wrote:Just to preempt any confusion:
The 4% rule comes from a study that showed if one withdrew 4% of his portfolio in his first year of retirement, then continued to withdraw this dollar amount adjusted for inflation in subsequent years, he would not outlive his money in 95% of 30-year historical scenarios starting back 100 years or so. It assumed a standard 60-40 portfolio.
People often misinterpret the rule as being "withdraw 4% of your portfolio each year". People also forget that its scope was only 30 years. If one adjusted it to a "3.71% rule" and following all the above assumptions he would succeed in 99% of historical scenarios. Don't forget that past results don't guarantee future results.
Source: http://www.firecalc.com/
and people also forget that the 40% were 5 year treasuries and the return used in the study was 2.1% real from those 5 year treasuries, and 3% inflation. It's not even close to 2.1% yield these days let alone 2.1% real. 10% was used as the average return from equities. Don't forget that past results don't guarantee future results.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Not really relevant what the 'average return from equities was'. The 4% 'Rule' was based on the 'Worst Case Historical' results. Nothing to do with Averages!midareff wrote:and people also forget that the 40% were 5 year treasuries and the return used in the study was 2.1% real from those 5 year treasuries, and 3% inflation. It's not even close to 2.1% yield these days let alone 2.1% real. 10% was used as the average return from equities. Don't forget that past results don't guarantee future results.
I've seen a lot of posts from you, where you are very wary of withdrawing from your portfolio. And I can understand why if you believe that 'backtesting' is based on averages rather than worst case. It's not as bad as you think it is!
Last edited by BahamaMan on Thu Feb 26, 2015 3:49 pm, edited 2 times in total.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Um, not right. The original study used historical returns, which included returns as low as they are today. This is not the first time bonds have had zero real return. Also, if you look in the Bogleheads Wiki, there are follow on studies that use a variety of asset allocations. Just about anything from 30% to 80% stocks seems to work.midareff wrote:Day9 wrote:Just to preempt any confusion:
The 4% rule comes from a study that showed if one withdrew 4% of his portfolio in his first year of retirement, then continued to withdraw this dollar amount adjusted for inflation in subsequent years, he would not outlive his money in 95% of 30-year historical scenarios starting back 100 years or so. It assumed a standard 60-40 portfolio.
People often misinterpret the rule as being "withdraw 4% of your portfolio each year". People also forget that its scope was only 30 years. If one adjusted it to a "3.71% rule" and following all the above assumptions he would succeed in 99% of historical scenarios. Don't forget that past results don't guarantee future results.
Source: http://www.firecalc.com/
and people also forget that the 40% were 5 year treasuries and the return used in the study was 2.1% real from those 5 year treasuries, and 3% inflation. It's not even close to 2.1% yield these days let alone 2.1% real. 10% was used as the average return from equities. Don't forget that past results don't guarantee future results.
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Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Yes, size of portfolio counts.
BUT, what your portfolio consists of, also matters.
BUT, what your portfolio consists of, also matters.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: Safe Withdrawal Rate as it relates to Size of Portfolio
If someone were to only withdraw 4% of their portfolio each year, then I guess they would never have to worry about running out of their portfolio. Maybe TP at somepoint, and bread, but not portfolio.Day9 wrote:Just to preempt any confusion:
The 4% rule comes from a study that showed if one withdrew 4% of his portfolio in his first year of retirement, then continued to withdraw this dollar amount adjusted for inflation in subsequent years, he would not outlive his money in 95% of 30-year historical scenarios starting back 100 years or so. It assumed a standard 60-40 portfolio.
People often misinterpret the rule as being "withdraw 4% of your portfolio each year". People also forget that its scope was only 30 years. If one adjusted it to a "3.71% rule" and following all the above assumptions he would succeed in 99% of historical scenarios. Don't forget that past results don't guarantee future results.
Source: http://www.firecalc.com/
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
The SWR is not dependent on portfolio size. However, retirees who do not need the entire AWR for living expenses have a much broader range for asset allocation.
For investors more concerned with shallow (volatility) risk more FI can be held. For those more concerned with deep (inflation) risk more equities can be held.
For investors more concerned with shallow (volatility) risk more FI can be held. For those more concerned with deep (inflation) risk more equities can be held.
KISS & STC.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
If I had $10MM I would pay off all my debts, buy 1-2 new cars (to minimize ongoing expenses) and then decide on a SWR and monitor that each year (from the beach chair).michaeldmck wrote:Does the size of the portfolio influence the chosen withdrawal strategy? For example, do safe withdrawals tend to change up or down if the portfolio is 10mil instead of 1mil?
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Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Thank you for your response. Could you please explain this quote further?RadAudit wrote:Now, if you had 10 mil vs 1 mil, the withdrawal rate from your portfolio may change but that would be due to personal reasons.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Starting a withdrawal at today's Shiller of near 28 and starting a withdrawal in 2009 at a Shiller of 16 are different animals. You can even go as far back as 2012 when the S&P500 last said good-bye to 1200. I'm guessing your not much of a believer in mean reversion? I'd suggest to you (without running the math myself) that if you started at a 4% WR in 2009/2010 and added the CPI-U to your money withdrawal number, you are probably near a 3% WR today, probably quite a bit less. I'd also suggest to you that the conditions used to base the 4% 'Rule" are quite different than they were at the time of the study as both the expected equity returns are no longer 10% and 5 year treasuries are not producing the 5.1% Bengen used as averages. A worst case scenario based on Bengen's assumptions (averages he used) and those that exist today are different.BahamaMan wrote:Not really relevant what the 'average return from equities was'. The 4% 'Rule' was based on the 'Worst Case Historical' results. Nothing to do with Averages!midareff wrote:and people also forget that the 40% were 5 year treasuries and the return used in the study was 2.1% real from those 5 year treasuries, and 3% inflation. It's not even close to 2.1% yield these days let alone 2.1% real. 10% was used as the average return from equities. Don't forget that past results don't guarantee future results.
I've seen a lot of posts from you, where you are very wary of withdrawing from your portfolio. And I can understand why if you believe that 'backtesting' is based on averages rather than worst case. It's not as bad as you think it is!
I know you are a big fan of the VPW from your posts and I hope it works flawlessly for you. Any plan that locks me in to a % for 30+ years regardless of the economic conditions, inflation and world markets is not a plan I can warm up to. There are lots of plans out there ... 4%, VPW, Ceiling and Floor, and variations of them from how to schedule withdrawals and what to withdraw from first, second and so forth. FWIW, I'd call my withdrawals conservative. It produces enough spare money to plan several domestic and international trips yearly, donate 4 figures to charity and buy plenty of toys and still leave extra money to be retuned to the portfolio. I guess I'll leave it right where it is and we can see how the flavor of messages on this board change when this six year old bull stops roaring and both inflation and interest rates start to creep upwards with the accompanying decline in bond fund NAV's. Chocolate and vanilla. ... everyone's got a favorite flavor.
Last edited by midareff on Fri Feb 27, 2015 11:22 am, edited 1 time in total.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
We agree on this! ...That's why I use VPW.midareff wrote: Any plan that locks me in to a % for 30+ years regardless of the economic conditions, inflation and world markets is not a plan I can warm up to.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
The math is the same but what changes is the definition and consequences of failure.michaeldmck wrote:Does the size of the portfolio influence the chosen withdrawal strategy? For example, do safe withdrawals tend to change up or down if the portfolio is 10mil instead of 1mil?
Someone with a million dollar portfolio might start out with a safe withdrawal rate much higher than the typical 4% ($40,000) and might get into trouble and have to cut their spending in half to just an inflation adjusted $20,000 a year which could be a real hardship.
Someone with a ten million dollar portfolio could start out with more than $400,000 a year and if they had to cutback to "just" $200,000 a year they might have to sell one of their vacation homes.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
There is no magic formula that covers every possibility except for being very rich and having way more money then you will ever need.If one is middle of the road and thinks they will be ok at 4 pct they better try 3 to 3.5 pct at the beginning.That is based on research done by Murphy who is famous for his law
K.I.S.S........so easy to say so difficult to do.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
I think there could be a small increase in the calculated SWR due to the, likely, lower fees for the larger portfolio. However, if both portfolios are self-managed in Vanguard index funds then the delta would be small to non-existent.michaeldmck wrote:Does the size of the portfolio influence the chosen withdrawal strategy? For example, do safe withdrawals tend to change up or down if the portfolio is 10mil instead of 1mil?
There could also be a small increase in SWR if the larger portfolio affords the opportunity to use superior investments (closed funds, high-minimum funds).
Finally, having a larger portfolio might give one the latitude to go beyond a simple SWR strategy and include annuities to some extent (in so much as the asset base will still be relatively high after dedicating a modest percentage to some strategy of purchasing SPIAs).
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
The only thing that would change the SWR would be asset allocation. My guess would be someone with $10M, even if their withdrawals are the same percent as to one with $1M, might have their allocation skewed away from bonds. My theory is similar to the size of your emergency fund. The size of your bonds/cash accounts should be suffient to cover 2-6 years of expenses, with 2 being at he tail end of a bear market. And no, I do not have $10M.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
If you only have $1 million, spend some time reading about Safe Withdrawal Rates in the Wiki section.michaeldmck wrote:Does the size of the portfolio influence the chosen withdrawal strategy? For example, do safe withdrawals tend to change up or down if the portfolio is 10mil instead of 1mil?
If you have $10 million, forget the reading and spend some time on your yacht in the sun section
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Not in my case. My planned SWR (absolute $ value) has not changed much over the last few years, although the size of my NW has increased significantly.
michaeldmck wrote:Does the size of the portfolio influence the chosen withdrawal strategy? For example, do safe withdrawals tend to change up or down if the portfolio is 10mil instead of 1mil?
Last edited by obgyn65 on Sat Feb 28, 2015 7:38 am, edited 1 time in total.
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Re: Safe Withdrawal Rate as it relates to Size of Portfolio
Safe can be viewed in at least 2 ways.
1. is this withdrawal rate going to last my lifetime. e.g. At this rate assuming x growth in expenses and y growth in investments what is the percentage of times I will have enough money to fund my retirement for 30 years.
2. How much of the withdrawal amount do I need to support my needs and how much is excess.
e.g. what is your margin. Your example of 1 vs 10 million is extreme. But the difference between what you decide to withdraw vs what you really need is critical. The greater the margin the safer the withdrawal plan will be.
1. is this withdrawal rate going to last my lifetime. e.g. At this rate assuming x growth in expenses and y growth in investments what is the percentage of times I will have enough money to fund my retirement for 30 years.
2. How much of the withdrawal amount do I need to support my needs and how much is excess.
e.g. what is your margin. Your example of 1 vs 10 million is extreme. But the difference between what you decide to withdraw vs what you really need is critical. The greater the margin the safer the withdrawal plan will be.
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
michaeldmck - these Vanguard tools may be helpful.
How much can I withdraw in retirement?
https://personal.vanguard.com/us/insigh ... ement-tool
Retirement nest egg calculator:
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
Also see Vanguards article on SWR's : http://www.vanguard.com/pdf/s325.pdf
How much can I withdraw in retirement?
https://personal.vanguard.com/us/insigh ... ement-tool
Retirement nest egg calculator:
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
Also see Vanguards article on SWR's : http://www.vanguard.com/pdf/s325.pdf
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
$1M: work Firecalc nervously for SWR. $10M: don't worry about it. $100M: lounge on the yacht trying to decide which house to use next week.
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Re: Safe Withdrawal Rate as it relates to Size of Portfolio
+1BahamaMan wrote:Not really relevant what the 'average return from equities was'. The 4% 'Rule' was based on the 'Worst Case Historical' results. Nothing to do with Averages!midareff wrote:and people also forget that the 40% were 5 year treasuries and the return used in the study was 2.1% real from those 5 year treasuries, and 3% inflation. It's not even close to 2.1% yield these days let alone 2.1% real. 10% was used as the average return from equities. Don't forget that past results don't guarantee future results.
I've seen a lot of posts from you, where you are very wary of withdrawing from your portfolio. And I can understand why if you believe that 'backtesting' is based on averages rather than worst case. It's not as bad as you think it is!
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
Re: Safe Withdrawal Rate as it relates to Size of Portfolio
It's not an annual percentage of your portfolio. It a percentage of your portfolio at retirement, inflation adjusted each year thereafter regardless of the fluctuations in the size of your portfolio.Leeraar wrote:Withdrawal rates are usually discussed as an annual percentage of the portfolio. So, the size of the portfolio does not matter,
However, as the percentage increases, there may be a need for differing investment strategies.
L.
You are right that size does not change the SWR percentage.