Do you Bogleheads really follow the 3-4% SWR rule?

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nobsinvestor
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Do you Bogleheads really follow the 3-4% SWR rule?

Post by nobsinvestor »

So, as I understand the SWR rule, you withdraw some nominal amount, 3 or 4% in the first year of retirement and adjust thereafter for inflation, regardless of what happens in the market.

But, do you Bogleheads who are doing this actually stick to it, year in and year out?

Or, when the stock market has a really good year (2013) or a really bad year (2008, 2011), do you make adjustments and take out less or more for the upcoming year?
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retiredjg
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by retiredjg »

I keep it in mind. But if you make big changes in your life (like move across the country) you can go over that number pretty easily. So other years, I try to take less.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by prudent »

It's more of a guideline than a hard and fast rule. It is meant to help people understand roughly how much they can safely withdraw starting at the typical retirement age while not depleting their savings in less than 30 years +/- based on historical data.

There are many variations on that guideline such as Variable Percentage Withdrawal, constant dollars, etc. I would expect almost everyone tweaks the guideline to suit their specific needs (different life expectancy, desire to leave an inheritance, charitable giving...)
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by jebmke »

I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by bengal22 »

I do not follow a 3-4% SWR rule. In fact, I would be hard pressed to know what my WR really is. I have a reduced private pension(thanks to government), distributions from my taxable accounts, and fun work income(4K). When there is a shortfall of funds to match expenses, I pull from my taxable account. When I take my month in Florida and other vacations, I pull from my taxable account. With the markets going up, and my portfolio growing despite withdrawals, this strategy seems to be working. If things go south(market down, health), I will adjust my expenses to reduce my withdrawals(If I need to). I am using what I call the SOTP(seat of the pants) rule. If not, I could be withdrawing more monies than I need to meet an arbitrary withdrawal rate. With this approach, I think I will have the same size portfolio at death than I have now. Other than giving to charities, I don't know what I would be spending more on.

Perhaps this whole 3-4% SWR discussion is for people that are not retired so that they can have some idea what they need to retire. Hmmmm.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by coachz »

What are some of the thought processes they use please ?
jebmke wrote:I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
Last edited by coachz on Thu Apr 23, 2015 6:27 pm, edited 1 time in total.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by bengal22 »

coachz wrote:What are some of the though processes they use please ?
jebmke wrote:I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
See above :happy
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by dbr »

No I don't. For one reason the onset of Social Security income will have changed the need for withdrawals before and after that change. SS is not the only financial factor that changes at some point in time. There have been and will be changes is expenses that have to be supported. One can anticipate other changes in retirement. Selling a home and moving to a rental with a larger portfolio and different expenses is an example. I would say that the word to describe all this is that retirement is "lumpy." These SWR rules are simply not rules but studies of how portfolios behave under withdrawal using various scenarios to state general properties.

Where the SWR studies apply is that they can be a sort of "rhumb line" that you can use to know if you are trending way out of a safe condition based on accumulating average withdrawals. A person might also attend to the current value of assets to judge if one is seriously in trouble.

Retirement planners in use today allow entry of scenarios for income streams and expenses that are lumpy. The withdrawal plan one would generate in such cases will not correspond to an SWR model. One can use the model to check if the scenario one expected is one that is actually developing and if there needs to be a recheck.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by jebmke »

coachz wrote:What are some of the though processes they use please ?
jebmke wrote:I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
Most use one of the following. Draw as needed using judgement (Taylor uses this method). Some spend their dividends only and have a mental barrier on selling assets. One person I know lives off pension and social security and only takes money out of assets for special items (like an emergency, new car ...) or to gift to kids/grandkids.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by bengal22 »

dbr wrote:No I don't. For one reason the onset of Social Security income will have changed the need for withdrawals before and after that change. SS is not the only financial factor that changes at some point in time. There have been and will be changes is expenses that have to be supported. One can anticipate other changes in retirement. Selling a home and moving to a rental with a larger portfolio and different expenses is an example. I would say that the word to describe all this is that retirement is "lumpy." These SWR rules are simply not rules but studies of how portfolios behave under withdrawal using various scenarios to state general properties.

Where the SWR studies apply is that they can be a sort of "rhumb line" that you can use to know if you are trending way out of a safe condition based on accumulating average withdrawals. A person might also attend to the current value of assets to judge if one is seriously in trouble.

Retirement planners in use today allow entry of scenarios for income streams and expenses that are lumpy. The withdrawal plan one would generate in such cases will not correspond to an SWR model. One can use the model to check if the scenario one expected is one that is actually developing and if there needs to be a recheck.
"In navigation, a rhumb line (or loxodrome) is an arc crossing all meridians of longitude at the same angle, i.e. a path with constant bearing as measured relative to true or magnetic north." Probably the only one that had to look up "rhumb line." If post would have said loxodrome I would have understood. :happy
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by dbr »

bengal22 wrote:
dbr wrote:No I don't. For one reason the onset of Social Security income will have changed the need for withdrawals before and after that change. SS is not the only financial factor that changes at some point in time. There have been and will be changes is expenses that have to be supported. One can anticipate other changes in retirement. Selling a home and moving to a rental with a larger portfolio and different expenses is an example. I would say that the word to describe all this is that retirement is "lumpy." These SWR rules are simply not rules but studies of how portfolios behave under withdrawal using various scenarios to state general properties.

Where the SWR studies apply is that they can be a sort of "rhumb line" that you can use to know if you are trending way out of a safe condition based on accumulating average withdrawals. A person might also attend to the current value of assets to judge if one is seriously in trouble.

Retirement planners in use today allow entry of scenarios for income streams and expenses that are lumpy. The withdrawal plan one would generate in such cases will not correspond to an SWR model. One can use the model to check if the scenario one expected is one that is actually developing and if there needs to be a recheck.
"In navigation, a rhumb line (or loxodrome) is an arc crossing all meridians of longitude at the same angle, i.e. a path with constant bearing as measured relative to true or magnetic north." Probably the only one that had to look up "rhumb line." If post would have said loxodrome I would have understood. :happy
Anyway, it was just a sort of an analogy, not to be taken too seriously but a way to represent the concept of there being a general global direction and a possibility of deviating around it in detail.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by celia »

I would guess that there are many bogleheads who have planned for years and in retirement they take a negative amount. By that, I mean, not only do they not withdraw anything, but they are also saving part of their yearly income. Even if they have to take RMDs, that does not mean they have to spend it, but it goes into taxable savings.

I know several people like that.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by Rodc »

It was never meant to be an actual plan to be used. It was a rough and ready measure for rough planning, a "plan" written in pencil.
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.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by The Wizard »

It turns out I'm withdrawing almost exactly 4% from my nest egg this year to supplement my annuity income.
This 4% is actually a fixed dollar amount that was closer to 5% when I began it two years ago, but with the growth of my nest egg the percentage has declined.
This "4%" is also in lieu of taking SS for the next five years, to age 70.
But when I hit 70, it won't change much since first RMD is just a bit less...
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by The Wizard »

celia wrote:I would guess that there are many bogleheads who have planned for years and in retirement they take a negative amount. By that, I mean, not only do they not withdraw anything, but they are also saving part of their yearly income. Even if they have to take RMDs, that does not mean they have to spend it, but it goes into taxable savings.

I know several people like that.
Some of it has to do with Tax Planning.
Withdrawing more from tax sheltered, including Roth conversions, in your 60s, so that RMDs don't bump your taxable income up as much later...
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by tennisplyr »

No I don't. Retired 4 years and I take what I need. This is not an exact science, it's all based on historical data and we all know what happens when one relies on history for implications on the future.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by longinvest »

nobsinvestor wrote:So, as I understand the SWR rule, you withdraw some nominal amount, 3 or 4% in the first year of retirement and adjust thereafter for inflation, regardless of what happens in the market.

But, do you Bogleheads who are doing this actually stick to it, year in and year out?

Or, when the stock market has a really good year (2013) or a really bad year (2008, 2011), do you make adjustments and take out less or more for the upcoming year?
nobsinvestor,

As you realize, almost no one would withdraw according to a strict 4% SWR schedule, taking withdrawals adjusted to inflation yearly regardless of market returns. Human self-preservation instincts would kick in quickly, unless the withdrawn money was totally superfluous and not necessary for the survival or comfort of the retiree.

Are you looking for a withdrawal method that can effectively be used in retirement? Personally, I like the wiki: Variable percentage withdrawal method (VPW). This withdrawal method has many attractive properties:
  • It adjusts withdrawals to market returns.
  • It adjusts withdrawals percentages to the asset allocation of the portfolio, the current age of the retiree, and the maximal age of last withdrawal.
  • It will never prematurely deplete a portfolio.
I think of VPW as a method where instead of being inflation adjusted, withdrawals are market-return adjusted.

Usually VPW is not used in isolation. People have other income, like Social Security and pensions. People also keep some additional money on the side, on which VPW is not applied. But, VPW is a very useful tool in a retirement toolbox.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by CyberBob »

jebmke wrote:I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
i find exotic withdrawal methods endlessly fascinating, but don't actually use any of them.

Srince my fixed costs in retirement are low and my spending flexible, I tend to default to Taylor's very zen 'use good judgement' method:
  • "One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

    I put Safe Withdrawal Rates into Google and it came up with more than 15 million hits. One wonders how people managed to retire without knowing their "SWR."

    Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately, past performance numbers do not predict future performance.

    I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

    So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

    This is what most people do and it works.

    "There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet

    Best wishes.
    Taylor"
I think following the 4% initial plus inflation method would actually be very hard psychologically. Especially in bad years like 2008, where your natural reaction would be to want to take less, rather than just blindly continuing inflation-adjusted withdrawals.
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nobsinvestor
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by nobsinvestor »

Interesting replies so far.

Perhaps a better rule of thumb would be to just take as needed, but do not exceed 5% in any given year unless your portfolio returned 10% or more?
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by IlliniDave »

nobsinvestor wrote:So, as I understand the SWR rule, you withdraw some nominal amount, 3 or 4% in the first year of retirement and adjust thereafter for inflation, regardless of what happens in the market.

But, do you Bogleheads who are doing this actually stick to it, year in and year out?

Or, when the stock market has a really good year (2013) or a really bad year (2008, 2011), do you make adjustments and take out less or more for the upcoming year?
I'm not yet retired and not intending to follow that "rule". I do use it as a planning guide in sizing my retirement assets. I'll spend what I need to spend, perhaps a little more if I seem to be getting ahead as time goes on. My baseline plan that intends to replicate my current lifestyle fairly closely would have me spending from investment assets at an average level of ~2%. Sizing the asset accumulation for 3% provides some margin.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by jimkinny »

No. I am more aligned with the above re Taylor's approach but acknowledge retiring in 1982 might have been just lucky circumstances in that the great returns of equities in the 1990s were ahead as well as the stunning returns of Treasuries for the next 30 years.
I think a 3-4% withdrawal rate is a good place to start, then modify as circumstances change.
It is pretty naive to think a single rule will work for 30 years in the future, but ......
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by dbr »

jimkinny wrote:No. I am more aligned with the above re Taylor's approach but acknowledge retiring in 1982 might have been just lucky circumstances in that the great returns of equities in the 1990s were ahead as well as the stunning returns of Treasuries for the next 30 years.
I think a 3-4% withdrawal rate is a good place to start, then modify as circumstances change.
It is pretty naive to think a single rule will work for 30 years in the future, but ......
JIm
It is a fact that the amount one can get away with taking varies hugely with the point in time when one retires. I think we now know that 1982 or so has been one of the best if not the best year to retire over an entire span of over a hundred years. However, that does not mean that the approach Tyler took to this would not have worked perfectly well under other circumstances.

I will always come back to the idea that fundamentally retirement income should be largely annuitized and not dependent on mathematical models of withdrawal schemes. It is granted that is easier to do when people have somewhat reliable pensions, especially COLA'd, that were never convertible to lump sums, and Social Security
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by jfn111 »

I use the 4% as a stop. I look at the start of the year and figure out the dollar amount that is the maximum I would want to withdraw. I then live my life and withdraw when needed. I've been retired three years and 2.9% was the highest withdrawal so far.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by midareff »

nobsinvestor wrote:So, as I understand the SWR rule, you withdraw some nominal amount, 3 or 4% in the first year of retirement and adjust thereafter for inflation, regardless of what happens in the market.

But, do you Bogleheads who are doing this actually stick to it, year in and year out?

Or, when the stock market has a really good year (2013) or a really bad year (2008, 2011), do you make adjustments and take out less or more for the upcoming year?

I have not read all the posts Noob so forgive me if this has been stated before. It's not the rule. It is a method, and one method among many available as tools. Phau has written extensile in this area, as a few others have, and his interpretation of Bengen's 4% was = to 2.75% today. There was another post recently that linked to a paper with 7 or 8 different methods besides VPW and prospective results, and there are more methods than the paper discussed.

Personally, my first three retired years have been much more conservative than what you expressed although having the luck to have made my retirement commitment early in a huge bull run has had an pleasant effect. If I flipped the results I doubt I would be a happy camper... the psychological impacts are important.

EDIT NOTE: I had the three stages of retired travel explained to me at the eye doctor's office by a 75 year old couple today. He cited the three stages as go-go, slo-go and no-go.

I think many of us are looking for a way to maximize withdrawals in the early stages, while we can still travel as an example, and protect the long end where we may require costly long term care. All of this is totally fraught with issues from our individual longevity to inflation rates, market returns, interest rate changes, etc.

Personally, I'm at 3.2% absolute projected this year and budgeted for 4.5% to possibly 5% (both of prior three years average portfolio balances). Need to book at least another international trip.
Last edited by midareff on Fri Apr 24, 2015 4:49 pm, edited 1 time in total.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by kolea »

jebmke wrote:I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
I use a mathematical method to draw from assets. Have it programmed into Excel, so all I have to do is update Excel with portfolio data once a quarter, and it tells me how much to sell of what. And more importantly, if I get hit by a bus, it tells my wife (who otherwise pays little attention to our portfolio) what to do in the future.

The formula is to calculate 3.4% of current portfolio value. If that amount is less than X, than re-adjust it to be X. If that amount is greater than Y, than readjust to Y. In other words, it has a floor and a ceiling. X (the floor) is an inflation adjusted dollar value and it was 2.8% of portfolio value in the year we retired. Y is the ceiling, and it is inflation adjusted dollar value. It was 4.5% of year-0 portfolio value. But other wise, the amount we withdraw floats between the floor and ceiling, and therefore depends on how well the portfolio is doing. (All percentages here are annual, but we withdraw quarterly, so actual percentages are 25% of these).

Lastly, I take the result of above and subtract off the current balance in our Schwab checking account. This is a "use it or lose it" policy - any left over money from previous quarter is applied to the next quarter's withdrawal amount. This is the withdrawal amount. My Excel sheet uses the AA to calculate how much bonds and/or equities to sell (after subtracting off distributions).

The 3.4% percentage will drop to 2.1% when I start collecting SS in 4-5 years. This will change also when I reach 70.5 and have to make RMDs.

So, no I do not follow the SWR rule, which is a constant (in real dollars) cash draw-down. Mine is constant percentage with floor/ceiling. I back-tested my scheme and it worked better than constant cash.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by retiredjg »

For the new people who may be wondering, I'd like to say this is not really a rule or a guaranteed method. It represents a study of what happened in the past.

Some people did a study of what happened for 30 year periods back to the 1920's if I recall correctly. In general, portfolios didn't fail before 30 years if you took no more than about 4% first year and increased it for inflation each year thereafter. This was the worst possible case. Lots of portfolios didn't fail with higher withdrawal rates, but hardly any failed using the 4% rate. So 4% got to be called the "safe" withdrawal rate because it had been safe under lots of different conditions over lots of different time periods.

They also looked at stock to bond ratio and the success at 4% depended on having a non-significant allocation to stocks - 10% stocks didn't really work very well - 40% worked well.

We have no idea if this 4% will work in most or all cases the future. On the other hand, it would be incredibly stupid to ignore the past. So take the "4% rule" as a guideline and then do what Taylor suggested - use your own common sense. Don't expect a 10% withdrawal rate to last 10 years if you are invested in stocks. A stock crash might leave you eating dog food. And remember that more people are now retired longer than 30 years.

If you want some real information about all this, instead of just how I remember the data, go to the Wiki (link upper right) and search for Trinity Study.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by White Coat Investor »

prudent wrote:It's more of a guideline than a hard and fast rule.
https://www.youtube.com/watch?v=6GMkuPiIZ2k

I find the concept of an SWR far more useful in determining how much money you need to retire than in actually managing it in retirement. The idea that your expenses will go up every year of retirement with inflation is seriously flawed.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by likegarden »

Yes, we (75/70 yrs old) take out about 3% every year, but do not notice it with the rising stock market. The first years in retirement we did not take anything out of savings because SS and pension were sufficient, I did also part-time work. We also had not yet any large health expenditures, our health insurance and Medicare are sufficient. We also do not do any large scale travelling, did that when we were younger.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by pkcrafter »

coachz, if you want to review a few studies, here's one from Morningstar's David Blanchette. You can also look up studies from Vangaurd and a few from Wade Pfau/Michael Kitces.

https://www.google.com/url?sa=t&rct=j&q ... GU&cad=rja

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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by 555 »

nobsinvestor wrote:So, as I understand the SWR rule, you withdraw some nominal amount, 3 or 4% in the first year of retirement and adjust thereafter for inflation, regardless of what happens in the market.

But, do you Bogleheads who are doing this actually stick to it, year in and year out?

Or, when the stock market has a really good year (2013) or a really bad year (2008, 2011), do you make adjustments and take out less or more for the upcoming year?
It's basically a complete myth that this has ever been intended as a rule or method. It is merely an analysis of data.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by dbr »

EmergDoc wrote:
prudent wrote:It's more of a guideline than a hard and fast rule.
https://www.youtube.com/watch?v=6GMkuPiIZ2k

I find the concept of an SWR far more useful in determining how much money you need to retire than in actually managing it in retirement. The idea that your expenses will go up every year of retirement with inflation is seriously flawed.
As a plan it certainly is. As an analysis it is simply a proposition of working in real dollars, which makes all kinds of sense. What you really have is a study involving constant withdrawals in real terms.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by Gill »

I use 3% of my net portfolio (after deducting all liabilities) combined with my total guaranteed income from SS, pension and annuities as a guideline as to an approximate limit on my spending for the coming year. I feel quite comfortable spending to that limit and realize I could probably exceed it if needed.
Gill
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by orangeclocker »

TwoByFour wrote:
jebmke wrote:I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
I use a mathematical method to draw from assets. Have it programmed into Excel, so all I have to do is update Excel with portfolio data once a quarter, and it tells me how much to sell of what. And more importantly, if I get hit by a bus, it tells my wife (who otherwise pays little attention to our portfolio) what to do in the future.

The formula is to calculate 3.4% of current portfolio value. If that amount is less than X, than re-adjust it to be X. If that amount is greater than Y, than readjust to Y. In other words, it has a floor and a ceiling. X (the floor) is an inflation adjusted dollar value and it was 2.8% of portfolio value in the year we retired. Y is the ceiling, and it is inflation adjusted dollar value. It was 4.5% of year-0 portfolio value. But other wise, the amount we withdraw floats between the floor and ceiling, and therefore depends on how well the portfolio is doing. (All percentages here are annual, but we withdraw quarterly, so actual percentages are 25% of these).

Lastly, I take the result of above and subtract off the current balance in our Schwab checking account. This is a "use it or lose it" policy - any left over money from previous quarter is applied to the next quarter's withdrawal amount. This is the withdrawal amount. My Excel sheet uses the AA to calculate how much bonds and/or equities to sell (after subtracting off distributions).

The 3.4% percentage will drop to 2.1% when I start collecting SS in 4-5 years. This will change also when I reach 70.5 and have to make RMDs.

So, no I do not follow the SWR rule, which is a constant (in real dollars) cash draw-down. Mine is constant percentage with floor/ceiling. I back-tested my scheme and it worked better than constant cash.
Impressive. Are you willing to consider sharing your excel template?
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coachz
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by coachz »

would love to see it
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siamond
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by siamond »

The SWR rule (a fixed amount inflation-adjusted every year) is demonstrably VERY flawed, and can be downright dangerous for a retiree. Those saying that it was supposed to be just a research tool may be correct, but fact is this led to a whole body of very misguided research, which undoubtedly led to a whole score of misguided retirees.

Personally, I like to have a plan. I need to, actually. For accumulation as well as distribution. I am not yet on stable ground as a retiree (retired recently, I still have some part-time income), but I plan to use a version of a variable method, either Guyton-Klinger, or maybe a smoothed variation of VPW/PMT (with a long grace period) as was discussed and analyzed in this thread:
http://www.bogleheads.org/forum/viewtop ... 2&t=160073

I have a strong suspicion that many retirees do not have a specific plan (kind of winging it) because they followed an SWR-like line of reasoning before retirement, ended up saving a lot and working really hard and really long, and when retirement finally comes, all floodgates come open, and planning goes out of the window. Which is actually perfectly ok at such stage, if you're well off and have been conservative your entire life. Now when you think a bit about it, such retirees might very well have been capable of retiring earlier, maybe even significantly earlier. But since the SWR drum keeps banging and banging, they didn't. Personally, I chose to plan ahead, accept a variable spending pattern, and retire early.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by kolea »

orangeclocker wrote: Impressive. Are you willing to consider sharing your excel template?
Let me see if I can extract the calculation from the details of my accounts. The spreadsheet tracks all of our bank accounts and investment accounts and the formula pulls all that info in, so I need to separate it out.
Kolea (pron. ko-lay-uh). Golden plover.
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siamond
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by siamond »

orangeclocker wrote:Impressive. Are you willing to consider sharing your excel template?
coachz wrote:would love to see it
What TwoByFour described (a fixed % of the current portfolio, subject to floor and ceiling) can be easily simulated on the cFIREsim online calculator. Except for the part about changing the fixed % when SS becomes available (which certainly makes sense). It is certainly a better approach than fixed SWR, although the level of year-to-year variability sounds quite high (unless the AA is VERY bonds-heavy). Personally, I accept variability, but only to an extent.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by 555 »

"You should withdraw 4% of your portfolio in the first year of retirement and adjust thereafter for inflation, regardless of what happens in the market"
said nobody ever.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by Sheepdog »

No, I do not follow that "rule". I take out the amount I want and/or need, but I maintain a planned average withdrawal over the years. My average is maintained at 4.5%. I have withdrawn as high as 7.52% and as low as 3.11%, but the average stays.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by nobsinvestor »

Glad this thread has so many replies already.

So it seems like a lot more people use variable than I thought.

Ok, so taking out 4% real no matter what seems a bit robotic/unrealistic.

But do you guys agree that your portfolio has to roughly average 4% real over a 30-35 year withdrawal period?

Surely nobody takes out 10%+, even if the market has had a great year? Or do you?

(I'm still a long way from retirement but this interests me)
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by 555 »

nobsinvestor wrote:But do you guys agree that your portfolio has to roughly average 4% real over a 30-35 year withdrawal period?
As a rough ballpark figure of what you could typically withdraw on average, sure. But it's fairly obvious.
As even rougher ballpark figures
1/30=3.33%
1/35=2.86%
and positive real returns add to what you can spend.
Last edited by 555 on Fri Apr 24, 2015 12:32 pm, edited 1 time in total.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by tc101 »

I don't follow any firm rule, but if I withdrew much more than 4% in any year it would be a warning that I should look more closely at what I am doing. So far that has not happened.
. | The most important thing you should know about me is that I am not an expert.
dbr
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by dbr »

nobsinvestor wrote:
Ok, so taking out 4% real no matter what seems a bit robotic/unrealistic.

But do you guys agree that your portfolio has to roughly average 4% real over a 30-35 year withdrawal period?

Surely nobody takes out 10%+, even if the market has had a great year? Or do you?
No, we already know from historical data that there are years of retirement where the overall average rate of safe withdrawal has been much more than 4%. In fact almost all, well all but one, of the historical periods known have had a greater than 4% withdrawal rate (more or less). The statement that 4% is the SWR when based on history means that no withdrawal rate up to and including 4% failed in any historical year. Obviously all the rest of the years that also did not fail could have sustained higher withdrawal rates. Some of those years may well have sustained 8% or more, just roughly remembering that data from somewhere. (All of this up to a little give and take on numbers.)

So the problem is one of ex ante opposed to ex post. If you could somehow know that you have retired in a good year, you could set a higher SWR . Conversely if you somehow think this year is a worse year to retire than any of those historical years, then you should set a lower SWR. (All of this assuming counter to experience that an SWR is even a plan.)

Unfortunately any year being a good year or a bad year does not tell us much about whether or not the whole retirement is a good or bad one. You could look at the variable percentage withdrawal algorithm in the Wiki and posted here on the forum to see what that method says about taking more or less depending on things going better or worse.

About the 10%, I would assume that a lot of people spend a lump sum of 10% of their portfolio on something whether or not the year is a bad one or a good one. That would depend more on the assessment of whether the portfolio less the 10% is still adequate to meet the needs of the future, whatever the future is assume to be.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by nobsinvestor »

dbr wrote:
nobsinvestor wrote:
Ok, so taking out 4% real no matter what seems a bit robotic/unrealistic.

But do you guys agree that your portfolio has to roughly average 4% real over a 30-35 year withdrawal period?

Surely nobody takes out 10%+, even if the market has had a great year? Or do you?
No, we already know from historical data that there are years of retirement where the overall average rate of safe withdrawal has been much more than 4%. In fact almost all, well all but one, of the historical periods known have had a greater than 4% withdrawal rate (more or less). The statement that 4% is the SWR when based on history means that no withdrawal rate up to and including 4% failed in any historical year. Obviously all the rest of the years that also did not fail could have sustained higher withdrawal rates. Some of those years may well have sustained 8% or more, just roughly remembering that data from somewhere. (All of this up to a little give and take on numbers.)

So the problem is one of ex ante opposed to ex post. If you could somehow know that you have retired in a good year, you could set a higher SWR . Conversely if you somehow think this year is a worse year to retire than any of those historical years, then you should set a lower SWR. (All of this assuming counter to experience that an SWR is even a plan.)

Unfortunately any year being a good year or a bad year does not tell us much about whether or not the whole retirement is a good or bad one. You could look at the variable percentage withdrawal algorithm in the Wiki and posted here on the forum to see what that method says about taking more or less depending on things going better or worse.

About the 10%, I would assume that a lot of people spend a lump sum of 10% of their portfolio on something whether or not the year is a bad one or a good one. That would depend more on the assessment of whether the portfolio less the 10% is still adequate to meet the needs of the future, whatever the future is assume to be.
Doesn't this then mostly depend largely on stocks/bonds mix (AA), retirement period as far as the markets are concerned and your net worth? In other words, factors other than a fixed withdrawal amount?

For example, a retiree with even a modest sum [call it 20-25x living expenses] to retire on in 1985 could probably have been 80-90% in either stocks or bonds and done exceedingly well until 2008, and even then he would be fine if he was mostly bonds.

I see your point though. Maybe it makes sense to just withdraw a bit more [up to 10-15%] without worry on Dec 31 of a good year in the market [15%+ return).
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by BahamaMan »

longinvest wrote: As you realize, almost no one would withdraw according to a strict 4% SWR schedule, taking withdrawals adjusted to inflation yearly regardless of market returns. Human self-preservation instincts would kick in quickly, unless the withdrawn money was totally superfluous and not necessary for the survival or comfort of the retiree.

Are you looking for a withdrawal method that can effectively be used in retirement? Personally, I like the wiki: Variable percentage withdrawal method (VPW). This withdrawal method has many attractive properties:
  • It adjusts withdrawals to market returns.
  • It adjusts withdrawals percentages to the asset allocation of the portfolio, the current age of the retiree, and the maximal age of last withdrawal.
  • It will never prematurely deplete a portfolio.
I think of VPW as a method where instead of being inflation adjusted, withdrawals are market-return adjusted.

Usually VPW is not used in isolation. People have other income, like Social Security and pensions. People also keep some additional money on the side, on which VPW is not applied. But, VPW is a very useful tool in a retirement toolbox.
+1 on VPW..... It is not only the Best Planning Tool for Retirement that I have come across, it can actually be employed as I am doing!
fidelio
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by fidelio »

retired three years, started out w/ various swr schemes. i've found 2.5% does it for me, at least for the time being. that number is not really accurate, as i've spent some dollars on home improvement this year.
john94549
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by john94549 »

No. I'm retired, but my wife still works (her choice). We're both pushing 68. I harvest the interest from a couple of CDs for my personal spending money and to augment the monthly household budget. That's it. Of course that will change when (if) my wife retires or we hit RMDs. Even then, as others have noted, nothing says you have to spend those RMDs. You just have to "do" them and pay taxes. You can always plow the after-tax proceeds of the RMDs right back into after-tax savings or investments.
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by gasdoc »

TwoByFour wrote:
jebmke wrote:I have said before, I know a lot of retirees and not one of them uses a mathematical method to draw from assets.
I use a mathematical method to draw from assets. Have it programmed into Excel, so all I have to do is update Excel with portfolio data once a quarter, and it tells me how much to sell of what. And more importantly, if I get hit by a bus, it tells my wife (who otherwise pays little attention to our portfolio) what to do in the future.

The formula is to calculate 3.4% of current portfolio value. If that amount is less than X, than re-adjust it to be X. If that amount is greater than Y, than readjust to Y. In other words, it has a floor and a ceiling. X (the floor) is an inflation adjusted dollar value and it was 2.8% of portfolio value in the year we retired. Y is the ceiling, and it is inflation adjusted dollar value. It was 4.5% of year-0 portfolio value. But other wise, the amount we withdraw floats between the floor and ceiling, and therefore depends on how well the portfolio is doing. (All percentages here are annual, but we withdraw quarterly, so actual percentages are 25% of these).

Lastly, I take the result of above and subtract off the current balance in our Schwab checking account. This is a "use it or lose it" policy - any left over money from previous quarter is applied to the next quarter's withdrawal amount. This is the withdrawal amount. My Excel sheet uses the AA to calculate how much bonds and/or equities to sell (after subtracting off distributions).

The 3.4% percentage will drop to 2.1% when I start collecting SS in 4-5 years. This will change also when I reach 70.5 and have to make RMDs.

So, no I do not follow the SWR rule, which is a constant (in real dollars) cash draw-down. Mine is constant percentage with floor/ceiling. I back-tested my scheme and it worked better than constant cash.
TwoByFour,
Your technique seems very similar to the plan described in a Vanguard article still on their website. If I remember accurately, they take a constant percentage of portfolio at the end of each year, and then subject the amount to a ceiling of 5% and a floor of 2.5% of the amount drawn the year before. This might have the added advantage of allowing the amount to drift up or down during several years of market increases or decreases. I have five years until retirement, but am thinking along these lines. I believe they used 4% and a retirement duration of 30 years in their Monte Carlo calculations, and there was a small group that ran out of money. Perhaps all of these "guidelines" should be seen as maximums and throw in a little flexibility as time goes on....
523HRR
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Re: Do you Bogleheads really follow the 3-4% SWR rule?

Post by 523HRR »

I do a look-back at the end of each quarter to evaluate portfolio withdrawal rate. Since retiring a couple of years ago, our annual withdrawal rate is in the 2 - 2.5% range. Investable assets are significantly higher now than when I left employment, so don't really sweat the details other than a quarterly review.
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