4% rule - Asset Allocation

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panther2014
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4% rule - Asset Allocation

Post by panther2014 » Thu Jul 14, 2016 1:03 pm

Hello BG,

What allocation split between stocks and bonds one should one have if they want to follow the 4% rule.

For example, let's say my yearly expenses are 10,000, so if I have a portfolio of $250,000 (25x yearly expenses) then how should this be split between the 3 fund portfolio so I should never run out of money ?

Thanks
Panther

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LAlearning
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Re: 4% rule - Asset Allocation

Post by LAlearning » Thu Jul 14, 2016 1:09 pm

it was based off 50:50 s&p and corporates i believe....

https://www.bogleheads.org/wiki/Trinity ... allocation
I know nothing!

mhalley
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Re: 4% rule - Asset Allocation

Post by mhalley » Thu Jul 14, 2016 1:12 pm

This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.

soboggled
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Re: 4% rule - Asset Allocation

Post by soboggled » Thu Jul 14, 2016 1:57 pm

mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.

Furthermore, equities are volatile, so high exposure to stocks are likely to trigger panic selling just at the time history indicates you should be staying the course or buying. One should not underestimate the temptation to sell into a bear market especially when dependent on investments for income. Better err on the side of conservatism.
Ask yourself what would you do if the stock market went down for 4 years as follows: -8.3, -25.12, -43.84, -8.64. That is what happened during the Great Depression. The studies assume you would do nothing or continue to dollar average in. Hah!

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sperry8
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Re: 4% rule - Asset Allocation

Post by sperry8 » Thu Jul 14, 2016 2:03 pm

mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


While I agree with this - I think 4% was too low then - and is still too low today. Since my retirement 9 years ago I could've spent 5% and still been fine. I understand this is an admittedly short period but nevertheless includes the Great Recession (and its corresponding 56% loss) as well as the new highs recently hit. Seems representative of the market over time to me.

I'd say 75/25 stocks/bonds-cash should get you there.
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soboggled
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Re: 4% rule - Asset Allocation

Post by soboggled » Thu Jul 14, 2016 2:10 pm

sperry8 wrote:
mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


While I agree with this - I think 4% was too low then - and is still too low today. Since my retirement 9 years ago I could've spent 5% and still been fine. I understand this is an admittedly short period but nevertheless includes the Great Recession (and its corresponding 56% loss) as well as the new highs recently hit. Seems representative of the market over time to me.

I'd say 75/25 stocks/bonds-cash should get you there.

Try the Great Depression when stocks went down 40% in a year and at one point fell 90% from their highs. One could argue with a little less luck we could have seen the same in 2007 rather than a paltry 56%. Ask the senior moderator what happened. Most people went broke or panicked, and it's hard to blame them. The models assume "rebalancing". Yeah, right. 100/0 or even 75/25 is for very young people who have low accumulations and the human capital to bounce back.
Last edited by soboggled on Thu Jul 14, 2016 2:14 pm, edited 1 time in total.

mhalley
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Re: 4% rule - Asset Allocation

Post by mhalley » Thu Jul 14, 2016 2:13 pm

That's the problem with all of this retirement stuff. There are tons of conflicting recommendations, ranging from asset allocation, rebalancing frequency, safe withdrwal rate, asset placement, consumption smoothing, it goes on and on. Many authors that bogleheads admire disagree about major points, ranging from Bogle not advising international, Ferri and high yield bonds, the Larry portfolio, etc, etc. It is no wonder that many people end up using Ameriprise or Jones etc.
All you can do is read and learn as much as you can, pick a strategy and hope you are right, or at least close enough to right.

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Re: 4% rule - Asset Allocation

Post by soboggled » Thu Jul 14, 2016 2:25 pm

No, it often just takes some common sense. If you are retiring and have to go 75/25 to make your income goals for 30 years, you had better reconsider your strategy if possible. Maybe you should tighten your belt and/or keep working a little longer to make up the difference. Somebody who doesn't get that would be better off with a fee only advisor rather than doing it themselves.

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Will do good
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Re: 4% rule - Asset Allocation

Post by Will do good » Thu Jul 14, 2016 2:30 pm

sperry8 wrote:
mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


While I agree with this - I think 4% was too low then - and is still too low today. Since my retirement 9 years ago I could've spent 5% and still been fine. I understand this is an admittedly short period but nevertheless includes the Great Recession (and its corresponding 56% loss) as well as the new highs recently hit. Seems representative of the market over time to me.

I'd say 75/25 stocks/bonds-cash should get you there.


Sperry8- If you don't mind sharing, does your 4-5% aim for near spend down after 30 years or have a healthy amount left for heirs? My goal is to have more or less what I started with at beginning of retirement to pass on to my heirs if possible, am try to gauge what my SWR should be. Thanks.

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Re: 4% rule - Asset Allocation

Post by azanon » Thu Jul 14, 2016 2:35 pm

panther2014 wrote:Hello BG,

What allocation split between stocks and bonds one should one have if they want to follow the 4% rule.

For example, let's say my yearly expenses are 10,000, so if I have a portfolio of $250,000 (25x yearly expenses) then how should this be split between the 3 fund portfolio so I should never run out of money ?

Thanks
Panther


I'm reluctant to attempt to answer the question, because the "4% rule" was never intended to be a retirement withdrawal method. There are far more responsible methods and strategies for generating retirement income from a portfolio, and virtually all of them will have you making reassessments on subsequent years, most typically yearly.

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Tyler9000
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Re: 4% rule - Asset Allocation

Post by Tyler9000 » Thu Jul 14, 2016 2:37 pm

panther2014 wrote:What allocation split between stocks and bonds one should one have if they want to follow the 4% rule.

For example, let's say my yearly expenses are 10,000, so if I have a portfolio of $250,000 (25x yearly expenses) then how should this be split between the 3 fund portfolio so I should never run out of money ?


There are two primary studies that determined the 4% rule of thumb. The first was the Bengen study that used a S&P500 fund for stocks and 5-year treasuries for bonds. The second was the Trinity study, which used the same S&P500 fund but high quality corporate bonds. Both looked at differing percentages of stocks and bonds, and found that the sweet spot from a SWR perspective is roughly anywhere between 25% stocks and 75% stocks (the precise amount mattered less than you'd expect). So if you want to follow the classic 4% rule, you should limit yourself to the stock and bond funds used in the studies and have between 25-75% stocks. Most people recommend the high end of that range, as while it doesn't necessarily boost SWRs it does improve the median end portfolio value.

Importantly, not all stocks and bonds are created equal and if you change the funds you get different withdrawal rates. That includes the Three-Fund portfolio! For more information, read this: How Safe Withdrawal Rates Work. The site also includes withdrawal rate data for a variety of different asset allocations and a calculator you can play with on your own.

There's also the matter of "never running out of money". Safe withdrawal rates are calculated based on the assumption of completely depleting your savings over a certain timeframe. Live longer than that, and if you were unlucky enough to have the honor of pushing that WR to its limit you won't like the result. For early retirees, I prefer the idea of a "sustainable" withdrawal rate that I define as the one that maintained your inflation-adjusted principal even in the worst timeframe. That's the one likely to last forever. The safe withdrawal rate approaches the sustainable rate over longer timeframes. Here's one example that shows the relationship between he safe and sustainable rates.

While the topic is a bit more sophisticated than many people realize it doesn't necessarily have to be difficult to implement in real life. The most important step is to find a diversified asset allocation that you can personally stick with through good times and bad. Do that, plan conservatively, and remain flexible on the income/spending side, and you'll more than likely do just fine.
Last edited by Tyler9000 on Thu Jul 14, 2016 2:46 pm, edited 3 times in total.

NMJack
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Re: 4% rule - Asset Allocation

Post by NMJack » Thu Jul 14, 2016 2:44 pm

soboggled wrote: Most people went broke or panicked, and it's hard to blame them.


I'm not convinced that "most" went broke or panicked. Certainly, a number of people did panic and sell at depressed prices. I personally worked with a number of them, and it was sad how short sighted they all suddenly became. I also worked with some who were 100% equities and just ignored the noise and kept focusing on job/family/life. It is possible to err on the side of paying too close attention to one's savings and investments.

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Re: 4% rule - Asset Allocation

Post by soboggled » Thu Jul 14, 2016 2:48 pm

I read the tables as presented to say that historically, if you had withdrawn 4% on a 70/30 portfolio (I assume adjusted for inflation), you would have run out of money only 2% of the time (i.e., 98% success rate).
The good news is that a 50/50 portfolio is actually safer (100% success rate).
But I am not fully buying it, the sample size is small and there are too many assumptions that the investor will act like an automaton rather than a human being.

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Re: 4% rule - Asset Allocation

Post by soboggled » Thu Jul 14, 2016 2:50 pm

NMJack wrote:
soboggled wrote: Most people went broke or panicked, and it's hard to blame them.


I'm not convinced that "most" went broke or panicked. Certainly, a number of people did panic and sell at depressed prices. I personally worked with a number of them, and it was sad how short sighted they all suddenly became. I also worked with some who were 100% equities and just ignored the noise and kept focusing on job/family/life. It is possible to err on the side of paying too close attention to one's savings and investments.

Sometimes it pays to not read the newspapers or watch TV. But I was talking about the Great Depression.

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Re: 4% rule - Asset Allocation

Post by David Jay » Thu Jul 14, 2016 3:22 pm

panther2014 wrote:...follow the 4% rule.


Another commenter said something similar, but let me be more specific. The 4% rule should be used in the accumulation stage of life - you will likely have enough to retire if your planned expenses are less than 4% of your portfolio.

Withdrawing exactly 4% each year regardless of circumstances is not a good retirement plan. It causes you to face sequence-of-return risks. Some reasonableness needs to be factored in. No, you shouldn't withdraw 4% from a stock account that just dropped 30% or 40%. Withdraw a bit less for a year or two (or withdraw only from bonds). Withdraw a bit more in good years - maybe put a year or two worth of expenses in the bank.
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Re: 4% rule - Asset Allocation

Post by midareff » Thu Jul 14, 2016 3:26 pm

sperry8 wrote:
mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


While I agree with this - I think 4% was too low then - and is still too low today. Since my retirement 9 years ago I could've spent 5% and still been fine. I understand this is an admittedly short period but nevertheless includes the Great Recession (and its corresponding 56% loss) as well as the new highs recently hit. Seems representative of the market over time to me.

I'd say 75/25 stocks/bonds-cash should get you there.


You may be right on sperr8 but I think it is appropriate to add that 7 of your 9 retired years have been spent in what is now the second longest running bull market in history. While there may be many, many market outcomes for today's retirees I don't think that is one of them.

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Re: 4% rule - Asset Allocation

Post by soboggled » Thu Jul 14, 2016 3:28 pm

David Jay wrote:
panther2014 wrote:...follow the 4% rule.


Another commenter said something similar, but let me be more specific. The 4% rule should be used in the accumulation stage of life - you will likely have enough to retire if your planned expenses are less than 4% of your portfolio.

Withdrawing exactly 4% each year regardless of circumstances is not a good retirement plan. It causes you to face sequence-of-return risks. Some reasonableness needs to be factored in. No, you shouldn't withdraw 4% from a stock account that just dropped 30% or 40%. Withdraw a bit less for a year or two (or withdraw only from bonds). Withdraw a bit more in good years - maybe put a year or two worth of expenses in the bank.

Nothing like a rule that nobody can follow, leaves little margin for error, and does not account for emergencies.

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Re: 4% rule - Asset Allocation

Post by azanon » Thu Jul 14, 2016 3:48 pm

panther2014 wrote:Hello BG,

What allocation split between stocks and bonds one should one have if they want to follow the 4% rule.

For example, let's say my yearly expenses are 10,000, so if I have a portfolio of $250,000 (25x yearly expenses) then how should this be split between the 3 fund portfolio so I should never run out of money ?

Thanks
Panther


I can show you a rule that will let you set those percentages to mostly whatever you want, and you can typically withdrawal more than 4% annually too (* of the current year's balance *). Oh, and the method ensures you don't run out either. Link to Variable Percentage Withdrawal (VPW): http://www.bogleheads.org/wiki/Variable ... withdrawal

It's using a proper withdrawal method that ensures you never run out, not a certain portfolio allocation.

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Re: 4% rule - Asset Allocation

Post by Phineas J. Whoopee » Thu Jul 14, 2016 4:30 pm

Tyler9000 wrote:...
There's also the matter of "never running out of money". Safe withdrawal rates are calculated based on the assumption of completely depleting your savings over a certain timeframe. Live longer than that, and if you were unlucky enough to have the honor of pushing that WR to its limit you won't like the result. For early retirees, I prefer the idea of a "sustainable" withdrawal rate that I define as the one that maintained your inflation-adjusted principal even in the worst timeframe. That's the one likely to last forever. The safe withdrawal rate approaches the sustainable rate over longer timeframes. Here's one example that shows the relationship between he safe and sustainable rates.
...

The word the Trinity authors used was sustainable, and it did mean not exhausting the portfolio before 30 years had passed. The Mad Moneys and Edward Joneses of the world pretended they said safe, thereby inverting the meanings of the words. It's safe in terms of their being able to make this month's payments on their boats, but that's about it.

PJW

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Tyler9000
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Re: 4% rule - Asset Allocation

Post by Tyler9000 » Thu Jul 14, 2016 4:34 pm

Phineas J. Whoopee wrote:The word the Trinity authors used was sustainable, and it did mean not exhausting the portfolio before 30 years had passed.


That's true. My definition of sustainable with regard to withdrawal rates is different than the one you may see elsewhere.

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Re: 4% rule - Asset Allocation

Post by sperry8 » Thu Jul 21, 2016 1:01 pm

soboggled wrote:
sperry8 wrote:
mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


While I agree with this - I think 4% was too low then - and is still too low today. Since my retirement 9 years ago I could've spent 5% and still been fine. I understand this is an admittedly short period but nevertheless includes the Great Recession (and its corresponding 56% loss) as well as the new highs recently hit. Seems representative of the market over time to me.

I'd say 75/25 stocks/bonds-cash should get you there.

Try the Great Depression when stocks went down 40% in a year and at one point fell 90% from their highs. One could argue with a little less luck we could have seen the same in 2007 rather than a paltry 56%. Ask the senior moderator what happened. Most people went broke or panicked, and it's hard to blame them. The models assume "rebalancing". Yeah, right. 100/0 or even 75/25 is for very young people who have low accumulations and the human capital to bounce back.


I disagree with this. Trying to mitigate risks from the Great Depression is not a sound investment strategy. It was a once in a lifetime event (or really multiple lifetimes). If one attempts to ensure they are safe should it occur again one likely dies with way too much money in the bank. Life is meant to be lived and enjoyed not spent in fear. I do not mean to sound trite and think it is wise to attempt to mitigate risk where one can. But choosing the Great Depression and then attempting to remove your risk should it happen again ensures your money will significantly outlast you. In my opinion that takes on too little risk.

Will do good wrote:Sperry8- If you don't mind sharing, does your 4-5% aim for near spend down after 30 years or have a healthy amount left for heirs? My goal is to have more or less what I started with at beginning of retirement to pass on to my heirs if possible, am try to gauge what my SWR should be. Thanks.


In my case I'm happy to spend it all before I go. So my 9 years of actual data allows for this - although that actual data has me up over those years (meaning my nest egg has actually grown during this time). However I haven't taken out 4-5% but rather 3.49% during that time. That's why I believe I could increase to 5% and spend down. But I've only needed 3.49% and as such my nest egg has grown.

midareff wrote:You may be right on sperr8 but I think it is appropriate to add that 7 of your 9 retired years have been spent in what is now the second longest running bull market in history. While there may be many, many market outcomes for today's retirees I don't think that is one of them.


We cannot be sure what the future holds but I think the last 9 years is representative of the stock market as a whole. You mention the 2nd longest bull in history - which is true. But it has only returned just over 5% on average much less than historical returns and also this bull came after the 2nd worst Recession in America's history (after the Great Depression). So to me I think one can use it (at least overall on a return basis) as a representative example of ongoing returns. I.e., do you truly expect to earn less than 5% in Stocks over a 30 year retirement? Possible yes, but highly unlikely imo.
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Re: 4% rule - Asset Allocation

Post by HomerJ » Thu Jul 21, 2016 1:32 pm

mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


Ugh... 4% already accounts for BAD times... Interest rates have been this low before, and still 4% worked.

You use 4% just in case we are in for some bad times. So the fact that you (and Wade Pfau) think we are in for bad times doesn't change anything. By using 4%, you're ALREADY assuming bad-times ahead.

It's one thing to say AVERAGE returns might be lower going forward. That might even be correct, but that has nothing to do with the 4% rule. When you say that the 4% rule may not be conservative enough, you are saying the next 30 years will be worse than any in our history. Worse than the Great Depression and 25% unemployment. Worse than late 60s-70s with inflation, rising interest rates, and stocks that went nowhere.

4% is already very conservative. It worked during the WORST times in the past, not the average times. It's really not that hard to pull 4% out of a portfolio where dividends from bonds and stocks are already paying you 2%.
Last edited by HomerJ on Thu Jul 21, 2016 1:37 pm, edited 1 time in total.

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Re: 4% rule - Asset Allocation

Post by HomerJ » Thu Jul 21, 2016 1:36 pm

soboggled wrote:I read the tables as presented to say that historically, if you had withdrawn 4% on a 70/30 portfolio (I assume adjusted for inflation), you would have run out of money only 2% of the time (i.e., 98% success rate).
The good news is that a 50/50 portfolio is actually safer (100% success rate).
But I am not fully buying it, the sample size is small and there are too many assumptions that the investor will act like an automaton rather than a human being.


Actually the fact that a real human being would cut back on spending during huge bear markets means the 4% rule would work BETTER than if one was an automation.

50/50 with a 4% withdrawal is extremely safe. It would, of course, be better that the 4% isn't bare-bones survival. For most of us, if 4% "fails", it just means we start going on two vacations a year instead of four.

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Re: 4% guideline- Asset Allocation

Post by Leif » Thu Jul 21, 2016 2:58 pm

The 4% is more what you'd call "guideline" than actual rule.
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Re: 4% rule - Asset Allocation

Post by Chadnudj » Thu Jul 21, 2016 3:20 pm

soboggled wrote:Try the Great Depression when stocks went down 40% in a year and at one point fell 90% from their highs. One could argue with a little less luck we could have seen the same in 2007 rather than a paltry 56%. Ask the senior moderator what happened. Most people went broke or panicked, and it's hard to blame them. The models assume "rebalancing". Yeah, right. 100/0 or even 75/25 is for very young people who have low accumulations and the human capital to bounce back.


To be clear, the Trinity Study DOES include the Great Depression (the table details results from 1926-2014). It also includes 70s stagflation, World War II, Vietnam, the entire Cold War, 9/11, etc.

And the Trinity Study ASSUMES you do not panic, and instead stick to the 4% "rule." Even so, most retirees are cautious WITH the 4% rule -- if a year comes along with bad returns, they can take one fewer vacation, or eat out a bit less, etc. to reduce some expenses.

And the 4% rule isn't some rigid absolute -- it's a planning tool, to give you an idea when you MIGHT have enough. No one should literally quit the day they have 25X their expenses in investments/savings; they should use that as a target, constantly re-evaluate, and maybe wait until they have finished an entire year (or more!) with at least 25X expenses in their accounts (or fought through until they have 27X or 28X or 30X to give themselves more of a buffer).

It's called a SAFE Withdrawal Rate for a reason -- over an extremely long period of history (one with extreme swings in inflation/returns and tons of turmoil), it's worked with amazing success. It should work even today, when we have low interest rates and correspondingly low inflation, but also a much more globalized market, etc.

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Will do good
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Re: 4% rule - Asset Allocation

Post by Will do good » Thu Jul 21, 2016 3:27 pm

Chadnudj wrote:
soboggled wrote:Try the Great Depression when stocks went down 40% in a year and at one point fell 90% from their highs. One could argue with a little less luck we could have seen the same in 2007 rather than a paltry 56%. Ask the senior moderator what happened. Most people went broke or panicked, and it's hard to blame them. The models assume "rebalancing". Yeah, right. 100/0 or even 75/25 is for very young people who have low accumulations and the human capital to bounce back.


To be clear, the Trinity Study DOES include the Great Depression (the table details results from 1926-2014). It also includes 70s stagflation, World War II, Vietnam, the entire Cold War, 9/11, etc.

And the Trinity Study ASSUMES you do not panic, and instead stick to the 4% "rule." Even so, most retirees are cautious WITH the 4% rule -- if a year comes along with bad returns, they can take one fewer vacation, or eat out a bit less, etc. to reduce some expenses.

And the 4% rule isn't some rigid absolute -- it's a planning tool, to give you an idea when you MIGHT have enough. No one should literally quit the day they have 25X their expenses in investments/savings; they should use that as a target, constantly re-evaluate, and maybe wait until they have finished an entire year (or more!) with at least 25X expenses in their accounts (or fought through until they have 27X or 28X or 30X to give themselves more of a buffer).

It's called a SAFE Withdrawal Rate for a reason -- over an extremely long period of history (one with extreme swings in inflation/returns and tons of turmoil), it's worked with amazing success. It should work even today, when we have low interest rates and correspondingly low inflation, but also a much more globalized market, etc.


+1. If you have SS/pension on top of this (like most folks) you should be fine. I know, there will always be some that still worries and go to 2% :mrgreen:

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Re: 4% rule - Asset Allocation

Post by Chadnudj » Thu Jul 21, 2016 4:03 pm

Will do good wrote:
Chadnudj wrote:
soboggled wrote:Try the Great Depression when stocks went down 40% in a year and at one point fell 90% from their highs. One could argue with a little less luck we could have seen the same in 2007 rather than a paltry 56%. Ask the senior moderator what happened. Most people went broke or panicked, and it's hard to blame them. The models assume "rebalancing". Yeah, right. 100/0 or even 75/25 is for very young people who have low accumulations and the human capital to bounce back.


To be clear, the Trinity Study DOES include the Great Depression (the table details results from 1926-2014). It also includes 70s stagflation, World War II, Vietnam, the entire Cold War, 9/11, etc.

And the Trinity Study ASSUMES you do not panic, and instead stick to the 4% "rule." Even so, most retirees are cautious WITH the 4% rule -- if a year comes along with bad returns, they can take one fewer vacation, or eat out a bit less, etc. to reduce some expenses.

And the 4% rule isn't some rigid absolute -- it's a planning tool, to give you an idea when you MIGHT have enough. No one should literally quit the day they have 25X their expenses in investments/savings; they should use that as a target, constantly re-evaluate, and maybe wait until they have finished an entire year (or more!) with at least 25X expenses in their accounts (or fought through until they have 27X or 28X or 30X to give themselves more of a buffer).

It's called a SAFE Withdrawal Rate for a reason -- over an extremely long period of history (one with extreme swings in inflation/returns and tons of turmoil), it's worked with amazing success. It should work even today, when we have low interest rates and correspondingly low inflation, but also a much more globalized market, etc.


+1. If you have SS/pension on top of this (like most folks) you should be fine. I know, there will always be some that still worries and go to 2% :mrgreen:


And, since in many cases spending decreases as you age (caveat: may not be the case for those facing long-term illness/nursing care needs), you might have even more safety in 4%.

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Re: 4% rule - Asset Allocation

Post by sperry8 » Fri Jul 22, 2016 1:16 am

HomerJ wrote:
mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


Ugh... 4% already accounts for BAD times... Interest rates have been this low before, and still 4% worked.

You use 4% just in case we are in for some bad times. So the fact that you (and Wade Pfau) think we are in for bad times doesn't change anything. By using 4%, you're ALREADY assuming bad-times ahead.

It's one thing to say AVERAGE returns might be lower going forward. That might even be correct, but that has nothing to do with the 4% rule. When you say that the 4% rule may not be conservative enough, you are saying the next 30 years will be worse than any in our history. Worse than the Great Depression and 25% unemployment. Worse than late 60s-70s with inflation, rising interest rates, and stocks that went nowhere.

4% is already very conservative. It worked during the WORST times in the past, not the average times. It's really not that hard to pull 4% out of a portfolio where dividends from bonds and stocks are already paying you 2%.


+1. This is what I've learned from experience since retirement as well. 4% is safe. I suppose one could plan for something worse than we've ever seen but I just don't see why anyone wants to plan for such a risk.
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Re: 4% rule - Asset Allocation

Post by jjface » Fri Jul 22, 2016 1:52 am

sperry8 wrote:
HomerJ wrote:
mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


Ugh... 4% already accounts for BAD times... Interest rates have been this low before, and still 4% worked.

You use 4% just in case we are in for some bad times. So the fact that you (and Wade Pfau) think we are in for bad times doesn't change anything. By using 4%, you're ALREADY assuming bad-times ahead.

It's one thing to say AVERAGE returns might be lower going forward. That might even be correct, but that has nothing to do with the 4% rule. When you say that the 4% rule may not be conservative enough, you are saying the next 30 years will be worse than any in our history. Worse than the Great Depression and 25% unemployment. Worse than late 60s-70s with inflation, rising interest rates, and stocks that went nowhere.

4% is already very conservative. It worked during the WORST times in the past, not the average times. It's really not that hard to pull 4% out of a portfolio where dividends from bonds and stocks are already paying you 2%.


+1. This is what I've learned from experience since retirement as well. 4% is safe. I suppose one could plan for something worse than we've ever seen but I just don't see why anyone wants to plan for such a risk.


I think flexibility will serve you far better than following a set rule. You need to be prepared reduce spending when times are tough and feel free to increase it when they are good. Don't ignore the human element to these decisions as even if you believe 4% is safe as illustrated by a study-it is still just a study - how many in the real world would continue to withdraw say $40k from an initial $1m pot if their portfolio kept falling ... $500k ...$400k ... $300k ... or even lower? Your stocks are crashing your bonds are falling too.. No worries I'm following the 4% rule!

This might be an interesting read
http://www.gocurrycracker.com/the-worst ... ment-ever/

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Re: 4% rule - Asset Allocation

Post by Dandy » Fri Jul 22, 2016 5:45 am

With US equities at an historic high and interest rates at an historic low you need to be careful basing your withdrawal strategy on historic results no matter how respected the study. It's ok for a place to start but I don't think any withdrawal approach is set it and forget it. So, every few years you need to check your expenses, health and portfolio to see if it still makes sense.

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Re: 4% rule - Asset Allocation

Post by tennisplyr » Fri Jul 22, 2016 6:52 am

Always thought 4% rule was a worst case scenario not something that was going to dictate my future. It's like saying your tires can withhold speeds at 130mph so you can safely travel at the roads at 120 mph.......I don't think so. How about some common sense?
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Re: 4% rule - Asset Allocation

Post by trueblueky » Fri Jul 22, 2016 7:47 am

sperry8 wrote:
mhalley wrote:This table from a Forbes article gives the swr for various portfolios and withdrawal rates. For 30 year wd, 75-50% stocks appear to be safe. ( well, 75% gives a 98% chance) it is based on the updated trinity study.
http://blogs-images.forbes.com/wadepfau ... column.jpg
Link to the entire article by Wade Pfau
http://www.forbes.com/sites/wadepfau/20 ... 3bfe7a1c5f

Pay particular attention to the last paragraph:
It’s important to understand that these success rates are based on U.S. history. It is faulty logic to think these are the success rates applying to new retirees today. The particular situation today is that interest rates are so low relative to history, and this is a very important matter when assessing the viability of different withdrawal strategies. So while I know that the Trinity study is still quite popular in practice, I would suggest a lot of extra caution for anyone seeking to plan their retirements using these numbers.


While I agree with this - I think 4% was too low then - and is still too low today. Since my retirement 9 years ago I could've spent 5% and still been fine. I understand this is an admittedly short period but nevertheless includes the Great Recession (and its corresponding 56% loss) as well as the new highs recently hit. Seems representative of the market over time to me.

I'd say 75/25 stocks/bonds-cash should get you there.

What's to stop you from starting over at a new 4%?

You have $1,000,000 at retirement and plan to take 4% annually, adjusting for inflation. You withdraw $40,000 the first year. But the stock market zooms and you find you have $1,500,000 as you enter year two. Do you withdraw $40,800 per the plan?

Or do you withdraw $60,000 and use that as the new baseline? How would your situation be any different than someone who retired in year two with $1,500,000?

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Re: 4% rule - Asset Allocation

Post by ryman554 » Fri Jul 22, 2016 8:36 am

trueblueky wrote:What's to stop you from starting over at a new 4%?

You have $1,000,000 at retirement and plan to take 4% annually, adjusting for inflation. You withdraw $40,000 the first year. But the stock market zooms and you find you have $1,500,000 as you enter year two. Do you withdraw $40,800 per the plan?

Or do you withdraw $60,000 and use that as the new baseline? How would your situation be any different than someone who retired in year two with $1,500,000?


You *could*, and you are getting into VPW territory. But since your expenses didn't change, why would you withdraw any more? Splurge year?

What you will guarantee is that you will be at higher -- in fact the highest -- risk of portfolio depletion unless your reset lower at year 3. You will be guaranteeing that you are taking 4% of your peak monies. SWR still says it is sustainable, but with less wiggle room.

Let's put it this way.
For the vast majority of 4% SWR, you end up at 30 years with more (usually significantly more) assets than when you started.
For 1-2%, you end up with 0.

Your strategy is "guaranteed" to approach the latter. Better hope your WR accounts for emergencies...

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Re: 4% rule - Asset Allocation

Post by midareff » Fri Jul 22, 2016 10:13 am

sperry8 wrote:
midareff wrote:You may be right on sperr8 but I think it is appropriate to add that 7 of your 9 retired years have been spent in what is now the second longest running bull market in history. While there may be many, many market outcomes for today's retirees I don't think that is one of them.


We cannot be sure what the future holds but I think the last 9 years is representative of the stock market as a whole. You mention the 2nd longest bull in history - which is true. But it has only returned just over 5% on average much less than historical returns and also this bull came after the 2nd worst Recession in America's history (after the Great Depression). So to me I think one can use it (at least overall on a return basis) as a representative example of ongoing returns. I.e., do you truly expect to earn less than 5% in Stocks over a 30 year retirement? Possible yes, but highly unlikely imo.


Sperry... I agree with your statement we cannot be sure what the market holds in the future but Morningstar's data disagrees with your statement about returns of the stock market. A 10K investment in the SP500 10 years ago would be worth $21,625.05 today, at a 5% increase annually it would have accumulated only $16,288.95.

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Re: 4% rule - Asset Allocation

Post by HomerJ » Fri Jul 22, 2016 12:35 pm

jjface wrote:I think flexibility will serve you far better than following a set rule. You need to be prepared reduce spending when times are tough and feel free to increase it when they are good.


I think we all agree with that.

I am just arguing that 4% is a good starting point and it is already very conservative.

People seem to think that 4% was the withdrawal rate for "average" times in the past, and since some "experts" are predicting bad times ahead, those people think that one should drop to 3% or 2% withdrawal rates.

But that is incorrect. In the past, one could pull 5%-6% during the vast majority of 30-year periods and not run out of money. It was pretty rare one could only pull 4%. So we start at 4% just in case we are indeed entering bad times (adjusting year to year, not blindly pulling 4% every year, but starting at 4%).

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Re: 4% rule - Asset Allocation

Post by HomerJ » Fri Jul 22, 2016 12:45 pm

Dandy wrote:With US equities at an historic high and interest rates at an historic low you need to be careful basing your withdrawal strategy on historic results no matter how respected the study. It's ok for a place to start but I don't think any withdrawal approach is set it and forget it. So, every few years you need to check your expenses, health and portfolio to see if it still makes sense.


Inflation is also at an historic low, and U.S. equities are quite often at historic highs.

But yes, the 4% guideline is not a set it and forget it strategy.

It's an excellent very conservative target. But of course, it's always good to have some buffer in any financial plan.
Last edited by HomerJ on Fri Jul 22, 2016 12:46 pm, edited 1 time in total.

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Re: 4% rule - Asset Allocation

Post by Jake-R » Fri Jul 22, 2016 12:46 pm

Is the 4% rule based off withdrawing from a tax advantaged plan (401k, 457)? Or can a diversified taxable account handle this as well?

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Re: 4% rule - Asset Allocation

Post by jjface » Fri Jul 22, 2016 12:53 pm

HomerJ wrote:
jjface wrote:I think flexibility will serve you far better than following a set rule. You need to be prepared reduce spending when times are tough and feel free to increase it when they are good.


I think we all agree with that.

I am just arguing that 4% is a good starting point and it is already very conservative.

People seem to think that 4% was the withdrawal rate for "average" times in the past, and since some "experts" are predicting bad times ahead, those people think that one should drop to 3% or 2% withdrawal rates.

But that is incorrect. In the past, one could pull 5%-6% during the vast majority of 30-year periods and not run out of money. It was pretty rare one could only pull 4%. So we start at 4% just in case we are indeed entering bad times (adjusting year to year, not blindly pulling 4% every year, but starting at 4%).



Fair enough. I was just making the point that in the worst years a 4% withdrawal, although deemed safe or successful over 30yrs, would have produced a wild ride and left you pretty much broke after 30 yrs save for any guaranteed income. Probably why considering 3 or 3.5% may help you sleep easier at night or better yet if you can vary your withdrawals to match conditions.

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Just sayin...
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Re: 4% rule - Asset Allocation

Post by Just sayin... » Fri Jul 22, 2016 2:28 pm

HomerJ wrote:
jjface wrote:...I am just arguing that 4% is a good starting point and it is already very conservative.

People seem to think that 4% was the withdrawal rate for "average" times in the past, and since some "experts" are predicting bad times ahead, those people think that one should drop to 3% or 2% withdrawal rates.

But that is incorrect. In the past, one could pull 5%-6% during the vast majority of 30-year periods and not run out of money. It was pretty rare one could only pull 4%. So we start at 4% just in case we are indeed entering bad times (adjusting year to year, not blindly pulling 4% every year, but starting at 4%).

I'm following your thinking here but, given my occupation and industry, only have one (1) shot to get it right - there's no going back. Thus, my conservatism. To try to side-step the sequence of returns risk in the first few years of retirement, I've come up with the following SWR plan:
- Year 1: SWR 2.75%
- Years 2-3: SWR 3.0%
If the markets are neutral to positive at this point, I'll then increase my SWR to 3.5% for years 4-7, then again,
if the markets are still neutral to positive, I'll again increase my SWR to 4%

Couple of questions though: should I factor in the NPV of SS and pensions when calculating SWR? Also, I will be retiring a month before my 56th birthday. Does a projected 35-yr retirement change the calculus?

Thanks!

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Re: 4% rule - Asset Allocation

Post by Dandy » Fri Jul 22, 2016 3:01 pm

I'm following your thinking here but, given my occupation and industry, only have one (1) shot to get it right - there's no going back. Thus, my conservatism. To try to side-step the sequence of returns risk in the first few years of retirement, I've come up with the following SWR plan:
- Year 1: SWR 2.75%
- Years 2-3: SWR 3.0%
If the markets are neutral to positive at this point, I'll then increase my SWR to 3.5% for years 4-7, then again,
if the markets are still neutral to positive, I'll again increase my SWR to 4%

Couple of questions though: should I factor in the NPV of SS and pensions when calculating SWR? Also, I will be retiring a month before my 56th birthday. Does a projected 35-yr retirement change the calculus?


For many of us we only have one shot since after retirement it is usually hard to get back to earning a decent income. I think it is wise to be conservative as far as withdrawals early in retirement especially retiring at 56. It is a long stretch to Social Security and Medicare and often to get a pension if you are lucky to be in line for one. I believe the 4% "rule" was based on 30 years. I feel the longer you are funding your retirement from your portfolio the more risk you have of coming up short. The good news bad news is people are living longer (which is often preferred to the alternative).

I like your plan but no plan is likely to be able to be followed lock step for decades. Too many variables. Every few years you need to check your expenses, health and portfolio and make adjustments as needed. If you look like you are coming up short smaller cut backs made earlier are often the best approach. Good luck.

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Re: 4% rule - Asset Allocation

Post by Bogle_Feet » Fri Jul 22, 2016 3:03 pm

Asset allocation is not 4% rule dependent. Asset allocation depends on things like your age, retirement needs, etc.

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Re: 4% rule - Asset Allocation

Post by HomerJ » Fri Jul 22, 2016 4:28 pm

Just sayin... wrote:
HomerJ wrote:
jjface wrote:...I am just arguing that 4% is a good starting point and it is already very conservative.

People seem to think that 4% was the withdrawal rate for "average" times in the past, and since some "experts" are predicting bad times ahead, those people think that one should drop to 3% or 2% withdrawal rates.

But that is incorrect. In the past, one could pull 5%-6% during the vast majority of 30-year periods and not run out of money. It was pretty rare one could only pull 4%. So we start at 4% just in case we are indeed entering bad times (adjusting year to year, not blindly pulling 4% every year, but starting at 4%).

I'm following your thinking here but, given my occupation and industry, only have one (1) shot to get it right - there's no going back. Thus, my conservatism. To try to side-step the sequence of returns risk in the first few years of retirement, I've come up with the following SWR plan:
- Year 1: SWR 2.75%
- Years 2-3: SWR 3.0%
If the markets are neutral to positive at this point, I'll then increase my SWR to 3.5% for years 4-7, then again,
if the markets are still neutral to positive, I'll again increase my SWR to 4%

Couple of questions though: should I factor in the NPV of SS and pensions when calculating SWR? Also, I will be retiring a month before my 56th birthday. Does a projected 35-yr retirement change the calculus?

Thanks!


You are going about this in a very different way than most people on these boards... Most of us start with required cash-flow first, then figure out how much we need to save to achieve that. We usually account for SS and pension as cash-flows. The 4% guideline does not apply to them.

For instance, I would like about $7000 a month in retirement (based on my current spending).

My wife's SS will generate about $2000 of that, so that means we need $5000 a month or $60,000 a year from investments... 25 x $60,000 = $1.5 million.

So once we have $1.5 million, we could retire pulling 4% a year.

See, it's interesting to me that you would start with 2.75% That's a very conservative number and means you have to save a lot more or spend a lot less.

Are you cutting back to bare-bones to achieve 2.75% (no trips, no eating out, no luxuries), and are you willing to spend at that level for a long time(because what if the markets do crash that first year).

Or is 2.75% a decent lifestyle with all your needs AND many of your wants met? Sounds like you are very fortunate to be in that position at 56.

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Re: 4% rule - Asset Allocation

Post by HomerJ » Fri Jul 22, 2016 4:33 pm

It does seem that many of people on these boards are very very rich, and find themselves in a position where they hit 25x expenses at 45 or 50, and then working until 55 and hitting 33x or even 40x expenses isn't much of a burden. They probably still like their jobs, got a kid still in high school or college, and 4% really was meant for 30 year retirements, so working a little longer and getting to 33x expenses (3% SWR) isn't that big of a deal.

My concern is with the people who are 60+ and worry that 4% isn't enough and end up working until 70 (and dying at 75) when they really didn't have to.

Those are a tough ten years to work for most people when you already had enough to retire, but got scared by people like Wade Pfau and other "experts" about the risks.

Well, dying or getting sick 3 years into your retirement is also a risk, and one that has be accounted for by most people (Again, maybe not by the super-rich Bogleheads who are financially independent at 45, not 60)

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Re: 4% rule - Asset Allocation

Post by Just sayin... » Fri Jul 22, 2016 5:31 pm

HomerJ wrote:See, it's interesting to me that you would start with 2.75% That's a very conservative number and means you have to save a lot more or spend a lot less.

Are you cutting back to bare-bones to achieve 2.75% (no trips, no eating out, no luxuries), and are you willing to spend at that level for a long time(because what if the markets do crash that first year).

Or is 2.75% a decent lifestyle with all your needs AND many of your wants met? Sounds like you are very fortunate to be in that position at 56.

We have had a combination of factors that have put us in this position. First, I have been been blessed with a good career that pays pretty well and I have been steadily employed for ~33 years. Second, we started saving/investing towards this goal when I got my first job out of college - maxing every available savings opportunity. Probably would be further along if I had discovered index investing in the mid 80's. Third, my wife and I came to a pre-marriage understanding that we would live way below our means for the duration - and stuck to it. Our vacations consisted of car trips and camping, or using hotel/airline points to go places. The single biggest expense relief I've had was driving a company car in various jobs for ~25 years - that enabled us to save a ton. We have had a few lucky breaks along the way that made this more tolerable. Finally, in the mid to late 90's I worked at a tech startup that did pretty well. Not Millionaire well, but pretty well. Luckily, I took the proceeds and prepaid my son's college expenses (WA GET program) and paid off our house while my co-workers were buying Hummers & Sailboats. I was able to then mentally keep paying the mortgage...but the money just got plowed into our investment account.

I have always looked forward to retirement as a chance to live more selfishly. Motorcycle trip to Lake Tahoe or Colorado? No problem...just go. Flyfishing whenever the mood hits? Do it. Want a new tennis racket *and* some new Wilson balls? Done. Some band that I'd like to see playing in SEA or SFO? Yep. 2.75% represents our current spending levels. 3% seems like we'll be living large. Beyond that is just silly. But I would like to spend a couple weeks where it's warm come January, so there's that. My worry is that I have only one shot at getting this right - there is no safety net. There are numerous variables that I can only roughly estimate, yet stress over (inflation rate, medical costs, investment performance, mortality, taxes, changes in laws, etc.) - so I've spent my time creating spreadsheet models, downloading and running 3rd party tools, etc - all as conservative as possible - looking for mistakes or faulty assumptions and trying to anticipate "what if's". My lifespan is finite and unknowable, so I guess eventually this problem will resolve itself one way or another. But I'd like to get going with the selfish phase of life.

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Re: 4% rule - Asset Allocation

Post by HomerJ » Sat Jul 23, 2016 11:23 am

Jake-R wrote:Is the 4% rule based off withdrawing from a tax advantaged plan (401k, 457)? Or can a diversified taxable account handle this as well?


A taxable account can handle it even better because taxes are even lower pulling from a taxable account (capital gains and dividends). Pulling from a 401k or IRA is considered income

Of course, it depends on how much income you are talking about... Many of us will be in a lower bracket in retirement, and taxes will be minimal... but yes, you should account for them.

dbr
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Re: 4% rule - Asset Allocation

Post by dbr » Sat Jul 23, 2016 11:39 am

Jake-R wrote:Is the 4% rule based off withdrawing from a tax advantaged plan (401k, 457)? Or can a diversified taxable account handle this as well?


The direct answer to this question is the "rule" does not make a distinction. That is because the withdrawal or the expenses are before tax. The retiree will have to consider how much of that 4% will have to be used to pay taxes. Naturally a person with assets mostly in tax deferred savings may end up with larger tax bills than someone spending from a taxable account. It is also true that the allowed spending is before investment costs. The retiree will have to consider how much of that 4% will be lost to ERs, trading costs, advisory fees, and so on.

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midareff
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Re: 4% rule - Asset Allocation

Post by midareff » Sat Jul 23, 2016 1:21 pm

HomerJ wrote:
soboggled wrote:I read the tables as presented to say that historically, if you had withdrawn 4% on a 70/30 portfolio (I assume adjusted for inflation), you would have run out of money only 2% of the time (i.e., 98% success rate).
The good news is that a 50/50 portfolio is actually safer (100% success rate).
But I am not fully buying it, the sample size is small and there are too many assumptions that the investor will act like an automaton rather than a human being.


Actually the fact that a real human being would cut back on spending during huge bear markets means the 4% rule would work BETTER than if one was an automation.

50/50 with a 4% withdrawal is extremely safe. It would, of course, be better that the 4% isn't bare-bones survival. For most of us, if 4% "fails", it just means we start going on two vacations a year instead of four.


If it's extremely safe how would you explain this quote from Larry in his recent article... which can be accessed through another thread.

"Until recently, the standard rule of thumb was that a 4% spending rate would result in a minimal chance of outliving your portfolio. Annual spending could be 4% of the portfolio’s starting balance, and then adjusted for inflation so the real spending level could be maintained. The original research in this area assumed an equity allocation of at least 50%.

Unfortunately for today’s investors, the finding that 4% was a safe withdrawal rate was based on historical data, when stock valuations were lower and bond yields were higher. Given currently higher equity valuations (which project lower future returns) and lower bond yields, forward-looking return expectations suggest that a 3% safe withdrawal rate is more prudent for investors with a 30-year horizon."

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Re: 4% rule - Asset Allocation

Post by peppers » Sat Jul 23, 2016 1:43 pm

A perspective on withdrawal rates from Vanguard.

https://institutional.vanguard.com/VGAp ... Retirement
"..the cavalry ain't comin' kid, you're on your own..."

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cfs
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The TLW Strategy

Post by cfs » Sun Jul 24, 2016 9:24 am

Good conversation.

Thanks to our shipmate Peppers for the link to the Vanguard study [good chart on page 11 on what type of withdrawal and spending rate investors are using].

It is easy to look back at PAST performance and go with the Couch Potato portfolio [over the PAST 50 years the 50% S&P 500 and 50% 5-yr Treasuries won the race and allowed investors sleep well at night. Yes, those invested 100% in the S&P 500 gained a little bit more but they could not sleep well turning on their beds during bad market conditions].

We just don't know what is going to happen in the NEXT 50 years, so, pick the allocation that will allow you to sleep well at night (SWAN). The Pillow Test is very important on picking the allocation that is right for YOU.

My withdrawal rate? On our retirement SWAN portfolio I will use The TLW strategy. Good luck with your investments.

Thanks for reading.
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sperry8
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Re: 4% rule - Asset Allocation

Post by sperry8 » Mon Jul 25, 2016 12:19 pm

midareff wrote:
sperry8 wrote:
midareff wrote:You may be right on sperr8 but I think it is appropriate to add that 7 of your 9 retired years have been spent in what is now the second longest running bull market in history. While there may be many, many market outcomes for today's retirees I don't think that is one of them.


We cannot be sure what the future holds but I think the last 9 years is representative of the stock market as a whole. You mention the 2nd longest bull in history - which is true. But it has only returned just over 5% on average much less than historical returns and also this bull came after the 2nd worst Recession in America's history (after the Great Depression). So to me I think one can use it (at least overall on a return basis) as a representative example of ongoing returns. I.e., do you truly expect to earn less than 5% in Stocks over a 30 year retirement? Possible yes, but highly unlikely imo.


Sperry... I agree with your statement we cannot be sure what the market holds in the future but Morningstar's data disagrees with your statement about returns of the stock market. A 10K investment in the SP500 10 years ago would be worth $21,625.05 today, at a 5% increase annually it would have accumulated only $16,288.95.


Agreed. However I quoted my returns over 9 years and sadly I am not 100% in the S&P so I made less. My point is simply that 4% is too low. And I do agree with the other posters that one could toggle downward (tighten belt) if/when a crash occurs. But to start at 2% or 3% is ultra safe and too low imo (based on my 9 years of retirement withdrawal experience).
Certainty is a requirement of ignorance. | Humbling Contest results: | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

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