Just trying to understand SWR better

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1210sda
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Just trying to understand SWR better

Post by 1210sda »

The Internal Rate of Return of a portfolio with a begining balance of $100,000 and with $4,000 annual withdrawals for 30 years is approximately 4.35% ( Note: Begining of Year withdrawals which are adjusted for inflation of 3% each year)

Assume the portfolio was able to generate an average of 9.35% for the 30 years.

Does this mean that the 5% difference (9.35 - 4.35) is due to the "sequence" of the annual returns ??

Thanks

1210
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CyberBob
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Re: Just trying to understand SWR better

Post by CyberBob »

1210sda wrote:Does this mean that the 5% difference (9.35 - 4.35) is due to the "sequence" of the annual returns ??
The oft-quoted 4% number comes from the Trinity Study, and is the worst-case scenario number that would get you through 30 years of retirement without running out of money.

So, yes, the sequence of annual returns is quite important for figuring that number. If you retired right before the 1929 crash and the great depression, the portfolio destruction, on top of the retirement withdrawals, mean your overall portfolio value fell fast in those early years. But, the 4% number still managed to squeak you through retirement.

But the sequence of annual returns is often less pessimistic than 4%. In fact, if you were lucky enough to retire right before a big bull market, there are several scenarios where the withdrawal percentage could have been 8% without you running out of money.

Bob
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bob90245
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Re: Just trying to understand SWR better

Post by bob90245 »

1210sda wrote:Does this mean that the 5% difference (9.35 - 4.35) is due to the "sequence" of the annual returns ??
Not so much "annual" returns sequence, but generally poor returns in the early years (say first 10 to 13 years).
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Blackwood
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Re: Just trying to understand SWR better

Post by Blackwood »

1210sda wrote:Assume the portfolio was able to generate an average of 9.35% for the 30 years.
I would love to be able to assume this, but it sees unlikely.

As CyberBob points out, the 4% safe withdrawal rate comes from the Trinity study and represents what you could have withdrawn each year (adjusted for inflation) from a balanced portfolio (75% stocks/25% bonds) and (based on data from 1926 to 1995) have very little chance of running out of money in the first 30 years of retirement.
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1210sda
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Post by 1210sda »

I was trying to show the following:

1. The return needed to sustain "4%" withdrawals, if returns were straightline. (i.e. they were the same every year). 4.35% in my example of 30 years with 3% inflation.

2. Since many portfolios will have a greater average return (for 30 yrs) than the 4.35%, the variance is due to the sequence of returns. As others have indicated....the possibility of generating negative (or low positive) returns in the early years.

3. 9.35% was just used because it resulted in a nice round 5% difference. I could have chosen 6.87% (or any other amount) and the amount due to sequence of returns would have been 2.52%. I did not mean to imply that I was expecting to generate a portfolio return of 9.35% for the 30 years.

1210
at ease
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Post by at ease »

.....on SWR......

one of the things not often mentioned on this forum when discussing the 4%-SWR for 30 years is...." the portfolio asset allocation" it is based on:

the Trinity study is often mentioned, and it is a good reference , but i'm looking at it now...and viewing table-3 (adj.for inflation)...and i believe the portfolio that is 75% stock and 25% bonds shows a 100% success rate for a 3% WR...and a 95% success rate at 4% WR for a 30 year payout....

i only mention that because "new folks" need to be aware ot the AA % of stocks and bonds that is required when considering the often mentioned 4% SWR..
bluesun
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Post by bluesun »

at ease wrote:.....on SWR......

one of the things not often mentioned on this forum when discussing the 4%-SWR for 30 years is...." the portfolio asset allocation" it is based on:

the Trinity study is often mentioned, and it is a good reference , but i'm looking at it now...and viewing table-3 (adj.for inflation)...and i believe the portfolio that is 75% stock and 25% bonds shows a 100% success rate for a 3% WR...and a 95% success rate at 4% WR for a 30 year payout....

i only mention that because "new folks" need to be aware ot the AA % of stocks and bonds that is required when considering the often mentioned 4% SWR..
Curious about this since I'm helping design a retirement portfolio for my parents - I found this on the wiki - http://www.bogleheads.org/wiki/index.ph ... Table1.jpg

You can see that in fact for a variety of asset allocations, the 4% worked (not just 75/25 stocks and bonds, but 50/50 stocks and bonds, 25/75, and 0/100)
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Post by Chuck T »

bluesun

Table1 is not adjusted for inflation and deflation. I think you would be better off looking at Table3 which is adjusted for inflation and deflation.

LInk is

http://www.bogleheads.org/wiki/index.ph ... Table3.jpg
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CyberBob
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Post by CyberBob »

bluesun wrote:Curious about this since I'm helping design a retirement portfolio for my parents - I found this on the wiki - http://www.bogleheads.org/wiki/index.ph ... Table1.jpg

You can see that in fact for a variety of asset allocations, the 4% worked (not just 75/25 stocks and bonds, but 50/50 stocks and bonds, 25/75, and 0/100)
Be careful about those Trinity Study tables. The one you mentioned - Table 1 - is not adjusted for inflation. I would suggest looking at Table 3, which is adjusted for inflation.

Bob

Edit: Doh! Chuck beat me to it ;)
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bob90245
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Post by bob90245 »

bluesun wrote:
at ease wrote:.....on SWR......

one of the things not often mentioned on this forum when discussing the 4%-SWR for 30 years is...." the portfolio asset allocation" it is based on:

the Trinity study is often mentioned, and it is a good reference , but i'm looking at it now...and viewing table-3 (adj.for inflation)...and i believe the portfolio that is 75% stock and 25% bonds shows a 100% success rate for a 3% WR...and a 95% success rate at 4% WR for a 30 year payout....

i only mention that because "new folks" need to be aware ot the AA % of stocks and bonds that is required when considering the often mentioned 4% SWR..
Curious about this since I'm helping design a retirement portfolio for my parents - I found this on the wiki - http://www.bogleheads.org/wiki/index.ph ... Table1.jpg

You can see that in fact for a variety of asset allocations, the 4% worked (not just 75/25 stocks and bonds, but 50/50 stocks and bonds, 25/75, and 0/100)
For someone unfamiliar, there is a big difference underlying the assumptions for Table 3 versus Table 1. Table 3 raises/lowers the withdrawal amount based on prior-year inflation/deflation. By contrast, Table 1 makes no adjustment to the withdrawal amount no matter what happens to inflation or deflation. That is why the success rates are so much better for Table 1.

Understand that when the retiree makes no adjustment for inflation, his purchasing power will diminish over time. Even at 3% average inflation, purchasing power will fall by half after 24 years.
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Post by Mel Lindauer »

CyberBob wrote:
bluesun wrote:Curious about this since I'm helping design a retirement portfolio for my parents - I found this on the wiki - http://www.bogleheads.org/wiki/index.ph ... Table1.jpg

You can see that in fact for a variety of asset allocations, the 4% worked (not just 75/25 stocks and bonds, but 50/50 stocks and bonds, 25/75, and 0/100)
Be careful about those Trinity Study tables. The one you mentioned - Table 1 - is not adjusted for inflation. I would suggest looking at Table 3, which is adjusted for inflation.

Bob

Edit: Doh! Chuck beat me to it ;)
Getting correct information twice is a whole lot better than not getting it at all, Bob. :D
Best Regards - Mel | | Semper Fi
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bob90245
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Post by bob90245 »

Mel Lindauer wrote:Getting correct information twice is a whole lot better than not getting it at all, Bob. :D
And must be even better getting correct information three times! :D
bluesun
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Post by bluesun »

bob90245 wrote:
Mel Lindauer wrote:Getting correct information twice is a whole lot better than not getting it at all, Bob. :D
And must be even better getting correct information three times! :D
Thanks! I looked at the table too hastily - glad there are so many sharp eyes around :)
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