3.5% [real] withdrawal for thirty years?

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antiqueman
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3.5% [real] withdrawal for thirty years?

Post by antiqueman » Thu Apr 14, 2011 11:44 am

Pls. provide your opinion of whether one can withdraw 3.5 %+ inflation each year with 25% equity/75% fixed income, and it last 30 years?


If you do not think this AA would survive, what is the minimum equity you think I would have to have to accompolish the task?


Thank you very much.

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withdrawal rate

Post by pkcrafter » Thu Apr 14, 2011 11:53 am

Trinity study says you have a 90% success rate. See Table 2.

http://www.fpanet.org/journal/CurrentIssue/TableofContents/PortfolioSuccessRates/

Paul
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Re: 3.5 withdrawl thirty years.

Post by YDNAL » Thu Apr 14, 2011 11:53 am

antiqueman wrote:Pls. provide your opinion of whether one can withdraw 3.5 %+ inflation each year with 25% equity/75% fixed income, and it last 30 years?

Relying on historical data is pretty much a crapshoot.

It really depends.... doesn't it?

1) If stocks don't provide sufficient return, you could run into trouble.
2) Worse yet, if the stock market makes it a habit to crash every 6 years (like recently), you've got big problems.
3) If interest rates remain low, Fixed income investments don't provide sufficient return.
4) If, if, if, if.

Remain flexible!
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Post by nisiprius » Thu Apr 14, 2011 12:06 pm

This sort of discussion is all very, very, very rough and uncertain. The quest for certainty in a stock-based portfolio is a fool's errand. This much can be said. For what it's worth, Vanguard offers an online Retirement Nest Egg Calculator and you can plug the numbers you mentioned into it.

When you do, making whatever assumptions Vanguard makes and using whatever methodology Vanguard uses, this is the result Vanguard presents:

Image

Three other points can be made.

1) Much depends on how high a failure probability you are willing to accept. If you want a low failure rate, say < 5%, every study I've seen gives the rather surprising result that, if you choose a withdrawal rate that has a low failure rate, the asset allocation doesn't matter much! Increasing the percentage of stocks does not lower the failure rate!

Try it yourself using Vanguard's tool.

What adding stocks does do is that if the portfolio survives, it increases the average final amount. That is, if you are making cautious and conservative withdrawals, adding stocks doesn't help you or hurt you--but it might help whoever will inherit your estate.

The frequently-made statement that more stocks reduces the chance of failure is only true when the failure rate is pretty high to begin with. That is, if you're withdrawing too much, with stocks you might hit the jackpot and be OK or you might not. With bonds you definitely will not.

2) Every thoughtful analysis of withdrawal rates suggests that you just need to be flexible, and be prepared to cut back if stocks tank and stay down for a while, whether you have a numerical rule to guide the cutback or whether you just use intuition and common sense.

3) If you are concerned that your portfolio is only just barely capable of meeting your needs, then you should be sure you understand what an "income annuity" is (also called "single premium immediate annuity"). It may or may not make sense but it's a potentially useful tool and should at least be in your mental toolkit.
Last edited by nisiprius on Thu Apr 14, 2011 12:10 pm, edited 1 time in total.
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Post by bob90245 » Thu Apr 14, 2011 12:08 pm

Maybe some of the TIPS bond ladder experts that post on this message board can help you, and thereby allow you to skip stocks altogether.

Look at an annuity calculator on a site like this:

http://www.moneychimp.com/calculator/an ... ulator.htm

A real return of just 0.4% will be enough to last 30 years if you only need a 3.5% CPI-adjusted initial withdrawal rate.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by jb1934 » Thu Apr 14, 2011 12:11 pm

Vanguards retirement nest egg calculator gives a 25/75 portfolio
a 97% survival rate.
https://retirementplans.vanguard.com/VG ... Search.jsf
edited: interesting that i get a 97% rate?

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Post by jb1934 » Thu Apr 14, 2011 12:36 pm

Thoughts on a survival rate % you feel comfortable with for a 30
year window?

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Post by sport » Thu Apr 14, 2011 1:14 pm

All of these discussions on survival rate presume a constant withdrawal rate adjusted for inflation. If you withdraw a straight percentage of the portfolio each year and let it vary with portfolio value, "survial rate" is 100%. In other words, it is no longer a concern. You can even use a higher withdrawal percentage, such as 5%. The trade-off is that you have to adapt to a fluctuating income stream. A fluctuating income steam is not necessarily a bad thing. Business owners and commissioned sales people do this routinely.

Jeff

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Post by HomerJ » Thu Apr 14, 2011 1:28 pm

jsl11 wrote:All of these discussions on survival rate presume a constant withdrawal rate adjusted for inflation. If you withdraw a straight percentage of the portfolio each year and let it vary with portfolio value, "survial rate" is 100%. In other words, it is no longer a concern. You can even use a higher withdrawal percentage, such as 5%. The trade-off is that you have to adapt to a fluctuating income stream. A fluctuating income steam is not necessarily a bad thing. Business owners and commissioned sales people do this routinely.

Jeff


Yes, and these charts assume you don't adapt at all... If, in Year 3, the market drops big time, and you continue to spend your planned amount with no changes at all, then you might be in trouble...

But it's not that hard to cut back a little during the bad times... Don't increase your spending by inflation for 1-2 years... Only take 2 trips instead of 3 that year, wait 1-2 years extra before buying a new car.

You can see if you're in the 4% failure range long before the 30 years are over, and adjust...

If you need 3.5% absolute minimum to just eat and heat your house, then 96% may not be good enough... If you have any kind of cushion at all in that 3.5%, your effective success rate should be 100% easily.

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Post by sport » Thu Apr 14, 2011 1:33 pm

rrosenkoetter wrote:
jsl11 wrote:All of these discussions on survival rate presume a constant withdrawal rate adjusted for inflation. If you withdraw a straight percentage of the portfolio each year and let it vary with portfolio value, "survial rate" is 100%. In other words, it is no longer a concern. You can even use a higher withdrawal percentage, such as 5%. The trade-off is that you have to adapt to a fluctuating income stream. A fluctuating income steam is not necessarily a bad thing. Business owners and commissioned sales people do this routinely.

Jeff


Yes, and these charts assume you don't adapt at all... If, in Year 3, the market drops big time, and you continue to spend your planned amount with no changes at all, then you might be in trouble...

But it's not that hard to cut back a little during the bad times... Don't increase your spending by inflation for 1-2 years... Only take 2 trips instead of 3 that year, wait 1-2 years extra before buying a new car.

You can see if you're in the 4% failure range long before the 30 years are over, and adjust...

If you need 3.5% absolute minimum to just eat and heat your house, then 96% may not be good enough... If you have any kind of cushion at all in that 3.5%, your effective success rate should be 100% easily.


If you need 3.5% to eat and heat your house, you should really use an annuity, social security, and any pensions to meet these requirements. The amount withdrawn from a fluctuating portfolio should have some ability to be flexible.

Jeff

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Post by Watty » Thu Apr 14, 2011 2:26 pm

I'm not an expert so take this with a grain of salt, I have been wondering about the same issues and this is my current thinking.

For perspective, if it were not for inflation then you could literarily put your money under a mattress and withdrawal 3.33% per year for 30 years. A 3.5% withdrawal rate would last 28.5 years.

The problem with using TIPS is that you are taxed on the inflation adjustment each year, but if your money is in a retirement account where that is not a problem, then you would only need to have the TIPS yield 0.17% to reach your goal of an inflation adjusted 3.5% withdrawal rate. 0.67% would get you a 4% withdrawl rate.

You might consider splitting your portfolio into two parts, the amount needed to cover your most basic needs, and the rest that you could live without in the worst case. You could invest the core portion of your portfolio in a TIPS ladder, if you have that much in retirement accounts, then invest the rest in a blended stocks and bonds portfolio. The non-core account could then be invested slightly more aggressively since the consequences would not be so high if you had to vary the amount you spend in certain years, or if it ran short.

I am also not focusing on a thirty year time frame, I look at it as a normal retirement investing for about the first 20 years, then buying an immediate annuity when I am 85 or so if it makes sense then.

I also think that the ideal of being able to spend your money at a steady rate for 30 years is pretty unrealistic. I have seen relatives that greatly slowed down in their 70's and since they lived in a paid off house, they had very few expenses each month while their health remained relatively good. Since they didn't travel or go out often, their main expenses were food, utilities, property taxes, insurance, and some uncovered medical expenses. In many months social security would be enough to cover all of these expenses.

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Post by pkcrafter » Thu Apr 14, 2011 2:43 pm

antiqueman asked:
Pls. provide your opinion of whether one can withdraw 3.5 %+ inflation each year with 25% equity/75% fixed income, and it last 30 years?

In the post title he asked something different-- a 3.5% real withdrawal for 30 years. The initial 4% withdrawal rate is based solely on the total value of the portfolio in the first year of withdrawals. It does not factor in inflation. Any inflation adjustment would come in the second year. As mentioned by others, a little common sense now and then will increase your success rate. Withdrawing in retirement is, for most, a balance between loss of spending power and loss of portfolio growth.

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Post by nisiprius » Thu Apr 14, 2011 2:49 pm

Watty wrote:I also think that the ideal of being able to spend your money at a steady rate for 30 years is pretty unrealistic. I have seen relatives that greatly slowed down in their 70's and since they lived in a paid off house, they had very few expenses each month while their health remained relatively good. Since they didn't travel or go out often, their main expenses were food, utilities, property taxes, insurance, and some uncovered medical expenses. In many months social security would be enough to cover all of these expenses.
Unfortunately, there's a countervailing problem: medical expenses and long-term-care expenses, which are large, unpredictable, certainly increase with age, and currently are increasing much faster than inflation. Because of the medical and long-term-care factors, alas, expenses are probably a bigger source of uncertainty than portfolio performance.

I've tried to plan for this--that is, I've tried to budget for insurance premiums. I scoped out Medicare premiums and Medicare supplemental premiums and long-term-care-insurance premiums and all that. But I don't have a lot of confidence that the assumptions I've made will hold for the next two or three decades. I don't think Social Security will go away, but I think it might get cut back somewhat. Medicare is going to start to hit stormy weather in less than a decade, and Medicare premiums are already increasing. Maybe someday our shrinking Social Security won't pay for much more than our rising Medicare premium. But it's all pure guesswork. And Vanguard doesn't have a calculator for it.
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Post by HomerJ » Thu Apr 14, 2011 2:58 pm

nisiprius wrote:
Watty wrote:I also think that the ideal of being able to spend your money at a steady rate for 30 years is pretty unrealistic. I have seen relatives that greatly slowed down in their 70's and since they lived in a paid off house, they had very few expenses each month while their health remained relatively good. Since they didn't travel or go out often, their main expenses were food, utilities, property taxes, insurance, and some uncovered medical expenses. In many months social security would be enough to cover all of these expenses.
Unfortunately, there's a countervailing problem: medical expenses and long-term-care expenses, which are large, unpredictable, certainly increase with age, and currently are increasing much faster than inflation. Because of the medical and long-term-care factors, alas, expenses are probably a bigger source of uncertainty than portfolio performance.

I've tried to plan for this--that is, I've tried to budget for insurance premiums. I scoped out Medicare premiums and Medicare supplemental premiums and long-term-care-insurance premiums and all that. But I don't have a lot of confidence that the assumptions I've made will hold for the next two or three decades. I don't think Social Security will go away, but I think it might get cut back somewhat. Medicare is going to start to hit stormy weather in less than a decade, and Medicare premiums are already increasing. Maybe someday our shrinking Social Security won't pay for much more than our rising Medicare premium. But it's all pure guesswork. And Vanguard doesn't have a calculator for it.


Exactly... this is a huge problem... I could probably retire in 10 years if it wasn't for this uncertainity... Instead I'll probably work 5+ more years after that to build up a huge cushion because I just have NO IDEA how much health care is going to cost me.

I'm old enough now that 5+ years is precious time to me.

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Post by richard » Thu Apr 14, 2011 3:09 pm

nisiprius wrote:When you do, making whatever assumptions Vanguard makes and using whatever methodology Vanguard uses, this is the result Vanguard presents

Vanguard uses the past as a guide to the future. They use another approach for their financial planners (they use the same history, but in sequential rather than random order) and yet another approach for institutional clients (they try to predict the future and warn about the shortcomings of using historic data).

It's hard to predict the future with any confidence, either on the income side or the spending side. We grasp at any methodology, despite its shortcomings. See the behavioral term "anchoring."

For stock market returns, we use the Standard & Poor's 500 Index from 1926 to 1970, the Dow Jones Wilshire 5000 Index from 1971 through April 22, 2005, and the MSCI US Broad Market Index thereafter. For bond market returns, we use the Standard & Poor's High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman U.S. Long Credit Aa Index from 1973 to 1975, and the Barclays Capital U.S. Aggregate Bond Index thereafter. For the returns on short-term reserves, we use the Citigroup 3-Month Treasury Bill Index. The returns used in this tool do not reflect the potential impact of fees or expenses.

For each year of each simulation, we randomly select one year of stock, bond, and stable-value returns from the database. Using those values, we calculate what would happen to your portfolio—subtracting your spending, adjusting for inflation, and adding your investment return. We repeat this process, one year at a time, until the end of your retirement or until your portfolio runs out of money. The next simulation starts the whole process from the beginning. After 5,000 independent simulations, we've tested a broad range of possible scenarios, and clear patterns begin to emerge. By keeping track of the number of simulations in which your portfolio lasts for the duration of your retirement, we're able to estimate the probability that your plan will be successful. For example, if your portfolio survives in 4,000 out of 5,000 simulations, we can estimate that the probability of success is 80% (4,000/5,000=0.80).

Of course, it's important to remember that Monte Carlo simulation assumes that the future will be at least somewhat like the past—after all, we're using historical data in each simulation. In actuality the future may contain scenarios that are better or worse than anything considered by this tool. It's also important to remember that, despite the sophistication of this method, this calculator makes a number of simplifying assumptions, so these results should never form the sole basis of your financial plan. In particular, the Monte Carlo methodology used here assumes no relationship between asset-class returns from one year to the next. Randomly selected years are considered in sequence. For example, in a given simulation the returns on stocks, bonds, and short-term reserves for 1982, when the nation was deep in recession, could be followed by the returns for 1999, a bull-market year.

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Post by TrustNoOne » Thu Apr 14, 2011 3:24 pm

I'm afaid the SWR studies are not very helpful.

First, they presume you live 30 years then die exaclty on time. In fact, based on my age - 58 it looks like there is a 73% chance I won't make it that far, and a 27% chance I will last longer. The good news, is that its unlikely two really bad things will both happen (i.e I live a really long time and my portfolio goes down the drain. In fact, I'm willing to bet that if the later happens, the former will be more likely.) :)

Second, they assume constant real spending. Problem is that no one knows if that's realistic. There is plenty of evidence that really old people don't spend nearly as much. (And dead people don't seem to spend anything, other than legal fees for thier estates, taxes, etc.) Conversely, the cost of staying alive (medical care) seems to be going up at such a pace that by the end of 30 years, the entire GDP of the US will be consumed by medical. (My own optiistic view is that won't happen. Medical costs, will abate as techology improves medical care.)

Third, thanks to pensions, social security, etc the withdrawel pattern is unlikely to be constant. I could wait to 62, 66 or even 70 to take SS. Makes a big difference in the withdrawel pattern. My wife could take a small pension now, or wait for several years and get more.

Firecalc allows one to experiment with some of these variables, but in the end, the answers are a probabitly of success. What does a 95% chance of succes mean? No one one knows, because you will only live one of possible outcomes (assuming it is even one of the ones modeled.) Of course, .27*.05 is a pretty small chance of failure. Perhaps merging Firecalc with a mortality table would be a better way to go, but in the end, no model can tell the future, or give very good odds for that matter.

So the solution is - work till you die.

Another solution is to make as much of your income cola's as possible - take SS as late as possible, for ex. (But then you have to trust that SS benefits won't get cut.)

In the meantime, spend as little as possible, and save as much as possible.

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Re: 3.5% [real] withdrawal for thirty years?

Post by bob90245 » Thu Apr 14, 2011 3:52 pm

antiqueman wrote:Pls. provide your opinion of whether one can withdraw 3.5 %+ inflation each year with 25% equity/75% fixed income, and it last 30 years?


If you do not think this AA would survive, what is the minimum equity you think I would have to have to accompolish the task?


Thank you very much.

I hope we have provided answers to your direct question. Plus we have provided answers to questions you have not asked! (Always happens with SWR threads; goes with the territory). Unfortunately, we cannot tell you if you will spend an initial amount and neatly rise with inflation for 30 years.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by PS 5@50 » Thu Apr 14, 2011 4:13 pm

TrustNoOne wrote: Perhaps merging Firecalc with a mortality table would be a better way to go,


Another factor to potentially throw in is martially status. Assuming two people are sharing a retirement porfolio what are the chances of them both living 30+ years?

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Post by bob90245 » Thu Apr 14, 2011 4:24 pm

Watty wrote:The problem with using TIPS is that you are taxed on the inflation adjustment each year, but if your money is in a retirement account where that is not a problem...

I'm not a tax expert. But in a taxable account, I believe the tax bite from TIPS would be similar to conventional bond funds. And it would probably be similar (though somewhat less) than the 75% bond allocation the opening poster requested for us to evaluate.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: 3.5% [real] withdrawal for thirty years?

Post by YDNAL » Fri Apr 15, 2011 2:02 pm

TrustNoOne wrote:In the meantime, spend as little as possible, and save as much as possible.

This is the best "calculator."
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Re: 3.5% [real] withdrawal for thirty years?

Post by LH » Fri Apr 15, 2011 2:44 pm

antiqueman wrote:Pls. provide your opinion of whether one can withdraw 3.5 %+ inflation each year with 25% equity/75% fixed income, and it last 30 years?


If you do not think this AA would survive, what is the minimum equity you think I would have to have to accompolish the task?


Thank you very much.


I think that is a reasonable assumption that it would survive per trinity.

If in doubt, I would use a SPIA as well for some diversification of risk depending on your age.

The answer of course is its uncertain, but we all already knew that right? One has to make some estimate, and your estimate appears reasonable.

Really, if no inflation x/30=.0333X= 3.33 percent a year withdrawal until zero left at thirty years, so assuming some investment that makes some minimal amount above inflation, then 3.5 percent is only .17 percent per year real gain required above the 3.33 percent with zero gain, zero inflation, 100 percent gauranteed to survive 30 years (with zero at the end).

So if you assume stocks 7 percent real, bonds 3 percent real, well, you have it made with your assumption. 7(.25)+3(.75)= 4 percent real gain of your portfolio......

Even if your portfolio only makes 1 percent real gain, it will make it too (with sequence of return risk, this is not true per se)......

Then factor in sequence of returns, well, thats what trinity does.

Nothing is foolproof, and saving saving saving has an associated cost of not spending it on what you like. One has to make assumptions.

The earth may get hit by a meteor, one may die tommorrow, past is not prologue, the portfolio may return negative over 30 years and fail, you may live 30 years past the portfolio expiring at 30 years. It may expire at 15 years during great depression II, and everything in between. Sure. Endless possibilities. No guarantees.

But at the end of the day, its a reasonable portfolio to last 30 years.

The ideal stock component is unknown, I would go with more stock most likely, but there is no right answer. Be aware of inflation risk with nominal bonds. 73 74 kills nominal bond wealth.


PS neat link nispirius

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Re: 3.5% [real] withdrawal for thirty years?

Post by YDNAL » Fri Apr 15, 2011 3:21 pm

YDNAL wrote:
TrustNoOne wrote:In the meantime, spend as little as possible, and save as much as possible.

This is the best "calculator."


LH wrote:The earth may get hit by a meteor, one may die tommorrow, past is not prologue, the portfolio may return negative over 30 years and fail, you may live 30 years past the portfolio expiring at 30 years. It may expire at 15 years during great depression II, and everything in between. Sure. Endless possibilities. No guarantees.

Important things to mull-over when using the "best calculator" above. :)
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Post by cliff » Fri Apr 15, 2011 3:23 pm

What rate of inflation does the Vanguard calculator use?

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