Static SWR rate?

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mkmal1
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Static SWR rate?

Post by mkmal1 » Tue Mar 05, 2013 6:47 pm

Greetings,
I've seen quite a few discussions on SWR's based on taking out x percent starting your first year of retirement and then increasing that amount annually by whatever the inflation rate is that year. Has anyone done a study on SWR's using a static percentage? Something like 4% of your portfolio no matter what it is that year (some years you get to spend more others less).

umfundi
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Re: Static SWR rate?

Post by umfundi » Tue Mar 05, 2013 6:55 pm

mkmal1 wrote:Greetings,
I've seen quite a few discussions on SWR's based on taking out x percent starting your first year of retirement and then increasing that amount annually by whatever the inflation rate is that year. Has anyone done a study on SWR's using a static percentage? Something like 4% of your portfolio no matter what it is that year (some years you get to spend more others less).
Take a look at the Wiki:

http://www.bogleheads.org/wiki/Withdrawal_Methods

Keith
Déjà Vu is not a prediction

Gill
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Re: Static SWR rate?

Post by Gill » Tue Mar 05, 2013 7:08 pm

I don't see why any study is needed. If you take a constant percentage you are mathematically guaranteed to never run out of money.
Bruce

mkmal1
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Re: Static SWR rate?

Post by mkmal1 » Tue Mar 05, 2013 7:39 pm

MBMiner wrote:I don't see why any study is needed. If you take a constant percentage you are mathematically guaranteed to never run out of money.
Bruce
What I am getting at is if you can stand fluctuation in what you take out every year (within reason) what is a good static SWR percentage? With the "adjust by inflation" method 4% was thought to be good but now it seems like it should be less. It would seem with using a static percentage you could go higher but how much, 5%, 6%, more? Obviously you don't want to take out 10% a year and get to the point were you only have $100 left so you are taking out $10 to live on.

umfundi
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Re: Static SWR rate?

Post by umfundi » Tue Mar 05, 2013 8:02 pm

mkmal1 wrote:
MBMiner wrote:I don't see why any study is needed. If you take a constant percentage you are mathematically guaranteed to never run out of money.
Bruce
What I am getting at is if you can stand fluctuation in what you take out every year (within reason) what is a good static SWR percentage? With the "adjust by inflation" method 4% was thought to be good but now it seems like it should be less. It would seem with using a static percentage you could go higher but how much, 5%, 6%, more? Obviously you don't want to take out 10% a year and get to the point were you only have $100 left so you are taking out $10 to live on.
There are the percentages mandated by the IRS with the RMD. That could be a starting point.

The one I like is to set a plan length in years (30?). The first year (age 65?) take 1/30, the second year take 1/29, etc. That turns out to be a constant dollar amount, before account fluctuations. It's very robust, because it more or less automatically smears current account fluctuations (up or down) over the life of the plan.

Keith
Déjà Vu is not a prediction

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Orion
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Re: Static SWR rate?

Post by Orion » Tue Mar 05, 2013 8:35 pm

It seems to me that people tend to pick 4% for this, even though 4% comes from a study of doing it the other way.

mkmal1
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Re: Static SWR rate?

Post by mkmal1 » Tue Mar 05, 2013 9:21 pm

Orion wrote:It seems to me that people tend to pick 4% for this, even though 4% comes from a study of doing it the other way.
Yes and the calculators (firecalc etc) are all set up for an inflation based withdrawal model. My gut tells me a static 4% WR is probably a good figure but I don't have any numbers to back that up.

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Orion
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Re: Static SWR rate?

Post by Orion » Tue Mar 05, 2013 9:36 pm

It's an interesting question because no percentage takes you to zero, but it's obvious that some percentages quickly lead to "uncomfortable" numbers. But the "uncomfortable" numbers come from roughly the original withdrawal style assumption. ie: there this is some amount of money (inflation adjusted) that you need.

Perhaps a hybrid based on an inflation adjusted amount that you need to survive, with all the luxuries paid for based on a current asset percentage?
Last edited by Orion on Tue Mar 05, 2013 11:21 pm, edited 1 time in total.

john94549
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Re: Static SWR rate?

Post by john94549 » Tue Mar 05, 2013 9:38 pm

My wife and I are pushing 66. When we finally start withdrawals (haven't had to yet), we'll probably start at 3.5 - 4% and keep it there until RMD exceeds. Last I checked, RMD governs after about age 73 for the "4%" folks.

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wade
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Re: Static SWR rate?

Post by wade » Wed Mar 06, 2013 7:15 am

I will try to look at this more systematically one of these days, but as a guess it seems the "constant percentage" withdrawal rate could be a bit higher. This is because making small downward adjustments to spending following market declines can have a big impact on boosting sustainability, and the constant percentage approach would have a built-in system for making these downward adjustments. With less coming out of the portfolio, it has more of a chance to recover and it is less likely that spending will continue to plummet.

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Cut-Throat
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Re: Static SWR rate?

Post by Cut-Throat » Wed Mar 06, 2013 7:53 am

wade wrote:I will try to look at this more systematically one of these days, but as a guess it seems the "constant percentage" withdrawal rate could be a bit higher. This is because making small downward adjustments to spending following market declines can have a big impact on boosting sustainability, and the constant percentage approach would have a built-in system for making these downward adjustments. With less coming out of the portfolio, it has more of a chance to recover and it is less likely that spending will continue to plummet.
+1.....exactly. it's like Buy low and Sell High. But more like spend more when the market is high, and spend less when the market is low.

mkmal1
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Re: Static SWR rate?

Post by mkmal1 » Wed Mar 06, 2013 2:38 pm

wade wrote:I will try to look at this more systematically one of these days, but as a guess it seems the "constant percentage" withdrawal rate could be a bit higher. This is because making small downward adjustments to spending following market declines can have a big impact on boosting sustainability, and the constant percentage approach would have a built-in system for making these downward adjustments. With less coming out of the portfolio, it has more of a chance to recover and it is less likely that spending will continue to plummet.

I look forward to you analysis!

I suppose a better way to ask the question would be, what static percentage could one take from their portfolio annually and have a low risk of the portfolio being depleted? i.e start off with 1 million and 40 years from now still have somewhere around the 40 year inflation adjusted equivalent to today's 1 million.

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ThePrune
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Re: Static SWR rate?

Post by ThePrune » Wed Mar 06, 2013 2:41 pm

mkmal1 wrote:I've seen quite a few discussions on SWR's based on taking out x percent starting your first year of retirement and then increasing that amount annually by whatever the inflation rate is that year. Has anyone done a study on SWR's using a static percentage? Something like 4% of your portfolio no matter what it is that year (some years you get to spend more others less).
In this post I'll answer the specific question you asked. In a subsequent post I'll suggest a better way to think about the retirement income problem.

Refer to Prof. Wade Pfau's article Variable Withdrawals In Retirement to get an overview of several appproaches of doing exactly what you are asking about.

This posting on Variable Withdrawals in Retirement from an archived copy of the old "Bob's Financial Website" has similar coverage to what Prof. Pfau discusses, but presented in a different manner.

Art
Investment skill is often just luck in sheep's clothing.

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Orion
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Re: Static SWR rate?

Post by Orion » Wed Mar 06, 2013 2:48 pm

mkmal1 wrote: I suppose a better way to ask the question would be, what static percentage could one take from their portfolio annually and have a low risk of the portfolio being depleted? i.e start off with 1 million and 40 years from now still have somewhere around the 40 year inflation adjusted equivalent to today's 1 million.
You may already know this but you've just made another significant change from most existing SWR studies: you want just as much money at the end as in the beginning, whereas the usual 40 year SWR considers anything that stays above zero to be successful.

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ThePrune
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Re: Static SWR rate?

Post by ThePrune » Wed Mar 06, 2013 3:09 pm

mkmal1,

You might find it more fruitful to view the problem of retirement withdrawals from an "economics" or "Life-Cycle" perspective. The more articles I read that have been published by Prof. Laurence Kutlikoff, by Prof. Moshe Milevsky and by Prof. Wade Pfau, the more I find my thinking is coming around to this way of looking at the problem.

Suggested articles to start with:
Laurence Kotlikoff, Economics Approach to Financial Planning.
Mosshe Milevsky, Spending Retirement on Planet Vulcan. Don't get bogged down in the math! Just focus on the results and the nice plots.
Wade Pfau, Spending Flexibility and Safe Withdrawal Rates
Investment skill is often just luck in sheep's clothing.

umfundi
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Re: Static SWR rate?

Post by umfundi » Wed Mar 06, 2013 3:27 pm

ThePrune wrote:mkmal1,

You might find it more fruitful to view the problem of retirement withdrawals from an "economics" or "Life-Cycle" perspective. The more articles I read that have been published by Prof. Laurence Kutlikoff, by Prof. Moshe Milevsky and by Prof. Wade Pfau, the more I find my thinking is coming around to this way of looking at the problem.

Suggested articles to start with:
Laurence Kotlikoff, Economics Approach to Financial Planning.
Mosshe Milevsky, Spending Retirement on Planet Vulcan. Don't get bogged down in the math! Just focus on the results and the nice plots.
Wade Pfau, Spending Flexibility and Safe Withdrawal Rates
The paper by Milevsky and Huang (2010) is quite interesting, and shows that this is an interminable discussion. There are so many preferences and desired outcomes that we can't agree on the problem, never mind the solution.

The comment that people will spend more in the beginning and compensate for longevity risk by spending less as they age is, I think, quite insightful. It's better than sneering at people for an inability to plan for delayed gratification.

Keith
Déjà Vu is not a prediction

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