What SWR/expense multiple to use for early retirement plan?

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What SWR (or annual expenses multiple) should one use for sizing an early retirement portfolio?

6% or higher - 17x annual expenses or less
0
No votes
5% or 20x annual expenses
4
3%
4% or 25x annual expenses
23
17%
3% or 33x annual expenses
50
38%
2.5% or 40x annual expenses
34
26%
2% or 50x annual expenses
19
14%
1% or lower - 100x annual expenses or more
3
2%
 
Total votes: 133

Topic Author
WageSlave
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What SWR/expense multiple to use for early retirement plan?

Post by WageSlave »

It seems the in-retirement withdrawal rate strategy debate comes up often enough, e.g. VPW or fixed withdrawal rate, etc. But I think my question actually comes first: before we worry about how to spend from the portfolio, how big does that portfolio need to be? And furthermore, this is from the perspective of early retirement, say, under age 45.

I've informally researched this off and on, both here and on other forums. But I've never seen a survey question like this. Some further qualifications and general comments on the background of the question:
  • The survey options (e.g. "3% or 35x expenses") are phrased as simple inversions. E.g., the inverse of 3% (1/0.03) is 33.3. This seems to be the typical way to structure a "how much do I need to retire" question, either as a multiple of average annual expenses, or as a portfolio withdrawal percentage.
  • The assumption is that one is planning to live exclusively off the portfolio. Income from any part-time work or side gigs will be treated as unplanned income (i.e. like a gift).
Finally, I know "early" can be very subjective in the context of retirement. I threw out 45 as a number to capture some very specific considerations:
  • At age 45, life expectancy plus any portfolio longevity padding is well beyond the 30 years typically used for traditional retirement planning.
  • Whatever your predictions/expectations for Social Security, this age is low enough that SS contributions are sub-optimal. If nothing else, it creates a very long time before any social security payments can be received.
  • The Social Security considerations also apply to health care coverage (i.e. self-funding required for a non-trivial amount of time).
  • Many parents at this age are likely to still have kids living at home, possibly facing college tuition.
  • I tend to think (ironically?) the earlier one retires, the greater the longevity risk due to there being more time for the next medical breakthrough that (for example) doubles the average lifespan.
I'm 35, married with two young children. Early retirement as I've outlined above may not be entirely out of the question. That's the motivation for posing the question anyway. I think the responses could differ depending on one's own situation (particularly the children thing, presumably). Either way, I'm equally interested in everyone's comments as well as the poll results.
randomguy
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Re: What SWR/expense multiple to use for early retirement pl

Post by randomguy »

5%. If things don't work out, you have plenty of time to go back to work and rebuild the savings. You are not in the same boat as the 65 year old who has to live on that money forever. It all depends on how badly you want to be retired versus how much you fear having to lower your living standards.
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SimpleGift
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Re: What SWR/expense multiple to use for early retirement pl

Post by SimpleGift »

Retiring at age 45 means you have to plan for at least a 40-year post-retirement investment period and perhaps 50 years. Assuming a 40% stock/60% bond portfolio, a 3% percent, inflation-adjusted withdrawal rate would have about a 5% failure rate, according to Wade Pfau's SWR and longevity studies (chart below).

In your situation, I'd be thinking about a 2.5% SWR at most and perhaps a 50% stock portfolio to be on the safe side.

Image
Source: Wade Pfau
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JoMoney
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Re: What SWR/expense multiple to use for early retirement pl

Post by JoMoney »

I like the idea of a variable rate withdrawal tide to expected lifespan, similar to what's used for the IRS calculations for RMD's from an IRA.
Seems to work out to about 2% for someone in their mid-30's, working up to 3% in the 50's , and hits 4% at around age 60.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Leesbro63
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Re: What SWR/expense multiple to use for early retirement pl

Post by Leesbro63 »

For a 50/50 portfolio, a 2-2.5% portfolio more or less is the income...dividends and interest. That's my plan in 10 years at age 65. To live off the dividends and interest of a 50-50 portfolio. About 2.5%. Very old fashioned...what our pre-Bogle-historic-Bogleheads did. Although in those days dividends where higher and interest somewhat higher than today.
Leesbro63
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Re: What SWR/expense multiple to use for early retirement pl

Post by Leesbro63 »

randomguy wrote:5%. If things don't work out, you have plenty of time to go back to work and rebuild the savings. You are not in the same boat as the 65 year old who has to live on that money forever. It all depends on how badly you want to be retired versus how much you fear having to lower your living standards.
This sounds foolish. What if things don't work out after 20 years of withered/obsolete employment skills?
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JoMoney
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Re: What SWR/expense multiple to use for early retirement pl

Post by JoMoney »

Leesbro63 wrote:
randomguy wrote:5%. If things don't work out, you have plenty of time to go back to work and rebuild the savings. You are not in the same boat as the 65 year old who has to live on that money forever. It all depends on how badly you want to be retired versus how much you fear having to lower your living standards.
This sounds foolish. What if things don't work out after 20 years of withered/obsolete employment skills?
Not only that, but someone who has left the workforce early is likely to have a low Social Security pay out. I would think extra caution would be needed for someone deciding to retire early.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Rodc
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Re: What SWR/expense multiple to use for early retirement pl

Post by Rodc »

What is your ability to rejoin the work force and earn enough to live comfortably on?

This should factor hugely in the amount of risk you would be willing to take.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
radix07
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Re: What SWR/expense multiple to use for early retirement pl

Post by radix07 »

But if you have a 40-50+ year time frame, why would you want an ultra conservative investing balance, why 40/60 or 50/50 when you will be in the stock market for quite some time? Is a higher allocation closer to 80/20 or 90/10 a bad idea in this situation?
radix07
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Re: What SWR/expense multiple to use for early retirement pl

Post by radix07 »

Leesbro63 wrote:
randomguy wrote:5%. If things don't work out, you have plenty of time to go back to work and rebuild the savings. You are not in the same boat as the 65 year old who has to live on that money forever. It all depends on how badly you want to be retired versus how much you fear having to lower your living standards.
This sounds foolish. What if things don't work out after 20 years of withered/obsolete employment skills?
I don't think you would suddenly notice your nest egg is almost gone after 20 years and then try to fill it back up from nothing. You would hopefully realize that you are not maintaining the levels you need to sustain your standard of living and maybe get a part-time job or something to fill in the gaps and let your portfolio grow a bit.
Random Poster
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Re: What SWR/expense multiple to use for early retirement pl

Post by Random Poster »

I voted for the 3% rate, but I think that I'd probably use a 2.75% rate in reality and have a 60/40 stock/bond portfolio.

That said, I'm not sure that I see an answer to your "first" question of how big does that portfolio need to be. For me, I think $1.25 million in a taxable account would be the baseline (assuming that I am living in a paid-off house), since that is what I'm basing the 2.75% withdrawal rate off of; whatever is in the tax-deferred account(s) is beside the point (at least at first), but I presume that I'd have at least $500K in those.
scrabbler1
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Re: What SWR/expense multiple to use for early retirement pl

Post by scrabbler1 »

As someone who retired 6 years ago at age 45, I ended up with a 2.5% SWR at the beginning. But, thanks to portfolio growth since late 2008 (when everything was low) and the ACA bringing my HI premiums under control, my SWR has actually dropped to around 2%.

Being a Fidelity client, I ran my numbers through their RIP program before I retired and a few tiems since then. It shows what I already knew - that my bigger challenge is getting to age ~60 which is when I start tapping into my "reinforcements" which are (1) unfettered access to my IRA, (2) my frozen company pension, and (3) Social Security. This is why I split my ER plan into two parts - getting to age ~60 and then beyond age 60.

If my SWR were closer to 3% I would still be fine, as I am still living off only dividends and interest, not tapping into principal. I still voted 2.5%. My AA is 35/65 in my taxable account and 50/50 in my IRA.
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market timer
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Re: What SWR/expense multiple to use for early retirement pl

Post by market timer »

Obviously lots of variables here. For example, what do you consider expenses? Is imputed rent an expense? Are you eligible for Obamacare and Social Security? What other forms of welfare will you receive by retiring early? Will both spouses retire?

I was comfortable leaving the work force before age 35 on a 4% withdrawal rate (ignoring Social Security benefits) and with a paid off house, expecting that I might need to bring in additional income at some point down the road.
randomguy
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Re: What SWR/expense multiple to use for early retirement pl

Post by randomguy »

radix07 wrote:
Leesbro63 wrote:
randomguy wrote:5%. If things don't work out, you have plenty of time to go back to work and rebuild the savings. You are not in the same boat as the 65 year old who has to live on that money forever. It all depends on how badly you want to be retired versus how much you fear having to lower your living standards.
This sounds foolish. What if things don't work out after 20 years of withered/obsolete employment skills?
I don't think you would suddenly notice your nest egg is almost gone after 20 years and then try to fill it back up from nothing. You would hopefully realize that you are not maintaining the levels you need to sustain your standard of living and maybe get a part-time job or something to fill in the gaps and let your portfolio grow a bit.
Exactly. Look at the failure cases for a 5% SWR. It isn't like life is going along great for 20 years and then things go to crap. It is you retire and then have a long period of low returns (either from a crash, inflation, or just poor market performance) early on, you need to adapt. The 5% SWR is good about 70%(depends a bit on your portfolio. Remember trinity was a naive one. Throwing in small caps and international boosts the rate slightly) of the time. If you in the other cases, you need to adapt. If you not willing/able to adapt, then you get stuck having to go with things like a 3% SWR.

Is this the safest way to go? Heck no. Working til 70 and getting down a 1% SWR is much safer. You do sacrifice 25 years of your life though for that safety.
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TheTimeLord
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Re: What SWR/expense multiple to use for early retirement pl

Post by TheTimeLord »

I think this poll will be very useful in weighing the advice I receive here. So far participants seem to definitely favor the very conservative approach.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
Rodc
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Re: What SWR/expense multiple to use for early retirement pl

Post by Rodc »

It seems the in-retirement withdrawal rate strategy debate comes up often enough, e.g. VPW or fixed withdrawal rate, etc. But I think my question actually comes first: before we worry about how to spend from the portfolio, how big does that portfolio need to be?
Seems to me those are only one question.

If you want $X per year the amount you need in your portfolio is just $X/WR.

If you want $40K per year @ 4% withdrawal rate you need $40K/0.04 = $1M.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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WageSlave
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Re: What SWR/expense multiple to use for early retirement pl

Post by WageSlave »

radix07 wrote:I don't think you would suddenly notice your nest egg is almost gone after 20 years and then try to fill it back up from nothing. You would hopefully realize that you are not maintaining the levels you need to sustain your standard of living and maybe get a part-time job or something to fill in the gaps and let your portfolio grow a bit.
But by that same token, the time it takes to recognize a "bad trend" is likely long enough to be a significant negative on your resume. I work in IT, where not keeping up with technology (and possibly age) are big red flags. So even a three year gap on my resume could bust me back down to entry-level, or at least add extra hurdles to finding a new job.

Maybe it depends on personality and personal risk tolerance. But say one early retires, and the next year there is a major unexpected expense (medical, home repair, car failure, etc) and/or a major market downturn. Do you say, "Eeek, time to go back to work?!" or do you say, "Let's wait another year and see how that looks?" If the latter, how many times do you wait one more year before resigning yourself to re-joining the workforce?
Sidney
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Re: What SWR/expense multiple to use for early retirement pl

Post by Sidney »

StarbuxInvestor wrote:I think this poll will be very useful in weighing the advice I receive here. So far participants seem to definitely favor the very conservative approach.
We won't really know this for another 40 years.
I always wanted to be a procrastinator.
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Re: What SWR/expense multiple to use for early retirement pl

Post by technovelist »

Leesbro63 wrote:
randomguy wrote:5%. If things don't work out, you have plenty of time to go back to work and rebuild the savings. You are not in the same boat as the 65 year old who has to live on that money forever. It all depends on how badly you want to be retired versus how much you fear having to lower your living standards.
This sounds foolish. What if things don't work out after 20 years of withered/obsolete employment skills?
+1.
In theory, theory and practice are identical. In practice, they often differ.
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market timer
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Re: What SWR/expense multiple to use for early retirement pl

Post by market timer »

WageSlave wrote:Maybe it depends on personality and personal risk tolerance. But say one early retires, and the next year there is a major unexpected expense (medical, home repair, car failure, etc) and/or a major market downturn. Do you say, "Eeek, time to go back to work?!" or do you say, "Let's wait another year and see how that looks?" If the latter, how many times do you wait one more year before resigning yourself to re-joining the workforce?
These are two different types of shocks. In the first case (medical, home, car), the loss is idiosyncratic and does not affect expected portfolio returns. I think you would need to find a way to spend less to get back on track or start looking for a job if more frugality is impossible. In the second case, your expected returns might be higher. For example, rising interest rates lower bond prices, but you end up with same future dollars if you hold until maturity. I believe there is a similar effect in the stock market if you use something like credit spreads as a proxy for the discount rate--higher spreads imply higher future returns. In this second case, I'd be more inclined to wait and see how my portfolio looks once risk sentiment stabilizes.
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Re: What SWR/expense multiple to use for early retirement pl

Post by radix07 »

WageSlave wrote:But by that same token, the time it takes to recognize a "bad trend" is likely long enough to be a significant negative on your resume. I work in IT, where not keeping up with technology (and possibly age) are big red flags. So even a three year gap on my resume could bust me back down to entry-level, or at least add extra hurdles to finding a new job.

Maybe it depends on personality and personal risk tolerance. But say one early retires, and the next year there is a major unexpected expense (medical, home repair, car failure, etc) and/or a major market downturn. Do you say, "Eeek, time to go back to work?!" or do you say, "Let's wait another year and see how that looks?" If the latter, how many times do you wait one more year before resigning yourself to re-joining the workforce?
I absolutely agree that there could be a significant effect on the type of job you would be looking at after 3-5 years out of the work force. But someone who is capable of retiring early is likely to be able to find some sort of work. I doubt you would want to go back to the same job anyway if you tried that hard to get out of it. Why not try something fun as a part-time gig, maybe working outside or picking up side gigs doing something you enjoy. You also won't need a full-time income, if you are able to retire early, you likely have adjusted your expenses to something sustainable on a much more modest income. You don't need to stash away more savings, just keep what you have growing without taking away from it.
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siamond
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Re: What SWR/expense multiple to use for early retirement pl

Post by siamond »

WageSlave wrote:It seems the in-retirement withdrawal rate strategy debate comes up often enough, e.g. VPW or fixed withdrawal rate, etc. But I think my question actually comes first: before we worry about how to spend from the portfolio, how big does that portfolio need to be? And furthermore, this is from the perspective of early retirement, say, under age 45.
Well, this is a key assumption though... Notably for an early retiree... The sheer concept (and calibration) of WR is linked to a given withdrawal method (and is usually associated with the -very flawed- fixed method). Depending on the fact that you accept variable withdrawals or not (and which flavor) will heavily influence the number. Could be anywhere between 3% (fixed) and 5% on average (some flavors of variable). I am an early retiree and I am pretty much settled on a variable method (not VPW though) - we'll see how it goes.

It also heavily depends on your asset allocation. If you go 30% equities and 70% bonds, good luck even sustaining 3% on the long run... And if you go more equity-heavy, you need to have some mechanisms in place to deal with volatility, which themselves may impact your WR.

It also heavily depends of the valuation of the day of retirement. 4% of today's (high!) valuation isn't the same thing as 4% of 2009's valuation.

Finally, for sure, if you retire at 45, you'll fill your days with various activities, and some will probably generate some side-revenue, even if enjoyment should take prevalence over money making. And as some posters indicated, you will definitely have a level of flexibility in this respect that late retirees may not have, at least for a while.

So... sorry, no simple answer here. You may want to play with various scenarios and various withdrawal methods, and see what goes. I like the http://www.cfiresim.comsimulator because you have such choices. I would strongly advise that you use the fees as 'market drag' of sorts though, plugging 1% or 2% in there to see what goes, as future returns may not be as rosy as past historical returns, even if you use very low-cost funds.
Last edited by siamond on Wed Oct 01, 2014 10:18 am, edited 1 time in total.
randomguy
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Re: What SWR/expense multiple to use for early retirement pl

Post by randomguy »

WageSlave wrote:
radix07 wrote:I don't think you would suddenly notice your nest egg is almost gone after 20 years and then try to fill it back up from nothing. You would hopefully realize that you are not maintaining the levels you need to sustain your standard of living and maybe get a part-time job or something to fill in the gaps and let your portfolio grow a bit.
But by that same token, the time it takes to recognize a "bad trend" is likely long enough to be a significant negative on your resume. I work in IT, where not keeping up with technology (and possibly age) are big red flags. So even a three year gap on my resume could bust me back down to entry-level, or at least add extra hurdles to finding a new job.

Maybe it depends on personality and personal risk tolerance. But say one early retires, and the next year there is a major unexpected expense (medical, home repair, car failure, etc) and/or a major market downturn. Do you say, "Eeek, time to go back to work?!" or do you say, "Let's wait another year and see how that looks?" If the latter, how many times do you wait one more year before resigning yourself to re-joining the workforce?
I know a have dozen woman in IT who have taken 3-5 years off and had no problems getting jobs. Or maybe your future isn't in IT anymore. Maybe you become a burger flipper:) Unexpected expenses are expected. They should be part of your budget (i.e. you normally spend 38k/yr and have 2k set aside for them). And yes retiring early at pretty much ANY swr is more dangerous than working til you drop. You can almost always talk yourself into one more year. Think about the last 5 or so years. When do you retire. Can't do it in 2008-2009 when your portfolio is crushed. Probably not 2011 when the correction is happening. Can't do it in 2013 because stocks are overvalued. And so on. There will always be a reason not to retire. At some point the reasons at the other side will matter more.

The other thing is that most people really have 2 numbers. One is the life I would like (i.e. spending 150k/yr) and the one I am happy with (100k). The person retiring with 3 million can start with the first one (5%) and drop to the second one (3.3%) if the portfolio drops in real terms below 3 million. The people living on 20k and needing 19.5k to make ends meet on the other hand probably should be planning on a 3.5% SWR as they have no flexibility. Note this differs from the VPW in that your putting a floor on how much your willing to cut. Of course the low end people only need to make to like 65 and then SS covers all of their needs.
MathWizard
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Re: What SWR/expense multiple to use for early retirement pl

Post by MathWizard »

siamond wrote: ...
It also heavily depends of the valuation of the day of retirement. 4% of today's (high!) valuation isn't the same thing as 4% of 2009's valuation.
This is certainly important, since you are deciding the base of the WR which you are going to keep adding to, so
the valuation at retirement is a critical parameter.

I plan to use 4% for an initial WR based upon Bergen and the Trinity Study, however, I will adjust the equity portion
to account for an inflated valuation based upon how the trailing P/E ratio compares to the historical average of about 15.

For example, last Fri, the S/P 500 had a trailing P/E ratio of 18.94. That is about 125% of the historical average,
so (assuming my equity portfolio was an SP 500 index fund) I would divide by the current valuation of the equity portion
of my portfolio by 1.25 (same as multiplying by 0.80). This gives a valuation which is normalized to the historical average.
Sometimes P/E values are very high due to a recession which lowers earnings drastically, so then I try do
make a conservative best guess for one year, and then renormalize yearly, until the the markets come back to a sensible
range. For example, I would not use the trailing P.E ratio of 71.24 for the Russell 2000.
This normalization is no good for market timing, but is useful for very long estimation , in my opinion.

Source for P/E ratios: http://online.wsj.com/mdc/public/page/2 ... yield.html
feh
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Re: What SWR/expense multiple to use for early retirement pl

Post by feh »

I think it depends on just how early one is retiring.

We are currently at 34x, planning on retiring in 18 months, at age 50 (although DW will continue to work for a couple years). I'm expecting that ratio to be more like 37x or 38x by then; I want to keep our expected WR between 2.5 and 3%.
MathWizard
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Re: What SWR/expense multiple to use for early retirement pl

Post by MathWizard »

feh wrote:I think it depends on just how early one is retiring.

We are currently at 34x, planning on retiring in 18 months, at age 50 (although DW will continue to work for a couple years). I'm expecting that ratio to be more like 37x or 38x by then; I want to keep our expected WR between 2.5 and 3%.
Congrats on making your number so early in life.
I wish you well in your long retirement.
RetiredinKaty
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Re: What SWR/expense multiple to use for early retirement pl

Post by RetiredinKaty »

RMDs after age 70 are conservative based on history, but may be more realistic today with low yields. Projecting an RMD from age 70 back to 45 is a huge extrapolation but may be a useful reference. During the ages 70 to 80, the RMD table assumes that each additional year of life extends the life expectancy 0.1 years. Extrapolating backward to age 45 gives:

Projected RMD at 45 = 27.4 + (70-45) - (70-45)*0.1 = 49.9

Projected W at 45 = 100 / 49.9 = 2.0
flyingaway
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Re: What SWR/expense multiple to use for early retirement pl

Post by flyingaway »

scrabbler1 wrote:As someone who retired 6 years ago at age 45, I ended up with a 2.5% SWR at the beginning. But, thanks to portfolio growth since late 2008 (when everything was low) and the ACA bringing my HI premiums under control, my SWR has actually dropped to around 2%.

Being a Fidelity client, I ran my numbers through their RIP program before I retired and a few tiems since then. It shows what I already knew - that my bigger challenge is getting to age ~60 which is when I start tapping into my "reinforcements" which are (1) unfettered access to my IRA, (2) my frozen company pension, and (3) Social Security. This is why I split my ER plan into two parts - getting to age ~60 and then beyond age 60.

If my SWR were closer to 3% I would still be fine, as I am still living off only dividends and interest, not tapping into principal. I still voted 2.5%. My AA is 35/65 in my taxable account and 50/50 in my IRA.
I like this approach to consider two phases separately, before age 60 and after age 60.
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WageSlave
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Re: What SWR/expense multiple to use for early retirement pl

Post by WageSlave »

flyingaway wrote:
scrabbler1 wrote: [... ] It shows what I already knew - that my bigger challenge is getting to age ~60 which is when I start tapping into my "reinforcements" which are (1) unfettered access to my IRA, (2) my frozen company pension, and (3) Social Security. This is why I split my ER plan into two parts - getting to age ~60 and then beyond age 60.
I like this approach to consider two phases separately, before age 60 and after age 60.
I've always looked at it as one big phase, for a few reasons:
  • I assume most people for whom early retirement (age ~45 or less) is a possibility are fairly high-earners, so their portfolios will be dominated by taxable accounts, rather than tax-advantaged (like IRAs).
  • I thought pensions were a thing of the past? :) At least for me, I have no pensions. (Though, had I stayed at my original company for 30+ years, I would have had a pension. But the way it was designed was "exponential growth" toward the very end of that 30 years. Leaving early resulted in an effectively negligible payout.)
  • If you stop working early, Social Security payments are likely to be quite low due to reduced contributions. In my personal planning, I'm not counting on it at all. But to be fair, even if I was planning on working until 60+, I probably wouldn't count on Social Security either (it's OK to call me cynical or overly-conservative).
So looking at it with all those things in mind, hitting age ~60 shouldn't incur terribly much change.

When I searched this site in the past for discussions about this topic, it seemed like the key phrase was "perpetual withdrawal". In other words, when planning a 45+ year retirement, there's probably too much risk/volatility to try to plan to precisely spend the portfolio down to $0 exactly at the time of death (hard enough to do for 30 years I suppose). Planning a 45 year retirement is the same as planning a 100-year or even 500-year retirement: it's effectively infinite.

Given that, I've always thought what's simple and intuitive is a portfolio that maintains it's value in real dollars, and casts off enough above-inflation growth to provide cost-of-living funding. So, with that perspective, maybe another way to ask this question is what perpetual withdrawal rate is sustainable? (I'm not actually changing the survey question, just trying to throw more thoughts out there to keep the discussion going.)
2015
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Re: What SWR/expense multiple to use for early retirement pl

Post by 2015 »

A couple of months away from retiring at 60, with delaying SS until 70, my overall WR for 60-95 retirement (95 = end of life projection) will be 2.5, or 39x expenses. Of course SWR will be higher between 60-70, but I've modeled this in ESPlanner, FIDO, and others and am confident with the results. Flexibility will be key as well.
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siamond
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Re: What SWR/expense multiple to use for early retirement pl

Post by siamond »

WageSlave wrote:When I searched this site in the past for discussions about this topic, it seemed like the key phrase was "perpetual withdrawal". In other words, when planning a 45+ year retirement, there's probably too much risk/volatility to try to plan to precisely spend the portfolio down to $0 exactly at the time of death (hard enough to do for 30 years I suppose). Planning a 45 year retirement is the same as planning a 100-year or even 500-year retirement: it's effectively infinite.

Given that, I've always thought what's simple and intuitive is a portfolio that maintains it's value in real dollars, and casts off enough above-inflation growth to provide cost-of-living funding. So, with that perspective, maybe another way to ask this question is what perpetual withdrawal rate is sustainable? (I'm not actually changing the survey question, just trying to throw more thoughts out there to keep the discussion going.)
I reached the very exact conclusion a couple of years ago, when planning for my early retirement. And started to seek out a way to get a 'perpetual portfolio' and a variable withdrawal method that would get the most out of such portfolio, while slowly reconverging towards the perpetual value in the midst of stock and bonds gyrations (+ the occasional lump sum spent or received). We can swap PMs on the topic if you wish. The various points I listed in an earlier post still apply though, this is no longer an SWR reasoning, this is a more subtle and adaptive approach to withdrawals.

Many posters on this forum are very conservative people, and thus are fine with a simpler reasoning based on a fairly low SWR. I totally respect that, but my approach is somewhat different, retire early, and be adaptive.
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SimpleGift
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Re: What SWR/expense multiple to use for early retirement pl

Post by SimpleGift »

WageSlave wrote:Given that, I've always thought what's simple and intuitive is a portfolio that maintains it's value in real dollars, and casts off enough above-inflation growth to provide cost-of-living funding. So, with that perspective, maybe another way to ask this question is what perpetual withdrawal rate is sustainable?
This research study by Jim Otar applies to your question directly, WageSlave. He found that the perpetual withdrawal rate was a maximum of 2.3% inflation-adjusted, from portfolios with 50% stock.

Perpetual Withdrawal Rates for Foundations, Endowments and Charitable Trusts

Personally, this is the approach I've taken with my own portfolio since retiring early at age 55. At 50% stock, the portfolio income has averaged about 2.5% over the last decade, so we've never had to sell any assets for our living expenses.
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zed
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Re: What SWR/expense multiple to use for early retirement pl

Post by zed »

I early retired last fall at age 53. With income streams from DW's SS, my early pension draw, a small drawdown from after tax investments, taking advantage of ACA subsidies and by reducing living expenses by buying rather than renting; our SWR is well south of 2%. It's complicated but best to look at how all of the pieces work together.
YMMV
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Re: What SWR/expense multiple to use for early retirement pl

Post by randomguy »

Simplegift wrote:
WageSlave wrote:Given that, I've always thought what's simple and intuitive is a portfolio that maintains it's value in real dollars, and casts off enough above-inflation growth to provide cost-of-living funding. So, with that perspective, maybe another way to ask this question is what perpetual withdrawal rate is sustainable?
This research study by Jim Otar applies to your question directly, WageSlave. He found that the perpetual withdrawal rate was a maximum of 2.3% inflation-adjusted, from portfolios with 50% stock.

Perpetual Withdrawal Rates for Foundations, Endowments and Charitable Trusts

Personally, this is the approach I've taken with my own portfolio since retiring early at age 55. At 50% stock, the portfolio income has averaged about 2.5% over the last decade, so we've never had to sell any assets for our living expenses.
I can't really figure it out from reading the paper but is that before or after fees? Merril Lynch had a paper a while back suggesting about 2% after paying their fees (not stated but you have to imagine in the 1.5-2%+ range). When you are talking long term portfolio choices tend to matter a lot more. Over 30 years you can get away with a ton of bonds. Over 100, not so much. And throw in things like small caps, international, emerging markets, value stocks and you can tweak the numbers up by .5% in most cases.
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Re: What SWR/expense multiple to use for early retirement pl

Post by Leesbro63 »

Simplegift wrote:
WageSlave wrote:Given that, I've always thought what's simple and intuitive is a portfolio that maintains it's value in real dollars, and casts off enough above-inflation growth to provide cost-of-living funding. So, with that perspective, maybe another way to ask this question is what perpetual withdrawal rate is sustainable?
This research study by Jim Otar applies to your question directly, WageSlave. He found that the perpetual withdrawal rate was a maximum of 2.3% inflation-adjusted, from portfolios with 50% stock.

Perpetual Withdrawal Rates for Foundations, Endowments and Charitable Trusts

Personally, this is the approach I've taken with my own portfolio since retiring early at age 55. At 50% stock, the portfolio income has averaged about 2.5% over the last decade, so we've never had to sell any assets for our living expenses.
Isn't this really overcomplicating things? Pretty much 2-3% is the income (dividends and interest) from a balanced (60-40 to 40-60) portfolio. We are essentially back to the old timer's "live off the income" way of doing things, before computers and SWRs etc etc.
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Re: What SWR/expense multiple to use for early retirement pl

Post by Philociraptor »

I'd say 4%, or 25x annual expenses pre-retirement (we're aiming to have that by age 40 using only retirement accounts, if we use taxable and/or real estate it could be closer to age 35). Once you retire, expenses should drop and you'll have time for income-generating or cost-saving hobbies, so that 4% could suddenly become 3% or less. Best of luck with your plans!
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Re: What SWR/expense multiple to use for early retirement pl

Post by SimpleGift »

Leesbro63 wrote:Isn't this really overcomplicating things? Pretty much 2-3% is the income (dividends and interest) from a balanced (60-40 to 40-60) portfolio. We are essentially back to the old timer's "live off the income" way of doing things, before computers and SWRs etc etc.
Good point. Even in the low interest rate and low dividend world of the last decade, a 50% stock/50% bond portfolio has generated about 2.5% in income. So a perpetual withdrawal rate of 2.3% could be sustained just from the portfolio income, I believe — with no worries about selling assets, bad sequence of returns, etc.
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Re: What SWR/expense multiple to use for early retirement pl

Post by randomguy »

Simplegift wrote:
Leesbro63 wrote:Isn't this really overcomplicating things? Pretty much 2-3% is the income (dividends and interest) from a balanced (60-40 to 40-60) portfolio. We are essentially back to the old timer's "live off the income" way of doing things, before computers and SWRs etc etc.
Good point. Even in the low interest rate and low dividend world of the last decade, a 50% stock/50% bond portfolio has generated about 2.5% in income. So a perpetual withdrawal rate of 2.3% could be sustained just from the portfolio income, I believe — with no worries about selling assets, bad sequence of returns, etc.
Your logic is a bit faulty. Your 2.5% income is based on portfolio value. Your 2.3% is a number that will increase with inflation every year. If the portfolio isn't growing there will be a point where 2.3% in expenses becomes more than 2.5% in income. You need that growth and it doesn't matter if you get it from a higher dividend (2.5% of 120 instead of 100) or by selling the stock. Now when your talking <3% SWR, you need a very low amount of real return to have a portfolio that last 30+ years. Going the variable route of adjusting spending to match portfolio income works with the caveat that you need to be willing to adjust expenses when needed.
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Re: What SWR/expense multiple to use for early retirement pl

Post by SimpleGift »

randomguy wrote:If the portfolio isn't growing there will be a point where 2.3% in expenses becomes more than 2.5% in income. You need that growth and it doesn't matter if you get it from a higher dividend (2.5% of 120 instead of 100) or by selling the stock.
Sure, if the portfolio value isn't growing to keep pace with inflation, then it can't sustain a 2.3% inflation-adjusted withdrawal rate from income — and assets would have to be sold to fund living expenses. But that's what the 50% equity in the portfolio is for! If we can't assume a reasonable, long-term growth rate in stock value, then perpetual withdrawal rates are meaningless, as any portfolio will eventually deplete.

In the linked study upthread, Otar requires a 50% stock portfolio for a perpetual, inflation-adjusted withdrawal of 2.3%.
Last edited by SimpleGift on Thu Oct 02, 2014 1:01 pm, edited 2 times in total.
Leesbro63
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Re: What SWR/expense multiple to use for early retirement pl

Post by Leesbro63 »

Also I would argue that 2.3% versus 2.5% is a rounding error. There's no way to know for sure that if you withdraw 2.5% in a 2.3% world, you'd be in trouble. Also, for early retirees, the portfolio has to last more than 30 years. Taking the "income", whatever % that turns out to be, from a 50/50 portfolio should last "forever"/in perpetuity, barring a calamity.
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Re: What SWR/expense multiple to use for early retirement pl

Post by zaboomafoozarg »

I am shooting for a 50/50 AA with 40 times my needed income, so 2.5%.
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Re: What SWR/expense multiple to use for early retirement pl

Post by Clearly_Irrational »

Dividends + Interest is your best bet for an extended retirement. With a 50/50 portfolio that's currently about 2.17% or so.
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Re: What SWR/expense multiple to use for early retirement pl

Post by randomguy »

Leesbro63 wrote:Also I would argue that 2.3% versus 2.5% is a rounding error. There's no way to know for sure that if you withdraw 2.5% in a 2.3% world, you'd be in trouble. Also, for early retirees, the portfolio has to last more than 30 years. Taking the "income", whatever % that turns out to be, from a 50/50 portfolio should last "forever"/in perpetuity, barring a calamity.
Sure but your income will not be constant. If you don't have that requirement (i.e. income doesn't go down drastically in bad years),there are tons of schemes that word. Just talking 5% out of the portfolio every year will result in you never running out of money and on average a steady increase in balance. But you will have some years where your spending is down 30%+ in nominal dollars.

It is easy to come up with some safe scheme (i.e. <3% SWR). The problem is they force you to work longer than you need. Figuring out what risk you want to take (years of your life or financial security) is a pretty personal one. Is it worth giving up lets say 5 years of your life to up your success rate from 95% to 99%? Depends on how much you fear falling into that 4% failure case (which is not going broke. Pretty much any reasonable person will make adjustments along the way. Modeling that is very hard.).

I can't find a free link to it but: Jonathan Guyton Withdrawal Rules: Squeezing More From Your Retirement Portfolio has a decent discussion of uisng a 5.5% SWR and adjust down in poor markets for people willing to adjust their spending during poor times.
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Re: What SWR/expense multiple to use for early retirement pl

Post by robertf57 »

Simplegift wrote:
WageSlave wrote:Given that, I've always thought what's simple and intuitive is a portfolio that maintains it's value in real dollars, and casts off enough above-inflation growth to provide cost-of-living funding. So, with that perspective, maybe another way to ask this question is what perpetual withdrawal rate is sustainable?
This research study by Jim Otar applies to your question directly, WageSlave. He found that the perpetual withdrawal rate was a maximum of 2.3% inflation-adjusted, from portfolios with 50% stock.

Perpetual Withdrawal Rates for Foundations, Endowments and Charitable Trusts

Personally, this is the approach I've taken with my own portfolio since retiring early at age 55. At 50% stock, the portfolio income has averaged about 2.5% over the last decade, so we've never had to sell any assets for our living expenses.

Hmmm. I am glad this is working for you, but you are living well below what would be safely possible. I am sorry to break it to you but you don't have a perpetual need :!: . You are going to make someone else wealthy at your passing :greedy :moneybag .
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Re: What SWR/expense multiple to use for early retirement pl

Post by SimpleGift »

robertf57 wrote:I am glad this is working for you, but you are living well below what would be safely possible. I am sorry to break it to you but you don't have a perpetual need. You are going to make someone else wealthy at your passing.
If that should come to pass, Robert, our heirs and several non-profits will certainly benefit. However, if a 50% stock/50% bond portfolio fails to achieve the expected total returns over our remaining lifetimes (joint expectancy of 30 years), then we can still sleep well at night. Yes, we're being fairly conservative in our withdrawals — but we're also living happily within our means and greatly enjoying our retirement so far.
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Re: What SWR/expense multiple to use for early retirement pl

Post by Leesbro63 »

randomguy wrote:
Leesbro63 wrote:Also I would argue that 2.3% versus 2.5% is a rounding error. There's no way to know for sure that if you withdraw 2.5% in a 2.3% world, you'd be in trouble. Also, for early retirees, the portfolio has to last more than 30 years. Taking the "income", whatever % that turns out to be, from a 50/50 portfolio should last "forever"/in perpetuity, barring a calamity.
Sure but your income will not be constant. If you don't have that requirement (i.e. income doesn't go down drastically in bad years),there are tons of schemes that word. Just talking 5% out of the portfolio every year will result in you never running out of money and on average a steady increase in balance. But you will have some years where your spending is down 30%+ in nominal dollars.
My guess is that your income would be "close enough" to steady. But to your point if you lived off just the income and dividends, you could probably buy a new car/take a cruise etc in good years on top of that.
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Re: What SWR/expense multiple to use for early retirement pl

Post by randomguy »

Leesbro63 wrote: My guess is that your income would be "close enough" to steady. But to your point if you lived off just the income and dividends, you could probably buy a new car/take a cruise etc in good years on top of that.
Lets see how the person living on the S&P 500 divs did in real dollars (http://www.multpl.com/s-p-500-dividend/table ) in the recent past

2008 32
2009 24.6
2010 24.6
2011 27.8
2012 32.3

is a 25% drop steady enough? Depends strictly on your flexibility. If that is cutting out the trip to Europe, life is good. If it turning off the heat, you might not find that acceptable. And it isn't always a short term thing either. The 1966 guy waited 22 years for his income to come back. If you are willing to do cuts like this, you can get pretty much any strategy to work well. You can start doing things like 5.5% SWR and not go broke since in the bad years you drop the rate down to 3.5%.

Again this is a very safe strategy. The "cost" is in having to save almost 2x as much money as when your willing to spend capital gains.
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Re: What SWR/expense multiple to use for early retirement pl

Post by JoMoney »

randomguy wrote:...is a 25% drop steady enough? Depends strictly on your flexibility. If that is cutting out the trip to Europe, life is good. If it turning off the heat, you might not find that acceptable. And it isn't always a short term thing either. The 1966 guy waited 22 years for his income to come back. If you are willing to do cuts like this, you can get pretty much any strategy to work well. You can start doing things like 5.5% SWR and not go broke since in the bad years you drop the rate down to 3.5%.

Again this is a very safe strategy. The "cost" is in having to save almost 2x as much money as when your willing to spend capital gains.
Bear in mind that you're looking at a table of "real" dividends reduced for inflation, the actual dividends from 1966 continued to grow. The 2008 drop in dividends is a bit unusual relative to most of the history.
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Re: What SWR/expense multiple to use for early retirement pl

Post by kermit »

I've heard 2.3% thrown around as the perpetual withdrawal rate. It's what I'm planning on using targeting age 40 (if everything goes to plan).
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Re: What SWR/expense multiple to use for early retirement pl

Post by BahamaMan »

I have seen a lot of people that enjoy the 'dangling' of a potential windfall to their heirs during their lifetime. It gets the heirs to wait on them and perform a lot of tasks that they would otherwise have to hire out. So the spending of the portfolio just takes away their power. This is what is probably the main motivator behind 2% - 2.5% SWRs.... Otherwise buying an annuity would provide much more income.
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