Is a Sub-4% SWR a Boglehead Quirk?

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VictoriaF
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by VictoriaF » Sun Jan 11, 2015 11:20 am

William Million wrote:...I would put it this way: Spending 2% of your nest egg in retirement (50x) means you will likely die with much of your nest egg still in tact. If that's what you want, no problem. I don't...
Safe Withdrawal Rate (SWR) is a planning number used during the accumulation phase.

In the distribution phase, the focus shifts from the SWR to the safety margin. Having less stocks in one's portfolio increases its safety margin. Taking lower withdrawals than the historical data-based studies indicate increases its safety margin.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by cherijoh » Sun Jan 11, 2015 11:22 am

whomever wrote:I think one aspect of the discussion that is often overlooked is how much cushion the desired withdrawal rate includes.

Let's imagine that Angie has $1M and needs 40k per year. And she really needs it; even $39k a year means wearing three sweaters because the electric company is threatening about unpaid bills, taking the bus because the car is too expensive, being afraid to walk on the rotting deck she can't afford to repair and so on. Angie wants to hear '100% success rate' because the consequences of failure are so high.

Beverly has $2M and 'needs' 80k per year - 50k for basic expenses and 30k for travel. If she had to lop the travel budget in half, no biggie. Beverly is probably happy with an 80% success rate.

I think people use 'how much I need' in both senses, and that leads to a lot of misunderstanding.

And, of course, people do actually differ substantially in their risk tolerance (and, paradoxically, those who have high risk tolerances in the accumulation years may end up with a bigger pile, and thus have less risk in retirement :-)).
I view this as a standard statistical hypothesis question. (For those of you who have taken statistics it's the type I/Type II error 4-blocker). On one axis you have your hypothesis: Someone won't run out of money if they use x% SWR. On the other axis, you have the look-back performance in the real world: For that person who took x% SWR, did they have a residual nest egg when they died (assuming they stuck with the x% SWR)? So there are 4 possible combinations and in two of them the reality did not match the hypothesis. But the consequences of the hypothesis' failure are very different.

Hypothesis is proved true:
For the "Yes"/"Yes" box, the person retired at x% SWR and didn't outlive their money. All to the good!
For the purpose of the hypothesis test, I assumed that if someone answered "No" that they thought x% wouldn't see them through, then they took out a lesser SWR y% that they thought was safe. (But you can still run the scenario with actual performance to see whether x% would have left them destitute). For the "No"/"No" box not taking x% was the prudent approach, so also good.

Hypothesis is proved false:
For the "Yes"/"No" box, the person retired at x% SWR and ran out of money - unless they adjusted their SWR when they saw they were in trouble. Using whomever's examples, Angie would be screwed and Beverly would have to tighten her belt somewhat but would survive on her adjusted amount.
For the "No"/"yes" box, the person took a smaller SWR than necessary and ended up with a larger residual estate vs. spending more in retirement. Some will view this outcome as prudent since you can't know the future and others will view it as a wasted opportunity and very foolish. This is the basis for much discussion in SWR threads :D

My guess is that most Bogleheads either say they are taking an x% SWR but have padded the budget (i.e., Beverly) or base their retirement budget on true needs but use a lesser SWR and then spend more when they have it (Taylor's approach). I think very few Bogleheads will take the higher SWR based on a bare-bones budget. I'm not so sure about this in the general population though. Look at all the people who raided their retirement plans to sustain their living standards during the great recession. Plus all the people who involuntarily retired early before they were truly prepared financially to retire.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by VictoriaF » Sun Jan 11, 2015 11:32 am

cherijoh wrote:For the "No"/"yes" box, the person took a smaller SWR than necessary and ended up with a larger residual estate vs. spending more in retirement. Some will view this outcome as prudent since you can't know the future and others will view it as a wasted opportunity and very foolish. This is the basis for much discussion in SWR threads.
If one dies shortly after retiring, e.g., in an accident, he will have the same outcome, i.e., a larger residual estate vs. spending more in retirement. You would not call it "wasted opportunity," because the person could not have known the date of his early death.

The "No/Yes" outcome is prudent when you prepare for likely eventualities, such as a long lifespan or high end-of-life expenses, and you have a good place (children, charities) to collect your residual estate.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by richard » Sun Jan 11, 2015 11:39 am

nisiprius wrote:
richard wrote:
nisiprius wrote:<>Meanwhile, Vanguard's own Retirement Nest Egg Calculator is showing me this. Only you can answer these questions: do you think a 7% chance of failure--a plan for a 7% chance of failure--matches your idea of "safe?" And, don't you think you need to allow some margin of safety to take account of the possibility that the calculator might be off? <>
What I find odd is the Vanguard research paper I linked above shows a 15% chance of failure while the online calculator shows a 7% chance of failure. See Figure 2 at the top of page 4 of the paper.
I imagine what that shows is something I've noticed over and over again: these studies are extremely sensitive to assumptions and to the specific choices of data and endpoint dates of the data. <snip>

The "proof" that the methodology is wrong is the difference between the SWR figures quoted circa 2000 and the differences quoted today. You may say "but the 1990s were great and 2000-2009 was sucky," but if the methodology were right, it shouldn't have mattered, because the claim was that SWR was not based on averages or recency, but on the whole historic period including all of the very worst periods. So adding a decade of lousy returns followed by five years of great returns shouldn't have made much difference--it should have just been "more of the same," because the historic record was supposed to have already included a good representative sample of lots of good and bad periods.
One reason for this is that we don't have enough data. Using 90 or so years of data to predict 30 years means about three independent data points. Very few data points means an additional bit of data can make a major difference.

There also the problem that the past might not be sufficiently comparable to the future to be useful for this exercise. As Merton Miller put it "I'm always worried that the last two hundred years, or whatever your sample period is, have been somewhat unusual." This adds to the brittleness.

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Re: The Trinity Study

Post by EddyB » Sun Jan 11, 2015 12:24 pm

Taylor Larimore wrote:Hi Bill:

Mathematicians love to study the plethora of data available to them to figure-out the best withdrawal rates. Of course, no one can predict the future but they try.

You can use the link below to read about the the Trinity authors updated study. I suggest using Table 2 as perhaps the most useful.

Portfolio Success Rates: Where to Draw the Line

Best wishes.
Taylor
Thanks for posting that link, it's an interesting collection. The information about median end-of-period balances makes me want more, though. For the various withdrawals, it would have been nice to see what percentage of starting points led to real end-of-period balances greater than the initial balance. That the nominal median ending balance for the inflation-adjusted 4% withdrawal from a 75%(stock)/25%(bond) is 10X the initial portfolio size is intriguing, as you'd need 8% annual inflation for 30 years in order for that not to show real growth. Like others have said, I'm optimistic about living more than 30 years from retirement, so I would like to know the odds that a particular withdrawal rate ended in a lower real balance. I don't think I can get that out of firecalc, as the only similar option is to shows the number of periods in which the balance never decreased below the starting point.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by William Million » Sun Jan 11, 2015 1:00 pm

VictoriaF wrote:
William Million wrote:...I would put it this way: Spending 2% of your nest egg in retirement (50x) means you will likely die with much of your nest egg still in tact. If that's what you want, no problem. I don't...
Safe Withdrawal Rate (SWR) is a planning number used during the accumulation phase.

In the distribution phase, the focus shifts from the SWR to the safety margin. Having less stocks in one's portfolio increases its safety margin. Taking lower withdrawals than the historical data-based studies indicate increases its safety margin.

Victoria
When talking about a long retirement, I suspect too few stocks also creates unnecessary risk. However, 25-50% equities should work.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by YDNAL » Sun Jan 11, 2015 1:04 pm

William Million » Sun Jan 11, 2015 10:22 am wrote:
YDNAL wrote:
William Million wrote:In the most extreme cases, we've even seen a few Bogleheads advocating sub-3% withdrawal rates. Makes very little sense for anyone retiring in their 60s. In sum, this might be a quirk of the conservative nature of Bogleheads who have vigilently denied gratification by saving all those years during the accumulation period.
Saving for "sub-3% withdrawal" simply means saving 33x (or more) the projected need for consumption.

The saving multiple (50x, 33x, 25x) is dependent on our individual ability to save from earnings, and says nothing about "vigilently denied gratification" -- that sounds like a personal opinion without basis.
I would put it this way: Spending 2% of your nest egg in retirement (50x) means you will likely die with much of your nest egg still in tact. If that's what you want, no problem. I don't.
Does that mean that you are backpedaling the "vigilantly denied gratification" comment?
William Million » Sun Jan 11, 2015 10:22 am wrote:If there is nothing you more you want/need in life than what 2% SWR provides, no issues. I doubt Warren Buffet could possibly need to spend more than 2%, unless on charity. However, a 70 year old who bemoans sitting in economy class, or does not book that Disney family outing cruise for his kids and grand kids, or drives a less-safe 1999 car on long highway trips should be spending 4% and - not 2.5% due to some extreme conservatism.
Sounds like more personal opinions without basis.

It is shortsighted to see savings rate (33x, 50x, whatever) as a single objective. Savers save for multiple objectives regardless if "you don't."
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by William Million » Sun Jan 11, 2015 1:12 pm

whomever wrote:I think one aspect of the discussion that is often overlooked is how much cushion the desired withdrawal rate includes.

Let's imagine that Angie has $1M and needs 40k per year. And she really needs it; even $39k a year means wearing three sweaters because the electric company is threatening about unpaid bills, taking the bus because the car is too expensive, being afraid to walk on the rotting deck she can't afford to repair and so on. Angie wants to hear '100% success rate' because the consequences of failure are so high.

Beverly has $2M and 'needs' 80k per year - 50k for basic expenses and 30k for travel. If she had to lop the travel budget in half, no biggie. Beverly is probably happy with an 80% success rate.

I think people use 'how much I need' in both senses, and that leads to a lot of misunderstanding.

And, of course, people do actually differ substantially in their risk tolerance (and, paradoxically, those who have high risk tolerances in the accumulation years may end up with a bigger pile, and thus have less risk in retirement :-)).
This is a great post, thanks. Yes, that is exactly my situation: I'm willing to accept an 80% success rate because failure (in my own case), while not desirable, is also not that bad. I believe many Bogleheads (judging from the net worth study) fall in the same boat.

The other issue is retirement spending trajectory. I expect to spend far less from 75-90 years old than I will spend from 60-75 years old. I will probably travel less, and engage less in the more adventurous, costly activities. (If I need assisted living for my last few years, the house will pay for that.)

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by William Million » Sun Jan 11, 2015 1:34 pm

YDNAL wrote:
William Million » Sun Jan 11, 2015 10:22 am wrote:
YDNAL wrote:
William Million wrote:In the most extreme cases, we've even seen a few Bogleheads advocating sub-3% withdrawal rates. Makes very little sense for anyone retiring in their 60s. In sum, this might be a quirk of the conservative nature of Bogleheads who have vigilently denied gratification by saving all those years during the accumulation period.
Saving for "sub-3% withdrawal" simply means saving 33x (or more) the projected need for consumption.

The saving multiple (50x, 33x, 25x) is dependent on our individual ability to save from earnings, and says nothing about "vigilently denied gratification" -- that sounds like a personal opinion without basis.
I would put it this way: Spending 2% of your nest egg in retirement (50x) means you will likely die with much of your nest egg still in tact. If that's what you want, no problem. I don't.
Does that mean that you are backpedaling the "vigilantly denied gratification" comment?
William Million » Sun Jan 11, 2015 10:22 am wrote:If there is nothing you more you want/need in life than what 2% SWR provides, no issues. I doubt Warren Buffet could possibly need to spend more than 2%, unless on charity. However, a 70 year old who bemoans sitting in economy class, or does not book that Disney family outing cruise for his kids and grand kids, or drives a less-safe 1999 car on long highway trips should be spending 4% and - not 2.5% due to some extreme conservatism.
Sounds like more personal opinions without basis.

It is shortsighted to see savings rate (33x, 50x, whatever) as a single objective. Savers save for multiple objectives regardless if "you don't."
But even you would agree that a SWR can be too low, wouldn't you? What would you say to someone who proposes a 1.5% SWR?

My point is simply that many Bogleheads, in disregarding the SWR advice of Vanguard, are working with such conservative SWRs that they will enjoy the material pleasures of retirement less than they could have. I fear they will become the richest guys in the cemetery. After years of habit-forming, careful saving during the accumulation phase, some Bogleheads might be unwilling to push the gas pedal in retirement. I believe that might be the origin of threads advocating 2.5% SWRs.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by robert88 » Sun Jan 11, 2015 2:27 pm

William Million wrote: My point is simply that many Bogleheads, in disregarding the SWR advice of Vanguard, are working with such conservative SWRs that they will enjoy the material pleasures of retirement less than they could have. I fear they will become the richest guys in the cemetery.
I think Vanguard's methodology of basing expected bond returns on some historical average instead of what bonds are yielding today in real terms is more than a little crazy, especially for retirees or those near retirement. Real rates will probably "mean revert" at some point, but it might be several decades before that happens and when they do rise you have capital losses on your existing bonds. If you have kids and grandchildren or a favorite charity, being the richest guy in the graveyard isn't the worst outcome in the world.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by EnjoyIt » Sun Jan 11, 2015 2:30 pm

William Million wrote:
My point is simply that many Bogleheads, in disregarding the SWR advice of Vanguard, are working with such conservative SWRs that they will enjoy the material pleasures of retirement less than they could have. I fear they will become the richest guys in the cemetery. After years of habit-forming, careful saving during the accumulation phase, some Bogleheads might be unwilling to push the gas pedal in retirement. I believe that might be the origin of threads advocating 2.5% SWRs.
Not only are they enjoying retirement less, they enjoy preretirement less as well. Although leaving a nice inheritance is a good gesture to your kin, to do it by sacrificing and not enjoying your own life is a waste.

Here is a little story:
A parable about a rich man reading the newspaper. He finds an article and realizes the world is in misery. He gets an idea to donate all of his fortune to charity, be even after he does, he still finds misery in the world. He goes to the hospital and tells the doctor he wants to donate a kidney. He does, and the surgery is successful. Still, people in the world are still suffering. He goes back to the doctor and tells him he wants to donate his entire body, but the doctor rejects his offer, telling him it is suicide. He returns home, having given up everything and failed his mission to fix everything. He sits in his bathtub, where he takes a knife and slices his throat, killing himself.

the lesson of the parable is, only a fool can believe he can solve the world's problems. Don't waste your life for the sake of giving away everything.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by 555 » Sun Jan 11, 2015 2:35 pm

Frugal Al wrote:
555 wrote:Currently for $1M you can buy an inflation-indexed annuity (SPIA) paying
inflation-indexed $40k/yr for a 65 year old couple for (the longer) life...
What insurance company currently has a joint life SPIA, with a 4% payout rate that is truly indexed for inflation, at age 65?
I saw this link, that others have posted here before for information only.
http://www.principal.com/retirement/inc ... income.htm
As of now (Jan 2015) it says $100k buys $333.86/month for a 65 year old couple for (the longer) life.
Of course the quote may be unreliable or there could be a catch, but it's at least circumstantial evidence for "4% payout rate", though you can take it with a grain of salt.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by YDNAL » Sun Jan 11, 2015 2:52 pm

William Million wrote:
YDNAL wrote:It is shortsighted to see savings rate (33x, 50x, whatever) as a single objective. Savers save for multiple objectives regardless if "you don't."
But even you would agree that a SWR can be too low, wouldn't you? What would you say to someone who proposes a 1.5% SWR?

My point is simply that many Bogleheads, in disregarding the SWR advice of Vanguard, are working with such conservative SWRs that they will enjoy the material pleasures of retirement less than they could have. I fear they will become the richest guys in the cemetery. After years of habit-forming, careful saving during the accumulation phase, some Bogleheads might be unwilling to push the gas pedal in retirement. I believe that might be the origin of threads advocating 2.5% SWRs.
People that advocate 2.5% withdrawal from retirement savings are considering lower projected returns, longer lifespans, etc. That said, regardless what our personal opinions may be, NO ONE knows what the right withdrawal rate proves to be in the future.

Lastly, you asserted in the OP that saving at 33x (plus) need in retirement equates to "vigilently denied gratification" which is really nonsense -- thus the reason for my first post.
YDNAL wrote:
William Million in the OP wrote:In the most extreme cases, we've even seen a few Bogleheads advocating sub-3% withdrawal rates. Makes very little sense for anyone retiring in their 60s. In sum, this might be a quirk of the conservative nature of Bogleheads who have vigilently denied gratification by saving all those years during the accumulation period.
Saving for "sub-3% withdrawal" simply means saving 33x (or more) the projected need for consumption.

The saving multiple (50x, 33x, 25x) is dependent on our individual ability to save from earnings, and says nothing about "vigilently denied gratification" -- that sounds like a personal opinion without basis.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Johno » Sun Jan 11, 2015 3:07 pm

Frugal Al wrote:
555 wrote:Currently for $1M you can buy an inflation-indexed annuity (SPIA) paying
inflation-indexed $40k/yr for a 65 year old couple...
What insurance company currently has a joint life SPIA, with a 4% payout rate that is truly indexed for inflation, at age 65?
True that's on the borderline in today's rate environment. I just punched it in to check on Vanguard's quote site. The best CPI-U adjusted immediate annuity for birth dates equating to couple now both 65, 100% survivor benefit was around 3.8%. 50% survivor benefit kicks it up to 4.2%.

Of course the other hitch which makes it a bit rash to say 4% is easily achievable is the credit risk of the annuity. If people are really insisting on total security even in the unlikely event of reaching a very old age, that's also a long period of time for less than a perfect credit to default. The ins co's in question are AA or A credits. Depending on the assumptions you make and which histories you look at, you can come with a wide range of predictions of AA or A default over 30 yrs, but it's likely to be at least several %. One would diversify, but that means less than top rate on average and a limited number of companies offer CPI adjusted annuities at all.
https://www.moodys.com/sites/products/D ... 474979.pdf

But still 2 or 3% is very low 'SWR' given the rate on annuities if the sole goal is just not to run out of money in one's own lifetime. But in many cases there's also a goal to leave money to heirs if possible. It seems in a lot of cases though this goal is implicit or partly subconscious, hence one point of resistance to annuities, which otherwise despite their practical limitations are exactly designed to cover the dual risk being discussed: very long life and low returns on risky assets.

Look at the graphs of the Vanguard simulation. For long periods they include many scenario's where the portfolios make huge gains even at 4% withdrawal rate, just several % of cases where the portfolio reaches zero. So, are those upside scenario's worth anything at all to one as retiree? I think to some people they are, and that's part of the resistance to annuities (where you don't get that), though again annuities are not without their limitations.
Last edited by Johno on Sun Jan 11, 2015 4:29 pm, edited 3 times in total.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by richard » Sun Jan 11, 2015 3:07 pm

William Million wrote:My point is simply that many Bogleheads, in disregarding the SWR advice of Vanguard, are working with such conservative SWRs that they will enjoy the material pleasures of retirement less than they could have. I fear they will become the richest guys in the cemetery. After years of habit-forming, careful saving during the accumulation phase, some Bogleheads might be unwilling to push the gas pedal in retirement. I believe that might be the origin of threads advocating 2.5% SWRs.
Exactly what SWR advice of Vanguard are you talking about? Which specific document? All I'm seeing is various percentages based on various time frames and various allocations, with the caveat that the numbers are based on history which may not be applicable to the future.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by scone » Sun Jan 11, 2015 3:23 pm

This topic always seems to go off into the weeds, arguing the mechanics of withdrawl. But the problem really revolves around two different and incompatible value systems. Some people value having more money to spend now, and equate more money with more enjoyment of life. Other people would rather have more money put aside, and therefore more security, hopefully, so they don't have to worry about money as much.

I am in the latter camp, since I have everything I need and don't get much pleasure from shopping. What I would really like is to never again have to worry about money at all, given any reasonable set of circumstances. A low withdrawl rate gets me closer to that goal. I choose to buy more peace of mind rather than more stuff, and the amount of money left over after I'm dead is not even relevant to the question. "Serenity now"-- that's what I want, not a Gucci bag or a cruise. That's what luxury means to me.

IMO these discussions would get a lot farther if the two camps would stop trying to convert each other. Arguing against other people's value systems is a waste of time.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by EnjoyIt » Sun Jan 11, 2015 4:13 pm

scone wrote: IMO these discussions would get a lot farther if the two camps would stop trying to convert each other. Arguing against other people's value systems is a waste of time.

That's the best comment I have read on this thread. But then again what else will we talk about?
lol

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by 555 » Sun Jan 11, 2015 4:31 pm

Some people are fortunate enough to have both high earning power and low spending needs/wants, so obviously they'll get into a situation of only needing to withdraw a small percentage.

But most people would find it hard to save up 50 years worth of expenses, so there are real questions about what kinds of spending needs/wants can be sustained with what combination of income and assets.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by dognose » Sun Jan 11, 2015 4:37 pm

When the issue of SWR comes up, I always defer to the great William Bernstein: a 2 percent withdrawal rate is bullet-proof, 3 percent is probably safe, 4 percent is pushing it, and at 5 percent, you're eating Alpo in your old age.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Johno » Sun Jan 11, 2015 5:10 pm

dognose wrote:When the issue of SWR comes up, I always defer to the great William Bernstein: a 2 percent withdrawal rate is bullet-proof, 3 percent is probably safe, 4 percent is pushing it, and at 5 percent, you're eating Alpo in your old age.
It still calls for explanation why you'd withdraw at 2% if CPI adjusted annuities pay (at least close to) 4%, and the actual goal is just security in one's own retirement. Credit risk of the annuity could be a partial reason as discussed, but hard to see that bridging the whole gap from 4 v 2 or even probably 4 v 3.

I withdraw at considerably less than 2%, but I do so to preserve a legacy. There would be no rational risk management reason to withdraw at that low a rate, or even 2%, if I only cared about not running out of money, when CPI adjusted annuities pay nearer 4%. This is the problem I see in such discussions: the ostensible goal is just secure retirement, the links to papers and articles and calculators assume that also, but a lot of people actually have a self imposed 'dual mandate' to leave as much as possible to heirs in upsides cases *and* make it extremely unlikely they run out themselves in downside cases. It's that IMO as much or more than 'different values' of spending v saving that explain why some people suggestion 'SWR' so far below annuity rates. They've worked hard and in some cases been major league cheap skates their whole life to build a significant net worth, it's a significant or major achievement of their lives, and they don't want it to all go 'poof' into an annuity provider's coffers if they check out early. That's understandable, but everyone has to be clear what the goal is before designing the strategy.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by afan » Sun Jan 11, 2015 5:45 pm

I have a different view of retirement plans.

I accept that some people think this way, but I have no interest in spending up to my ability. I want to spend enough to maintain a comfortable life, which I can do at a level of consumption far lower than what I could afford. I plan to be a net saver throughout retirement. Right now, that is not a particularly aggressive goal. Really bad economic outcomes over the next 50 years could ruin these plans, but they work out even with pretty poor future investment returns.

I plan for a very long life, far beyond average or my personal expectancy. Basically, I take it to the longest anyone is likely to live, which I place at something over 110.

I expect to retire when infirmity or lack of demand for my services force me to do so. It is impossible to project this with any reliability, but looking at people in my line of work, I estimate the combination of flagging stamina and accumulating health issues make an early to mid 70's retirement age likely. I could get lucky and go until 85, or get unlucky and be forced out of the workforce tomorrow.

I plan first for retiring right now. No intention of doing this, but I could with little risk of running out of money in a very long retirement. This still has me a net saver throughout the rest of my life.

Then I plan for retiring at the target age of 75. Net saver throughout my life.


Then, I start cutting expected Social Security receipts down from current promises to lower amounts, to nothing. Still works.

Then I start increasing the expected spending in retirement. This is not because I plan to take European vacations. I have not done that yet, and I have no intention of ever doing that. I expect my expenses would go down in retirement compared to now if I were to retire while healthy. I definitely will do less traveling, have lower commuting and clothing costs and have time to do more work around the house myself, rather than paying people for it.

But as I said, I don't plan to retire healthy. I plan to retire when my physical or mental health have declined to the point that I cannot work.

So I plan for increasing costs due to deteriorating health. The upper end of those costs is planning for 20 years in a skilled nursing facility. They are very expensive. One year in a good facility would cost about our combined spending now. If either of us has that need for that long, it could hurt our long term plan. It might not be fatal, since the person in the nursing home has near zero costs for travel, entertainment, etc. One person in a nursing home and the other at home would be the worst. Both in a nursing home would have us selling the real estate and shedding a lot of costs.

I don't look at this in terms of an SWR, since the wild cards are how much care, for how long, at what annual cost. Twenty years is an arbitrary figure, but I think one is unlikely to go longer than that, given the poor state of health that would put someone in a nursing home in the first place.

Right now, retiring at 65, 70, or 75 would work at no more than 2% withdrawal rate.

But take away SS, increase expenses for ill health, get forced out of the workforce early, and then we start getting closer to spending our income and not being net savers. Since increased expenses and forced early retirement add up to a lot of money, I am far away from thinking that I could afford to splurge, having allowed for those events. To be completely comfortable, I would need to have enough to cover projected "healthy" expenses to age 115 for both of us, with no SS and poor investment returns. Got that. Then I would need to have a side fund that would cover a top quality skilled nursing facility for both of us to age 115. THAT would be a lot of money, we are not there yet. We probably would be there if I do work to age 75.

I spend less, in real dollars, now than I did 10 years ago, even after allowing for no more tuition. I keep cutting my expenses, but I could cut a lot more if I get worried.

Overall, great prospects if I make happy assumptions. Problems if I make progressively worse assumptions. To my way of thinking, few people can really afford to splurge on expensive cars, foreign travel, pricey wine, fancy clothes, or other things that our culture tells us we should want.

So that is the way I plan.
I will be very happy if I have my highest networth of my life on the day I die.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Johno » Sun Jan 11, 2015 6:07 pm

afan wrote:I have a different view of retirement plans.

I plan for a very long life, far beyond average or my personal expectancy. Basically, I take it to the longest anyone is likely to live, which I place at something over 110.

I will be very happy if I have my highest networth of my life on the day I die.
Not to criticize anyone's plan but just explore, do you accept that annuities can significantly (though not wholly necessarily) address the possibility of living to such an extreme age? If one does accept any such validity of annuities, then it's possible to pass a boundary condition of common sense by getting more and more conservative in assuming a longer and longer life when actually you can pay a known amount to reduce if not the remove that risk. Even if you were sure you'd live past 110, insurance companies are virtually sure you won't, and will charge very little to take the risk of even very expensive nursing home care at age 100 off your hands (again subject to addressing the issue of their credit risk from your perspective).

And second you say you'd be happy if net worth was highest on the last day, but you didn't mention heirs that I noticed. Is it important to you to leave money to anyone or anything else (besides spouse which was implied already)? I don't understand a desire to die with a lot of money if you don't have heirs or leaving money to them isn't a major goal, and no mention of them in a pretty long explanation tends to imply that's a low priority, though maybe that's a mistaken impression.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by HomerJ » Sun Jan 11, 2015 6:25 pm

richard wrote:Here's Vanguard research with a chart showing you need withdrawal rates no higher than 4% over 30 years to have a 85% success rate.
http://www.vanguard.com/pdf/s325.pdf

85% doesn't sound very safe to me. YMMV. Longer time periods implied lower withdrawal rates. More safety would also imply a lower withdrawal rate.
Something to keep in mind... "failure" for most Bogleheads means dropping to 2 vacations a year instead of 4 vacations a year (or 4 cheaper vacations).

So 85% is pretty good when those are the stakes. Especially if to get to 100% success rate means working 5 more years in your 60s.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by HomerJ » Sun Jan 11, 2015 6:30 pm

555 wrote:In the real world you can use annuities to eliminate some longevity risk.
This, also... SPIAs are a great Plan B...

Say you are 10-15 years into your retirement, and the nest egg has dropped 40%....

Well, buy a SPIA with 80% of your remaining money, and you'll probably get 8%+ (assuming that 10-15 years into your retirement you are 70 something).

Yeah, not much left for the heirs, but it is a real option that keeps you living well until the day you die.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by afan » Sun Jan 11, 2015 6:36 pm

Spouse, heirs and charities.

All are more worthy than wasting money on frivolous expenditures.

Saving money is a goal in itself. Like not overeating at one's last meal.

As you note, annuities might address the longevity problem if one were willing to project creditworthiness of insurance companies decades into the future. Buying annuities cuts networth and heritable wealth. Annuities also leave one exposed to inflation risk, even in those that have some inflation protection.

I see annuities as much more appropriate for people who want a steady income stream for a relatively limited period of time, years, not decades, over which the credit and inflation concerns are less risky. The shorter time might be while waiting for a windfall, due to short life expectancy or bridging a gap while waiting for pension or SS to kick in.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Ungoliant » Sun Jan 11, 2015 7:31 pm

afan wrote:Spouse, heirs and charities.

All are more worthy than wasting money on frivolous expenditures.
To each their own, but I myself am targeting a WR much closer to 4% than 2% so that I can retire early (hopefully around age 50) and spend more of my life with my family, friends, hobbies, and charitable works. My reasons for accepting a higher withdrawal rate have nothing whatsoever to do with wasting money on frivolous expenditures, but with the desire to maximize the value of the one truly limited resource we have, time. I'm sure my family would appreciate me being around more than getting a bigger check when I'm gone, at least the ones that I'd care to leave anything to. The idea of working until I'm 85 for money I'll never spend is the exact opposite of what I would call "lucky".
afan wrote:Saving money is a goal in itself. Like not overeating at one's last meal.
If I knew it was my last meal, I'd eat until I couldn't eat another bite and savor every bit of it.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by nisiprius » Sun Jan 11, 2015 7:49 pm

Ungoliant wrote:...To each their own, but I myself am targeting a WR much closer to 4% than 2% so that I can retire early (hopefully around age 50)...
Surely you understand that the 4% rule of thumb assumes funding 30 years of retirement, so if you are assuming 4% withdrawals starting at age 50, you are taking an age of 80 as the extreme, longest conceivable lifetime you are planning for.

I would have thought that if you were retiring at age 50 you would be taking 45 years as your planning number for years in retirement.

In the Vanguard calculator, for 30 years and 4%, about the best results are obtained at a stock allocation of about 60%, bonds 40%, cash 0%, and it is a success rate of 93%. If I extend the time period to 45 years, I need to reduce the withdrawal rate to get the same success rate. It appears that I need to reduce it to about 3.2%.

In other words, if you believe that the 4% rule is right for a 30-year retirement, it becomes only a 3.2% rule if you need 45 years in retirement.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Ungoliant » Sun Jan 11, 2015 8:07 pm

nisiprius wrote:
Ungoliant wrote:...To each their own, but I myself am targeting a WR much closer to 4% than 2% so that I can retire early (hopefully around age 50)...
Surely you understand that the 4% rule of thumb assumes funding 30 years of retirement, so if you are assuming 4% withdrawals starting at age 50, you are taking an age of 80 as the extreme, longest conceivable lifetime you are planning for.

I would have thought that if you were retiring at age 50 you would be taking 45 years as your planning number for years in retirement.

In the Vanguard calculator, for 30 years and 4%, about the best results are obtained at a stock allocation of about 60%, bonds 40%, cash 0%, and it is a success rate of 93%. If I extend the time period to 45 years, I need to reduce the withdrawal rate to get the same success rate. It appears that I need to reduce it to about 3.2%.

In other words, if you believe that the 4% rule is right for a 30-year retirement, it becomes only a 3.2% rule if you need 45 years in retirement.
If aware if that and as I said, closer to 4% than 2%; I'm not literally planning on a full 4% WR. Also, most calculators like that fail to account for the value of social security, which can significantly reduce one's portfolio withdrawal rate in later years and act as some degree of insurance against longevity. I also will likely end up annuitizing some portion as well to further dampen longevity risk and give a reasonable floor of income should I exceed my current life expectancy. I'd also expect my spending to somewhat decline should I be fortunate enough to live into my 80s and 90s compared to what I'd like it to be at 50, so the entire concept of a constant withdrawal rate seems somewhat silly to me. But going back to my original point, I value my free time a lot more than most it would seem. I'll happily get by on less if needed rather than throw away a decade or two of my life chasing 99.9% success rates and fearing worst case scenarios.
Last edited by Ungoliant on Sun Jan 11, 2015 8:17 pm, edited 2 times in total.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Johno » Sun Jan 11, 2015 8:10 pm

afan wrote: 1. Spouse, heirs and charities.

2. All are more worthy than wasting money on frivolous expenditures.

3. Saving money is a goal in itself. Like not overeating at one's last meal.

4. As you note, annuities might address the longevity problem if one were willing to project creditworthiness of insurance companies decades into the future. Buying annuities cuts networth and heritable wealth. Annuities also leave one exposed to inflation risk, even in those that have some inflation protection.
1. OK, it was just interesting the whole previous pretty long explanation never mentioned the latter two.
2. Someone can as easily choose a relatively high withdrawal rate in order to retire earlier at a given modest lifestyle, not make 'frivolous expenditures'. So I think your approach is a bit confused on this, in several times equating higher withdrawal rate with 'frivolity', not necessarily the case.
3. This kind of thinking might actually be as prevalent as a reason as 1 or 2, but it's seems hard to logically explain or justify. I've sometimes detected a tendency in myself to act as if that was a valid reason to save, but I consider it irrational for myself.
4. I'm specifically speaking of CPI adjusted annuities so I don't see how those provide 'some' inflation protection in any sense that other assets provide more. TIPS adjust to the same index; stocks historically don't do well in times of high inflation; real estate or commodities might do better but tend to be unpopular assets around here. On credit risk of annuities yes it's one consideration, but in balance with other considerations. The actuarial chance of living to 100 is so small, thus the ratio of a $ paid now to an insurance co v what they will pay if you hit that jackpot is so high, that you can greatly over-cover yourself with annuity protection (to guard against credit problems) if the concern is really just to make money last for oneself/spouse to such an extreme age.

In summary, saying one is withdrawing at a very low rate (anything near or below 2% as a general idea) to preserve a legacy for heirs (my case) or charities makes sense to me. Saying one is doing it in case they/spouse live to some very extreme age makes a lot less sense. That might justify some rate noticeably below 4%, but at a certain point the actuarial probability of living to a certain age is so low, therefore annuity economics at that age so attractive, it just can't make sense to be conservative enough to fund oneself through a very advanced age without using annuities, if longevity risk is the reason. And 'saving is a goal in itself' I think may actually be the money quote, but the optional task of logically justifying it seems very difficult IMO.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by BahamaMan » Sun Jan 11, 2015 8:50 pm

afan wrote:I have a different view of retirement plans.

I plan for a very long life, far beyond average or my personal expectancy. Basically, I take it to the longest anyone is likely to live, which I place at something over 110.

I will be very happy if I have my highest networth of my life on the day I die.
Yes, you do have a different view of retirement plans.

Dying with the highest networth of my of my life, would be a Complete Retirement Planning Failure to me.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by john94549 » Sun Jan 11, 2015 8:53 pm

Not clear if there is a description for what we plan, but we plan to withdraw from IRA CDs for the first "tier" of retirement (roughly 15 years), then nibble at tax-deferred stocks and bonds, then after-tax assets.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by afan » Sun Jan 11, 2015 9:05 pm

Johno wrote: 2. Someone can as easily choose a relatively high withdrawal rate in order to retire earlier at a given modest lifestyle, not make 'frivolous expenditures'. So I think your approach is a bit confused on this, in several times equating higher withdrawal rate with 'frivolity', not necessarily the case.
Not sure I follow. A higher withdrawal rate always increases the risk of running out of money. It also reduces the networth at death, no matter how favorable an investment experience one might have. My interpretation of "frivolous" includes many of the things people in this thread have been mentioning as things to do in retirement. When I retire, I plan to wait around to die, having delayed my retirement as long as I could.

3. This kind of thinking might actually be as prevalent as a reason as 1 or 2, but it's seems hard to logically explain or justify. I've sometimes detected a tendency in myself to act as if that was a valid reason to save, but I consider it irrational for myself.
Free country. You are welcome to disagree. But not rational? Please explain your thinking.

4. I'm specifically speaking of CPI adjusted annuities so I don't see how those provide 'some' inflation protection in any sense that other assets provide more. TIPS adjust to the same index; stocks historically don't do well in times of high inflation; real estate or commodities might do better but tend to be unpopular assets around here. On credit risk of annuities yes it's one consideration, but in balance with other considerations. The actuarial chance of living to 100 is so small, thus the ratio of a $ paid now to an insurance co v what they will pay if you hit that jackpot is so high, that you can greatly over-cover yourself with annuity protection (to guard against credit problems) if the concern is really just to make money last for oneself/spouse to such an extreme age.
On inflation protection, the last time I looked, which was quite a while ago, and I was not that interested anyway, the inflation protection was not complete. The annuities I investigated provided some protection, but would even promise to try not keep increasing by the full CPI at high rates year after year. Insurance companies now may offer annuities that will simply track the CPI, no matter how high the inflation rate, but I did not see them then. If they did, the cost would be pretty high. If I am reluctant to pay for a promise from an insurance company to be around 20 years from now, I am more reluctant to pay a large amount of money for protection against inflation years from now. The risk of living to extreme old age is there, however unlikely. But the three goals of providing a comfortable life, saving money and maximizing networth do not change.
In summary, saying one is withdrawing at a very low rate (anything near or below 2% as a general idea) to preserve a legacy for heirs (my case) or charities makes sense to me. Saying one is doing it in case they/spouse live to some very extreme age makes a lot less sense.
Also must consider constant improvements in medical care make longer lives more likely than they have ever been.
That might justify some rate noticeably below 4%, but at a certain point the actuarial probability of living to a certain age is so low, therefore annuity economics at that age so attractive, it just can't make sense to be conservative enough to fund oneself through a very advanced age without using annuities, if longevity risk is the reason.
We will have to agree to disagree. I would not want to bet my future, or that of the others who will get our assets when we are gone, on the performance of insurance companies decades from now. In my state only a portion of annuity payments are protected by the state fund, and that is funded by other insurance companies. One can buy from a top rated company now, and find both that company and the others that would provide the state fund get in trouble in the same down markets. Then you have paid out a lot of money, and received a promise in return. If they cannot pay off the promise, you don't get your money back.
And 'saving is a goal in itself' I think may actually be the money quote, but the optional task of logically justifying it seems very difficult IMO.
I am not sure how one would provide "logical justification" of saving as a goal. I would not even know what that means. What would a "logical justification" for leaving money to heirs and charities look like? It would be someone's priority, but what would constitute logical justification?

What would be the logical justification for statements like "I like cheese", or " I hate to travel". They would seem to be in the same category as "I consider saving to be an important goal in life".

But I will give you some logic. It makes no sense to wonder whether one will have enough money to support oneself throughout retirement and simultaneously plan to retire before necessary and spend money one need not spend. Warren Buffet can retire whenever he likes. He has reduced the likely duration of his life without earned income by working a long time, and he has accumulated enough money to have no concerns about his financial future. For regular working stiffs, it makes no sense to contemplate retiring before necessary if they have not already fully funded a secure future under the most conservative assumptions. As I indicate, those assumptions include a confluence of bad luck.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by afan » Sun Jan 11, 2015 9:19 pm

If I knew it was my last meal, I'd eat until I couldn't eat another bite and savor every bit of it.

I would not want to go to my death feeling bloated and disgusting. YMMV
Dying with the highest networth of my of my life, would be a Complete Retirement Planning Failure to me.
The real problem is that I will maintain a risky asset allocation to the end. This means that simple volatility makes it highly likely that the highest networth will occur sometime before I die, rather than on the last day. I should state this more carefully: I want to pursue a policy that maximizes the expected networth over a lifetime, with this expectation growing throughout retirement. I accept that this introduces a possibility of asset prices declining leading up to my last day.

But there are not things I want, that are for sale, and I don't have. I get my enjoyment from things that are cheap or free, and I have little or no interest in fancy or expensive entertainments. Free local concerts are far more appealing than box seats at the Met. Yet I love opera. A walk in a local park is more appealing than a trip to Europe. Reading a good book from the library or downloaded in the public domain is far more enjoyable than going to a movie, another thing I rarely do. Boring and too expensive. When I no longer need professional attire, I will no longer need to maintain suits, dress shirts, ties and such. I consider them unreimbursed, but non deductible business expenses.
Last edited by afan on Mon Jan 12, 2015 12:32 pm, edited 1 time in total.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by protagonist » Sun Jan 11, 2015 9:46 pm

NET WORTH

Median family net worth
Age 45 to 54: $117,900
Age 55 to 64: $179,400
Age 65 to 74: $206,700

(Source: Federal Reserve Survey of Consumer Finances, 2012)

I assume your median retired family is living off a lot more than $8000/year (4% of $200,000, assuming no debt).

OK, add social security benefits. The average SS monthly payment for non-disabled workers is $1294/month= about $15,500/year. So if you add that to the median family net worth, that's $23,500 that the MEDIAN non-disabled retired worker's family can spend annually at 4%, right? (ok, I am assuming one wage earner here, I know, a flaw). I assume many still have mortgages and other debts. And taxes.

There are 40.3 million Americans over 65. So let's guess that 20.15 million fall below the median (I'm not factoring in that the median SS benefit is based only on non-disabled retired workers) .

If the 4% figure is accurate and my thinking is correct, it seems to me that the streets of every American town would be swarming with homeless, destitute 70- and 80-somethings. REALLY swarming. Like, overwhelmed.


And reducing or raising the annual withdrawal rate by 1% would only make a $2000 pre-tax annual difference for the MEDIAN non-disabled retired worker's family.

Something is off....either my analysis is missing something or the model is far too pessimistic.
Last edited by protagonist on Sun Jan 11, 2015 10:06 pm, edited 11 times in total.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by bhsince87 » Sun Jan 11, 2015 9:47 pm

Lots of good arguments back and forth here, but I'm still trying to figure out what people actually mean when they say "4% withdrawal rate"!

I've seen two definitions. One is 4% of the initial (at retirement ) portfolio value, adjusted each year for inflation. The other is 4% of portfolio value each year.

The 4% of initial value plus inflation adjustment seems more conservative and sensible to me. But it's harder to model.

Such a small variation in definition as this can lead to drastically different outcomes!
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by BahamaMan » Sun Jan 11, 2015 9:54 pm

bhsince87 wrote:Lots of good arguments back and forth here, but I'm still trying to figure out what people actually mean when they say "4% withdrawal rate"!

I've seen two definitions. One is 4% of the initial (at retirement ) portfolio value, adjusted each year for inflation. The other is 4% of portfolio value each year.

The 4% of initial value plus inflation adjustment seems more conservative and sensible to me. But it's harder to model.

Such a small variation in definition as this can lead to drastically different outcomes!
The Standard 4% is Initial Portfolio value + Inflation Adjustment.

But you're wrong about it being more conservative. The 4% of portfolio value each year is far more conservative. It will never fail!

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Ungoliant » Sun Jan 11, 2015 10:02 pm

afan wrote:But there are not things I want, that are for sale, and I don't have. I get my enjoyment from things that are cheap or free, and I have little or no interest in fancy or expensive entertainments. Free local concerts are far more appealing than box seats at the Met. Yet I love opera. A walk in a local park is more appealing than a trip to Europe. Reading a good book from the library or downloaded in the public domain is far more enjoyable than going to a movie, another thing I rarely do. Boring and too expensive. When I no longer need professional attire, I will no long need to maintain suits, dress shirts, ties and such. I consider them unreimbursed, but non deductible business expenses.
It's interesting because I mostly feel the same way, yet have the complete opposite view of what that means for retirement planning. To me, the great luxury of being happy without needing to spend a great deal money is that you don't need as much of it and that you don't need to feel the same anxiety over investing scenarios where you might lose much of it. That adds up to an earlier retirement for me and more free time to enjoy those simple pleasures without having to live in fear that my life will be ruined if I can't maintain a certain spending level. It means that my WR, flexible as it is, might be higher, not because of frivolous spending, but for lack of years of needless saving. I guess we ultimately just disagree on the inherent virtue of saving for saving's sake. Or maybe I just don't feel the same obligation to spend my golden years providing financially for my future grandchildren when I could be enjoying some of those things you mention with them instead.
Last edited by Ungoliant on Sun Jan 11, 2015 10:09 pm, edited 2 times in total.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by bhsince87 » Sun Jan 11, 2015 10:03 pm

BahamaMan wrote:
bhsince87 wrote:Lots of good arguments back and forth here, but I'm still trying to figure out what people actually mean when they say "4% withdrawal rate"!

I've seen two definitions. One is 4% of the initial (at retirement ) portfolio value, adjusted each year for inflation. The other is 4% of portfolio value each year.

The 4% of initial value plus inflation adjustment seems more conservative and sensible to me. But it's harder to model.

Such a small variation in definition as this can lead to drastically different outcomes!
The Standard 4% is Initial Portfolio value + Inflation Adjustment.

But you're wrong about it being more conservative. The 4% of portfolio value each year is far more conservative. It will never fail!
You're right, 4% of total will never "fail". But by the same logic, 40% will also never fail!
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by BahamaMan » Sun Jan 11, 2015 10:11 pm

bhsince87 wrote: You're right, 4% of total will never "fail". But by the same logic, 40% will also never fail!
I was only pointing out to you that it was far more conservative, as you picked 4% +inflation as the more conservative.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by bhsince87 » Sun Jan 11, 2015 10:20 pm

BahamaMan wrote:
bhsince87 wrote: You're right, 4% of total will never "fail". But by the same logic, 40% will also never fail!
I was only pointing out to you that it was far more conservative, as you picked 4% +inflation as the more conservative.
Well, yes. I think there is a good argument that it could be more conservative. Who knows?

The 4% plus inflation at least makes budgeting more reasonable.

If the market is up 20% one year, and inflation is 1.5% (like the past year or two), and the retiree only increases their withdraw by 1.5%, to 4.06%, that seems pretty conservative to me.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by market timer » Sun Jan 11, 2015 10:26 pm

protagonist wrote:Something is off....either my analysis is missing something or the model is far too pessimistic.
You can get a good picture of the average retiree's income/expenses by looking at the Consumer Expenditure Survey, broken down by occupation here: http://www.bls.gov/cex/2013/combined/occup.pdf

In 2013, retired households (averaging 1.7 people per household, average age 73.2) spent $40K/year. Average after-tax income was $36K, implying a drawdown of $4K/year from assets. Income came primarily from Social Security and other pensions ($26K), wages and salaries ($8K), and passive income ($3K). This picture is consistent with a household with low six-figure investments.

Looks like the main flaw in your analysis is the low assumption for Social Security and/or not counting other pensions. Keep in mind that even a single-income household is typically eligible for spousal Social Security benefits. A nonworking spouse can receive 50% of the working spouse's benefit. Also, I'm not sure why a retired household is earning wages of $8K. Perhaps this can be explained by the head of household being retired and a spouse working, or perhaps a head of household working part-time can still be considered retired.

What really stands out from this picture is how dependent the average retiree is on Social Security.

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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by HomerJ » Sun Jan 11, 2015 10:45 pm

afan wrote:Spouse, heirs and charities.

All are more worthy than wasting money on frivolous expenditures.
Spending time with spouse, heirs, and volunteering at charities could also be considered more worthy than working until one is too sick to work anymore...

But to each his own.

I will retire at 55, and spend a ton of time with my spouse, children, and grandchildren while I'm still healthy.. Yes, they will only inherit a million or two instead of 5-10 million, but I think it's a good trade-off.

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William Million
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by William Million » Sun Jan 11, 2015 10:57 pm

When I run a 4% SWR for a 40 year retirement, Vanguard tells me I've got an 86% chance of never running out of dough with a 50/50 portfolio. That's pretty darn good. I know some Bogleheads want it closer to 100% but I'll take 86%, knowing I can readjust lifestyle if necessary.

https://retirementplans.vanguard.com/VG ... ggCalc.jsf

cherijoh
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by cherijoh » Sun Jan 11, 2015 11:14 pm

VictoriaF wrote:
cherijoh wrote:For the "No"/"yes" box, the person took a smaller SWR than necessary and ended up with a larger residual estate vs. spending more in retirement. Some will view this outcome as prudent since you can't know the future and others will view it as a wasted opportunity and very foolish. This is the basis for much discussion in SWR threads.
If one dies shortly after retiring, e.g., in an accident, he will have the same outcome, i.e., a larger residual estate vs. spending more in retirement. You would not call it "wasted opportunity," because the person could not have known the date of his early death.
That would be a statistical outlier. The wasted opportunity is that he didn't retire earlier.

Johno
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Johno » Sun Jan 11, 2015 11:20 pm

afan wrote:
Johno wrote: And 'saving is a goal in itself' I think may actually be the money quote, but the optional task of logically justifying it seems very difficult IMO.
1. I am not sure how one would provide "logical justification" of saving as a goal. I would not even know what that means. What would a "logical justification" for leaving money to heirs and charities look like? It would be someone's priority, but what would constitute logical justification?

2. What would be the logical justification for statements like "I like cheese", or " I hate to travel". They would seem to be in the same category as "I consider saving to be an important goal in life".

3. But I will give you some logic. It makes no sense to wonder whether one will have enough money to support oneself throughout retirement and simultaneously plan to retire before necessary and spend money one need not spend. Warren Buffet can retire whenever he likes. He has reduced the likely duration of his life without earned income by working a long time, and he has accumulated enough money to have no concerns about his financial future. For regular working stiffs, it makes no sense to contemplate retiring before necessary if they have not already fully funded a secure future under the most conservative assumptions. As I indicate, those assumptions include a confluence of bad luck.
1 but now you're mixing the points together. Saving for heirs makes sense, I not only agreed to that, it's why I have a very low 'SWR' personally. But that's a separate point from, *you* made it separately from, 'saving is a goal *in itself*'. My ** emphasis added.

3. here you mix back in the security issue, so again that's not a 'savings is a goal in itself. And while we can do the 'free country, agree to disagree' routine, actually there is a boundary condition of common sense. If actuarial probability of reaching age X reaches .00001%, an insurance company will pay, even at a big discount to actuarial value, order of magnitude $mils for every $1 they collect to someone who lasts that long. It's an extreme example but the point is at *some* level concerns like credit are overwhelmed by how tiny the probability is of ever getting there. IOW at a certain point one can buy 2,3, 10 or a 100 times as much or many different annuities to cover that risk as one nominally needs. And current annuity prices aren't based on unknown future medical advances, nor do they discriminate against particular individuals with genetically encoded super long lives, because ins co's don't believe there's any such thing, or at least can't determine who exactly it might apply to (nor might they even be allowed to if such an idea were proven valid and testable, but as of now besides not being testable it's doubtful: most evidence says longevity is largely a crap shoot, not that heavily dependent on having longed lived relatives). So working many more years to achieve a very low SWR because one thinks one is going to live to a very unlikely age, you mentioned 100, and not using annuities as any part of the solution to such a belief, doesn't make a lot of sense. Sorry, have to stick with that. :D

2. Spending perhaps decades more working to amass money just to amass it, as in 'saving is a goal itself' strikes me as somewhat more important that cheese. I can see having no logic in liking/disliking cheese, it's more puzzling to have no logic behind a statement like 'saving is a goal in itself'.

itstoomuch
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Re: Is a Sub-4% SWR a Bogleheuse ad Quirk?

Post by itstoomuch » Mon Jan 12, 2015 12:25 am

^nisprius, +1
",,,The other way is to use a very specific tool for the job. ..."

In the beginning, our investment/retirement tools were pretty simple-Chose a fund(s) to make enough $, to meet T time future, X expenses, for Y years of retirement, by D date. Somehow the $,X,Y,T and D changed because the environment changed. I discovered HD and their tool section. A tool specifically made for a certain job. That new tool could do a better job in nearly every way than the generalized first tool. The problem is the new tool(s) cost money and the P personal, W willingness, to L learn how to use the tool properly.

Using A alcohol to get to sleep. :beer
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Taylor Larimore
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Taylor Larimore » Mon Jan 12, 2015 10:04 am

I will be very happy if I have my highest networth of my life on the day I die.
Afan:

We began giving our our three sons their inheritance in the form of an allowance about 10 years ago. They were and are very grateful. It gives us great pleasure to see them enjoy their inheritance in advance.

One son died last year. I could not forgive myself if we had not helped him when he was alive.

Please reassess your goal to be richest man in the graveyard.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

protagonist
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by protagonist » Mon Jan 12, 2015 10:31 am

market timer wrote:
protagonist wrote:Something is off....either my analysis is missing something or the model is far too pessimistic.
You can get a good picture of the average retiree's income/expenses by looking at the Consumer Expenditure Survey, broken down by occupation here: http://www.bls.gov/cex/2013/combined/occup.pdf

In 2013, retired households (averaging 1.7 people per household, average age 73.2) spent $40K/year. Average after-tax income was $36K, implying a drawdown of $4K/year from assets. Income came primarily from Social Security and other pensions ($26K), wages and salaries ($8K), and passive income ($3K). This picture is consistent with a household with low six-figure investments.

Looks like the main flaw in your analysis is the low assumption for Social Security and/or not counting other pensions. Keep in mind that even a single-income household is typically eligible for spousal Social Security benefits. A nonworking spouse can receive 50% of the working spouse's benefit. Also, I'm not sure why a retired household is earning wages of $8K. Perhaps this can be explained by the head of household being retired and a spouse working, or perhaps a head of household working part-time can still be considered retired.

What really stands out from this picture is how dependent the average retiree is on Social Security.
This makes a lot of sense. Thanks.

My $8K figure was not to reflect wage earnings. Rather to reflect the 4% annual withdrawal from a median net worth of c. $200K.

And yes, the figures do reflect how dependent retirees are on social security. At a 4% annual withdrawal rate from savings, this represents a relatively small percentage of what the majority of Americans are actually living off. Savings, while not trivial, seem much less important than social security, and shifts of 1-2% (or more) in either direction in withdrawal rates become almost trivial for all but the relatively wealthy whose expensive life styles are far more financially demanding.

For these reasons, I think that books such as Wade Pfau's are irrelevant to the majority of Americans, and serve only as a scare tactic (which one may argue is necessary in a society with an average $12K+ family credit card debt). They are relevant only to those wealthy enough to live a relatively lavish life style in retirement, which, if they are not cautious, potentially can drain their assets prematurely (forcing them to live on social security and pensions like the majority of Americans in their latter years).

I'm 62, have been retired for 7 years, and am (surprisingly to me) not spending all that much more annually than the figures you mention. And I am living (though not in luxury) by most people's standards, very well. I can think of nothing I want that I do not have. I took a huge hit in portfolio value the first couple of years following retirement in March 2008 (the most vulnerable years acc. to Pfau) but my net worth has been growing steadily ever since. From personal experience I think the "doomsday scenario" of running out of money is overblown for most of us who frequent this forum (I assume probably wealthier than average) and who are relatively sensible with their finances. You don't need a fortune to retire comfortably.

Beliavsky
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Beliavsky » Mon Jan 12, 2015 11:13 am

The whole idea of setting an initial withdrawal level as a percentage of current wealth and then increasing it by inflation, regardless of changes in wealth, is poor, so it is better to think about other strategies, such as Variable percentage withdrawal.

flyingaway
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by flyingaway » Mon Jan 12, 2015 11:25 am

I would consider 4% as the upper bound that one could withdraw from one's portfolio, not the percentage that one must withdraw from the portfolio. I think most people are smart enough to adjust their spending in retirement, not following the 4% SWR religiously.

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