Is a Sub-4% SWR a Boglehead Quirk?

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Looking4Ward
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Looking4Ward » Mon Jan 12, 2015 5:56 pm

For those who believe a 4% SWR is based on the worst of times, and feel that one should have and could have the flexibility to adjust the percentage based on good times and bad, I'm curious:

If you were to make your annual draw from your portfolio today for 2015, what percentage would you use?

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

Post by BahamaMan » Mon Jan 12, 2015 5:57 pm

scone wrote: Very much on point, but not in denial of the inevitable. If you burn through your money early, you can easily end up homeless and destitute. That's the reality for millions of old people today. And that can happen even if you think you have saved up a pretty good sum. My (rather obvious) point is, you may have to save even more and spend even less in order to lower the odds of a very unpleasant old age.

Many people seem to have real difficulty facing the simple reality of mortality. I'm sorry if the prospect of decrepitude and death upsets you, but it's the universal fate of all mankind. You are going to get old and eventually, your body will decay past the point where you can take care of yourself. At some point after that, possibly many years after that point, you will die. Getting angry about it is pointless, illogical, and a waste of time.

Alternatively, you could suck it up and face facts while you are still relatively young, and take steps to increase the odds of a decent final few years. Maybe even ten or twenty years of extreme old age. Your choice.
You have completely missed my point. Yes, everyone dies. I have no problem with that. Not everyone however goes to assisted living. You can go. That is your choice. I'm not going.

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

Post by BahamaMan » Mon Jan 12, 2015 6:00 pm

Looking4Ward wrote:For those who believe a 4% SWR is based on the worst of times, and feel that one should have and could have the flexibility to adjust the percentage based on good times and bad, I'm curious:

If you were to make your annual draw from your portfolio today for 2015, what percentage would you use?
I use VPW and am retired. My portfolio draw that I took for 2015 (1 week ago) was 4.3% of my Portfolio Balance. Much safer than any Fixed percentage Withdrawal.

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

Post by midareff » Mon Jan 12, 2015 6:03 pm

Looking4Ward wrote:For those who believe a 4% SWR is based on the worst of times, and feel that one should have and could have the flexibility to adjust the percentage based on good times and bad, I'm curious:

If you were to make your annual draw from your portfolio today for 2015, what percentage would you use?

Why would I make the withdrawal today for the whole year? To put it in the bank making near zip interest? Why am I not withdrawing what I need monthly from an extra low volatility fund such as Limited Term Tax-Ex?

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

Post by randomguy » Mon Jan 12, 2015 6:09 pm

HomerJ wrote:
Besides there is always a SPIA as a last resort... If you find your portfolio 50% down 15 years into your retirement, you can always annuitize a good chunk of what's left and get yourself back pretty close to your original withdrawal rate, since 15 years into your retirement you can probably get 8% SPIAs

Nothing for the heirs, of course, with that plan...
SPIA don't really help. Lets say you start with 1 million dollars spending 4%. 15 years later your spending 55k or so/yr (2% inflation) and have a 500k portfolio. If you got 11%, you would cover your currently monthly expenses but every year you would have to cut your expenses by 2%. For an 80 year old (65 year old retire 10 years in) they might be better off gambling they will die in the next 10 years. SPIAs up your floor a bit (i.e. when you 95 you will be likely be assured of getting lets say 25k in todays dollars versus 0 for the 4%) in the extended lifespan case which might be worth something.

Now a 50% reduction is a pretty darn huge. The 60/40 guy who retired in 2000 didn't quit touch that in early 2009 (more like 40%). You are planning for the once every 50 year type event. The real strategy is it looks like your in the bad case (i.e. if 5 years in your portfolio is less than you started), reduce your spending (pass up inflation or actually cut expenses) for 2 or 3 years.

You could also just plan on a 3% SWR. The downside of that of course is working for another 3 or 4 years. Whether the fear of dying before being able to spend your money is a bigger concern than running out of money is up to you. I am happy with 80% success rate because I know the failure case isn't eating dog food. It is eating at outback instead of ruth chris. Sure it is a down grade but it isn't the end of the world.

If I was spending my money today and planning for about 30 years, I would be counting on 4%. Sure we are likey for a correction in the next 5 years but there is no reason it will be some 50%er (they don't happen that often) or that we will have 0% real returns for 15 years(also doesn't happen very often). The valuations today don't suggest that you need to cut it to 3.5% or that 5% is reasonable so I would go with the standard 4%. If stocks go up 25% this year then yeah cutting to 3.5% would make sense. If they drop 30%, you can talk about upping it to 5% going forward.

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

Post by Looking4Ward » Mon Jan 12, 2015 6:11 pm

midareff wrote:
Looking4Ward wrote:For those who believe a 4% SWR is based on the worst of times, and feel that one should have and could have the flexibility to adjust the percentage based on good times and bad, I'm curious:

If you were to make your annual draw from your portfolio today for 2015, what percentage would you use?

Why would I make the withdrawal today for the whole year? To put it in the bank making near zip interest? Why am I not withdrawing what I need monthly from an extra low volatility fund such as Limited Term Tax-Ex?
It was a hypothetical question to those who base and vary their percentage on overall market conditions. Am curious to see who believes that current conditions are good/bad and how that impacts the rate they would decide to use.

If you don't withdraw the full year at one time and instead draw what you need each month, what percentage would you have decided for this year?
Last edited by Looking4Ward on Mon Jan 12, 2015 6:17 pm, edited 1 time in total.

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

Post by Looking4Ward » Mon Jan 12, 2015 6:14 pm

BahamaMan wrote:
Looking4Ward wrote:For those who believe a 4% SWR is based on the worst of times, and feel that one should have and could have the flexibility to adjust the percentage based on good times and bad, I'm curious:

If you were to make your annual draw from your portfolio today for 2015, what percentage would you use?
I use VPW and am retired. My portfolio draw that I took for 2015 (1 week ago) was 4.3% of my Portfolio Balance. Much safer than any Fixed percentage Withdrawal.
Thanks BahamaMan. Is that percentage higher, lower, or about the same as you used last year?

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

Post by BahamaMan » Mon Jan 12, 2015 6:19 pm

Looking4Ward wrote:
BahamaMan wrote:
Looking4Ward wrote:For those who believe a 4% SWR is based on the worst of times, and feel that one should have and could have the flexibility to adjust the percentage based on good times and bad, I'm curious:

If you were to make your annual draw from your portfolio today for 2015, what percentage would you use?
I use VPW and am retired. My portfolio draw that I took for 2015 (1 week ago) was 4.3% of my Portfolio Balance. Much safer than any Fixed percentage Withdrawal.
Thanks BahamaMan. Is that percentage higher, lower, or about the same as you used last year?
My percentage is exactly the same as last year, however the Withdrawal amount is much larger due to an increase in my portfolio.

With VPW the percentage of portfolio balance is always staying the same or increasing. The amount however fluctuates with Market performance.

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

Post by Looking4Ward » Mon Jan 12, 2015 6:22 pm

BahamaMan wrote:My percentage is exactly the same as last year, however the Withdrawal amount is much larger due to an increase in my portfolio.

With VPW the percentage of portfolio balance is always staying the same or increasing. The amount however fluctuates with Market performance.
Thank you.

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

Post by G12 » Mon Jan 12, 2015 7:31 pm

Is a Sub-4% SWR a Boglehead Quirk?
It may be safe to say that a considerable segment on here are anal retentive and possibly not very adaptive, but one can only plan and control so much. The withdrawal ranges presented may prove reasonable, they may not be. If a 3.5% withdrawal rate for a 35-40 year retirement period fails, even with adaptive spending utilization during poor performing periods, things may not be "good" for anyone, working or retired. I'm not obsessed with this subject matter, nor do I plan on resorting to trapping rodents in the back yard for food. YMMV, hopefully to the positive side.

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

Post by robert88 » Mon Jan 12, 2015 7:37 pm

HomerJ wrote:
richard wrote:However, if you are looking to what we've learned from history, it's quite possible "the next 30 years will be WORST 30 years in modern history".
Okay, as long as we recognize that that is what we're predicting...

A lot of people seem to think that 4% is for "normal" times, and since we're in a low-rate environment, we need to go lower...

I've just been trying to point out that 4% is ALREADY conservative... it was generated looking at the WORST times in the past, not the "normal" times...

If we want to drop to 3%, then we need to recognize that we're predicting the next 30 years will be worse than the Great Depression, worse than World War II, worse than the inflation of the 70s, and worse than the tech crash and housing crash of the 2000s.
1. 4% did have two years in which it failed: 1965 and 1966, so historically it has only had about a 96% success rate.
2. Conventional wisdom on this board seems to recommend something approaching global free float cap weighting for a split between international and developed stocks. If you're going to own international stocks, calculating SWRs based on only US data seems like an extreme example of cherry picking the data.
HomerJ wrote: That's a pretty big prediction based on low-interest rates. I think the people who lived through 25% unemployment, and the people who sent 10 million men off to war, and the people who experienced 12% mortgage rates and high inflation would laugh as we sit here predicting the next 30 years will be WORSE financially than anything they lived through.
I'm not sure what you're trying to get at here. Are you suggesting that real interest rates on Treasury bonds were lower during the Great Depression or WWII than they are today?

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

Post by BahamaMan » Tue Jan 13, 2015 8:42 am

randomguy wrote: The 4% rule was never ment to be followed religiously. It is a good first guess though and doesn't result in wildly changing spending (VPW) basised on market whims.
In reality, the guy that is following a fixed SWR would result in much more 'wildly changing spending' than the guy following VPW. He won't have the 'guts' to follow a fixed SWR when the market tanks and will probably cut spending far more than VPW would call for.

Once you understand VPW and set an appropriate AA, and then merge withdrawals with Social Security and/or Pensions, there is very little "wildly changing spending".

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

Post by WageSlave » Tue Jan 13, 2015 4:26 pm

Johno wrote: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.
Do those CPI adjusted close-to-4% annuities exist for 45 year olds? How about 40 year olds? Or are they only for the "classic retirement age" 60+ folks? Honest question!
scone wrote: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.
My interest in these never-ending SWR discussions deals with the specific case of early retirement. And what I call "early retirement" many people might call "extreme early retirement", which would be 45-years old or less. Actually, it's less about the age but more about supporting a family, i.e. potentially young children. My parents retired in their mid-50s, but I don't consider that "early" because I (their only child) was not living at home and not relying on them at all for any kind of financial support.

So, I would assume most people with an (extreme) early retirement mindset would also be in the latter camp (as quoted above). Although this guy tells everyone that a 4% rule with a 100% equity portfolio is safe enough for extreme early retirees (though I think the "fine print" is that it works because it's apparently so trivial to make money in retirement, and besides, a $25k/year spend rate is one of extreme indulgence and luxury).

Not to mention, there are a lot of extra "whammies" when you take a very early retirement: lower social security (due to less contributions/working time); historical data even less useful (few enough data points when doing a historical analysis of 30-year retirements, 50-year retirements only makes it worse); greater longevity risk (more time for the next medical breakthrough that extends everyone's life dramatically); child-care expenses, as I already mentioned. Personally, it's having young children that makes me perhaps less rational: I can't help but feel that if I didn't have to worry about supporting my children (until they're old enough to support themselves), I'd be looking at a much less conservative early retirement portfolio.

Also, at least for me, the use of "SWR" is a bit misleading: I'm implicitly talking about its inverse as a savings-target. For example, if I say, "2.5% SWR", I'm really talking about saving 40x annual expenses. Actual withdrawal strategy would be VPW, or simply a less sophisticated but commonsense "tighten the belt a bit in bad times, splurge a bit in good times" approach. The assumption is that the first year or two of withdrawals would be quite close to the SWR, but as the years go on, that number would basically only have "academic" value.

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

Post by bengal22 » Tue Jan 13, 2015 4:29 pm

Looking4Ward wrote:For those who believe a 4% SWR is based on the worst of times, and feel that one should have and could have the flexibility to adjust the percentage based on good times and bad, I'm curious:

If you were to make your annual draw from your portfolio today for 2015, what percentage would you use?
I would not use a percentage at all. I spend what I need to spend on my "fixed" items and I spend on my extravagant items based on my improvements in net worth. I did not work this hard to put a formula around my life.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

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

Post by randomguy » Tue Jan 13, 2015 4:41 pm

WageSlave wrote:
Johno wrote: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.
Do those CPI adjusted close-to-4% annuities exist for 45 year olds? How about 40 year olds? Or are they only for the "classic retirement age" 60+ folks? Honest question!
scone wrote: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.
My interest in these never-ending SWR discussions deals with the specific case of early retirement. And what I call "early retirement" many people might call "extreme early retirement", which would be 45-years old or less. Actually, it's less about the age but more about supporting a family, i.e. potentially young children. My parents retired in their mid-50s, but I don't consider that "early" because I (their only child) was not living at home and not relying on them at all for any kind of financial support.

So, I would assume most people with an (extreme) early retirement mindset would also be in the latter camp (as quoted above). Although this guy tells everyone that a 4% rule with a 100% equity portfolio is safe enough for extreme early retirees (though I think the "fine print" is that it works because it's apparently so trivial to make money in retirement, and besides, a $25k/year spend rate is one of extreme indulgence and luxury).

Not to mention, there are a lot of extra "whammies" when you take a very early retirement: lower social security (due to less contributions/working time); historical data even less useful (few enough data points when doing a historical analysis of 30-year retirements, 50-year retirements only makes it worse); greater longevity risk (more time for the next medical breakthrough that extends everyone's life dramatically); child-care expenses, as I already mentioned. Personally, it's having young children that makes me perhaps less rational: I can't help but feel that if I didn't have to worry about supporting my children (until they're old enough to support themselves), I'd be looking at a much less conservative early retirement portfolio.
Extreme early retirement is easy. You retire at 40 and 10 years things are not looking good. You need to generate 24k of income. Two people can generate that burger flipping. And then when your 70 SS bails you out (you don't get much value for that last 50% of contributions.). You also have low health care (thanks ACA),0 taxes, and so on. Of course you have to be happy living on 40k (with housing payments, 25k without) which few people are.

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

Post by 555 » Tue Jan 13, 2015 4:51 pm

WageSlave wrote:
Johno wrote: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.
Do those CPI adjusted close-to-4% annuities exist for 45 year olds? How about 40 year olds? Or are they only for the "classic retirement age" 60+ folks? Honest question!
They are for "classic retirement age" 60+ folks, more like 65. Obviously for very early retirement like 40, you need quite a bigger pile than 25X. Firstly you have to cover that many more years. Second, there is more uncertainty (about many things) in a longer time interval.

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

Post by Johno » Tue Jan 13, 2015 5:46 pm

WageSlave wrote:
Johno wrote: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.
Do those CPI adjusted close-to-4% annuities exist for 45 year olds? How about 40 year olds? Or are they only for the "classic retirement age" 60+ folks? Honest question!

My interest in these never-ending SWR discussions deals with the specific case of early retirement. And what I call "early retirement" many people might call "extreme early retirement", which would be 45-years old or less.
No of course the single payment immediate annuity rate as % of the payment is a strictly increasing function of age, and I said the quote I gave was specifically for a couple both 65, 3.8% for 100% survivor benefit, 4.2% for 50% SB, CPI adjusted. I don't recall now whether you need a Vanguard log in to reach the page I was using, which then takes you to another site of a cooperating insurance provider. But those were real rates from real companies as of that post a day or two ago. Also you might not be able to put in birth dates equating to lower than a certain age for immediate annuity.

Obviously in general you need more money for 'very early' retirement, or any at all earlier than standard mid 60's. I think it's understood the classic '4% or less SWR' debate refers to the latter, not the former.

But the general point about annuities with regard to the final phase of life, whether you retire at 65 or 30, still holds IMO. With regard to that particular phase of life, there is a boundary condition of just extending and extending the planned death date and correspondingly decreasing the withdrawal rate (of what remains at age 65, even if you retired at 25 and spent down a lot in the interim) where it no longer makes sense. Ie it just doesn't make sense to say you need a 2% withdrawal rate at 65 when CPI adjusted annuities pay twice that, *if the goal is just to live out person's/couple's lifetime and not run out of money*. As to whether it might make sense to have a 3-something% % rate without annuities, if annuities pay just barely 4% and given the limitations of annuities, that's a completely reasonable discussion. But at some point you can extend the planned death date and reduce the WR until it's not reasonable, and some people seem to, and it doesn't always seem to actually be because they want to leave money to heirs. Just seems to me, reading posts on this forum for awhile...Again, even if you're sure you'll live to 100 and something, insurance companies are almost sure you won't, and their annuity prices reflect it. You can't just ignore that, rationally, IMHO.
Last edited by Johno on Tue Jan 13, 2015 5:56 pm, edited 1 time in total.

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

Post by dognose » Tue Jan 13, 2015 5:54 pm

Johno,

Please stop trying to litigate a question that cannot be answered anyway (a safe withdrawal rate). You've made your point on annuities over and over and over again. I'm begging you.

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

Post by Johno » Tue Jan 13, 2015 5:57 pm

dognose wrote:Johno,

Please stop trying to litigate a question that cannot be answered anyway (a safe withdrawal rate). You've made your point on annuities over and over and over again. I'm begging you.
You're free not to read it. I'm not begging you, don't care whether you do or not. Have a good one. :D

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

Post by richard » Tue Jan 13, 2015 6:05 pm

William Million wrote:<>- Low bond/savings interest rates. Of course, less interest is less interest, but it also might mean higher equity returns or enhanced bond appreciation.

- Low future appreciation appreciation. The PE10 crowd will sometimes chime in that equities will not yield as much moving forward. If PE10 has such predictive powers (it obviously doesn't) you could do a lot better than a 4% SWR through careful market-timing. Good luck with that.<>
Low interest rates don't necessarily mean anything about equity returns. Low interest rates temporarily increase bond prices, but over the long run hurt returns.

Vanguard found PE10 (and p/e) to have more predictive power than other metrics over a 10 year horizon, being able to predict about 40% of the variation in real returns. As many have said, a general ability to predict returns does not imply an ability to market time. If you disagree, please provide an exact specification on how you'd market time.

Compare the studies for 4%. These use three independent data points, which hardly seems a sufficient number (predicting a 30 year period with approximately 90 years of data, not all of which is reliable or necessarily relevant).

If you believe history is useful, then the case for PE10 seems stronger than the case for 4%. If you don't believe history is useful, what's the case for 4%?

Also, for those who plan to use 4% for more than 30 years, how does it make sense to cite Trinity, etc. for support? Similar studies show lower SWRs over longer periods.

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

Post by am » Tue Jan 13, 2015 7:09 pm

So retirement is a leap of faith for us relatively affluent Bogleheads who have more than Social security. We do not have enough data from the past and obviously no knowledge about the future to come up with an accuarate withdrawel rate. We do not know our life expectancy nor do we know the quality of life throughout retirement. Since many experts disagree, there is no right answer.

Best to derive your own comfort level, just like we do with asset allocation. But you gotta be reasonable. Withdrawel rates from say 2-5% or so will work depending on personal circumstances assuming a 30 year retirement. If something happens to your health that lowers life expectancy can go up to higer rate. If returns are fantastic, can go higher. And so on.

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

Post by YDNAL » Fri Jan 16, 2015 10:51 am

Ungoliant » Sun Jan 11, 2015 8:31 pm wrote: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.
Have you asked all of them? :D
Ungoliant » Sun Jan 11, 2015 9:07 pm wrote:
nisiprius wrote:In the Vanguard calculator, for 30 years and 4%,.....
If aware if that (<- I'm aware of 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.
That would be a user mistake because we control the input.

The input requires an amount "to be spent from portfolio" after it is reduced by other projected sources of income (Social Security, Pension, Etc.)
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by DFAMAN » Fri Jan 16, 2015 11:58 am

nisiprius wrote:
Munir wrote:...In the Vanguard webinar this past Thursday, both the Vanguard president and chief investment officer suggested as a general rule lowering the SWR to 3.5% in view of lower expected returns for the foreseable future...
In the 2014 announcement of the revamp (which cut the target from 5% to 4%) John Ameriks specifically appealed to the "4% rule" as justification for believing in the sustainability of the fund distribution target: "The concept of the '4% spending rule' has been around for a long time." The prospectus for Vanguard's managed payout fund continues to use a formula that targets a 4% rate of sorts--a variable 4% rate smoothed by a three-year moving average--

Image

while stating its investment objective in these words:
Investment Objective
The Fund will make monthly cash distributions while seeking to have these distributions and the invested capital keep pace with inflation over time.
In other words, in one place Vanguard is recommending a 3.5% safe withdrawal rate in order to minimize the risk of running the portfolio down to zero. In other place, they are saying their "objective" is to pay out a gently fluctuating 4%, keeping pace with inflation, while not only never running the portfolio down to zero, not only preserving its value, but preserving its real value over time. You get a gently fluctuating 4%, your heirs get a amount that's equal to what you put in, even after adjusting for inflation.

I get it that these are not actually contradictory because a) the Managed Payout Fund is making its own form of variable withdrawal, and b) it's only an "objective," not a promise. At the same time it still seems like they are speaking out of both sides of their mouth on this. Draw out 3.5% and your portfolio will survive, versus draw 4% and your portfolio not only survives but thrives.

If the 4% target for the fund is based on the "4% spending rule," and if Vanguard now counsels a 3.5% spending rule, then I think it would be prudent for them to adjust the Managed Payout fund's target down. (Again).

I do not view the 4% and 3.5% as inconsistent at all. Assuming that the "3.5% spending rule" is referring to a first year withdrawal amount that is expected to be adjusted for inflation every year, the 4% formula (which, as you noted, is a form of "percent of current balance" approach with some smoothing) is a very different animal. It won't result in automatic inflation adjustments and even the nominal amount of withdrawals can go down in bad markets. By being much more reactive to performance, it enhances the likelihood of maintaining the real value of the portfolio over long periods.

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

Post by midareff » Fri Jan 16, 2015 12:34 pm

nisiprius wrote:
William Million wrote:...

The other way is to use a very specific tool for the job. This tool pretty well solves the problem of "dying with much of your nest egg intact." It is directly targeted on longevity risk, unlike portfolio withdrawal strategies that have no connection with your personal life span and do not take longevity into account (other than putting you in the strange situation of hoping you won't live too long). It has problems of its own, the obvious one being that it creates the opposite problem of "dying with none of your nest egg and thus having nothing to leave to your heirs." It has risks and problems of its own, as do all financial products. It gets rid of market volatility risk, but does not eliminate institutional or "black swan" risks.

Don't forget to factor in the "risk that the model I am using turns out to be overoptimistic." It would really be sucky to run out of money in fifteen years and have all the advisor-types saying "Oh, 3.5%, that old rule, we don't recommend that any more, it was way too high."

Let's suppose you start with a million .. OK, WIlliam Million? You live 30 years but have been conservative and have $200,000 left. If inflation ran a 3% average for those 30 years your remaining equivalent buying power with that remaining $200,000.00 is $80,201. Having $750K still in the pot is equal to $300K in buying power under those assumptions. If inflation runs 4% and you have the full million intact the buying power will only be equal to $294K today. If I only knew how long I was going to live, if I only knew the inflation rate, the markets, the crazies, .... now that the Fed is going to publish C-CPI-U monthly how long will it be until they change the SS cola? I'm not a doom and gloomer but I have good doctor's and could make 30 more, or close to it. No human capital left, only the check book, the IRS and it hurtzzzz over there.

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

Post by Ungoliant » Fri Jan 16, 2015 2:37 pm

YDNAL wrote:
Ungoliant » Sun Jan 11, 2015 9:07 pm wrote:
nisiprius wrote:In the Vanguard calculator, for 30 years and 4%,.....
If aware if that (<- I'm aware of 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.
That would be a user mistake because we control the input.

The input requires an amount "to be spent from portfolio" after it is reduced by other projected sources of income (Social Security, Pension, Etc.)
I don't consider that a user mistake, it's a limitation of the tool, which makes it inappropriate for someone like myself planning a very early retirement. The above calculator assumes a single, constant withdrawal rate, but the amount that I'll need to withdraw from my portfolio from ages 50 to 69 is very different from the amount I'll need to withdraw afterwards (due to social security). Something like Firecalc gives more options for simulating such scenarios and I have my own tool that I use as well; I was just pointing out that assuming a constant rate for 45 years is not an accurate simulation of my planned retirement.

And just to clarify, when I refer to my withdrawal rate, I'm talking about my rate at retirement, prior to drawing social security, since that figures to represent the majority of my retirement (by current life expectancy) and the period in which I'm most susceptible to portfolio risk, since 100% of my expenses need to be paid from it without SS to cover the essentials. Obviously, assuming I need to maintain that portfolio withdrawal rate until I'm 95 would be unduly pessimistic.

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

Post by YDNAL » Fri Jan 16, 2015 3:02 pm

Ungoliant wrote:
YDNAL wrote:
Ungoliant » Sun Jan 11, 2015 9:07 pm wrote:
nisiprius wrote:In the Vanguard calculator, for 30 years and 4%,.....
If aware if that (<- I'm aware of 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.
That would be a user mistake because we control the input.

The input requires an amount "to be spent from portfolio" after it is reduced by other projected sources of income (Social Security, Pension, Etc.)
I don't consider that a user mistake, it's a limitation of the tool, which makes it inappropriate for someone like myself planning a very early retirement.
Agree, such tools are not perfectly aligned with every person's specific situation.

That said, you stated that "calculators fail to account for the value of social security" which is just incorrect. The following sentence would make more sense.
Ungoliant » Fri Jan 16, 2015 3:37 pm wrote:....I was just pointing out that assuming a constant rate for 45 years is not an accurate simulation of my planned retirement.
Now, run this by me again. You are planning "closer to 4% than 2%; I'm not literally planning on a full 4% WR" for a period of 45 years?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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

Post by Ungoliant » Fri Jan 16, 2015 4:23 pm

YDNAL wrote:That said, you stated that "calculators fail to account for the value of social security" which is just incorrect.
I don't see what's incorrect about that unless you're making a pedantic argument that instructing the user to exclude needs covered by SS & pensions before putting their input into the calculator is "accounting for it". By contrast, what I was referring to is a calculator like Firecalc, which truly accounts for it by allowing a user actually to input their expected annual benefits and the year in which they will begin, which is a better tool for planning a retirement in which the retirement date and SS start date are not the same. Hence my original quote that you've subtly changed was, "calculators like that fail to account for..." (emphasis added), because that tool in particular was inappropriate for the case we were discussing, precisely due to its failure to explicitly model the impact of SS benefits.
YDNAL wrote:Now, run this by me again. You are planning "closer to 4% than 2%; I'm not literally planning on a full 4% WR" for a period of 45 years?
I don't really know how to say it any more clearly:
Ungoliant wrote:And just to clarify, when I refer to my withdrawal rate, I'm talking about my rate at retirement, prior to drawing social security, since that figures to represent the majority of my retirement (by current life expectancy) and the period in which I'm most susceptible to portfolio risk, since 100% of my expenses need to be paid from it without SS to cover the essentials. Obviously, assuming I need to maintain that portfolio withdrawal rate until I'm 95 would be unduly pessimistic.
Ungoliant wrote: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.

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

Post by YDNAL » Fri Jan 16, 2015 6:14 pm

Ungoliant wrote:I don't see what's incorrect about that unless you're making a pedantic argument that instructing the user to exclude needs covered by SS & pensions before putting their input into the calculator is "accounting for it". By contrast, what I was referring to is a calculator like Firecalc, which truly accounts for it by allowing a user actually to input their expected annual benefits and the year in which they will begin, which is a better tool for planning a retirement in which the retirement date and SS start date are not the same.
Lets leave it where you said what you didn't mean.
Ungoliant » Fri Jan 16, 2015 3:37 pm wrote:....I was just pointing out that assuming a constant rate for 45 years is not an accurate simulation of my planned retirement.
Ungoliant » Fri Jan 16, 2015 5:23 pm wrote:By contrast, what I was referring to is a calculator like Firecalc, which....
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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