Is a Sub-4% SWR a Boglehead Quirk?

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

Post by William Million » Sat Jan 10, 2015 4:00 pm

I've noticed whenever SWRs are discussed, there is a committed group of Bogleheads that urge lower, often much lower, SWRs. I'm confused by that since Vanguard's best research still suggests 4% works for nearly everyone. There might be a few qualifiers, such as whether you retire at 40 or if you insist on an ultra-conservative portfolio (with 20% or less equities). However, 4% strikes an excellent balance for most retirees, especially with social security, pensions and reverse mortgages smoothing out some of the rough edges.

I see a few arguments frequently put forward:

- 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.

- Bad luck in the initial years of retirement. It's true that retiring just before a bear market can mean 4% + inflation will absorb a greater and greater share of the nest egg. However, every recent bear market has been followed by a bull market recovery, usually within 5 years. After 2/3rds of years are up for equities.

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.

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

Post by richard » Sat Jan 10, 2015 4:21 pm

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.

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

Post by timboktoo » Sat Jan 10, 2015 4:25 pm

If you can get it down to 2%, you can just live off of equity dividends :)

Obviously, the lower your withdrawal rate, the higher the chance you won't run out of money. I do think that Bogleheads are conservative with money. They seem to suggest owning more bonds on average than most groups, for example. Run the numbers yourself. If you think you can make it on a 4% withdrawal rate, then you probably can. Consider how much you want to leave to your heirs, too.

- Tim

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The Trinity Study

Post by Taylor Larimore » Sat Jan 10, 2015 4:29 pm

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

Post by 555 » Sat Jan 10, 2015 4:37 pm

SWR is just a calculation, not a strategy. It just gives a ballpark figure of how much to save up.

In the real world you can use annuities to eliminate some longevity risk.

Also look at the gazillion earlier threads on this topic.

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

Post by wjo » Sat Jan 10, 2015 4:39 pm

Not a specific Boglehead quirk - several thoughtful finance people (Wade Pfau comes to mind) have looked at the past work and rethought it running lower bond returns in particular. This tends to reduce the SWR. Most of the research also uses US stock returns, which in the post war era have been atypical of global results.

I think anyone retiring today in good health should plan for a long life as medical science is improving rapidly. The ability for us to reach 30yr+ plus survival rates is increasing. To me, that means conservative assumptions for the portfolio are in line and we should listen carefully to those who question 4%.

Remember, the 4% Bengen study was formulated as a critique of those advocating 7%+ SWRs. It was not meant to be an absolute rule. It is likely that 4% will be ok, but the probability of it being ok is much less when looked at with the lens of current rates. With both bond yields and stock dividends below 3%, it doesn't take much insight to see that you are going to spending principal with withdrawing 4%. Yes, stocks may grow faster, there may be buybacks instead of dividends, but you are clearly going to be putting a lot of emphasis on the stock part of the portfolio to do all the heavy lifting - which at the very least exposes you to sequence of returns risk.

I find the most thoughtful approach to longevity planning is taking a liability matching approach where you fund stable floor with guaranteed/safe assets and let the risky portion of their portfolio provide for aspirational spending. Practically, this means having a true minimum withdrawal rate that is low and you let performance of the risky portfolio fund trips to Europe, etc. Or as Taylor has put is so eloquently - 'in good years we spent a little more and in bad years we tightened our belts' (paraphrasing).

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

Post by VictoriaF » Sat Jan 10, 2015 4:44 pm

The 4% withdrawal rate is recommended for a 30-year portfolio. I am planning to live more than 30 years.

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

Post by richard » Sat Jan 10, 2015 4:44 pm

555 wrote:SWR is just a calculation, not a strategy. It just gives a ballpark figure of how much to save up.

In the real world you can use annuities to eliminate some longevity risk.

Also look at the gazillion earlier threads on this topic.
Yep. A strategy would be: if you seem to be spending too much, cut back, if you seem to have more than you could need, feel free to spend more, as Taylor has repeatedly and convincingly written.

This is a topic that has been covered in great and frequent depth.

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

Post by nisiprius » Sat Jan 10, 2015 4:58 pm

For any set of assumptions, it always seems to be true that the curve of failure rate versus withdrawal rate is very steep. You are strolling along the edge of a cliff. 0.25% lower rate and you are much safer, 0.25% higher rate and you are in much more danger. Unfortunately, different studies, different strategy choices, and different sets of data endpoints result in big changes in the location of that cliff. If someone says "the" rate is 4% and someone else says "the" rate is 3.7% there's no way to be sure who's right. The best reason for using 4% that you acknowledge that it's just a rough rule of thumb.

I don't think a sub-4% SWR is "a Boglehead quirk:"

Image

But, if it is, it might be because there are more disinterested parties in the Bogleheads forum than in the financial world. An awful lot of places giving out retirement advice make money by doing it. I think there are obvious reasons for them to want to lean in the optimistic direction. They want to present themselves as being able to help you succeed. And they are competing with other people: why would you take advice from someone who says they can only 3.7% safely when someone else insists that with their portfolio you can withdraw 4.2%? And they are competing with insurance companies, whose annuity products have an unfair advantage from mortality credits. And with Dave Ramsey, who says he can get you 8%.

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?

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

Post by TravelerMSY » Sat Jan 10, 2015 5:01 pm

It's a risk of ruin problem. You can retire with any withdrawal rate you want, but the odds of depleting your portfolio increase as you raise the withdrawal rate. No one can predict the future. The SWRs are calculated using Monte Carlo simulations based on historical returns/drawdowns.

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

Post by J295 » Sat Jan 10, 2015 5:13 pm

Who knows what will unfold for each of us in the next 30 -40 days, let alone the world and our finances in the next 30-40 years? Certainly I advocate for prudence and proper planning; however, to some extent the finer points of the SWR dialogue tends to be fencing with windmills.

Flexibility and creativity (including, if possible, an ability to generate additional income and/or reduce expenses if necessary) are helpful ingredients going forward.

From our IPS: To retain awareness that there are two risks impacting our financial choices. One, the risk that we could someday run out of money. The other, more subtle, that we die without living fully because we are unduly inhibited by the first risk. We shall strike a balance and retain flexibility. Phil. 4:12

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

Post by Johno » Sat Jan 10, 2015 5:21 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.
The first one doesn't fly IMO. Low bond rates mean low returns for said bonds if held to maturity and no default (give or take only a marginal effect of reinvesting coupons at unknown future rates, it's a purely true statement only for zero coupon bonds). Low rates don't cause bonds to appreciate, *lower* rates cause them to, but again that washes out if you hold the bond to maturity. Low rates mean low expected returns for the term of such rates, pretty much. And there's little reason at this point to suppose that the effect of today's low rates isn't fully reflected in stocks prices. Again past rate declines have helped stocks rally to where they are now, but that's different than saying past rate declines will somehow make stocks continue to rally for years to come. And rates have only so much further they can fall, with clear tendency to negative implications for stocks in a significant drop from as low as they already are. OTOH one's investment horizon might be several decades and bond investments 5 or 10 yrs term, so sure, bond returns could be higher in the long term future. But as of now they strongly indicate low expected returns on the bond side in the medium term.

On second, you don't have to be in 'the PE10 crowd' to accept some concept that expected returns on stocks are likely to be in some way related to expected returns on bonds, particularly risky bonds. If junk bonds yield ~5.8% in ~5yrs (the HYG ETF now, approx) and the expected return on stocks is really the 10% long term average, stocks are a fantastic deal and/or junk a really crappy one. Some people really seem to believe one or both (even though that junk yield is notably higher now than fairly recently), but more likely stock expected returns are now also relatively low (the S&P beat junk by order of only ~1% in the modern junk era), and PE10 just tends to corroborate that.

As for the rest, the 'SWR' question is full of uncertainties of very long terms returns, sequence of returns, personal longevity, subjective tolerance for only somewhat high (say 85%) assurance of success, and personal adaptability. IOW how really psychologically painful is it for somebody to throttle back their retired lifestyle if things go especially poorly investment-wise? It depends on the person. It's fairly unlikely to become a question of physical want, for most.

But IMO, brushing off analysis which indicates lower than historical expected medium term investment returns from here is not wise.

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

Post by am » Sat Jan 10, 2015 5:35 pm

Most of us who frequent this site will likely have a retirement with some luxuries which can be cut back if need be. In the worst case, social security in the last years would not be the end of the world.

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

Post by Kenkat » Sat Jan 10, 2015 5:42 pm

I think most people - aka the average Joe or Josey - probably ends up taking even more than 4%. Most of the time it still probably works out and when it doesn't, people cut back or the safety net / public assistance kicks in. Not that that is where anyone wants to end up, but most don't end up there and for those that do, things still tend to work out somehow. The average poster on this board, on the other hand, is much more interested in this stuff and analyzes whether 93% success is good enough or whether 85% is not. For most people, 85% means that out of 20 people, only 3 of them don't have enough money, and of those three, no one really starves or goes homeless. So I don't see it as walking on the edge of a cliff so much as the difference between walking on a paved path and walking on a muddy and rocky path. Sure, one is preferable to the other, but you do make it either way.

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

Post by WolfpackFan » Sat Jan 10, 2015 5:55 pm

If you can get it down to 2%, you can just live off of equity dividends
in other words, to get there you'll need TWICE as much to retire as the 4% SAFE withdrawal rate. IMO that's extreme overkill.

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

Post by am » Sat Jan 10, 2015 6:12 pm

They say that death and taxes are the only guarantees. Life is risky. No amount of money or swr will guarantee the retirement you want.

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

Post by vitaflo » Sat Jan 10, 2015 6:17 pm

kenschmidt wrote:For most people, 85% means that out of 20 people, only 3 of them don't have enough money, and of those three, no one really starves or goes homeless.
Also, keep in mind there's also a good chance all 3 of those people who would run out of money, die well before they do. Most people calculate success chance based on living to 90 or beyond. Most people do not live this long.

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

Post by richard » Sat Jan 10, 2015 6:36 pm

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.

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

Post by FreeAtLast » Sat Jan 10, 2015 6:39 pm

1) Four percent has always been just a planning guide....I will withdraw the least that I can out of my retirement savings every year, as long as I am living comfortably....this procedure is just prudent, considering that no mathematical model is clairvoyant about our economy or our society.
2) On a personal note, three out of my four grandparents and one parent lived to be over ninety. The other parent is heading that way. For me, 30 years may be an insufficient value to plug into the Monte Carlo or FireCalc algorithms. Yet another reason to be conservative about distribution percentages.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by john94549 » Sat Jan 10, 2015 7:15 pm

I don't think it a "quirk" so much as a conservative view of withdrawing from one's portfolio. In addition, I've noticed that Bogleheads in general hate "rules", especially "rules of thumb", which might not be accurate. Doesn't help a retiree ten years into a thirty year (plus) retirement to have that "oops" moment. I'd rather err on the conservative side, and leave a little on the table for the kids and grand-kids, than the alternative. If that's a "quirk", I'm quirky.

My Mom lived to 98 1/2. Should either my wife or I be so fortunate, we want to "pay our way".

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

Post by EnjoyIt » Sat Jan 10, 2015 7:24 pm

4% for people who will need all 4% for the bare minimum of their existence risk running out of money. Anyone who appropriately saved for a comfortable retirement will take less vacations per year to Europe for a few years when the markets don't behave like they want. It is human nature even even if the downturn will have no consequence on their retirement in the long run.

it is Okay to be conservative, it is not okay to not enjoy your life because you are too conservative. Life is already too short.

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

Post by BahamaMan » Sat Jan 10, 2015 7:44 pm

4% is a planning number. I don't know anyone that retired ever took a Fixed inflation Adjusted withdrawal and stuck with it. With that said, why not actually employ a WR that can be followed and is much safer than a 2,3 or 4% WR?

See VPW for something that you can follow. A plan that will probably let you withdraw more money and will only have you cut back IF and when you need to.
Last edited by BahamaMan on Sat Jan 10, 2015 8:38 pm, edited 1 time in total.

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

Post by Paul78 » Sat Jan 10, 2015 8:33 pm

am wrote:Most of us who frequent this site will likely have a retirement with some luxuries which can be cut back if need be. In the worst case, social security in the last years would not be the end of the world.
Yes

It is not like you are going to withdraw 4% a year and go from having many years and a decent nest egg to nothing overnight. You can always adjust if needed and there are safety nets (ie SS, pension for some, children, ect) where you can at least have some quality of life. To me it makes more sense to enjoy you 50s-60s-70s by spending more than to spend less and be guaranteed you will plenty left in you 90s-100s (if you even make it there). I seen plenty of 90 and 100 year olds and most of them are not living large. They either have lost their mental capacity or physical capacity by that point. Yes health care would be a huge cost but again some basic level of care will be provided. A luxury nursing home in you 90s (if you make it that far) would be nice but I don't think it trumps having more fun in your 50s-60s-70s (still no guarantee you will live that long but it is far more likely than 90).

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

Post by whomever » Sat Jan 10, 2015 9:00 pm

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 :-)).

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

Post by bhsince87 » Sat Jan 10, 2015 9:12 pm

One more thing to keep in mind.

Say a 60 year old has a life expectancy of 90. And a 4% withdrawal rate gives them a 95% "success rate" to age 90.

The life expectancy only gives them a 50% "life success" rate to age 90.....
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by 555 » Sat Jan 10, 2015 9:25 pm

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

inflation-indexed $40k/yr for a 60 year old individual for life

Payouts would be higher in times of higher interest rates. Since that option is there, it's ridiculous to talk about withdrawal rates much lower than that for those kinds of ages. (Obviously if someone is retiring at age 30, they need to spread their assets over more years.)

When people start talking about 2% withdrawal rates they've just lost contact. (Cue Twilight Zone music.)
Last edited by 555 on Sat Jan 10, 2015 9:27 pm, edited 1 time in total.

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

Post by john94549 » Sat Jan 10, 2015 9:26 pm

bhsince87 wrote:One more thing to keep in mind.

Say a 60 year old has a life expectancy of 90. And a 4% withdrawal rate gives them a 95% "success rate" to age 90.

The life expectancy only gives them a 50% "life success" rate to age 90.....
I doubt most folks would be willing to pull the plug, even if it were legal. The point of a conservative withdrawal is not only to plan for "black swans", but also for "silver swans". We care not just for ourselves, but our spouses, and our children (and others who feel obligated to care for us). Might be a tad old-fashioned, maybe it was something I learned from my Mom, but one should always have enough to never need. If you get the drift.

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

Post by IlliniDave » Sat Jan 10, 2015 9:27 pm

In my planning I'm a sub-4%-er because I'm planning to retire early and may need my assets to last more than 30 years. I also have an interest in leaving something behind for my family. Lastly, we are not assured history will repeat itself when it comes to market returns, so I want to be somewhat prepared should we ever hit extended doldrums. For whatever it's worth, I'm intending to cap withdrawals at 2% from age 55-70, then allow spending to go up to 3%. My planning assumption is a 3.5% real return on investments for an 80/20 portfolio. There's no guarantee I'll achieve all my planning goals, nor do I propose my way of doing things is suitable for anyone but myself. I'm not planning an extravagant retirement. Between some fixed income sources I have and the withdrawals/constraints, I expect to be able to generate a fairly level $50K (adjusted for inflation) pre-tax annual income which, if necessary, could increase after 70 due to SS. But even the $50K is quite a bit higher than my present lifestyle expenses, which I largely intend to maintain.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by MathWizard » Sat Jan 10, 2015 10:24 pm

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

inflation-indexed $40k/yr for a 60 year old individual for life

Payouts would be higher in times of higher interest rates. Since that option is there, it's ridiculous to talk about withdrawal rates much lower than that for those kinds of ages. (Obviously if someone is retiring at age 30, they need to spread their assets over more years.)

When people start talking about 2% withdrawal rates they've just lost contact. (Cue Twilight Zone music.)
If the goal is only portfolio survival, it clearly makes
no sense to have a WR that is lower than available inflation
adjusted joint annuities.
The link to the updated Trinity study that Taylor posted shows in Table 2
a 75/25 AA as having a 100 success rate for 4% WR over 30 yrs.
Table 4 shows a median terminal value after 30 yrs. was 6 times the initial
value. Clearly an annuity company can average the risk to provide a much
The inflation adjusted annuity approach makes a lot of sense for a retirement
floor , which could be coupled with a higher WR for discretionary spending that could
be decreased during market downturns.

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

Post by Watty » Sat Jan 10, 2015 10:42 pm

EnjoyIt wrote:4% for people who will need all 4% for the bare minimum of their existence risk running out of money. Anyone who appropriately saved for a comfortable retirement will take less vacations per year to Europe for a few years when the markets don't behave like they want. It is human nature even even if the downturn will have no consequence on their retirement in the long run.

it is Okay to be conservative, it is not okay to not enjoy your life because you are too conservative. Life is already too short.
+1

In addition to cutting back you could also buy a single premium immediate annuity midway through retirement to keep your income levels up if your investments are falling short.

For a 30 year retirement you could put your money under your mattress and just spend 1/30th (3.33% ) each year and have a 0% failure risk, except for inflation. For money in a retirement account where taxes are not a problem you could just put the money into a ladder of individual TIPS and have the 3.33% withdraw plus whatever the interest the TIPS earn.

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

Post by bhsince87 » Sat Jan 10, 2015 10:51 pm

john94549 wrote:
bhsince87 wrote:One more thing to keep in mind.

Say a 60 year old has a life expectancy of 90. And a 4% withdrawal rate gives them a 95% "success rate" to age 90.

The life expectancy only gives them a 50% "life success" rate to age 90.....
I doubt most folks would be willing to pull the plug, even if it were legal. The point of a conservative withdrawal is not only to plan for "black swans", but also for "silver swans". We care not just for ourselves, but our spouses, and our children (and others who feel obligated to care for us). Might be a tad old-fashioned, maybe it was something I learned from my Mom, but one should always have enough to never need. If you get the drift.
Wow, I'm having trouble communicating effectively today. I didn't mean to imply that suicide was a potential solution.

I'm just trying to point out that, if you believe the statistics, such a person might have a 15% chance of running out of money at age 90, but they would also have a 50% chance of being dead before that ever happened.

It just seems to me that while we're discussing the potential effects of a half a percentage point in withdrawal rate, we shouldn't lose sight of the other more dominant number.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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

Post by Paul78 » Sat Jan 10, 2015 11:15 pm

bhsince87 wrote:
john94549 wrote:
bhsince87 wrote:
Wow, I'm having trouble communicating effectively today. I didn't mean to imply that suicide was a potential solution.

I'm just trying to point out that, if you believe the statistics, such a person might have a 15% chance of running out of money at age 90, but they would also have a 50% chance of being dead before that ever happened.

It just seems to me that while we're discussing the potential effects of a half a percentage point in withdrawal rate, we shouldn't lose sight of the other more dominant number.
It seemed pretty clear to me in your original post.

Way more bogleheads will die before running out of money compared to running out of money before dying. It hardly seems efficient to aim for a 100% success rate with you withdrawal amount UNLESS you goal is to leave an inheritance behind. In most cases if you are that conservative you will die with money left over. It makes more sense to either spend more in retirement or retire earlier.

Why not just aim for a 80% success rate and then modify your lifestyle if necessary (ie if you are the 1 out of 5 people that is unlucky). As others have said most bogleheads with have a retirement with some luxury in it (ie room to cut money if it becomes necessary later in retirement). Thus it is not as though you will be homeless if you have to reduce your withdrawal amount.

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

Post by bhsince87 » Sat Jan 10, 2015 11:22 pm

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

Post by am » Sun Jan 11, 2015 12:41 am

Wish I knew my life expectancy and quality of life throughout retirement. Than I could come much closer than knowing the precise SWR. Too bad firecalc does not do this :)

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

Post by freebeer » Sun Jan 11, 2015 1:47 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.
I agree with and applaud your point about the vagueness of "need" and its impact on the meaning of success rate. Although considering that $39k/year instead of $40k/year for retiree Angie could mean being worried about the power being shut off and not being able to afford to drive seems pretty contrived. The poverty rate for a single person in the U.S. is $12k/year, and $40k is the median individual income (which includes workers still saving for retirement and incurring payroll taxes and other expenses that retirees don't have). OK maybe someone lives in a high-cost area in a relatively expensive home so they "need" the full $40k to stay where they want to be, but to me that still isn't a true "need", you can always move into a smaller place and if need be to a less expensive area. Maybe another way to characterize would be that the intensity of "want" varies.

Anyway of course 80% success rate in these examples really means much lower actual risk of going broke because the probability of a 65-year-old still being alive 30 years down the road is low.

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

Post by lack_ey » Sun Jan 11, 2015 2:06 am

Yup, and spending rate is in practice rarely not adaptive, unless my read on people is way off. Who actually goes in guns blazing at 4%, sees a 50% market drop early on, and proceeds to cash out 4% adjusted for inflation that whole time while religiously rebalancing once a year?

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

Post by obgyn65 » Sun Jan 11, 2015 5:17 am

I am using a lower than 4% SWR because I am only 50, and hold a very conservative portfolio. I guess my SWR will be higher when I reach 60 or 70.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by BahamaMan » Sun Jan 11, 2015 5:44 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.
Angie needs to look for a job.... The cushion is not overlooked at all and has been discussed here many times. I think Angie would need $2 Million if she has to have to a $40k per year to live. Lets face it, If someone can't pay the electric bill with the difference between $39K and $40K, it's not going to much of enjoyable retirement.

Also, your example is not reality. More than likely, Angie would get $15K in Social Security, making her 'need' only $25K from her portfolio.
Last edited by BahamaMan on Sun Jan 11, 2015 5:58 am, edited 2 times in total.

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

Post by mac808 » Sun Jan 11, 2015 5:53 am

Planning to retire at 45 and use a 3% SWR in my calculations, but sometimes I wonder if I should reduce it down to 2.5% given that my grandfather just hit 100.

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

Post by BahamaMan » Sun Jan 11, 2015 6:00 am

mac808 wrote:Planning to retire at 45 and use a 3% SWR in my calculations, but sometimes I wonder if I should reduce it down to 2.5% given that my grandfather just hit 100.
Why don't you run VPW out to 100, and see what it says. It will be safer than a 2.5% or 3% and it will probably allow you to take more in your early years.

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

Post by rustymutt » Sun Jan 11, 2015 6:06 am

Rather than just sticking with 4%, I plan to use a flexible spending plan depending on economic conditions, and other conditions each year. Some years may be 5%, others 2%.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Frugal Al » Sun Jan 11, 2015 6:36 am

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?

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

Post by White Coat Investor » Sun Jan 11, 2015 6:56 am

I'm with the OP. People get insane about SWRs around here sometimes.

Sometimes people forget it is a combination of the risk of running out of money and your risk of living a long time. If your risk of running out of money after 30 years is 10% and your risk of actually living 30 years is 10%, then your real risk is 1%. I'm willing to run that, especially since I have the option to cut back if its not going well.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by YDNAL » Sun Jan 11, 2015 7:06 am

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

Post by longinvest » Sun Jan 11, 2015 8:48 am

BahamaMan wrote:4% is a planning number. I don't know anyone that retired ever took a Fixed inflation Adjusted withdrawal and stuck with it. With that said, why not actually employ a WR that can be followed and is much safer than a 2,3 or 4% WR?

See VPW for something that you can follow. A plan that will probably let you withdraw more money and will only have you cut back IF and when you need to.
BahamaMan is referring to the wiki:Variable percentage withdrawal (VPW) method.
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Re: Is a Sub-4% SWR a Boglehead Quirk?

Post by Dandy » Sun Jan 11, 2015 9:39 am

the 4% "rule" is not a bad starting point for someone in their 60's. It assumes a certain equity allocation and that withdrawals will be adjusted for inflation each year after the first year. You make those inflation adjusted withdrawals - no more - no less each year no matter what the market does. That approach and assumptions should have your portfolio last for 30 years.

There seems to be an assumption that your personal expenses will be growing at the same rate as inflation and there will be no unexpected spikes in your personal expenses.

So, you follow the 4% plan until say 85 and are in great health and notice that you have about 4 years of withdrawals left. Still going to take last year's amount bumped up by inflation? Suppose you are 80 and things are going well and the market drops 30% and you need a new roof and extensive dental work? Going to take last year's amount bumped up by inflation?

I guess what I am saying is it seems pretty naïve to think you are going to set a withdrawal strategy that will not need review and adjustment over say a 30 year period. Making very minor adjustments early can make a big difference in your retirement funding. Most people, especially Bogleheads, will not fall into that set it and forget it trap. They are used to making reasonable adjustments to their expenditures in response to asset/income challenges.

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

Post by texasdiver » Sun Jan 11, 2015 10:00 am

Just curious if you folks perceive a difference between your withdrawal rate and your spend rate.

For example, my parents have their accounts managed by an advisor. He currently withdrawals about 3-4% a year which is then transferred to their interest-earning checking account that they they live off of in addition to their SS and pensions. However I suspect they are coming nowhere near using it up and they have what is in effect a large and growing cash emergency fund. Probably not the most efficient way to go about things from a tax perspective but there are worse problems to have and they like having a large savings cushion that is not part of their managed portfolio. My Dad would probably see it as shameful if he had to go to his advisor and ask for more money in a given year.

The advantage to this approach for them is that they now have money that is begging to be spent on things they enjoy before they get too old. They are so frugal they might not ever touch any of their portfolio if it wasn't withdrawn and put into their spending account and they would frankly probably adjust just fine under a 0% withdrawal rate given their other sources of income.

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

Post by William Million » Sun Jan 11, 2015 10:22 am

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.

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.

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

Post by nisiprius » Sun Jan 11, 2015 11:07 am

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.

I first noticed it myself when I was personally trying to use the Fidelity Retirement Income Planner circa 2007 to... plan my retirement. All the direction encouraged you to explore changes in asset allocation, but I discovered that withdrawal rate had a far, far, far bigger effect. The funniest thing was that at one point the tool itself made a very specific recommendation that I increase my stock allocation by a specific amount. When I made the suggested change and reran the tool, there was virtually no difference in portfolio survival time!

What happens is that the curve of failure rate versus withdrawal rate is very steep. For any fixed set of assumptions, a small change in withdrawal rate makes a big change in failure rate. Even if a small change in assumptions makes only a small change in "withdrawal rate for a fixed failure rate," that means it makes a large change in "failure rate for a fixed withdrawal rate."

I feel that you can say "4% is a decent rule of thumb, 3-3.5% is probably more appropriate if you're conservative, Peter Lynch's 7% is too high, Dave Ramsey's 8% is too high." Anything more precise than that is an exercise in futility. The reason is that financial data are just so darned variable that measures of past history just do not settle down, even over periods of 80 and 90 years. For example, the "historic return of the stock market over a period of more than 80 years" comes out anywhere from 9% to 11% if you just move the endpoints back and forth a few years.

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

Post by nisiprius » Sun Jan 11, 2015 11:15 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...
Well, there are two ways to address that issue.

One is to increase your risk. And the big question is whether you've made a good appraisal of what the risk really is and what your risk tolerance really is. But be careful, I think there is a real danger of overconfidence and wishful thinking, both in regard to what the risks are, and what your risk is.

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.

You prefer to use the first method. A sane person could do that. Just make sure you choose your desired risk and longevity targets thoughtfully, starting from zero, and sticking to them. It doesn't do to start by saying "I want to assume a 30-year retirement and I want less than a 5% chance of portfolio failure," then when you don't like the numbers, say "Oh well, a 15% chance of failure is OK and now that I think about it I probably won't live 30 years anyway, so I am going to rejigger my assumptions to get the withdrawal rate I want."

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."
Last edited by nisiprius on Sun Jan 11, 2015 11:22 am, edited 1 time in total.
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