Trinity Study updated to 2018

[tadamsmar]

This is from January, but I searched and did not find a post on it:

https://www.forbes.com/sites/wadepfau/2 ... 65ac7e6860

Wade Pfau updated the Trinity Study to include data thru 2017. He also includes failure rates up to 40 years. He changed the analysis a bit to use treasury bond rather than corporate bonds.

[Tycoon]

Good stuff. Thanks for posting.

[longinvest]

SWR* again?!


* Safe Withdrawal Rate method, also called Constant-Dollar Withdrawal method. It consists of choosing a withdrawal amount at retirement, then increasing this withdrawal amount with inflation every year, regardless of market returns, when using a portfolio of fluctuating assets (stocks and bonds). It's one of the worst possible portfolio withdrawal methods.

Why would I select a withdrawal model that had a 5% chance of prematurely depleting my portfolio, leaving me penniless eating cat food under a bridge, and an 85% chance of significant underspending leading me to die as the richest person in the graveyard?

I would suggest learning about the simple withdrawal method (Safe Withdrawal Rates ? Complexity vs. Simplicity) of author and Bogleheads forum co-founder Taylor Larimore, and about our wiki's Variable percentage withdrawal (VPW) method.

[azanon]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

[tadamsmar]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

True, it's just a planning tool for estimating a "safe" portfolio balance at retirement. Maybe it should be called "Safe Portfolio Size" or something

[tadamsmar]

This study extended out to 40 years seems to indicate that Age in Bonds might be too conservative.

AA with more than 25% stock do better at the 3% withdrawal rate.

But perhaps Age in Bonds would still be 100% safe at 40 years, not sure.

[longinvest]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

True, it's just a planning tool for estimating a "safe" portfolio balance at inflation. Maybe it should be called "Safe Portfolio Size" or something.

Let me add to this.

As a planning tool, it's important to use it correctly. The well-known 4% SWR rule of thumb tells me that it's reasonable to retire with a portfolio representing 25 times my desired pre-tax annual portfolio withdrawals when retiring at age 65.

The 25 factor (which is equal to 1 divided by 4%) is applied to the pre-tax amount I need in addition to non-portfolio retirement income, like Social Security, pension (if any), and inflation-indexed SPIA (if necessary). Taxes will have to be paid reducing the amount of money available for spending.

The 4% SWR was calculated for a 30-year retirement (that means that the retiree dies at age 95 in the model). If I was to retire at age 55, I would need to plan for 10 additional years in retirement; I would use the SWR for a 40-year retirement, which can be rounded to 3.1%. That would be a factor of 32 at age 55.

[retiredjg]

I'd love to read it, but can't open anything at Forbes. This has happened before. Anyone else having this problem? I'm using Safari 11.0.3

[longinvest]

This study extended out to 40 years seems to indicate that Age in Bonds might be too conservative.

AA with more than 25% stock do better at the 3% withdrawal rate.

But perhaps Age in Bonds would still be 100% safe at 40 years, not sure.

It's important not forget that while stocks have returned, on average, more than bonds, they were significantly more volatile. So, yes, the success rate at a high withdrawal rate (beyond what the return on bonds would have been able to support) was superior, but this hides the fact that stocks are much riskier, especially in face of the sequence of return risk of a constant-dollar withdrawal.

The consequence is that a retiree using a variable withdrawal approach will be able to extract more money from his portfolio, on average, using a stock-heavy portfolio than using a bond-heavy portfolio. But, his withdrawals will be significantly more volatile!

[Kenkat]

It’s a great planning tool but a relatively poor execution strategy. I think it gives you a good idea of roughly how much you need to plan on saving to fund retirement income. When the time comes to actually fund that retirement? That’s a different animal.

[dbr]

I would think to start with that retirement execution begins with figuring out how to manage what you are going to spend before you worry about managing how you are going to invest. I have found that spending is more variable and harder to understand than investing.

If people want testimony to that, one an find the threads on health insurance/health care, taking care of indigent/disabled friends and relatives, and all the family disputes from divorce to how to divide up the farm.

The one truism that applies is that the only sure solution to all of those is to have a lot of money, really a lot, and that is not the situation most people are in.

[Whakamole]

This study extended out to 40 years seems to indicate that Age in Bonds might be too conservative.

AA with more than 25% stock do better at the 3% withdrawal rate.

But perhaps Age in Bonds would still be 100% safe at 40 years, not sure.

It's important not forget that while stocks have returned, on average, more than bonds, they were significantly more volatile. So, yes, the success rate at a high withdrawal rate (beyond what the return on bonds would have been able to support) was superior, but this hides the fact that stocks are much riskier, especially in face of the sequence of return risk of a constant-dollar withdrawal.

The consequence is that a retiree using a variable withdrawal approach will be able to extract more money from his portfolio, on average, using a stock-heavy portfolio than using a bond-heavy portfolio. But, his withdrawals will be significantly more volatile!

CFiresim supports VWR, and I've used it to see how low those yearly drawdowns can go. I tried putting in $1M/4% (aka $40K) just to get an idea; for the 1966 cohort, withdrawals drop below $30K inflation adjusted for about 20 years, even dropping near or under $27K at points - which is a 33% reduction in planned spending! That would seem to indicate you'd be cutting more than just vacations overseas. Even if you have several million, a 33% cut in spending is going to hurt and may make you question whether you want to keep doing VWR or switch to another method.

Granted the 1966 cohort is also when SWR has failed, but it is still useful to look at the models and see if you can stomach that kind of variability.

[longinvest]

This study extended out to 40 years seems to indicate that Age in Bonds might be too conservative.

AA with more than 25% stock do better at the 3% withdrawal rate.

But perhaps Age in Bonds would still be 100% safe at 40 years, not sure.

It's important not forget that while stocks have returned, on average, more than bonds, they were significantly more volatile. So, yes, the success rate at a high withdrawal rate (beyond what the return on bonds would have been able to support) was superior, but this hides the fact that stocks are much riskier, especially in face of the sequence of return risk of a constant-dollar withdrawal.

The consequence is that a retiree using a variable withdrawal approach will be able to extract more money from his portfolio, on average, using a stock-heavy portfolio than using a bond-heavy portfolio. But, his withdrawals will be significantly more volatile!

CFiresim supports VWR, and I've used it to see how low those yearly drawdowns can go. I tried putting in $1M/4% (aka $40K) just to get an idea; for the 1966 cohort, withdrawals drop below $30K inflation adjusted for about 20 years, even dropping near or under $27K at points - which is a 33% reduction in planned spending! That would seem to indicate you'd be cutting more than just vacations overseas. Even if you have several million, a 33% cut in spending is going to hurt and may make you question whether you want to keep doing VWR or switch to another method.

Granted the 1966 cohort is also when SWR has failed, but it is still useful to look at the models and see if you can stomach that kind of variability.

It would have been significantly better for a 1966 retiree to cut withdrawals by 33% for a few years using a variable withdrawal method, than to cut them by 100% in old age for the rest of his life using SWR.

Here's what the Bogleheads wiki variable percentage withdrawal (VPW) page says:

VPW is best used in conjunction with guaranteed base income from Social Security, pensions, and, if necessary, inflation-indexed Single Premium Immediate Annuity (SPIA).

Missing payments, between retirement and the start of Social Security pension, can be provided by using a simple CD ladder. For the purposes of VPW calculations, the money set aside in this CD ladder should not be considered as part of the portfolio.

It has been suggested to delay the Social Security pension to age 70 to increase base income in Bogleheads forum topic: Delay Social Security to age 70 and Spend more money at 62.

[dbr]

CFiresim supports VWR, and I've used it to see how low those yearly drawdowns can go. I tried putting in $1M/4% (aka $40K) just to get an idea; for the 1966 cohort, withdrawals drop below $30K inflation adjusted for about 20 years, even dropping near or under $27K at points - which is a 33% reduction in planned spending! That would seem to indicate you'd be cutting more than just vacations overseas. Even if you have several million, a 33% cut in spending is going to hurt and may make you question whether you want to keep doing VWR or switch to another method.

Granted the 1966 cohort is also when SWR has failed, but it is still useful to look at the models and see if you can stomach that kind of variability.

No withdrawal method grants immunity against the luck of history. One might be able to limit the damage by a more alert form of management, but everyone has been saying that all along.

[Bob]

This is from January, but I searched and did not find a post on it:

https://www.forbes.com/sites/wadepfau/2 ... 65ac7e6860

Wade Pfau updated the Trinity Study to include data thru 2017. He also includes failure rates up to 40 years. He changed the analysis a bit to use treasury bond rather than corporate bonds.

Thank you for posting the link.

[Top99%]

This is interesting especially given The Retire Early Home Page just updated their "real life retiree returns" http://www.retireearlyhomepage.com/reallife18.html table. It looks to me whether 4% "works" depends on both the portfolio and the starting conditions. Comparing the tables for 1994 Vs 2000 start dates is enlightening because to me it doesn't look like 4% will work for 75/25 S&P500/FI portfolio if one starts in 2000 but 60/40, MPT and Larry Portfolio are looking OK. Of course this assumes one was blindly pulling out 4% + inflation in 2009 after the portfolio value had declined nearly 50% which I doubt many people would do. The question is does today look more like 1994 or 2000? Or look entirely different.

[grok87]

thanks.
i'm partial to the 3.5% safe withdrawal rate which some other study suggested is what would have worked historically over the last century or so for a 30 year horizon for a GLOBAL portfolio (i.e. not just US).

if i find it i'll post the link...

cheers,
grok

[longinvest]

If I was to retire at age 55, I would need to plan for 10 additional years in retirement; I would use the SWR for a 40-year retirement, which can be rounded to 3.1%. That would be a factor of 32 at age 55.

As nobody asked, here's how I got the rounded 3.1% planning SWR for a retirement at age 55.

Using a financial calculator, I calculated the implied growth rate* of a 4% planning SWR for a retirement at age 65:

* This growth rate is lower than the portfolio's actual growth rate over historical periods, because of sequence of return risk.

• Length of retirement for SWR calculation purpose: 95 - 65 = 30 years
• n = 30, PV = -100, FV = 0, PMT = 4, BGN = true
• => i = 1.309565126

Then, I calculated the planning SWR of a retirement at age 55 using the same implied growth rate:

• Length of retirement for SWR calculation purpose: 95 - 55 = 40 years
• n = 40, i = 1.309565126, PV = -100, FV = 0, BGN = true
• => PMT = 3.185934304

This was a (rounded down) 3.1% planning SWR, or a (rounded up) factor of 32 at age 55.

Doing the same thing for a retirement at age 60 gives a (rounded down) 3.5% planning SWR, or a (rounded up) factor of 29 at age 60.

I insist: these are planning numbers to use as a rule of thumb to answer the question "How much do I need to retire?". For actual portfolio withdrawals, during retirement, I would use the percentages of the VPW Table based on my age and asset allocation for the upcoming year at the time of each withdrawal. I would never use portfolio withdrawals alone; I would always combine them with non-portfolio income (such as Social Security, a pension, or an inflation-indexed SPIA*).

* Inflation-indexed Single Premium Immediate Annuity.

[Cousin Eddie]

This is interesting especially given The Retire Early Home Page just updated their "real life retiree returns" http://www.retireearlyhomepage.com/reallife18.html table. It looks to me whether 4% "works" depends on both the portfolio and the starting conditions. Comparing the tables for 1994 Vs 2000 start dates is enlightening because to me it doesn't look like 4% will work for 75/25 S&P500/FI portfolio if one starts in 2000 but 60/40, MPT and Larry Portfolio are looking OK. Of course this assumes one was blindly pulling out 4% + inflation in 2009 after the portfolio value had declined nearly 50% which I doubt many people would do. The question is does today look more like 1994 or 2000? Or look entirely different.

I don't understand. In 1999, the S&P500/FI portfolio had $216k and it then grew to $236k by 2017. All of this is in constant dollars after pulling 4% out per year. How does that not work?

[Taylor Larimore]

Bogleheads:

This post is about my own retirement 37 years ago. I hope you find it helpful:

Hi Bogleheads:

One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 16,000 hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately for us, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.

"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet

Best wishes.
Taylor

[aristotelian]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

Statistically speaking, it is not reckless. The whole idea is to find the maximum number that is not reckless based on historical data. Most times it would have resulted in leaving money on the table. If anything, it is overly conservative.

That said, I think most people use it more as a guideline for determining financial independence rather than a strict withdrawal system. If the market crashed the day after you retire, common sense would tell you to tighten your spending even if historically you would be on perfectly solid ground.

[stlutz]

it doesn't look like 4% will work for 75/25 S&P500/FI portfolio if one starts in 2000

Playing around with data from the Simba/siamond spreadsheet--the use of corporate bonds for fixed income as opposed to total bond or treasuries does hurt this portfolio more than I would have expected. Of course, what would work best given a different set of economic conditions would be different. However, assuming this is a couple who are now age 84, they would be able to annuitize and be okay.

[Bluwtrguy]

How do I handle a non-cola adjusted pension in the VPW worksheet? Is it automatically reduced each year for inflation or do I attempt to discount the entry?

[Top99%]

This is interesting especially given The Retire Early Home Page just updated their "real life retiree returns" http://www.retireearlyhomepage.com/reallife18.html table. It looks to me whether 4% "works" depends on both the portfolio and the starting conditions. Comparing the tables for 1994 Vs 2000 start dates is enlightening because to me it doesn't look like 4% will work for 75/25 S&P500/FI portfolio if one starts in 2000 but 60/40, MPT and Larry Portfolio are looking OK. Of course this assumes one was blindly pulling out 4% + inflation in 2009 after the portfolio value had declined nearly 50% which I doubt many people would do. The question is does today look more like 1994 or 2000? Or look entirely different.

I don't understand. In 1999, the S&P500/FI portfolio had $216k and it then grew to $236k by 2017. All of this is in constant dollars after pulling 4% out per year. How does that not work?

Scroll all the way down to the bottom to the last table. For 75/25, starting value in 1999 was $100K and in 2017 it was worth $60K... It might make it another 13 years but it will be close. If I were a 1999 retiree with that portfolio balance I would be puckering a bit given today's valuations, real interest rates and the length of the current bull market. Granted when the portfolio reached about $52K in 2008 most people would cut back so in the real world with somewhat adaptable withdrawal rates it might well work. My main point is starting conditions (valuations, real interest rates) and the portfolio seem to matter a lot.

[Cousin Eddie]

This is interesting especially given The Retire Early Home Page just updated their "real life retiree returns" http://www.retireearlyhomepage.com/reallife18.html table. It looks to me whether 4% "works" depends on both the portfolio and the starting conditions. Comparing the tables for 1994 Vs 2000 start dates is enlightening because to me it doesn't look like 4% will work for 75/25 S&P500/FI portfolio if one starts in 2000 but 60/40, MPT and Larry Portfolio are looking OK. Of course this assumes one was blindly pulling out 4% + inflation in 2009 after the portfolio value had declined nearly 50% which I doubt many people would do. The question is does today look more like 1994 or 2000? Or look entirely different.

I don't understand. In 1999, the S&P500/FI portfolio had $216k and it then grew to $236k by 2017. All of this is in constant dollars after pulling 4% out per year. How does that not work?

Scroll all the way down to the bottom to the last table. For 75/25, starting value in 1999 was $100K and in 2017 it was worth $60K... It might make it another 13 years but it will be close. If I were a 1999 retiree with that portfolio balance I would be puckering a bit given today's valuations, real interest rates and the length of the current bull market. Granted when the portfolio reached about $52K in 2008 most people would cut back so in the real world with somewhat adaptable withdrawal rates it might well work. My main point is starting conditions (valuations, real interest rates) and the portfolio seem to matter a lot.

Ahh, got it. If they started in 1994, their stocks grew so much they were only withdrawing 1.85% of their total portfolio by 2000 while MPT and Larry's portfolio were drawing 2.77% and 3%. Makes sense now.

[michaeljc70]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

Statistically speaking, it is not reckless. The whole idea is to find the maximum number that is not reckless based on historical data. Most times it would have resulted in leaving money on the table. If anything, it is overly conservative.

That said, I think most people use it more as a guideline for determining financial independence rather than a strict withdrawal system. If the market crashed the day after you retire, common sense would tell you to tighten your spending even if historically you would be on perfectly solid ground.

It is very conservative. Essentially planning for the worst case scenario. When the study was originally released, it was very controversial- most financial planners thought it was way too conservative (after all, historical real returns were exceeding 4% by far). I've read that 2/3rd of people wind up (after 30 years) with more than double their starting portfolio if they follow a 4% SWR. It also doesn't take into account other future income like social security for those retiring early. Of course, if you are retiring at SS age, it is easy to deduct that from your expenses and then multiply by 25. I prefer to call it a rule of thumb rather than rule.

[dbr]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

Statistically speaking, it is not reckless. The whole idea is to find the maximum number that is not reckless based on historical data. Most times it would have resulted in leaving money on the table. If anything, it is overly conservative.

That said, I think most people use it more as a guideline for determining financial independence rather than a strict withdrawal system. If the market crashed the day after you retire, common sense would tell you to tighten your spending even if historically you would be on perfectly solid ground.

It is very conservative. Essentially planning for the worst case scenario. When the study was originally released, it was very controversial- most financial planners thought it was way too conservative (after all, historical real returns were exceeding 4% by far). I've read that 2/3rd of people wind up (after 30 years) with more than double their starting portfolio if they follow a 4% SWR. It also doesn't take into account other future income like social security for those retiring early. Of course, if you are retiring at SS age, it is easy to deduct that from your expenses and then multiply by 25. I prefer to call it a rule of thumb rather than rule.

Other income is irrelevant as no one would imagine that you don't take that into account first. There is a consideration that failure in that case does not mean zero income. But the real point of the study was to recognize the effect of getting a poor sequence of returns in producing the worst cases. The average real return being greater than 4% had nothing to do with it. It is still a problem in doing planning based on withdrawing from a portfolio that taking so little money as to avoid a worst case leaves most of the outcomes with unspent wealth. Solving that problem is a much more complex issue.

[michaeljc70]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

Statistically speaking, it is not reckless. The whole idea is to find the maximum number that is not reckless based on historical data. Most times it would have resulted in leaving money on the table. If anything, it is overly conservative.

That said, I think most people use it more as a guideline for determining financial independence rather than a strict withdrawal system. If the market crashed the day after you retire, common sense would tell you to tighten your spending even if historically you would be on perfectly solid ground.

It is very conservative. Essentially planning for the worst case scenario. When the study was originally released, it was very controversial- most financial planners thought it was way too conservative (after all, historical real returns were exceeding 4% by far). I've read that 2/3rd of people wind up (after 30 years) with more than double their starting portfolio if they follow a 4% SWR. It also doesn't take into account other future income like social security for those retiring early. Of course, if you are retiring at SS age, it is easy to deduct that from your expenses and then multiply by 25. I prefer to call it a rule of thumb rather than rule.

Other income is irrelevant as no one would imagine that you don't take that into account first. There is a consideration that failure in that case does not mean zero income. But the real point of the study was to recognize the effect of getting a poor sequence of returns in producing the worst cases. The average real return being greater than 4% had nothing to do with it. It is still a problem in doing planning based on withdrawing from a portfolio that taking so little money as to avoid a worst case leaves most of the outcomes with unspent wealth. Solving that problem is a much more complex issue.

Of course, you can take other income into account with something like Firecalc, but not easily with the 4% rule. It doesn't account for that. Of course the average real return had something to do with it as many stated that as their reason. That doesn't mean they were correct in their thinking.

I think using variable withdrawal methods helps a lot in not having so much unspent wealth. Also, if you look at most of the worst case scenarios (where sequence of returns will hit you hardest), it is toward the beginning of your retirement. Personally, after 5-10 years if things have gone well, I'll spend more.

[longinvest]

Michael,

I think using variable withdrawal methods helps a lot in not having so much unspent wealth. Also, if you look at most of the worst case scenarios (where sequence of returns will hit you hardest), it is toward the beginning of your retirement. Personally, after 5-10 years if things have gone well, I'll spend more.

I am not sure what you mean by "sequence of returns", when discussing a variable withdrawal method. Here's what "sequence of returns" means in the retirement literature:

viewtopic.php?f=2&t=190721&start=50#p2900256

Maybe I can help illustrate the difference between what longinvest refers to as 'market risk' and sequence of returns risk. I have made three graphs using made up numbers.

I made 10 random returns, and then scrambled those 10 returns into a variety of different sequences. The first picture shows a $1M portfolio following each of these different paths. Note that the final portfolio value is identical in each case. Holding a portfolio without adding or withdrawing is not subject to sequence of returns risk. The sequence does not matter.



The next image shows the same portfolio with a 4% annual withdrawal. This is not a constant dollar withdrawal, it is a constant percentage withdrawal. Note, that the end values of all the paths are the same. Constant percentage withdrawal is not subject to sequences of returns risk. The portfolios are subject to market risk, in that the ending value could be high or low but the sequence does not matter.



The final image shows the same portfolio with a $40K withdrawal, this is the dreaded constant dollar withdrawal. Note that in this case, the final portfolio values are all different. That difference is sequence of returns risk. In this case, poor returns early combined with constant withdrawals results in varied outcomes.



It turns out (and this surprised me mathematically, but longinvest demonstrated it another thread) that a sequence of varied percentage withdrawals has the same property as a constant percentage withdrawal. In other words, VPW is also mathematically immune to sequence of returns risk.

So here is a bonus picture. In this one, the portfolios are all subject to the same sequence of varied percentage withdrawals. You can see that the end portfolio values are all the same once again.



So VPW is immune to sequence of returns risk with regard to final portfolio value.

That does not mean that VPW is not 'risky' or that it magically fixes the fact that the markets themselves are 'risky.' But (along with similar percentage based withdrawal methods) it does not suffer from sequence of returns risk. How cool is that!

[dbr]

A withdrawal method that forces you to vary your withdrawals according to events is probably an intelligent approach to managing a portfolio, but it is not immune to anything. There is no such thing as immunity to what history hands you as your fate.

[longinvest]

Dbr,

A withdrawal method that forces you to vary your withdrawals according to events is probably an intelligent approach to managing a portfolio, but it is not immune to anything. There is no such thing as immunity to what history hands you as your fate.

But, Social Security exists, as well as do pensions (for some people). For others, inflation-indexed lifelong income can be bought. It is expensive, but it exists. It is sold by insurance companies under the name inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA).

Combining stable non-portfolio income with variable portfolio withdrawals might not be a perfect solution, but it's good enough for me.

Others can do whatever they want with their money and take the risks they want during their retirement. If they don't mind significantly underspending, or realizing too late that their portfolio has shrunk too much, they can use an inflexible method such as SWR and fly by the seat of their pants to decide when to stop following the plan.

The reality is that a 4% SWR retiree won't follow the plan during a severe market downturn; instead, he'll let his emotions dictate how much to cut withdrawals (which is likely to be way too much).

My understanding of our philosophy was that I should develop a workable plan; a plan that I can follow in good times and in bad times. SWR doesn't look to me as a workable plan.

[dbr]

Dbr,

A withdrawal method that forces you to vary your withdrawals according to events is probably an intelligent approach to managing a portfolio, but it is not immune to anything. There is no such thing as immunity to what history hands you as your fate.

But, Social Security exists, as well as do pensions (for some people). For others, inflation-indexed lifelong income can be bought. It is expensive, but it exists. It is sold by insurance companies under the name inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA).

Combining stable non-portfolio income with variable portfolio withdrawals might not be a perfect solution, but it's good enough for me.

Others can do whatever they want with their money and take the risks they want during their retirement. If they don't mind significantly underspending, or realizing too late that their portfolio has shrunk too much, they can use an inflexible method such as SWR and fly by the seat of their pants to decide when to stop following the plan.

The reality is that a 4% SWR retiree won't follow the plan during a severe market downturn; instead, he'll let his emotions dictate how much to cut withdrawals (which is likely to be way too much).

My understanding of our philosophy was that I should develop a workable plan; a plan that I can follow in good times and in bad times. SWR doesn't look to me as a workable plan.

You are addressing a bunch of issues I didn't even raise. I guess when I write on this topic in the future I will need to be much more clear. I don't see why you find a need to lecture me. My only dispute with a comment was that the idea of immunization in general is not likely to be a feature of any plan. Maybe I got the attributions and response chain wrong. I even pointed out that the idea of variable withdrawals makes sense on the face of it.

As far as personal strategy goes more of our income comes from SS and pensions than comes from portfolio withdrawals, so you are preaching to the choir if you are addressing me. On top of that we aren't pushing the withdrawal rate except in the case most of the large contingencies thought of in our spending arise. I also tend to believe in insurance, including LTCI and in our case even a bit of life insurance. As a backup there are also some things we have in mind if everything goes so well that there is a lot of money left over. The key input to all this from the beginning was/is never trying to spend more than we can afford.

[michaeljc70]

Michael,

I think using variable withdrawal methods helps a lot in not having so much unspent wealth. Also, if you look at most of the worst case scenarios (where sequence of returns will hit you hardest), it is toward the beginning of your retirement. Personally, after 5-10 years if things have gone well, I'll spend more.

I am not sure what you mean by "sequence of returns", when discussing a variable withdrawal method. Here's what "sequence of returns" means in the retirement literature:

Those are two separate sentences the content of which was having too much at the end of your life. I know what sequence of returns (really sequence of returns risk) is. Those charts are using the same returns just in a different order. The real world is not like that.

"The next image shows the same portfolio with a 4% annual withdrawal. This is not a constant dollar withdrawal, it is a constant percentage withdrawal. Note, that the end values of all the paths are the same. Constant percentage withdrawal is not subject to sequences of returns risk. "

The 4% rule (from the Trinity study- the topic we are in) doesn't use a percentage withdrawal every year. It is a percentage withdrawal the FIRST year, and then it is adjusted for inflation.

This is from Blackrock:

https://www.blackrock.com/pt/literature ... -va-us.pdf



As you can see, it isn't about the same ANNUAL return just in different orders.

[michaeljc70]

deleted

[longinvest]

Dbr,

A withdrawal method that forces you to vary your withdrawals according to events is probably an intelligent approach to managing a portfolio, but it is not immune to anything. There is no such thing as immunity to what history hands you as your fate.

(Followed with a "lecture" by longinvest)

You are addressing a bunch of issues I didn't even raise. I guess when I write on this topic in the future I will need to be much more clear. I don't see why you find a need to lecture me. My only dispute with a comment was that the idea of immunization in general is not likely to be a feature of any plan. Maybe I got the attributions and response chain wrong. I even pointed out that the idea of variable withdrawals makes sense on the face of it.

My apologies. I misunderstood your post.

[dbr]

Dbr,

A withdrawal method that forces you to vary your withdrawals according to events is probably an intelligent approach to managing a portfolio, but it is not immune to anything. There is no such thing as immunity to what history hands you as your fate.

But, Social Security exists, as well as do pensions (for some people). For others, inflation-indexed lifelong income can be bought. It is expensive, but it exists. It is sold by insurance companies under the name inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA).

Combining stable non-portfolio income with variable portfolio withdrawals might not be a perfect solution, but it's good enough for me.

Others can do whatever they want with their money and take the risks they want during their retirement. If they don't mind significantly underspending, or realizing too late that their portfolio has shrunk too much, they can use an inflexible method such as SWR and fly by the seat of their pants to decide when to stop following the plan.

The reality is that a 4% SWR retiree won't follow the plan during a severe market downturn; instead, he'll let his emotions dictate how much to cut withdrawals (which is likely to be way too much).

My understanding of our philosophy was that I should develop a workable plan; a plan that I can follow in good times and in bad times. SWR doesn't look to me as a workable plan.

You are addressing a bunch of issues I didn't even raise. I guess when I write on this topic in the future I will need to be much more clear. I don't see why you find a need to lecture me. My only dispute with a comment was that the idea of immunization in general is not likely to be a feature of any plan. Maybe I got the attributions and response chain wrong. I even pointed out that the idea of variable withdrawals makes sense on the face of it.

As far as personal strategy goes more of our income comes from SS and pensions than comes from portfolio withdrawals, so you are preaching to the choir if you are addressing me. On top of that we aren't pushing the withdrawal rate except in the case most of the large contingencies thought of in our spending arise. I also tend to believe in insurance, including LTCI and in our case even a bit of life insurance. As a backup there are also some things we have in mind if everything goes so well that there is a lot of money left over. The key input to all this from the beginning was/is never trying to spend more than we can afford.

I'm not sure why multiple things I said was "irrelevant". Including one that was a fact. Talk about a lecture.....maybe you should just ignore things you deem irrelevant. As far as I can tell, you didn't create the topic and I didn't originally quote or respond to you!

Yes, I think I got a bunch of attributions munged. I wanted to make general comments rather than direct something at any one of you in particular and I messed it up.

[michaeljc70]

Dbr,

A withdrawal method that forces you to vary your withdrawals according to events is probably an intelligent approach to managing a portfolio, but it is not immune to anything. There is no such thing as immunity to what history hands you as your fate.

But, Social Security exists, as well as do pensions (for some people). For others, inflation-indexed lifelong income can be bought. It is expensive, but it exists. It is sold by insurance companies under the name inflation-indexed Single Premium Immediate Annuity (inflation-indexed SPIA).

Combining stable non-portfolio income with variable portfolio withdrawals might not be a perfect solution, but it's good enough for me.

Others can do whatever they want with their money and take the risks they want during their retirement. If they don't mind significantly underspending, or realizing too late that their portfolio has shrunk too much, they can use an inflexible method such as SWR and fly by the seat of their pants to decide when to stop following the plan.

The reality is that a 4% SWR retiree won't follow the plan during a severe market downturn; instead, he'll let his emotions dictate how much to cut withdrawals (which is likely to be way too much).

My understanding of our philosophy was that I should develop a workable plan; a plan that I can follow in good times and in bad times. SWR doesn't look to me as a workable plan.

You are addressing a bunch of issues I didn't even raise. I guess when I write on this topic in the future I will need to be much more clear. I don't see why you find a need to lecture me. My only dispute with a comment was that the idea of immunization in general is not likely to be a feature of any plan. Maybe I got the attributions and response chain wrong. I even pointed out that the idea of variable withdrawals makes sense on the face of it.

As far as personal strategy goes more of our income comes from SS and pensions than comes from portfolio withdrawals, so you are preaching to the choir if you are addressing me. On top of that we aren't pushing the withdrawal rate except in the case most of the large contingencies thought of in our spending arise. I also tend to believe in insurance, including LTCI and in our case even a bit of life insurance. As a backup there are also some things we have in mind if everything goes so well that there is a lot of money left over. The key input to all this from the beginning was/is never trying to spend more than we can afford.

I'm not sure why multiple things I said was "irrelevant". Including one that was a fact. Talk about a lecture.....maybe you should just ignore things you deem irrelevant. As far as I can tell, you didn't create the topic and I didn't originally quote or respond to you!

Yes, I think I got a bunch of attributions munged. I wanted to make general comments rather than direct something at any one of you in particular and I messed it up.

I got messed up with all the back and forth too....that is why I deleted that comment. Apologies.

[longinvest]

Michael,

Michael,

I think using variable withdrawal methods helps a lot in not having so much unspent wealth. Also, if you look at most of the worst case scenarios (where sequence of returns will hit you hardest), it is toward the beginning of your retirement. Personally, after 5-10 years if things have gone well, I'll spend more.

I am not sure what you mean by "sequence of returns", when discussing a variable withdrawal method. Here's what "sequence of returns" means in the retirement literature:

Those are two separate sentences the content of which was having too much at the end of your life. I know what sequence of returns (really sequence of returns risk) is. Those charts are using the same returns just in a different order. The real world is not like that.

"The next image shows the same portfolio with a 4% annual withdrawal. This is not a constant dollar withdrawal, it is a constant percentage withdrawal. Note, that the end values of all the paths are the same. Constant percentage withdrawal is not subject to sequences of returns risk. "

The 4% rule (from the Trinity study- the topic we are in) doesn't use a percentage withdrawal every year. It is a percentage withdrawal the FIRST year, and then it is adjusted for inflation.

This is from Blackrock:



As you can see, it isn't about the same ANNUAL return just in different orders.

If the intent is to discuss that markets are risky (e.g. that stocks can have bad returns, leading to low withdrawals when using a percent-of-portfolio withdrawal method"), then it's important to use a proper name for the risk. I propose the use of "market risk" or "low return risk".

Sequence of return risk is really about getting different final outcomes (like "premature depletion"). It isn't about the fact that intermediate portfolio balances are different when one changes the order of returns.

Anyone is free to call a cat "a dog" and a dog "a cat". But, using unusual meanings for words can easily lead to misunderstandings.

[abuss368]

Hi Bogleheads:

One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 16,000 hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately for us, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.

"There seems to be some perverse human characteristic that likes to make easy things difficult."--Warren Buffet

Best wishes.
Taylor

Hi Taylor -

Thank you for sharing that wonderful post about your personal experience. The sharing of wisdom and lessons learned in life is invaluable.

Best wishes.

[Leesbro63]

Taylor had the great luck to retire in 1982. What about the Taylors of 1966 and 1939?

[longinvest]

Leesbro,

Taylor had the great luck to retire in 1982. What about the Taylors of 1966 and 1939?

I guess that he would have done as he wrote: he would have withdrawn what he needed and kept an eye on his portfolio balance. When the balance went down he would have tightened his belt and economized.

He would have probably spent less on vacations, luxuries and charity.

Don't forget that he had accumulated a $2,500,000 portfolio before retiring, when expressed in 2018 dollars.

It all seems pretty sensible to me.

[skime]

What withdrawal rate and AA would you use at 50?

[longinvest]

Skime,

What withdrawal rate and AA would you use at 50?

If you're referring to this post, then here's the calculation of a planning SWR for a retirement at age 50:

• Length of retirement for SWR calculation purpose: 95 - 50 = 45 years
• n = 45, i = 1.309565126, PV = -100, FV = 0, BGN = true
• => PMT = 2.916857308

This is a 2.9% planning SWR, or a factor of 35 at age 50.

Note that this is not an actual withdrawal rate, during retirement. It's a factor to determine "how much to save" before retiring.

A workable retirement plan can be found in the linked post, below. It also discusses the issue of asset allocation (AA).

Here's a post (and follow ups) I've written to illustrate how to build a workable retirement plan using VPW:

... snip ...
One approach to build a workable retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income and (ii) variable portfolio withdrawals. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income around age 80, when the payout of an inflation-indexed Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.
...

Continues here.

[Clever_Username]

I really like this explanation:

As a planning tool, it's important to use it correctly. The well-known 4% SWR rule of thumb tells me that it's reasonable to retire with a portfolio representing 25 times my desired pre-tax annual portfolio withdrawals when retiring at age 65.

[michaeljc70]

Michael,

Michael,

I think using variable withdrawal methods helps a lot in not having so much unspent wealth. Also, if you look at most of the worst case scenarios (where sequence of returns will hit you hardest), it is toward the beginning of your retirement. Personally, after 5-10 years if things have gone well, I'll spend more.

I am not sure what you mean by "sequence of returns", when discussing a variable withdrawal method. Here's what "sequence of returns" means in the retirement literature:

Those are two separate sentences the content of which was having too much at the end of your life. I know what sequence of returns (really sequence of returns risk) is. Those charts are using the same returns just in a different order. The real world is not like that.

"The next image shows the same portfolio with a 4% annual withdrawal. This is not a constant dollar withdrawal, it is a constant percentage withdrawal. Note, that the end values of all the paths are the same. Constant percentage withdrawal is not subject to sequences of returns risk. "

The 4% rule (from the Trinity study- the topic we are in) doesn't use a percentage withdrawal every year. It is a percentage withdrawal the FIRST year, and then it is adjusted for inflation.

This is from Blackrock:



As you can see, it isn't about the same ANNUAL return just in different orders.

If the intent is to discuss that markets are risky (e.g. that stocks can have bad returns, leading to low withdrawals when using a percent-of-portfolio withdrawal method"), then it's important to use a proper name for the risk. I propose the use of "market risk" or "low return risk".

Sequence of return risk is really about getting different final outcomes (like "premature depletion"). It isn't about the fact that intermediate portfolio balances are different when one changes the order of returns.

Anyone is free to call a cat "a dog" and a dog "a cat". But, using unusual meanings for words can easily lead to misunderstandings.

My contention with what you are saying is if three retiring people (in different years) earn 7% average return (as in the example) over a long period of time, they CAN wind up with different end balances even if the return on average is the same due to different sequences. You seem to think it is just mixing up the same fixed annual returns in different orders. That is contrary to the Blackrock explanation and just about any other explanation I've read.

[michaeljc70]

One thing that stands out to me in the table in the article is if you are 75/25 you have almost a 50/50 chance of a 7% SWR over 30 years.

[longinvest]

Michael,

Michael,

Michael,

I think using variable withdrawal methods helps a lot in not having so much unspent wealth. Also, if you look at most of the worst case scenarios (where sequence of returns will hit you hardest), it is toward the beginning of your retirement. Personally, after 5-10 years if things have gone well, I'll spend more.

I am not sure what you mean by "sequence of returns", when discussing a variable withdrawal method. Here's what "sequence of returns" means in the retirement literature:

Those are two separate sentences the content of which was having too much at the end of your life. I know what sequence of returns (really sequence of returns risk) is. Those charts are using the same returns just in a different order. The real world is not like that.

"The next image shows the same portfolio with a 4% annual withdrawal. This is not a constant dollar withdrawal, it is a constant percentage withdrawal. Note, that the end values of all the paths are the same. Constant percentage withdrawal is not subject to sequences of returns risk. "

The 4% rule (from the Trinity study- the topic we are in) doesn't use a percentage withdrawal every year. It is a percentage withdrawal the FIRST year, and then it is adjusted for inflation.

This is from Blackrock:



As you can see, it isn't about the same ANNUAL return just in different orders.

If the intent is to discuss that markets are risky (e.g. that stocks can have bad returns, leading to low withdrawals when using a percent-of-portfolio withdrawal method"), then it's important to use a proper name for the risk. I propose the use of "market risk" or "low return risk".

Sequence of return risk is really about getting different final outcomes (like "premature depletion"). It isn't about the fact that intermediate portfolio balances are different when one changes the order of returns.

Anyone is free to call a cat "a dog" and a dog "a cat". But, using unusual meanings for words can easily lead to misunderstandings.

My contention with what you are saying is if three retiring people (in different years) earn 7% average return (as in the example) over a long period of time, they CAN wind up with different end balances even if the return on average is the same due to different sequences. You seem to think it is just mixing up the same fixed annual returns in different orders. That is contrary to the Blackrock explanation and just about any other explanation I've read.

All three retirees had identical $60,000 withdrawals all retirement long, except for Mr. White who got $0 withdrawal for the last two years. All three retirees had distinct final portfolios left for bequest.

This chart is illustrating the sequence of return risk of SWR:

• A possibility of premature portfolio depletion.
• Different final portfolio balances.

Percent-of-current-portfolio withdrawal methods, like constant-percentage withdrawal (CPW) and variable-percentage withdrawals (VPW), don't have sequence of return risk. If we were to take the same example with CPW or VPW, none of the three retirees would be exposed to a possibility of premature portfolio depletion, and all three retirees would have identical final portfolio balances.

[nisiprius]

A disservice is done every time the Trinity study is equated to a retirement income withdrawal strategy. As the latter, it would have to be the worst method. The thought of setting a withdrawal rate, then never looking again at actual outcome, portfolio balance, inflation, etc. is reckless.

A disservice is done every time the Trinity study is cited without citing the words of the authors of the study:

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.

The Trinity authors were not advocating anything reckless. They established that 4% is a reasonable planning number... and that much higher numbers that had been quoted in the mid-1990s, were not.

[tadamsmar]

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

Best wishes.
Taylor

Great! None of the mathematics stuff is required! Us math haters love it!

So, I guess we can all retire now and withdraw what we need and keep an eye on the balance. No math required, we just eyeball the balance. Right?

Do we perhaps have to compare our portfolio with an estimate of what is required? Apparently not, because coming up with that estimate would require some of that math stuff.

If it is indeed true that we don't need to compare our nest egg with any kind of estimate at retirement, then we don't need SWR or any other approach to coming up with a ball park estimate for what is required.

[longinvest]

Tadamsmar,

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

Best wishes.
Taylor

Great! None of the mathematics stuff is required! Us math haters love it!

So, I guess we can all retire now and withdraw what we need and keep an eye on the balance. No math required, we just eyeball the balance. Right?

Do we perhaps have to compare our portfolio with an estimate of what is required. Apparently not, because coming up with that estimate would require some of that math stuff.

If it is indeed true that we don't need to compare our nest egg with any kind of estimate at retirement, then we don't need SWR or any other approach to coming up with a ball park estimate for what is required.

He had a $2,500,000 portfolio, when expressed in 2018 dollars. He could be safe using common sense ("When our balance went down we tightened our belt and economized").

To accumulate such a portfolio, I'm sure he had already developed a habit of living below his means.