"Safe" Withdrawal Rate for Early Retirees (or any retiree)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
skime
Posts: 71
Joined: Fri Nov 10, 2017 6:24 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by skime » Tue Oct 09, 2018 9:04 am

Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.

Anyone else think this way?

User avatar
HomerJ
Posts: 11935
Joined: Fri Jun 06, 2008 12:50 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by HomerJ » Tue Oct 09, 2018 9:21 am

skime wrote:
Tue Oct 09, 2018 9:04 am
Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.

Anyone else think this way?
You wouldn't be wrong.

But you'll have to work longer to get to 2%. Time is also a limited resource.

Now, if you're saving a ton of money each year and you're talking retiring at 40 with 3% withdrawals or 45 with 2% withdrawals, then no great hardship to work until 45.

(you might feel differently at 43 as you stare out the office window at a nice fall day) :)

If you're talking retiring at 58 at 4% or working until 68 to get to 2%, I would think long and hard before making that trade-off. I know too many people who died or had health problems in their 60s and early 70s.
The J stands for Jay

User avatar
willthrill81
Posts: 6449
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Tue Oct 09, 2018 9:33 am

skime wrote:
Tue Oct 09, 2018 9:04 am
Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.

Anyone else think this way?
The historical perpetual SWR is not a matter of opinion; it is what it is. Using data since 1970, the perpetual SWR for a three-fund portfolio (40% TSM / 20% int'l / 40% ITT) has been about 3.6% (i.e. you were left with the same inflation-adjusted capital that you started with). Now that doesn't include some of the very worst historic sequences, like those of the Great Depression and 1966. So it's likely about 3% if we include those.

3% is a lot more than 2%, 50% more in fact. You'll need a portfolio 50% larger to allow you to make 2% withdrawals, and it will likely take a number of years to get there, years that cannot be recovered. I urge you to read HomerJ's post closely. You can make adjustments to your withdrawals later on if truly necessary, but you cannot regain spent life.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

randomguy
Posts: 6617
Joined: Wed Sep 17, 2014 9:00 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by randomguy » Tue Oct 09, 2018 9:36 am

skime wrote:
Tue Oct 09, 2018 9:04 am
Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.

Anyone else think this way?
I would say that is more like the Min😁 About 3.5% would be the max.

User avatar
Tyler9000
Posts: 357
Joined: Fri Aug 21, 2015 11:57 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Tyler9000 » Tue Oct 09, 2018 11:30 am

willthrill81 wrote:
Mon Oct 08, 2018 9:41 am
But again, the '4% rule' is only used in such discussions because it is mathematically easy to backtest. In reality, virtually no sane person maintains their inflation-adjusted spending when the markets are tanking. To some extent, almost everyone uses variable withdrawals of some kind. But modeling this flexibility in a realistic manner can be challenging.
I love challenges. ;)

https://portfoliocharts.com/portfolio/r ... -spending/

wrongfunds
Posts: 1908
Joined: Tue Dec 21, 2010 3:55 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by wrongfunds » Tue Oct 09, 2018 11:48 am

livesoft wrote:
Mon Oct 08, 2018 5:37 pm
HomerJ wrote:
Mon Oct 08, 2018 5:24 pm
Do you have a crystal ball that tells you how long you will live?
Of course not, but when I am 60, I can say I won't live to 70 more years. And when I am 100, I can say I won't live 30 more years. But when I am 45, what can I say?
You can say I won't live 85 more years. Isn't it exactly the same as your other two scenarios?

I sincerely do not get what specific difference that you see at 45 vs 60.

livesoft
Posts: 62910
Joined: Thu Mar 01, 2007 8:00 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by livesoft » Tue Oct 09, 2018 1:07 pm

^15 more years of living gives one a different perspective on life and maybe some added maturity, so that one wouldn't worry as much about SWR.
Wiki This signature message sponsored by sscritic: Learn to fish.

am
Posts: 2794
Joined: Sun Sep 30, 2007 9:55 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by am » Tue Oct 09, 2018 2:02 pm

Roothy wrote:
Tue Oct 09, 2018 8:55 am
randomguy wrote:
Mon Oct 08, 2018 4:34 pm
Of course. That is part of the definition of SWR as it is obviously set by the limiting years (1966 or 1929 depending on your exact definition). Is 1966-1981 the worst possible outcome? Seems unlikey. Seems like it is wholely possible for that period to stretch out another 2-5 years (or the rebound be a bit slower) and drop your SWR to 3.5%. The sub 2% world tends to require revolution;). It is tough to say if the 1929-1940, 1966-1981, 2000-9 were 1:30 events (about what we saw), 1:10 events (we were really lucky) or 1:100 events (we were really unlucky). Our sample size isn't big enough. Through in that it is a dynamic system (i.e have the odds changed over the years which changes in monetary policy and willingess of governments to intervene) and we are all making guesses. I am sure 90%+ of the retirees going forward will get 4%+. I have no clue if the bottom 10% are getting 4.5%,4%, 3.5% or 3%.
and
randomguy wrote:
Mon Oct 08, 2018 4:34 pm

Of course not. But you have to be careful how you phrase it. The past doesn't control the future.. The worst period of the past 100 years might not be the worst period of the next 100. It is easy to say 4.5% SWR (for a fund with small value, S&P 500 and bonds) never failed historically. But that is no guarantee that it will not fail in the future. 3-4.5% is a reasonable guess for a SWR when talking 40+ years. The more flexible you are, the more aggressive you can be. Can't ever cut 1 penny of spending? You should be down at 3%. Can cut spending by 50%? 5% is fine.
I read these kinds of threads obsessively, and it's hard to say something new. You did, and it was really helpful. Thanks, randomguy.
You can’t insure against everything. Why not let go, be reasonable, and have faith in the future? 3.5-5% is more than good enough depending on your budget. If lots of discretionary go for the higher end, if not lower end. If hyperworrier, then have some backup plans- reverse mortgage, go back to part time work, move etc. like others have said, time is precious, and you can never buy more. Time>>>money.

User avatar
HomerJ
Posts: 11935
Joined: Fri Jun 06, 2008 12:50 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by HomerJ » Tue Oct 09, 2018 4:52 pm

livesoft wrote:
Tue Oct 09, 2018 1:07 pm
^15 more years of living gives one a different perspective on life and maybe some added maturity, so that one wouldn't worry as much about SWR.
Or maybe one would worry more. I know a lot of dumb 45 year-olds who haven't planned for the future.
The J stands for Jay

User avatar
JoMoney
Posts: 6280
Joined: Tue Jul 23, 2013 5:31 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by JoMoney » Tue Oct 09, 2018 5:20 pm

HomerJ wrote:
Tue Oct 09, 2018 4:52 pm
...I know a lot of dumb 45 year-olds who haven't planned for the future.
I know some 45 year olds that are otherwise brilliant, but just don't have a personality geared for saving/sacrificing now for the future.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
willthrill81
Posts: 6449
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Fri Oct 12, 2018 9:53 pm

JoMoney wrote:
Tue Oct 09, 2018 5:20 pm
HomerJ wrote:
Tue Oct 09, 2018 4:52 pm
...I know a lot of dumb 45 year-olds who haven't planned for the future.
I know some 45 year olds that are otherwise brilliant, but just don't have a personality geared for saving/sacrificing now for the future.
I'm not sure that it's due to personality as much as other factors, like simple ignorance. Many believe that they can start saving for retirement in their 50s and be just fine. Obviously, they haven't crunched the numbers.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
JoMoney
Posts: 6280
Joined: Tue Jul 23, 2013 5:31 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by JoMoney » Fri Oct 12, 2018 10:25 pm

willthrill81 wrote:
Fri Oct 12, 2018 9:53 pm
JoMoney wrote:
Tue Oct 09, 2018 5:20 pm
HomerJ wrote:
Tue Oct 09, 2018 4:52 pm
...I know a lot of dumb 45 year-olds who haven't planned for the future.
I know some 45 year olds that are otherwise brilliant, but just don't have a personality geared for saving/sacrificing now for the future.
I'm not sure that it's due to personality as much as other factors, like simple ignorance. Many believe that they can start saving for retirement in their 50s and be just fine. Obviously, they haven't crunched the numbers.
I'm sure there are multiple factors, and unique circumstances in every individual case...
There are people who get by reasonably 'ok' on social security alone,
https://www.businessinsider.com.au/budg ... ?r=US&IR=T
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

heyyou
Posts: 3196
Joined: Tue Feb 20, 2007 4:58 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by heyyou » Sat Oct 13, 2018 5:56 am

The problem is figuring out how much the future will resemble the past.
What we can do:
Expect to adapt in retirement.
Delay SS to boost our steady income.
Downsize our housing.
Live in a lower COL area for retirement, if that suits your spouse.
Track our annual spending vs. portfolio size so we can compare our spending to the previous worst case retirement sequences.
We can try to keep our necessary spending at 3% annually so we can easily adapt to future variable WDs with the surplus used for discretionary spending.

From McClung:
We can WD a calculated % of each recent annual portfolio balance to immediately adjust our spending relative to our remaining asset size, not blindly WDing 4% real, based on only the retirement day portfolio value that Bengen used.

Progressively, we can very slightly boost each annual WD due to our reduced longevity, as does the RMD % on our tIRA assets.
We can adjust our initial WD % to account for current equity valuation levels, i.e. if high valuations, slightly lower initial WD rate.
We can start retirement with a near 50/50 allocation, then WD from bonds first to let the equities grow for at least the first decade.

When writing a book in 2015, to expand the number of 30 year retirement periods, wrap the data from 2014 back to 1926 then forward again. For example, the 2000 retiree would have 15 years of recent data, followed by 1926 through 1940 stock returns. The 2014 retiree would have 29 years of the same 30 year retirement as the 1926 retiree. Assume that there will not be worse retirement sequences than the worst historical ones, but still compare your annual WDs/remaining portfolio value with the worst known historical sequences. Bad sequences can be seen as they occur if you are monitoring for that.

At some point, we do have to take the chance of giving up our work income to live off of our savings.

User avatar
AtlasShrugged?
Posts: 613
Joined: Wed Jul 15, 2015 6:08 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by AtlasShrugged? » Sat Oct 13, 2018 6:44 am

A bullet-proof 'safe' (whatever that means) withdrawal rate can only be known retrospectively. As Larry Swedroe points out, "Our crystal balls are cloudy, at best".

My best guess is that a 4.5% rate, coupled with some spending rules, will turn out to be just fine. Why 4.5%? Well, Bill Bengen did a reddit blog not so long ago and the takeaway I had was this: Starting with a 55% equity/45% bond allocation, you could take 4.5% annually and end (30 years) with close what you started. Jane Bryant Quinn makes the same recommendation. Others have as well.

What spending rules, you ask? In any year the market is down, you do not take an inflation adjustment. You make a small, but permanent cut to your spending. Kitces wrote about this in multiple posts. The math makes total sense to me. Seems to be easy to implement as well. And it dovetails nicely with human behavior. When the market corrects/tanks, what do most people do? They watch their expenses much more closely.

One final observation. I loved Mr. Larimore's comment on safe withdrawal rates. Oceans of common sense in what he said. :)
“If you don't know, the thing to do is not to get scared, but to learn.”

Dandy
Posts: 5469
Joined: Sun Apr 25, 2010 7:42 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Dandy » Sat Oct 13, 2018 8:51 am

In reality, virtually no sane person maintains their inflation-adjusted spending when the markets are tanking.
+1 That is probably the 'saving" grace of the "safe" withdrawal rate idea.

My concerns are that the origin of "safe" may have been a push to the higher limit of "safe" vs a reasonable limit. i.e. how much can I take out as soon as possible and still be ok as opposed to what is reasonable. Don't know that for a fact.

The other concerns are that people don't discuss what allocation or range of allocations is involved, what to do if inflation is extreme (still add that extra amount to last year's withdrawal?), what happens if you are alive and in good health after 30 years - are your assets at zero or close to it?, what contingencies are there for large unexpected expenses especially toward the end of the 30 years. It is projected as "safe" and almost set it and you can forget it -- which I think is not very wise. The past is history your particular future is mystery.

It is a shame if people are too frugal in retirement and die with a large estate when they could have enjoyed their "golden" years more. But maybe some were actually wise in not exposing themselves and their spouse to unnecessary financial risk.
It is a challenge for those with a decent nest egg. For those who don't have a decent nest egg there are other challenges.

msk
Posts: 946
Joined: Mon Aug 15, 2016 10:40 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by msk » Sat Oct 13, 2018 9:17 am

5% of a 100% stocks portfolio will last forever, and the average annual $ withdrawal will keep up with inflation, together of course with the annual portfolio balance keeping up with inflation, forever. I checked this against history (the reconstructed SP500 from 1871), against 50 years between 1966 and 2016 and also with Monte Carlo simulations (US stocks or global). I.e you can hand over a portfolio of VT (Vanguard World including EM) today to your 2 year-old toddler worth $1 million and he'll never, ever have to work! 5% = $50k p.a. this year, markets collapse 50% and he'll still be able to withdraw $25k p.a. and if markets rise he can buy more video games. The point is that it is crucially important that we react to market collapses, and we will be fine. Forever. Inflation adjusting occurs automatically, at least if the next 100 years is anywhere similar to history from 1871 till now.

User avatar
David Jay
Posts: 5778
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by David Jay » Sat Oct 13, 2018 9:49 am

skime wrote:
Tue Oct 09, 2018 9:04 am
Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.
“wrong” is a strong word, but there is a significant opportunity cost for your position, based on an unrealistic fear and false dichotomy.

There have been a number of studies looking at true “perpetual”portfolios - that is, a portfolio where the principle is not reduced (spending only the gains). The ones I have seen all indicate a value in range of 2.4 to 2.7% (I usually use 2.5% as shorthand). And again, this is not a “retirement” portfolio, this is a truly perpetual portfolio. So at 2% you are beyond even perpetual, in the category of a continuously accumulating portfolio.

To restate your second and third sentences: “...it’s almost a certainty that you will accumulate vast assets over time and there is still a chance that a catastrophic event will leave you without resources.” Going to 1.5% or even 1% will not provide cosmic certainty for your future, there is no financial solution to an extinction-level event. None of us is guaranteed a tomorrow.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
willthrill81
Posts: 6449
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Sat Oct 13, 2018 10:10 am

Dandy wrote:
Sat Oct 13, 2018 8:51 am
My concerns are that the origin of "safe" may have been a push to the higher limit of "safe" vs a reasonable limit. i.e. how much can I take out as soon as possible and still be ok as opposed to what is reasonable. Don't know that for a fact.
It's important to keep in mind that when Bengen originally defined "safe withdrawal rate," completely draining the portfolio after 30 years was an acceptable outcome. But it's also important to remember that that only happened in the very worst historical scenarios. Most of the time, the '4% rule' would have left the retiree with a large balance at the end of the 30 year period. I think it's reasonable to say "I'm alright with draining my portfolio if a really, really bad sequence of returns occurs, but I'll probably leave behind a sizable chunk of my portfolio."
Dandy wrote:
Sat Oct 13, 2018 8:51 am
The other concerns are that people don't discuss what allocation or range of allocations is involved, what to do if inflation is extreme (still add that extra amount to last year's withdrawal?), what happens if you are alive and in good health after 30 years - are your assets at zero or close to it?, what contingencies are there for large unexpected expenses especially toward the end of the 30 years. It is projected as "safe" and almost set it and you can forget it -- which I think is not very wise. The past is history your particular future is mystery.
There are several big factors at work here, perhaps the biggest being how flexible retirees can be with their spending as well as their age at the point of retirement. A retiree whose essential spending could be satisfied with 2% withdrawals, for instance, could dramatically rein in their spending from the '4% rule' if they needed to do so. As HomerJ frequently points out, 'failure' of the '4% rule' may mean that you only take half as many vacations as you originally planned.

And the life expectancy tables out there indicate that relatively few 65 year olds, for instance, will survive past age 95. And even if they did, the odds are very high that only one spouse in a couple will survive to that point, resulting in reduced expenses for the survivor. Further, they are historically likely to end the 30 year period with a large portion of their starting portfolio remaining.
Dandy wrote:
Sat Oct 13, 2018 8:51 am
It is a shame if people are too frugal in retirement and die with a large estate when they could have enjoyed their "golden" years more. But maybe some were actually wise in not exposing themselves and their spouse to unnecessary financial risk.
Retirees' withdrawal strategies should balance many things, including enjoying the fruits of one's labors and savings, not going through 'feast or famine' periods of spending, sleeping well at night, not being the richest person in the graveyard, and being able to fund unexpected expenses along the way.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Dandy
Posts: 5469
Joined: Sun Apr 25, 2010 7:42 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Dandy » Sat Oct 13, 2018 11:19 am

It's important to keep in mind that when Bengen originally defined "safe withdrawal rate," completely draining the portfolio after 30 years was an acceptable outcome. But it's also important to remember that that only happened in the very worst historical scenarios. Most of the time, the '4% rule' would have left the retiree with a large balance at the end of the 30 year period. I think it's reasonable to say "I'm alright with draining my portfolio if a really, really bad sequence of returns occurs, but I'll probably leave behind a sizable chunk of my portfolio."
That isn't "safe" or "sustainable" or acceptable to me. If people are going to start with 4% and then adjust that's fine. The key to me with any withdrawal plan is some flexibility and "common sense". If people want to do 4% an adjust for inflation each year and risk running out of money in 30 years (or less) and want to consider that "safe" be my guest. Since there is usually no human capital left, you can't totally leave your fate blindly to a formula for 30 years or more no matter how well back tested it is. I'm not disputing the odds of success just don't like signalling it is "safe" and being silent on the most likely need to adjust as necessary. It should be billed as a decent, reasonable starting point that most likely will last 30 years even under most circumstances.

trueblueky
Posts: 1376
Joined: Tue May 27, 2014 3:50 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by trueblueky » Sat Oct 13, 2018 11:35 am

Jeff Albertson wrote:
Mon Oct 08, 2018 2:49 pm
Never heard of "Mad Fientist", but Bill Bernstein has this to say:
Below the age of 65, 2% spending rate is bulletproof, 3% is probably safe, and 4% is taking chances. Above 5%, you're taking an increasing serious risk of dying poor. (For each five years above 65, add perhaps half a percentage point to those numbers).
https://www.amazon.com/Ages-Investor-Cr ... f+investor
So:
3.5% at 70
4.5% at 80
5.5% at 90

Can I be your heir?
Because I guessing there will be a lot of money left.

michaeljc70
Posts: 3888
Joined: Thu Oct 15, 2015 3:53 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by michaeljc70 » Sat Oct 13, 2018 12:25 pm

I am using 4% SWR for 40 year retirement. I exclude social security and any potential inheritance which can/will act as buffers. I am also 75/25 AA. Essentially, I have to make it to SS age and then I am pretty much home free assuming my portfolio wasn't decimated. If things look grim I can pick up consulting gigs to plug gaps in the early years.

RadAudit
Posts: 3090
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by RadAudit » Sat Oct 13, 2018 2:44 pm

I am absolutely fascinated by these threads that essentially boil down to what is the least amount of money I have to accumulate to spend the most money I can for as long as I live.

I don't see how you can ever get a definitive answer to that question.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The calvary isn't coming, kids. You are on your own.

User avatar
willthrill81
Posts: 6449
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Sat Oct 13, 2018 3:29 pm

Dandy wrote:
Sat Oct 13, 2018 11:19 am
That isn't "safe" or "sustainable" or acceptable to me. If people are going to start with 4% and then adjust that's fine. The key to me with any withdrawal plan is some flexibility and "common sense". If people want to do 4% an adjust for inflation each year and risk running out of money in 30 years (or less) and want to consider that "safe" be my guest. Since there is usually no human capital left, you can't totally leave your fate blindly to a formula for 30 years or more no matter how well back tested it is. I'm not disputing the odds of success just don't like signalling it is "safe" and being silent on the most likely need to adjust as necessary. It should be billed as a decent, reasonable starting point that most likely will last 30 years even under most circumstances.
Flexibility is something that I too espouse, as do many others on this forum. However, it can be very difficult to know when that flexibility is truly needed and to what extent.

For instance, look at year 2000 retirees who used the '4% rule' with a 60/40 portfolio (half and half U.S. and international equities plus TBM). If they started with $1M, by February, 2009, their portfolio would have dropped to an inflation-adjusted $532,574. They would be in fine shape now with a nominal balance of $997,731 (inflation-adjusted $665,183), over 16 years of spending remaining if 0% real growth, but that was obviously unknown back in 2009.

What do any of us do if we saw our portfolio's real value cut nearly in half less than a decade into retirement? Even if withdrawals were just 4% of the portfolio's balance every year, the low point in Feb., 2009, would have still been $582,329, not much of an improvement over the 4% fixed plus inflation withdrawals. The huge drop was not a result of big withdrawals but a very poor sequence of returns.

But in early 2009, what could be done besides rein in spending? There were few employment opportunities available. And while something like a $20k part-time job would have certainly taken a lot of the stress off of the portfolio in the above instance, how many 75 year olds are able to return to the workforce for even a part-time job, much less be hired in a recession?

This is an issue that needs more discussion, probably its own thread. How will you know when you really need to make adjustments if you encounter a very poor sequence of returns, and what kind of adjustments are possible?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Dandy
Posts: 5469
Joined: Sun Apr 25, 2010 7:42 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Dandy » Sat Oct 13, 2018 5:55 pm

How will you know when you really need to make adjustments if you encounter a very poor sequence of returns, and what kind of adjustments are possible?
Ah, the question for the ages -the retirement ages. I agree that once a withdrawal plan is established when do you dial back? or dial up? You have the well meaning headwinds of stay the course and don't be a market timer to resist. I don't have an answer for it and maybe there isn't a road map to guide us on it, but it is something most of us may face.

One small step may be to stop calling any withdrawal plan "safe" and position ones that are well back tested as it as a decent starting points. Maybe, instead of just focusing on how much you can withdraw maybe how much potential withdrawals you should have left at various ages.

Or maybe there is some rule of thumb formula e.g. current nest eqq divided by current withdrawal = x years + current age should = 95. (obviously, that is a wild example). I am out of my math and actuarial expertise but at some early point is seems to make sense to focus some analysis on how much I have left vs how much I can withdraw based on my starting balance years ago.

User avatar
JoMoney
Posts: 6280
Joined: Tue Jul 23, 2013 5:31 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by JoMoney » Sat Oct 13, 2018 6:09 pm

My current thoughts on SWR is essentially annuitization, not necessarily to buy a SPIA, but to use something like the IRS SEPP 72(t) withdrawal methodology and create an amortization schedule on current interest rates, or divide balance by remaining life expectancy (although I don't see anything wrong with SPIA instead of fixed income investments if you're happy with current interest rates).
I kind of like the idea of a mixture, to create a floor income of fixed income assets via amortization schedule and use a variable withdrawal on equity based on balance/life expectancy.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

heyyou
Posts: 3196
Joined: Tue Feb 20, 2007 4:58 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by heyyou » Sat Oct 13, 2018 7:06 pm

but to use something like the IRS SEPP 72(t) withdrawal methodology .........or divide balance by remaining life expectancy
http://crr.bc.edu/wp-content/uploads/20 ... 19-508.pdf
The researchers used the annual RMD % numbers on the entire portfolio, including backing up to start at age 65. The annual % WD list is on page 7 of the brief, in the Appendix.
IRS publication 590 shows RMD numbers for all ages since some tIRAs are inherited by children or grand children of any age, all of whom have to pay the taxes on the RMD withdrawals that are now sized to fit the age of the new owner of those assets.

In the brief about using the annual RMD % on the entire portfolio, there are references to an optimal WD rate without ever describing it. For researchers, that is often the historical max safe WD rate as if all of the future returns were known in advance. That optimal rate is not a practical WD method but it is a good standard for comparing various WD methods.

User avatar
HomerJ
Posts: 11935
Joined: Fri Jun 06, 2008 12:50 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by HomerJ » Sat Oct 13, 2018 8:57 pm

msk wrote:
Sat Oct 13, 2018 9:17 am
5% of a 100% stocks portfolio will last forever, and the average annual $ withdrawal will keep up with inflation, together of course with the annual portfolio balance keeping up with inflation, forever.
This is incorrect. During the Great Depression you have gone bankrupt.
I.e you can hand over a portfolio of VT (Vanguard World including EM) today to your 2 year-old toddler worth $1 million and he'll never, ever have to work! 5% = $50k p.a. this year, markets collapse 50% and he'll still be able to withdraw $25k p.a. and if markets rise he can buy more video games.
Oh, if he drops his spending 50%, it works.

I do have a pretty good buffer built into my spending, but I'm not sure if a 50% drop would be easy to live through.
The J stands for Jay

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Ron Scott » Sat Oct 13, 2018 9:15 pm

skime wrote:
Tue Oct 09, 2018 9:04 am
Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.

Anyone else think this way?

Just the phrase "SWR" implies to many people a 4% draw at an early 60s retirement and 3% much before that. I discount all this as too much googling and groupthink. Fact is none of us can predict whether the future will be the same as the past in the short term OR long term so these numbers are essentially back-tested nonsense IMO.

So... If you can't predict the future try to be prepared for it. 2%, may be a tad more, would be my comfort % for ER. No, nothing is perfect: you could go with 2% and wish you did 4, or still go broke. But you'll have a better chance than the guy who shot for 4% out of the box.

I like your style.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

marcopolo
Posts: 1272
Joined: Sat Dec 03, 2016 10:22 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by marcopolo » Sat Oct 13, 2018 10:03 pm

Ron Scott wrote:
Sat Oct 13, 2018 9:15 pm
skime wrote:
Tue Oct 09, 2018 9:04 am
Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.

Anyone else think this way?

Just the phrase "SWR" implies to many people a 4% draw at an early 60s retirement and 3% much before that. I discount all this as too much googling and groupthink. Fact is none of us can predict whether the future will be the same as the past in the short term OR long term so these numbers are essentially back-tested nonsense IMO.

So... If you can't predict the future try to be prepared for it. 2%, may be a tad more, would be my comfort % for ER. No, nothing is perfect: you could go with 2% and wish you did 4, or still go broke. But you'll have a better chance than the guy who shot for 4% out of the box.

I like your style.

Ron Scott,
You seem to be softening a bit. I would have fully expected you to recommend to keep working and keep saving, now you are allowing people to early retire with a 2% WR, seems awfully cavalier of you.

I mean, if you can't put faith on any historical data, then it seems odd to say 3% for ER is "groupthink", but 2% you are comfortable with.
Discarding historical data, then you are left to imagining dire scenarios, which I understand. But, is your imagination so limited that you can only conjure up scenarios where 3% fail, but can't think of any where 2% would fail, how about 1%?
Once in a while you get shown the light, in the strangest of places if you look at it right.

User avatar
Sandtrap
Posts: 5462
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Sandtrap » Sat Oct 13, 2018 10:08 pm

The weakness of using a flat rate, 2-3-4. . . SWR (implying "safe") is that individual lives don't follow generalized spreadsheet projections.
For many, diversification of income streams (SS, multiple pensions, income property, annuities, etc) provides or adds to portfolio withdrawal safety margins.
And, for others who are completely reliant on portfolio returns through retirement, a variable withdrawal rate may be "safer", with the ability to adjust income and expenses as market returns fluctuate.
Other variables can be, size of the portfolio, etc.
Each portfolio is unique.
j

User avatar
JoMoney
Posts: 6280
Joined: Tue Jul 23, 2013 5:31 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by JoMoney » Sat Oct 13, 2018 10:18 pm

marcopolo wrote:
Sat Oct 13, 2018 10:03 pm
...
I mean, if you can't put faith on any historical data, then it seems odd to say 3% for ER is "groupthink", but 2% you are comfortable with.
Discarding historical data, then you are left to imagining dire scenarios, which I understand. But, is your imagination so limited that you can only conjure up scenarios where 3% fail, but can't think of any where 2% would fail, how about 1%?
It's not even a matter of relying on historical data. A 2% withdrawal relate implies it can support 50 years of withdrawals at zero real return. If you're unwilling to accept the idea of zero real return, the strategy of saving money is ridiculous and you should be focusing on spending your money as quickly as possible before it loses value.

If the goal is to leave a huge estate, that's a different case for someone who really doesn't need to worry about a SWR.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

AlphaLess
Posts: 1053
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by AlphaLess » Sat Oct 13, 2018 10:34 pm

livesoft wrote:
Mon Oct 08, 2018 1:25 pm
Rowan Oak wrote:
Mon Oct 08, 2018 9:35 am
Very detailed blog post by the "Mad Fientist".
That is from 2015.

For the mostest on Early Retirement SWR:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
with articles from late 2016 to summer 2018 so far.

The series is an absolute must-read for early retiree wannabees. Otherwise, they might end up in the CRAP category: Can't Retire As Planned.
Having read this in detail, I would highly recommend this as well.
"You can get more with a kind word and a gun than with just a kind word." George Washington

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Ron Scott » Sat Oct 13, 2018 10:39 pm

marcopolo wrote:
Sat Oct 13, 2018 10:03 pm
Ron Scott wrote:
Sat Oct 13, 2018 9:15 pm
skime wrote:
Tue Oct 09, 2018 9:04 am
Why would I be wrong in my opinion that 2% is the max perpetual SWR for early retirement? I understand that there's a chance that I may accumulate significant assets over time. I'd rather do that than risk running out of money.

Anyone else think this way?

Just the phrase "SWR" implies to many people a 4% draw at an early 60s retirement and 3% much before that. I discount all this as too much googling and groupthink. Fact is none of us can predict whether the future will be the same as the past in the short term OR long term so these numbers are essentially back-tested nonsense IMO.

So... If you can't predict the future try to be prepared for it. 2%, may be a tad more, would be my comfort % for ER. No, nothing is perfect: you could go with 2% and wish you did 4, or still go broke. But you'll have a better chance than the guy who shot for 4% out of the box.

I like your style.

Ron Scott,
You seem to be softening a bit. I would have fully expected you to recommend to keep working and keep saving, now you are allowing people to early retire with a 2% WR, seems awfully cavalier of you.

I mean, if you can't put faith on any historical data, then it seems odd to say 3% for ER is "groupthink", but 2% you are comfortable with.
Discarding historical data, then you are left to imagining dire scenarios, which I understand. But, is your imagination so limited that you can only conjure up scenarios where 3% fail, but can't think of any where 2% would fail, how about 1%?
Marco Polo,

If you’re going rehash that tired argument, that we all face the choice of EITHER the historical 4% OR doomsday, but nothing in the middle, you just have to get in line. Be sure to bring your collection of yellowing How-Much-Money-Should-I-Save? paperbacks to boost your spirit while you wait...
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

User avatar
willthrill81
Posts: 6449
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Sat Oct 13, 2018 11:04 pm

JoMoney wrote:
Sat Oct 13, 2018 6:09 pm
My current thoughts on SWR is essentially annuitization, not necessarily to buy a SPIA, but to use something like the IRS SEPP 72(t) withdrawal methodology and create an amortization schedule on current interest rates, or divide balance by remaining life expectancy (although I don't see anything wrong with SPIA instead of fixed income investments if you're happy with current interest rates).
Siamond plans on just using the PMT formula, which is simple annuitization. The key variables are (1) over what period to amortize, (2) the assumed rate of return, and (3) how much the ending balance should be. This method makes a lot of logical sense to me.
JoMoney wrote:
Sat Oct 13, 2018 6:09 pm
I kind of like the idea of a mixture, to create a floor income of fixed income assets via amortization schedule and use a variable withdrawal on equity based on balance/life expectancy.
I do too. I posted about a withdrawal strategy that I've considered that used a mixture of income flooring, time segmentation, and distinction between essential and discretionary spending.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

fennewaldaj
Posts: 379
Joined: Sun Oct 22, 2017 11:30 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by fennewaldaj » Sat Oct 13, 2018 11:23 pm

HomerJ wrote:
Mon Oct 08, 2018 3:08 pm
randomguy wrote:
Mon Oct 08, 2018 1:16 pm
Rowan Oak wrote:
Mon Oct 08, 2018 9:35 am
Very detailed blog post by the "Mad Fientist".

Safe Withdrawal Rate for Early Retirees
  • The 4% rule is actually very safe for a 30-year retirement
Was not is. The problem is figuring out how much the future will resemble the past.
Note that 4% is for the WORST case scenarios. Normal times in the past, you could pull 5%, 6%, even 7% and be fine. During the BAD times though, 5%-7% withdrawals could bankrupt you. So 4% became the "safe" withdrawal rate because it worked even in the WORST times.

So the future doesn't have to resemble the past too closely. 4% is a bet that the next 30 years won't be WORST 30-year period in U.S. history.

And even if it is, 4% should have SOME discretionary spending in there, like eating out and travel. So even if you go with 4%, and we do hit the Great Depression II, you will probably still survive fairly comfortably, even if you don't get to go to Europe every year.
Right it represents the worst case from the US data set but the US had one of the best performing stock markets over the period.

User avatar
willthrill81
Posts: 6449
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Sat Oct 13, 2018 11:25 pm

fennewaldaj wrote:
Sat Oct 13, 2018 11:23 pm
HomerJ wrote:
Mon Oct 08, 2018 3:08 pm
randomguy wrote:
Mon Oct 08, 2018 1:16 pm
Rowan Oak wrote:
Mon Oct 08, 2018 9:35 am
Very detailed blog post by the "Mad Fientist".

Safe Withdrawal Rate for Early Retirees
  • The 4% rule is actually very safe for a 30-year retirement
Was not is. The problem is figuring out how much the future will resemble the past.
Note that 4% is for the WORST case scenarios. Normal times in the past, you could pull 5%, 6%, even 7% and be fine. During the BAD times though, 5%-7% withdrawals could bankrupt you. So 4% became the "safe" withdrawal rate because it worked even in the WORST times.

So the future doesn't have to resemble the past too closely. 4% is a bet that the next 30 years won't be WORST 30-year period in U.S. history.

And even if it is, 4% should have SOME discretionary spending in there, like eating out and travel. So even if you go with 4%, and we do hit the Great Depression II, you will probably still survive fairly comfortably, even if you don't get to go to Europe every year.
Right it represents the worst case from the US data set but the US had one of the best performing stock markets over the period.
For a global cap-weighted portfolio, the SWR has been around 3.5%, lower than that of a U.S. only portfolio, but not down to the 2-3% level many toss around.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

msk
Posts: 946
Joined: Mon Aug 15, 2016 10:40 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by msk » Sun Oct 14, 2018 1:09 am

HomerJ wrote:
Sat Oct 13, 2018 8:57 pm
msk wrote:
Sat Oct 13, 2018 9:17 am
5% of a 100% stocks portfolio will last forever, and the average annual $ withdrawal will keep up with inflation, together of course with the annual portfolio balance keeping up with inflation, forever.
This is incorrect. During the Great Depression you have gone bankrupt.
I.e you can hand over a portfolio of VT (Vanguard World including EM) today to your 2 year-old toddler worth $1 million and he'll never, ever have to work! 5% = $50k p.a. this year, markets collapse 50% and he'll still be able to withdraw $25k p.a. and if markets rise he can buy more video games.
Oh, if he drops his spending 50%, it works.

I do have a pretty good buffer built into my spending, but I'm not sure if a 50% drop would be easy to live through.
IMHO BHs are much more pessimistic than is actually warranted. I did the historical 5% (actually used 0.4167% per month) withdrawals from 1871 till 2018, taxing dividends at 15% and using the actual inflation rate for each month. Shiller's data are that detailed. Here's what comes out. I used numbers that would make sense to us in real terms today, all numbers REAL terms:
Cash withdrawal in January 1871 pegged at $5k after paying 15% tax on dividends
Your bad month would have been August 1920 @ $3900 (nasty WW I)
But then euphoric in September 1929 @ $18,100 (Roaring 20s)
Worst month through the Great Depression would have been June 1932 @ $3500 but recovering to >$5,000 in a couple of months
Momentarily dipping down in April 1942 to $4700 (nasty WW II)
Thereafter sailing merrily upwards to January 2018 @ $21,000!

Moral from the history: 100% well diversified stocks, NEVER exceed 5% p.a. and you ought to do fine through world wars and whatever.
Actually, 300+ year history researched by Piketty, "Capital in the Twenty-First Century" concludes that productive RE pays around 4% REAL TERMS and that Trade and Industry pays another 1+% higher REAL TERMS. Sounds like humans are genetically programmed to accept not less than 5% REAL TERMS for their trade and industry investments :sharebeer

Yes, we are at euphoric stock market highs currently, so if a BH is really nervous about a 50% collapse, guess how long it will last (1, 3, 5 years?) keep some of your portfolio under the mattress (bonds) and use that to augment your withdrawals from a stock portfolio. E.g. 2.5% for 5 years is 12.5% in bonds. Stock markets worldwide will always recover, otherwise we have much a bigger headache than WW I or WW II.

visualguy
Posts: 869
Joined: Thu Jan 30, 2014 1:32 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by visualguy » Sun Oct 14, 2018 1:40 am

msk wrote:
Sun Oct 14, 2018 1:09 am
Stock markets worldwide will always recover, otherwise we have much a bigger headache than WW I or WW II.
It has been like this for the US, but not so much worldwide. The Japanese stock market never really recovered... It's about where it was 30 years ago. If you look at the ex-US index, it has performed poorly over the long term. The US market is actually an aberration, and my big worry is what happens if and when it starts resembling the rest of the world.

msk
Posts: 946
Joined: Mon Aug 15, 2016 10:40 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by msk » Sun Oct 14, 2018 4:33 am

That's why I am 100% stocks worldwide including EM. I lived through the Japan euphoria and collapse and palpably felt it was invincible. I am still at a loss to explain why, after decades of very successful manufacturing of cars, cameras, hi-fi, etc. their stock market has not recovered. Where did all their profits go? Just in a factor 2x currency appreciation... :confused

Dandy
Posts: 5469
Joined: Sun Apr 25, 2010 7:42 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Dandy » Sun Oct 14, 2018 6:40 am

It seems as if people want a plan of withdrawal that is safe and is not subject to change and that it will last their entire retirement. What I would call set it and forget it. Just follow the original plan no matter the market, inflation, interest rates, the current size of my portfolio, etc.

It would seem prudent, despite the validity of the back testing, to position decent withdrawal plans as prudent starting points that should carry most retirees through most retirements and offer some guidance on when the approach might need to be modified. I think there are just too many variables over a several decades retirement to have a strict formula approach and to "stay that course" no matter what.

ignition
Posts: 201
Joined: Sun Dec 11, 2016 11:28 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by ignition » Sun Oct 14, 2018 7:33 am

msk wrote:
Sun Oct 14, 2018 4:33 am
That's why I am 100% stocks worldwide including EM. I lived through the Japan euphoria and collapse and palpably felt it was invincible. I am still at a loss to explain why, after decades of very successful manufacturing of cars, cameras, hi-fi, etc. their stock market has not recovered. Where did all their profits go? Just in a factor 2x currency appreciation... :confused
Japan really was the perfect storm: huge asset price bubble in housing and stocks, bad central bank policies, appreciating yen causing exports to fall, banks overexposed to bad credit that weren't allowed to fail and that had to be bailed out no matter what, interest rates that were already close to zero, bad demographics, population with a savers mentality ...

User avatar
vineviz
Posts: 2301
Joined: Tue May 15, 2018 1:55 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by vineviz » Sun Oct 14, 2018 7:34 am

Dandy wrote:
Sun Oct 14, 2018 6:40 am
It seems as if people want a plan of withdrawal that is safe and is not subject to change and that it will last their entire retirement. What I would call set it and forget it.
If only there were a financial product people could buy using a fixed amount of money up front that would provide a guaranteed stream of fixed income for the rest of their lives ....
Last edited by vineviz on Sun Oct 14, 2018 8:44 am, edited 1 time in total.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

marcopolo
Posts: 1272
Joined: Sat Dec 03, 2016 10:22 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by marcopolo » Sun Oct 14, 2018 8:24 am

Dandy wrote:
Sun Oct 14, 2018 6:40 am
It seems as if people want a plan of withdrawal that is safe and is not subject to change and that it will last their entire retirement. What I would call set it and forget it. Just follow the original plan no matter the market, inflation, interest rates, the current size of my portfolio, etc.

It would seem prudent, despite the validity of the back testing, to position decent withdrawal plans as prudent starting points that should carry most retirees through most retirements and offer some guidance on when the approach might need to be modified. I think there are just too many variables over a several decades retirement to have a strict formula approach and to "stay that course" no matter what.
I think you might be reading a bit too much into what people mean when they talk about their WR, or even SWR. I suspect very few people are looking for, or use, the " set it and forget it. Just follow the original plan no matter the market, inflation, interest rates, the current size of my portfolio".

What most people mean is that they use that as a gauge to decide if they believe they have enough in their portfolio to support their desired level of spending, or vice-versa, gauging the level of spending their portfolio can support, knowing there will likely be adjustments throughout their remaining lifetime. Very few people lived their accumulation years with that type of set it and forget it spending profile, i am not sure why they would be expecting that during their deaccumulation phase.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Dandy
Posts: 5469
Joined: Sun Apr 25, 2010 7:42 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Dandy » Sun Oct 14, 2018 8:50 am

I think you might be reading a bit too much into what people mean when they talk about their WR, or even SWR. I suspect very few people are looking for, or use, the " set it and forget it. Just follow the original plan no matter the market, inflation, interest rates, the current size of my portfolio".
I hope you are right. I see scant effort to guide people on when a modification might be warranted. After all the "safe" withdrawal plan has been back tested through some wild market swings. If one decides to follow the plan they should expect that to encounter some significant hits to their portfolio so they shouldn't panic. So when is it that some caution should be exercised?

By the way I'm not following a specific withdrawal plan - just trying to make sure those who decide on one labeled "safe" have confidence but some more guidance.

marcopolo
Posts: 1272
Joined: Sat Dec 03, 2016 10:22 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by marcopolo » Sun Oct 14, 2018 9:01 am

Dandy wrote:
Sun Oct 14, 2018 8:50 am
I think you might be reading a bit too much into what people mean when they talk about their WR, or even SWR. I suspect very few people are looking for, or use, the " set it and forget it. Just follow the original plan no matter the market, inflation, interest rates, the current size of my portfolio".
I hope you are right. I see scant effort to guide people on when a modification might be warranted. After all the "safe" withdrawal plan has been back tested through some wild market swings. If one decides to follow the plan they should expect that to encounter some significant hits to their portfolio so they shouldn't panic. So when is it that some caution should be exercised?

By the way I'm not following a specific withdrawal plan - just trying to make sure those who decide on one labeled "safe" have confidence but some more guidance.
I think many people kind of do what they did all their lives, they have a baseline standard of living, and they spend more when times are flush, they spend less when times are lean. Others might use something like Guyten-Klinger, or other more formal rules, there are plenty out there that have been studied and discussed to various level. But, the point is very few people will just blindly spend at some per-determined level even when things go south, I hope.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Ron Scott » Sun Oct 14, 2018 9:24 am

msk wrote:
Sun Oct 14, 2018 1:09 am
HomerJ wrote:
Sat Oct 13, 2018 8:57 pm
msk wrote:
Sat Oct 13, 2018 9:17 am
5% of a 100% stocks portfolio will last forever, and the average annual $ withdrawal will keep up with inflation, together of course with the annual portfolio balance keeping up with inflation, forever.
This is incorrect. During the Great Depression you have gone bankrupt.
I.e you can hand over a portfolio of VT (Vanguard World including EM) today to your 2 year-old toddler worth $1 million and he'll never, ever have to work! 5% = $50k p.a. this year, markets collapse 50% and he'll still be able to withdraw $25k p.a. and if markets rise he can buy more video games.
Oh, if he drops his spending 50%, it works.

I do have a pretty good buffer built into my spending, but I'm not sure if a 50% drop would be easy to live through.
IMHO BHs are much more pessimistic than is actually warranted. I did the historical 5% (actually used 0.4167% per month) withdrawals from 1871 till 2018, taxing dividends at 15% and using the actual inflation rate for each month. Shiller's data are that detailed. Here's what comes out. I used numbers that would make sense to us in real terms today, all numbers REAL terms:
Cash withdrawal in January 1871 pegged at $5k after paying 15% tax on dividends
Your bad month would have been August 1920 @ $3900 (nasty WW I)
But then euphoric in September 1929 @ $18,100 (Roaring 20s)
Worst month through the Great Depression would have been June 1932 @ $3500 but recovering to >$5,000 in a couple of months
Momentarily dipping down in April 1942 to $4700 (nasty WW II)
Thereafter sailing merrily upwards to January 2018 @ $21,000!

Moral from the history: 100% well diversified stocks, NEVER exceed 5% p.a. and you ought to do fine through world wars and whatever.
Actually, 300+ year history researched by Piketty, "Capital in the Twenty-First Century" concludes that productive RE pays around 4% REAL TERMS and that Trade and Industry pays another 1+% higher REAL TERMS. Sounds like humans are genetically programmed to accept not less than 5% REAL TERMS for their trade and industry investments :sharebeer

Yes, we are at euphoric stock market highs currently, so if a BH is really nervous about a 50% collapse, guess how long it will last (1, 3, 5 years?) keep some of your portfolio under the mattress (bonds) and use that to augment your withdrawals from a stock portfolio. E.g. 2.5% for 5 years is 12.5% in bonds. Stock markets worldwide will always recover, otherwise we have much a bigger headache than WW I or WW II.
Not sure I'm following your logic so help me. Are you saying the general economic impacts of the world wars in the 20th century were NEGATIVE to the US and its equity markets, and using that to support a worst-case scenario?
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

am
Posts: 2794
Joined: Sun Sep 30, 2007 9:55 am

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by am » Sun Oct 14, 2018 10:13 am

Here is a nice article by physician on fire. I think we are way too conservative!

https://www.physicianonfire.com/money-t ... =198528596

User avatar
Sandtrap
Posts: 5462
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Sandtrap » Sun Oct 14, 2018 10:46 am

vineviz wrote:
Sun Oct 14, 2018 7:34 am
Dandy wrote:
Sun Oct 14, 2018 6:40 am
It seems as if people want a plan of withdrawal that is safe and is not subject to change and that it will last their entire retirement. What I would call set it and forget it.
If only there were a financial product people could buy using a fixed amount of money up front that would provide a guaranteed stream of fixed income for the rest of their lives ....
SPIA??

User avatar
vineviz
Posts: 2301
Joined: Tue May 15, 2018 1:55 pm

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by vineviz » Sun Oct 14, 2018 10:48 am

Sandtrap wrote:
Sun Oct 14, 2018 10:46 am
vineviz wrote:
Sun Oct 14, 2018 7:34 am
Dandy wrote:
Sun Oct 14, 2018 6:40 am
It seems as if people want a plan of withdrawal that is safe and is not subject to change and that it will last their entire retirement. What I would call set it and forget it.
If only there were a financial product people could buy using a fixed amount of money up front that would provide a guaranteed stream of fixed income for the rest of their lives ....
SPIA??
We have a winner!

The steak knives are in the mail.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Sandtrap
Posts: 5462
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Sandtrap » Sun Oct 14, 2018 10:49 am

am wrote:
Sun Oct 14, 2018 10:13 am
Here is a nice article by physician on fire. I think we are way too conservative!

https://www.physicianonfire.com/money-t ... =198528596
Interesting article.
Thanks for posting.

Yes.
Planning for a 30+ year retirement duration and dying earlier with "too much" would indeed be dissapointing :oops: .

Post Reply