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

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

Post by visualguy » Sun Oct 14, 2018 11:45 pm

willthrill81 wrote:
Sun Oct 14, 2018 11:42 pm
visualguy wrote:
Sun Oct 14, 2018 11:33 pm
JoMoney wrote:
Sun Oct 14, 2018 10:03 pm
visualguy wrote:
Sun Oct 14, 2018 7:37 pm
I think it would also be informative to look at a 60/40 portfolio, but with ex-US for the 60% instead of US. Basically, answering the question of what the SWRs would have been like if the US had performed the same as ex-US.
PortfolioVisualizer Monte Carlo Simulations 4% inflation adjusted withdrawal
60% US Stock / 40% US Bond :happy
60% Global Ex-US Stock / 40% Global Bonds Unhedged :annoyed
Thanks.

Assuming I plugged in the numbers correctly...

For 60% US stock and 40% US bond, you get a 97.82% success rate for 4%/30yr, while for 60% ex-US and 40% US bond, you get only 83.3%.

For 4%/40yr, the difference is bigger: 94.48% success for US stock/US bonds, and only 67.64% for ex-US stock/US bonds. You would need to go down to a 2.5% withdrawal rate with ex-US stock to match the US stock success rate at 4% for the 40 year period, and you would need to be a bit under 3% for the 30 year period with ex-US.

Which brings me back to my concern that the SWR values that we typically have in mind are really a result of the much better historical long-term performance of the US market relative to foreign markets. If the US market had performed the same as ex-US, the SWRs would be significantly lower.

Although, maybe I don't understand what this tool is doing exactly since the results seem to be different from what I get by the tool mentioned earlier by Tyler9000 (Monte Carlo vs something different).
Again, I would urge you to use U.S. bonds rather than international. There's really no good reason why international bonds would be preferable on U.S. bonds.

This tool is a Monte Carlo simulation, while the tool used by Tyler9000 uses actual historical data. I favor the latter.
I was using US bonds, not international. I was varying only the stock part between US and ex-US.

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willthrill81
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Sun Oct 14, 2018 11:48 pm

visualguy wrote:
Sun Oct 14, 2018 11:45 pm
willthrill81 wrote:
Sun Oct 14, 2018 11:42 pm
visualguy wrote:
Sun Oct 14, 2018 11:33 pm
JoMoney wrote:
Sun Oct 14, 2018 10:03 pm
visualguy wrote:
Sun Oct 14, 2018 7:37 pm
I think it would also be informative to look at a 60/40 portfolio, but with ex-US for the 60% instead of US. Basically, answering the question of what the SWRs would have been like if the US had performed the same as ex-US.
PortfolioVisualizer Monte Carlo Simulations 4% inflation adjusted withdrawal
60% US Stock / 40% US Bond :happy
60% Global Ex-US Stock / 40% Global Bonds Unhedged :annoyed
Thanks.

Assuming I plugged in the numbers correctly...

For 60% US stock and 40% US bond, you get a 97.82% success rate for 4%/30yr, while for 60% ex-US and 40% US bond, you get only 83.3%.

For 4%/40yr, the difference is bigger: 94.48% success for US stock/US bonds, and only 67.64% for ex-US stock/US bonds. You would need to go down to a 2.5% withdrawal rate with ex-US stock to match the US stock success rate at 4% for the 40 year period, and you would need to be a bit under 3% for the 30 year period with ex-US.

Which brings me back to my concern that the SWR values that we typically have in mind are really a result of the much better historical long-term performance of the US market relative to foreign markets. If the US market had performed the same as ex-US, the SWRs would be significantly lower.

Although, maybe I don't understand what this tool is doing exactly since the results seem to be different from what I get by the tool mentioned earlier by Tyler9000 (Monte Carlo vs something different).
Again, I would urge you to use U.S. bonds rather than international. There's really no good reason why international bonds would be preferable on U.S. bonds.

This tool is a Monte Carlo simulation, while the tool used by Tyler9000 uses actual historical data. I favor the latter.
I was using US bonds, not international. I was varying only the stock part between US and ex-US.
You apparently used total bond market. I would recommend intermediate-term Treasuries in this instance because it has a longer history than TBM. Doing so improves the success rate to about 91%.
“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

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

Post by visualguy » Sun Oct 14, 2018 11:53 pm

willthrill81 wrote:
Sun Oct 14, 2018 11:48 pm
You apparently used total bond market. I would recommend intermediate-term Treasuries in this instance because it has a longer history than TBM. Doing so improves the success rate to about 91%.
Correct.

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

Post by visualguy » Mon Oct 15, 2018 12:24 am

marcopolo wrote:
Sun Oct 14, 2018 11:40 pm
I have not run the scenario, so take this as hear say, but i recall reading somewhere that many of the failure cases for the ex-US is driven by countries that were reduced to rubble during the WW1 and/or WW2. I recall that discussion saying if you excluded those scenarios, the gap between US and ex-US outcomes got a lot closer. Sure, the US could also be reduced to rubble, I am not sure how to plan for that.
That wouldn't explain more recent numbers. For example, let's start at 1986. No major economies have been reduced to rubble after that, and it's long-enough after the world wars. The US had a CAGR of 10.50% over the 32-year period since then, while ex-US had 7.08%.

Maybe you can blame Japan, so let's start at 1992 which is after their stock market crashed. The US had a CAGR of 9.73% in the 26-year period since then, while ex-US had 5.09%, which is a huge difference. The ex-US return was about the same as US bonds over that period, only with much higher volatility, of course.

The concern I have is that the foundation for the SWRs that we're talking about is a lot more fragile than many of us believe because they are based on the stock market results of one country (US) which did exceptionally well. The SWRs aren't based on some inherent principle - you don't get those values when you look at ex-US which is huge and diverse, yet hasn't done nearly as well.

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willthrill81
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Mon Oct 15, 2018 9:35 am

visualguy wrote:
Mon Oct 15, 2018 12:24 am
marcopolo wrote:
Sun Oct 14, 2018 11:40 pm
I have not run the scenario, so take this as hear say, but i recall reading somewhere that many of the failure cases for the ex-US is driven by countries that were reduced to rubble during the WW1 and/or WW2. I recall that discussion saying if you excluded those scenarios, the gap between US and ex-US outcomes got a lot closer. Sure, the US could also be reduced to rubble, I am not sure how to plan for that.
That wouldn't explain more recent numbers. For example, let's start at 1986. No major economies have been reduced to rubble after that, and it's long-enough after the world wars. The US had a CAGR of 10.50% over the 32-year period since then, while ex-US had 7.08%.

Maybe you can blame Japan, so let's start at 1992 which is after their stock market crashed. The US had a CAGR of 9.73% in the 26-year period since then, while ex-US had 5.09%, which is a huge difference. The ex-US return was about the same as US bonds over that period, only with much higher volatility, of course.

The concern I have is that the foundation for the SWRs that we're talking about is a lot more fragile than many of us believe because they are based on the stock market results of one country (US) which did exceptionally well. The SWRs aren't based on some inherent principle - you don't get those values when you look at ex-US which is huge and diverse, yet hasn't done nearly as well.
Keep in mind that apart from volatility, you only need a real return of about 1.2% annually to make the '4% rule' work. The U.S. having had a higher SWR is very possibly more a result of having had better sequences of returns rather than higher returns.

Using historic data going back to 1970 through Portfolio Charts, a portfolio with 60% ex-U.S. stock and 40% intermediate-term Treasuries had a safe withdrawal rate of 4.8% over a 30 year period. That's significantly higher than the '4% rule' and not built on American exceptionalism. If you substituted the ex-U.S. stock for U.S. total stock market, the safe withdrawal rate actually fell to 4.5%.
“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

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

Post by HomerJ » Mon Oct 15, 2018 10:30 am

marcopolo wrote:
Sun Oct 14, 2018 11:40 pm
I have not run the scenario, so take this as hear say, but i recall reading somewhere that many of the failure cases for the ex-US is driven by countries that were reduced to rubble during the WW1 and/or WW2. I recall that discussion saying if you excluded those scenarios, the gap between US and ex-US outcomes got a lot closer. Sure, the US could also be reduced to rubble, I am not sure how to plan for that.
This. People keep saying that the U.S. will fall back to the global averages, but the ex-US SWR is low because it includes the effects of WWI and WWII.

I don't understand why the global averages can't come UP to the U.S. averages, as long as we avoid WWIII.
The J stands for Jay

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willthrill81
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Mon Oct 15, 2018 10:36 am

HomerJ wrote:
Mon Oct 15, 2018 10:30 am
marcopolo wrote:
Sun Oct 14, 2018 11:40 pm
I have not run the scenario, so take this as hear say, but i recall reading somewhere that many of the failure cases for the ex-US is driven by countries that were reduced to rubble during the WW1 and/or WW2. I recall that discussion saying if you excluded those scenarios, the gap between US and ex-US outcomes got a lot closer. Sure, the US could also be reduced to rubble, I am not sure how to plan for that.
This. People keep saying that the U.S. will fall back to the global averages, but the ex-US SWR is low because it includes the effects of WWI and WWII.

I don't understand why the global averages can't come UP to the U.S. averages, as long as we avoid WWIII.
Again, from the aspect of 30 year SWRs, ex-U.S. equities have been slightly better than U.S. equities since 1970. The sequence of returns is at least as important as the returns themselves.
“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

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

Post by HomerJ » Mon Oct 15, 2018 10:42 am

visualguy wrote:
Mon Oct 15, 2018 12:24 am
marcopolo wrote:
Sun Oct 14, 2018 11:40 pm
I have not run the scenario, so take this as hear say, but i recall reading somewhere that many of the failure cases for the ex-US is driven by countries that were reduced to rubble during the WW1 and/or WW2. I recall that discussion saying if you excluded those scenarios, the gap between US and ex-US outcomes got a lot closer. Sure, the US could also be reduced to rubble, I am not sure how to plan for that.
That wouldn't explain more recent numbers. For example, let's start at 1986. No major economies have been reduced to rubble after that, and it's long-enough after the world wars. The US had a CAGR of 10.50% over the 32-year period since then, while ex-US had 7.08%.

Maybe you can blame Japan, so let's start at 1992 which is after their stock market crashed. The US had a CAGR of 9.73% in the 26-year period since then, while ex-US had 5.09%, which is a huge difference. The ex-US return was about the same as US bonds over that period, only with much higher volatility, of course.
7.08% and 5.09% are good enough to easily support at 4% withdrawal rate. But we really shouldn't look at averages. Sure, the averages have been better in the U.S. in recent years, but we're not basing 4% off the average returns. We need to compare the worst 30-year periods with U.S. and ex-U.S.

What are the WORST 30-year periods in ex-US stocks since, say 1955?

Did 4% work for an 60/40 ex-US portfolio in those periods?
The J stands for Jay

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

Post by Dandy » Mon Oct 15, 2018 1:17 pm

munemaker wrote:
Sun Oct 14, 2018 5:54 pm
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 ....
Curious whether you are an insurance salesman?
Not sure who is being asked if they are an insurance salesman? Not Dandy.

But full disclosure I did work for a major insurance company in auditing, budgeting and their mutual fund transfer agency. In auditing I exposed an agent fraud with matching gifts, another case where agents were taking cash value out life products and using it to fund annuities and when I was in mutual funds identified agents were cashing out IRAs and using the checks to buy annuities thereby avoiding replacement detection. That was found via a redemption survey I implemented to determine when we were getting so many IRA mutual fund full redemptions where the check was being sent directly to the holder not a custodian to custodian transfer. When I ran mutual fund call centers we were constantly fighting market timer agents and brokers that were finding ways to circumvent the rules.

So, I have seen first hand the unethical actions of insurance agents and brokers. I also learned a bit about the products by taking insurance related courses. I never sold insurance or investment products or was engaged in or had any sales or marketing responsibilities. Keep in mind I saw the worst of maybe 30,000 agents and brokers.

My views on the merits of immediate annuities in some circumstances comes a bit from my courses but mostly by learning about investments etc. after I retired. There are many respected investment/retirement authors who suggest a decent role for those products in certain circumstances.

Dandy

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

Post by heyyou » Mon Oct 15, 2018 2:46 pm

When discussing what is the truly safe, safe withdrawal rate, folks are looking for certainty for every year of a specific future 30 year period. The bad news is there isn't any certainty, nor is there going to be any.

The current information is as good as it needs to be. You can strive for more exactitude but that will not be more accuracy about your specific future. Just accept that level of uncertainty and expect to adapt as the future unfolds.

You can plan to limit your necessary spending to a lesser percentage than the expected optimal one.
You can spend a set percentage of each recent annual portfolio value.
You can slightly adjust your WD percentage by current valuations expecting the direction of future returns.

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

Post by Ron Scott » Mon Oct 15, 2018 4:24 pm

PhysicianOnFIRE wrote:
Sun Oct 14, 2018 11:46 am
These conversations revolve around risk and how willing you are to accept some risk.

If you have a very low risk tolerance, shoot for a withdrawal rate of 3% or less and invest more heavily in bonds. If you feel your tolerance for risk is higher, start with a withdrawal rate of 4% or higher and a higher percentage of stocks.

No one is right or wrong, necessarily. The earlier you retire and the higher your initial withdrawal rate, the more likely you are to need to make adjustments by earning more or spending less if returns are particularly bad in the first 5 to 10 years. If you accept that risk, do as you please!

Image

Some people want the greenest shade on the table. And that's fine. Others might be OK living in the yellow range. I wouldn't suggest the burnt orange, but that's truthfully where many retirees are -- relying on Social Security and maybe a few hundred thousand in assets. The table is from part 1 of ERN's excellent 28-part SWR series.

-PoF
I know we're supposed to read the chart as GREEN SAFE and RED RISKY. Viewed this way "risk" becomes more dependent on beliefs about future returns and psychological tolerance to equity investment. (The chart is designed to lead to that conclusion.)

I can't help think the better way to read it is LEFT SIDE SAFE and RIGHT SIDE RISKY. "Risk" here is less dependent on beliefs about future returns and tolerance to equity investment.

Less is more...?
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.

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

Post by MnD » Mon Oct 15, 2018 6:37 pm

If your objective is to translate decades of "saving for retirement" into retirement income, the medium and low inflation adjusted SWR's (3-4%) lack much utility, other than providing a pretty good stake in the richest person in the graveyard contest.

Here's 5% of annual portfolio balance spend with a 3% inflation-adjusted floor compared to 4% and 3% inflation adjusted.

Start $1M portfolio, 70/30 AA, ER .11%, 35 years, everything in real dollars.
Cfiresim historical sequence of returns from 1871 onward
http://www.cfiresim.com/input.php


35 years 5% of annual portfolio balance with 3% inflation-adjusted floor ($30,000 minimum real spend)
Image
% of portfolio has a significant higher median and average total spend over retirement, no failures, no huge runaway portfolio to the upside. Check out on average with about in real terms what you started with so kids shouldn't complain. Low ending portfolio and low spend is the 1965/66 sequence where after a few years you spend retirement on the 3% floor. Which is fine. Cut back if you need to.


35 years 4% inflation-adjusted ($40,000 real spend)
Image
8% of sequences fail! Moderate average and median total spend. Leave a lot of money on the table on average/median (like 1.5-2X what you started with) and huge runaway portfolio balance potential in the rosy scenario.


35 years 3% inflation-adjusted ($30,000 real spend)
Imageg
You spend frugally in retirement like it's worst past case 1966 whether it is or not. Might die with $10M real portfolio starting with $1M - Woo-hoo Misers dream!

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

Post by am » Mon Oct 15, 2018 9:08 pm

visualguy wrote:
Sun Oct 14, 2018 11:33 pm
JoMoney wrote:
Sun Oct 14, 2018 10:03 pm
visualguy wrote:
Sun Oct 14, 2018 7:37 pm
I think it would also be informative to look at a 60/40 portfolio, but with ex-US for the 60% instead of US. Basically, answering the question of what the SWRs would have been like if the US had performed the same as ex-US.
PortfolioVisualizer Monte Carlo Simulations 4% inflation adjusted withdrawal
60% US Stock / 40% US Bond :happy
60% Global Ex-US Stock / 40% Global Bonds Unhedged :annoyed
Thanks.

Assuming I plugged in the numbers correctly...

For 60% US stock and 40% US bond, you get a 97.82% success rate for 4%/30yr, while for 60% ex-US and 40% US bond, you get only 83.3%.

For 4%/40yr, the difference is bigger: 94.48% success for US stock/US bonds, and only 67.64% for ex-US stock/US bonds. You would need to go down to a 2.5% withdrawal rate with ex-US stock to match the US stock success rate at 4% for the 40 year period, and you would need to be a bit under 3% for the 30 year period with ex-US.

Which brings me back to my concern that the SWR values that we typically have in mind are really a result of the much better historical long-term performance of the US market relative to foreign markets. If the US market had performed the same as ex-US, the SWRs would be significantly lower.

Although, maybe I don't understand what this tool is doing exactly since the results seem to be different from what I get by the tool mentioned earlier by Tyler9000 (Monte Carlo vs something different).

Does firecalc come with a time machine? :D All these successes are based on past data. Stocks have a wide range of returns which over time gets wider,

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willthrill81
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Mon Oct 15, 2018 9:21 pm

am wrote:
Mon Oct 15, 2018 9:08 pm
Does firecalc come with a time machine? :D All these successes are based on past data. Stocks have a wide range of returns which over time gets wider,
The wide range of returns is taken into account. No one can predict the future, but virtually every single person on this board is using something historical to at least give them some kind of notion of what to expect going forward.
Last edited by willthrill81 on Mon Oct 15, 2018 10:46 pm, edited 1 time in total.
“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

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

Post by bhsince87 » Mon Oct 15, 2018 9:56 pm

MnD wrote:
Mon Oct 15, 2018 6:37 pm
If your objective is to translate decades of "saving for retirement" into retirement income, the medium and low inflation adjusted SWR's (3-4%) lack much utility, other than providing a pretty good stake in the richest person in the graveyard contest.

Here's 5% of annual portfolio balance spend with a 3% inflation-adjusted floor compared to 4% and 3% inflation adjusted.

Start $1M portfolio, 70/30 AA, ER .11%, 35 years, everything in real dollars.
Cfiresim historical sequence of returns from 1871 onward
http://www.cfiresim.com/input.php


35 years 5% of annual portfolio balance with 3% inflation-adjusted floor ($30,000 minimum real spend)
Image
% of portfolio has a significant higher median and average total spend over retirement, no failures, no huge runaway portfolio to the upside. Check out on average with about in real terms what you started with so kids shouldn't complain. Low ending portfolio and low spend is the 1965/66 sequence where after a few years you spend retirement on the 3% floor. Which is fine. Cut back if you need to.


35 years 4% inflation-adjusted ($40,000 real spend)
Image
8% of sequences fail! Moderate average and median total spend. Leave a lot of money on the table on average/median (like 1.5-2X what you started with) and huge runaway portfolio balance potential in the rosy scenario.


35 years 3% inflation-adjusted ($30,000 real spend)
Imageg
You spend frugally in retirement like it's worst past case 1966 whether it is or not. Might die with $10M real portfolio starting with $1M - Woo-hoo Misers dream!
I understand your point. And it's a good one.

But your analysis falls into the same trap that many of the doomsday 2 percenters go down.

No reasonably astute person is going to sit back and watch their portfolio balloon to $10 million. Just like they won't watch it fall to zero.

If it grows more than expected, they'll spend more. If not, they won't.

We're not automatons following some rule like a 3.73876% withdrawal until the day we die!
Retirement: When you reach a point where you have enough. Or when you've had enough.

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

Post by willthrill81 » Mon Oct 15, 2018 10:50 pm

bhsince87 wrote:
Mon Oct 15, 2018 9:56 pm
No reasonably astute person is going to sit back and watch their portfolio balloon to $10 million. Just like they won't watch it fall to zero.

If it grows more than expected, they'll spend more. If not, they won't.

We're not automatons following some rule like a 3.73876% withdrawal until the day we die!
I don't see why any people complain about something like the '4% rule' "leaving a pile of money on the table." This is one of the biggest straw-man arguments I've ever heard of. No one that I've ever heard of even by the vaguest rumor strictly followed the '4% rule'. People cut back when times are lean, and they loosen their purse strings when times are good. If they do leave behind a pile of money, it will have far more to do with them dying earlier than they planned for and/or being unnecessarily frugal in retirement.

The '4% rule' and similar withdrawal methods are used as guidelines, starting points, and for illustrative purposes. There's no need to poke holes into every little aspect of them because nobody is following them precisely anyway.
“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

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

Post by Hyperborea » Tue Oct 16, 2018 2:29 am

bhsince87 wrote:
Mon Oct 15, 2018 9:56 pm
MnD wrote:
Mon Oct 15, 2018 6:37 pm
If your objective is to translate decades of "saving for retirement" into retirement income, the medium and low inflation adjusted SWR's (3-4%) lack much utility, other than providing a pretty good stake in the richest person in the graveyard contest.

Here's 5% of annual portfolio balance spend with a 3% inflation-adjusted floor compared to 4% and 3% inflation adjusted.

Start $1M portfolio, 70/30 AA, ER .11%, 35 years, everything in real dollars.
Cfiresim historical sequence of returns from 1871 onward
http://www.cfiresim.com/input.php

<snip>

You spend frugally in retirement like it's worst past case 1966 whether it is or not. Might die with $10M real portfolio starting with $1M - Woo-hoo Misers dream!
I understand your point. And it's a good one.

But your analysis falls into the same trap that many of the doomsday 2 percenters go down.

No reasonably astute person is going to sit back and watch their portfolio balloon to $10 million. Just like they won't watch it fall to zero.

If it grows more than expected, they'll spend more. If not, they won't.

We're not automatons following some rule like a 3.73876% withdrawal until the day we die!
I think the seat of the pants "do better then spend more; do poorly then spend less" is an approximation to the spending a percent of the portfolio value with a floor. Putting it into numbers allows for it to be backtested and codifies it so that it can be easier for some to implement in real life.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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

Post by Ron Scott » Tue Oct 16, 2018 6:36 am

willthrill81 wrote:
Mon Oct 15, 2018 9:21 pm
am wrote:
Mon Oct 15, 2018 9:08 pm
Does firecalc come with a time machine? :D All these successes are based on past data. Stocks have a wide range of returns which over time gets wider,
The wide range of returns is taken into account. No one can predict the future, but virtually every single person on this board is using something historical to at least give them some kind of notion of what to expect going forward.
...and history shows that when significant numbers of people believe in something enough it in fact does come true.

How could the average and range of 80 years’ historical data not simply define the average and range of the next 30, 40, 50 or 60 years?
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.

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

Post by Dandy » Tue Oct 16, 2018 7:48 am

My quibble is don't call 4% a safe withdrawal rate call it a safe initial withdrawal rate. or something that signals that it isn't safe under all conditions. When you use the term safe and then follow it with up that dollar amount for inflation each year- that is unnecessarily misleading.

A second point is that we offer nothing? on when a starting rate of 4% should be cut back. We stress stay the course and don't market time but expect people in retirement to reduce their withdrawals pretty much on their own. Is there no rule of thumb we can offer/develop to consider a change in withdrawals? Even when you might increase them.?

How about something like: current assets divided by current withdrawal dollars = number of years. Add that to your current age. If it is 95 or less consider a lower withdrawal amount. If it is below 90 you should cut back withdrawals. If it is higher than 95 you might be able to withdraw more. This is off the top of my head not based on any valid back testing. If not that something that focuses on current age and current assets (or maybe current assets less 1/2 of equity assets).

Sure most people are sensible and will make adjustments so why not build that thought at the front end. We have all types of people who read this forum. Ranging from very sophisticated to the opposite.

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

Post by longinvest » Tue Oct 16, 2018 7:53 am

How about Variable percentage withdrawal (VPW), instead?
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TN_Boy
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by TN_Boy » Tue Oct 16, 2018 8:12 am

visualguy wrote:
Sun Oct 14, 2018 6:48 pm

Most of post deleted ...

If you have enough money, then you can deal with these things as best you can with money, which is better than without money for sure. Like you said, LTC insurance and Medicaid have their drawbacks and limitations. I consider having the money and assets to pay for LTC to be the better solution by far. The question that's hard to answer is how much is needed to cover reasonably likely scenarios, but it's definitely significant resources.
I was scanning this thread, and your remark here caught my eye. To me, your question is backwards. It "seems" straightforward to me to look at the averages and come up with the amount of money to cover "reasonably likely scenarios." What seems much harder, again to me, is deciding how much you are going to worry about extreme situations.

For example, the average stay in assisted living is something like 21 months. So I pad that to 36 months per person. And I'm done! (I exaggerate, of course). But that is the way I think of it. So you are looking at maybe six years worth of assisted living expenses. There are a number of permutations here, of course. One spouse in assisted living, the other not. One spouse dies, then the other goes into assisted living later, etc.

But playing around with scenarios like the above I think works for "likely" scenarios. And 6 years is probably pessimistic given the combination of average stays plus the likelihood (which is NOT 100%) of actually going into a facility.

Now, the worst cases are what I don't know what to do with. 10 years in skilled nursing? Well, for most of us to handle that well means, I don't know, don't retire. That's a very uncommon disaster case.

For what it is worth. We do have information on average stays in LTC, the likelihood of going in a facility, etc.

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

Post by longinvest » Tue Oct 16, 2018 8:14 am

According to United States Life Tables, 2013 (page 6), 1.0% of males and 2.8% of females reach the venerable age of 100 in the U.S.

In other words, (1,023 / 51,252) = 2.0% of 80 years old males and (2,754 / 64,427) = 4.3% of 80 years old females make it to age 100. The chance of one spouse surviving to age 100, in a man and woman couple both of age 80, is ((2.0% + 4.3%) - (2.0% X 4.3%)) = 6.2%. This is for the general population, without accounting for socio-economic status.
Last edited by longinvest on Tue Oct 16, 2018 8:24 am, edited 1 time in total.
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by Ron Scott » Tue Oct 16, 2018 8:20 am

bhsince87 wrote:
Mon Oct 15, 2018 9:56 pm
MnD wrote:
Mon Oct 15, 2018 6:37 pm

You spend frugally in retirement like it's worst past case 1966 whether it is or not. Might die with $10M real portfolio starting with $1M - Woo-hoo Misers dream!
But your analysis falls into the same trap that many of the doomsday 2 percenters go down.

No reasonably astute person is going to sit back and watch their portfolio balloon to $10 million. Just like they won't watch it fall to zero.

If it grows more than expected, they'll spend more.
Exactly.

Those who defend The 4% Rule against more conservative approaches pull out some pretty strange arguments to do so. Consider:

Doomsday
"So, if you don't think history predicts the future I guess we'll all just die from a big asteroid and none of this will make a difference!"
Fear-of-not-spending-enough
"You'll die with $10M!" "You're a Miser!"
Poor me!
"So you're telling thousands of Americans they have to work until they're 80 and then live on rice and beans."

These odd arguments deflect from the real issue: Proponents of The 4% Rule cannot produce a logical argument for the validity of using historical data from 20th century America to predict a specific 30-50-year retirement period in the future. So they throw a smokescreen of numbers at us and attack the attacker instead.

Skeptics of The 4% Rule look for other ways--without relying on historical returns--to develop reasonable withdrawal rates. We know we can't predict the future but believe our time is better spent preparing for a future that is not as financially strong as the past. My approach is to base a withdrawal rate on a future scenario with 0% real returns. For a 30 year retirement this yields a maximum 3.3% WR. I personally am spending less and I'm happy as a lark. Conservative yes, doomsday no...if you prepare.

So with this said, let's revisit the Early Retirement Now chart and see how far apart we all are.

Let's try this mental exercise:

1. Picture the chart without the 50- and 60-year retirement periods. Sincere apologies to the 30-years out there who plan to FIRE on their grandfather's' inheritance.
2. Now picture the chart without the extreme allocations in stocks--no 0%, no 100%. Who does this anyway?
3. Finally, consider that future returns JUST MIGHT NOT BE AS ROSY AS THE PAST. Just consider...

What you're left with is a chart that reflects 95% of the population in which THE LOWER WITHDRAWAL RATES ARE MORE INDICATIVE OF SUCCESS than the higher ones. In fact, that 3.3% rate described above looks pretty good even using the historical data (which shouldn't be used)!

Image
Last edited by Ron Scott on Tue Oct 16, 2018 8:32 am, edited 1 time in total.
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by longinvest » Tue Oct 16, 2018 8:31 am

No sane person would ever follow a withdrawal approach (SWR) that lets most of its (hypothetical) adopters die as the richest people in the graveyard, and bankrupts most of the rest.

There exist flexible withdrawal methods that automatically increase withdrawals in good markets, and reduce them in bad markets, as sensible people do in real life.

Unfortunately, it's better business to spread fear. The industry (financial advisers, insurance sales people, bloggers) loves SWR!
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by TN_Boy » Tue Oct 16, 2018 8:47 am

Ron Scott wrote:
Tue Oct 16, 2018 8:20 am

Stuff deleted

These odd arguments deflect from the real issue: Proponents of The 4% Rule cannot produce a logical argument for the validity of using historical data from 20th century America to predict a specific 30-50-year retirement period in the future. So they throw a smokescreen of numbers at us and attack the attacker instead.

Skeptics of The 4% Rule look for other ways--without relying on historical returns--to develop reasonable withdrawal rates. We know we can't predict the future but believe our time is better spent preparing for a future that is not as financially strong as the past. My approach is to base a withdrawal rate on a future scenario with 0% real returns. For a 30 year retirement this yields a maximum 3.3% WR. I personally am spending less and I'm happy as a lark. Conservative yes, doomsday no...if you prepare.
Without getting into the low level details, I did want to point out that a 0% real return is, at a high level, very conservative, not just "conservative." It means that over that time period, a stock and bond investor lost money.

0% real before taxes is negative after taxes. You lost money. Over a long timespan. And generally, I think capitalism works a bit better than that.

And once we start talking about scenarios where everybody lost money, I don't think 0% real is any better for a stake in the ground than -1% or +1%. It's all just "nobody is making any money."

But finally, a 3.3% withdrawal rate, which is where you wind up, doesn't seem particularly doomsday to me, though I think it a little pessimistic for a typical length retirement.

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

Post by MnD » Tue Oct 16, 2018 8:53 am

bhsince87 wrote:
Mon Oct 15, 2018 9:56 pm
MnD wrote:
Mon Oct 15, 2018 6:37 pm
If your objective is to translate decades of "saving for retirement" into retirement income, the medium and low inflation adjusted SWR's (3-4%) lack much utility, other than providing a pretty good stake in the richest person in the graveyard contest.

Here's 5% of annual portfolio balance spend with a 3% inflation-adjusted floor compared to 4% and 3% inflation adjusted.

Start $1M portfolio, 70/30 AA, ER .11%, 35 years, everything in real dollars.
Cfiresim historical sequence of returns from 1871 onward
http://www.cfiresim.com/input.php


35 years 5% of annual portfolio balance with 3% inflation-adjusted floor ($30,000 minimum real spend)
Image
% of portfolio has a significant higher median and average total spend over retirement, no failures, no huge runaway portfolio to the upside. Check out on average with about in real terms what you started with so kids shouldn't complain. Low ending portfolio and low spend is the 1965/66 sequence where after a few years you spend retirement on the 3% floor. Which is fine. Cut back if you need to.


35 years 4% inflation-adjusted ($40,000 real spend)
Image
8% of sequences fail! Moderate average and median total spend. Leave a lot of money on the table on average/median (like 1.5-2X what you started with) and huge runaway portfolio balance potential in the rosy scenario.


35 years 3% inflation-adjusted ($30,000 real spend)
Imageg
You spend frugally in retirement like it's worst past case 1966 whether it is or not. Might die with $10M real portfolio starting with $1M - Woo-hoo Misers dream!
I understand your point. And it's a good one.

But your analysis falls into the same trap that many of the doomsday 2 percenters go down.

No reasonably astute person is going to sit back and watch their portfolio balloon to $10 million. Just like they won't watch it fall to zero.

If it grows more than expected, they'll spend more. If not, they won't.

We're not automatons following some rule like a 3.73876% withdrawal until the day we die!
5% of portfolio balance with a 3% inflation-adjusted floor simply applies some past-tested guidance to a "spend more spend less" approach which I'm certainly in favor of. I have a hard time imagining the fixed ultra-low SWR crowd loosening up, especially earlier in retirement when they have the health and energy to add on some extras if the awful sequence of returns they are imagining does not materialize. On the flip side I could see some unguided new retirees spending 10% or more per year if a few good years handing them those type of returns early out the gate. There's also no "rule" that you have to spend 5% of the portfolio balance if/when experiencing a favorable sequence. I like the balance of this approach, but I'm sure we won't follow it to the letter. :beer

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

Post by bornloser » Tue Oct 16, 2018 9:04 am

Hats off to a good discussion, typical Bogleheads erudite, analytical, etc. I enjoy many other financial forums such as Mad Fientist, WCI, Early Retirement Now as well. One comical point that comes up not infrequently on some of the other sites is the over-thinking, over-planning and over-stressing by the Bogleheads as it pertains to retirement funding (ie, what if a meteor strikes the earth in the first 5 years of retirement, oh no!). After years of saving, investing and sticking to my IPS, I'm going to enjoy some really nice craft beer and NOT stress so much.

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

Post by marcopolo » Tue Oct 16, 2018 9:14 am

Ron Scott wrote:
Tue Oct 16, 2018 8:20 am

My approach is to base a withdrawal rate on a future scenario with 0% real returns. For a 30 year retirement this yields a maximum 3.3% WR. I personally am spending less and I'm happy as a lark. Conservative yes, doomsday no...if you prepare.
If you base your WR on an assumed 0% real return, unless you put all your money in something like a TIPS ladder or SPIA, I think your WR would have to be quite a bit lower than 3.3%. You are not accounting for sequence of return effects. With expected variability, the sustainable withdrawal rate it typical;y quite a bit lower than the CAGR over a 30 year time frame.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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

Post by heyyou » Tue Oct 16, 2018 4:31 pm

Sequence risk does not suddenly appear. Those who monitor their annual WDs relative to their remaining portfolio balance will see it. I believe some of McClung's dense tables of 30 year retirement WDs show each remaining annual balance as a decimal amount of the starting balance.

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

Post by pivoprussia » Tue Oct 16, 2018 5:58 pm

These are my favorite threads. We all want to know IF we should be ok in our decisions.

I have seen lots of comments about "flexibility" and the notion people will not blindly just follow the 4% rule from the Trinity Study.

I have not seen anyone mention the articles specifically addressing the myths of flexibility addressed in the Early Retirement Now series.
Certainly people will cut back, but exactly how helpful is this? I guess it boils down to how much discretionary spending you have budgeted.

Regardless, if you have not, I suggest reading the 3 articles:

https://earlyretirementnow.com/2018/02/ ... exibility/
https://earlyretirementnow.com/2018/05/ ... s-reality/
https://earlyretirementnow.com/2018/05/ ... ity-myths/

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

Post by michaeljc70 » Tue Oct 16, 2018 6:14 pm

If you live pretty frugally, I don't know realistically how much you can cut back on your withdrawals in bad times (market downturns). If I had to cut more than 5-10% from what I am spending now, I'd really feel it. It's not like I am staying in 5 star hotels and flying business class on vacations where I can move down to coach and stay at a 4 star hotel. Sure, I can take less vacations, eat out less (though I don't eat out a lot already), cut out some of the foods I like that are more expensive, drink cheaper wine, etc. but that isn't going to massively change my expenses. Housing, healthcare, auto and food are the bulk of my expenses.

I know the obvious counter to this is to retire later, work longer, etc. to have a bigger cushion, but that isn't always an option.

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

Post by longinvest » Tue Oct 16, 2018 7:09 pm

I see that VPW was backtested on a highly volatile 80/20 stocks/bonds portfolio. The retiree didn't have any stable lifelong non-portfolio income like a pension, Social Security, or an inflation-indexed SPIA. I don't need to read the details of the article to guess that the author probably claims that VPW is volatile. That's not a surprise; VPW's withdrawals fluctuate with the portfolio; if the portfolio is volatile, withdrawals will be volatile.

To get smoother withdrawals with VPW is simple: apply it on a smooth (balanced) portfolio, where bonds dampen the volatility of stocks. Here's a post I wrote about how to get smooth retirement income with VPW withdrawals and Social Security: viewtopic.php?f=2&t=120430&start=700#p3480568
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by One Ping » Tue Oct 16, 2018 7:41 pm

pivoprussia wrote:
Tue Oct 16, 2018 5:58 pm
These are my favorite threads.
Ditto.
pivoprussia wrote:
Tue Oct 16, 2018 5:58 pm
I have seen lots of comments about "flexibility" and the notion people will not blindly just follow the 4% rule from the Trinity Study.

I have not seen anyone mention the articles specifically addressing the myths of flexibility addressed in the Early Retirement Now series.
Certainly people will cut back, but exactly how helpful is this? I guess it boils down to how much discretionary spending you have budgeted.

Regardless, if you have not, I suggest reading the 3 articles:

https://earlyretirementnow.com/2018/02/ ... exibility/
https://earlyretirementnow.com/2018/05/ ... s-reality/
https://earlyretirementnow.com/2018/05/ ... ity-myths/
I've often wondered how you determine, quantitatively, early enough that you are in a situation where you need to take corrective action and how you determine, again quantitatively, what corrective action to take. "Gut feel" is not a plan. ERN's approach attempts to put some numbers to at least parts of the problem.

Looking at back testing cases or Monte Carlo simulations that failed can give you quantitative insight on how portfolios fail. I don't believe you need to have an exact analog to reality to gain these quantitative insights. Trade studies using these failed cases can be conducted to suss out alert/alarm levels vs time for when corrective action needs to be taken and what those remedial actions might/should be. Parts of ERN's articles begin to get at this.

Good reading and good recommendation pivoprussia.

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

Post by akushner23 » Tue Oct 16, 2018 7:53 pm

I always feel like the strategy of picking your retirement start date and than tracking inflation seems complicated. What if you don’t have a hard “start date” but are working part time and also pulling from your portfolio? What if the week after you retire the market tanks? Do you base your 4% on the retirement date or the new reality of the lower portfolio?

How about instead of withdrawing an inflation adjusted 4% you instead withdraw 1% of your portfolio’s value, 4x a year? The 1% will be based on your actual portfolio value, not on the value the day you retired. Also you are guaranteed to not run out of money- if the portfolio drops your widthdrawl amount drops.

I don’t have as much knowledge as everyone here so perhaps there is something I’m missing.

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

Post by longinvest » Tue Oct 16, 2018 8:06 pm

akushner23 wrote:
Tue Oct 16, 2018 7:53 pm
How about instead of withdrawing an inflation adjusted 4% you instead withdraw 1% of your portfolio’s value, 4x a year? The 1% will be based on your actual portfolio value, not on the value the day you retired. Also you are guaranteed to not run out of money- if the portfolio drops your widthdrawl amount drops.

I don’t have as much knowledge as everyone here so perhaps there is something I’m missing.
The idea of always multiplying the percentage by the current portfolio balance at the time of withdrawal is, effectively, a great idea! But, continuing to take 4% (4 X 1%) at age 90 would represent significant under-spending (it's 1/20 of the portfolio). A better solution is to withdraw a percentage which varies with the retiree's age and asset allocation.

What's the percentage? It can be found in our wiki: https://www.bogleheads.org/wiki/Variabl ... #VPW_Table
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by willthrill81 » Tue Oct 16, 2018 8:34 pm

One Ping wrote:
Tue Oct 16, 2018 7:41 pm
I've often wondered how you determine, quantitatively, early enough that you are in a situation where you need to take corrective action and how you determine, again quantitatively, what corrective action to take. "Gut feel" is not a plan. ERN's approach attempts to put some numbers to at least parts of the problem.

Looking at back testing cases or Monte Carlo simulations that failed can give you quantitative insight on how portfolios fail. I don't believe you need to have an exact analog to reality to gain these quantitative insights. Trade studies using these failed cases can be conducted to suss out alert/alarm levels vs time for when corrective action needs to be taken and what those remedial actions might/should be. Parts of ERN's articles begin to get at this.
+1

This is an issue that is not discussed nearly often enough IMHO. Just because your portfolio is down 25% in the first two years of your retirement does not necessarily mean that you've encountered a terrible sequence of returns and need to return to the workforce or reduce your spending by 75%. But when should you take corrective steps, and what kinds of corrective steps should be taken?

I think this issue warrants another thread.
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by EddyB » Tue Oct 16, 2018 8:45 pm

JoMoney wrote:
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.
Sure, but even then you’re making assumptions about the human life span based on historical data.
Last edited by EddyB on Tue Oct 16, 2018 9:22 pm, edited 1 time in total.

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

Post by Ron Scott » Tue Oct 16, 2018 8:58 pm

pivoprussia wrote:
Tue Oct 16, 2018 5:58 pm
I have seen lots of comments about "flexibility" and the notion people will not blindly just follow the 4% rule from the Trinity Study.

I have not seen anyone mention the articles specifically addressing the myths of flexibility addressed in the Early Retirement Now series.
Certainly people will cut back, but exactly how helpful is this? I guess it boils down to how much discretionary spending you have budgeted.

Regardless, if you have not, I suggest reading the 3 articles:

https://earlyretirementnow.com/2018/02/ ... exibility/
https://earlyretirementnow.com/2018/05/ ... s-reality/
https://earlyretirementnow.com/2018/05/ ... ity-myths/
I love Myth #7 in Part 25 as it appears to represent an avoidable horror to some people.

Myth #7: Thou shalt not over-accumulate wealth

"I’m throwing this one in just to poke a little bit of fun at the flexibility fans. That’s because here I’m actually the one invoking flexibility while they seem to be surprisingly stubborn and inflexible. The criticism that I hear most often is that I’m overly conservative and will just end up with way too much money. My response: I could get rid of that problem pretty quickly..."
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.

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

Post by MnD » Sat Oct 20, 2018 8:43 am

pivoprussia wrote:
Tue Oct 16, 2018 5:58 pm
These are my favorite threads. We all want to know IF we should be ok in our decisions.

I have seen lots of comments about "flexibility" and the notion people will not blindly just follow the 4% rule from the Trinity Study.

I have not seen anyone mention the articles specifically addressing the myths of flexibility addressed in the Early Retirement Now series.
Certainly people will cut back, but exactly how helpful is this? I guess it boils down to how much discretionary spending you have budgeted.

Regardless, if you have not, I suggest reading the 3 articles:

https://earlyretirementnow.com/2018/02/ ... exibility/
https://earlyretirementnow.com/2018/05/ ... s-reality/
https://earlyretirementnow.com/2018/05/ ... ity-myths/
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
The flexibility that I'll be using (5% of portfolio balance with 3% inflation-adjusted floor) requires a 40% reduction in spending quite soon into retirement if say 2019 turns out to be the next 1966. But if you aren't faced with those sorts of unfortunate sequences one will enjoy far greater utility from a variable retirement income conversion plan versus say 3% fixed.

The problem with non-flexible low SWR's is that you end up with a worst case conversion of wealth to income whether you need to or not. It's easy to say that's an easy problem to fix later ad-hoc, but IMO it's unlikely the castle/moat/belt/suspenders types will have an easy time ramping up the payouts from fortress portfolio. And even if it becomes crystal clear one can do so and one acts on it, it will likely be quite a ways into retirement when one might not have the energy, health and other circumstances to fully enjoy it or might be checked out per the Rich, Broke, Dead thread.

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

Post by longinvest » Sat Oct 20, 2018 9:26 am

MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.

For readers interested in building a robust retirement plan, I offer this post, instead:
longinvest wrote:
Sun Sep 03, 2017 9:10 am
The first principle of our Philosophy is to Develop a workable plan. One of the best features of a workable plan is that it helps us relax.

Threads about SWR seem to exhibit a lot of anxiety. I think that this is because SWR does not qualify as a workable retirement withdrawal plan.

SWR is a withdrawal method which lets most of its adopters die as the richest people in the graveyard, while bankrupting most of the rest. Its risk of failure includes not only the possibility of premature portfolio depletion, but also the possibility of excessive underspending.

Flying by the seat of one's pants to decide how much to cut withdrawals during a crisis, to avoid premature portfolio depletion, is definitely not a workable plan.
  • Beyond the odds of hitting a rough patch, there are the consequences of loss to consider.
    -- Prof. Zvi Bodie, Risk Less and Prosper, 2012.
In the above citation, Prof. Bodie was right. Consequences are important. When SWR fails (in the traditional sense, through premature depletion), it completely fails. It leaves the retiree bankrupt. It's no wonder that even the smallest probability of failure generates so much anxiety.

Anyway, this whole concept of probabilistic success rate analysis is illogical from a single retiree point of view. Let me explain. My goal isn't to maximize the number of retirements where I don't end up bankrupt, living under a bridge eating cat food, over a hypothetical future 1,000 lives! I've got a single life and a single retirement to hopefully enjoy. I just can't afford to mess it up.

I must elaborate a workable plan, one which will work even if markets are uncooperative or crash at an inopportune time in the future.

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.

Such a plan can use our Wiki's Variable Percentage Withdrawal (VPW) method, a withdrawal method which adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

So, here's an example of a workable plan for retirement:
  1. Delay Social Security (SS) until age 70 to maximize this lifelong non-portfolio inflation-indexed income.
  2. Fill the gap in Social Security payments between retirement and age 70 using a non-rolling TIPS ladder. It is important to exclude this non-rolling ladder from the portfolio used for variable withdrawals; this non-rolling ladder is part of the lifelong non-portfolio stable inflation-indexed income. Forum member #Cruncher has developed an awesome tool for this; the link is at the end of the following post:
    Re: How should I build a TIPS income ladder?.
  3. Those without a defined benefit pension can buy a small inflation-indexed SPIA at retirement as a supplement to the above SS & gap-ladder income.
  4. At the beginning of every retirement year, lookup the appropriate percentage according to (i) the age of the retiree (or spouse, the lowest of the two) and (ii) the asset allocation of the portfolio* in the VPW table. Multiply this percentage by the current portfolio balance. Withdraw the resulting amount from the portfolio while rebalancing it.
  5. Around age 80, assuming one is still alive, use enough of the remaining portfolio to buy an inflation-indexed SPIA which will provide sufficient lifelong non-portfolio stable inflation-indexed income, when combined with existing non-portfolio income, in case of survival beyond age 100**. The idea is that even if the portfolio gets down to zero, total income should be sufficient to live well. Luckily, inflation-indexed SPIAs are cost-efficient at age 80.
  6. Continue depleting the remaining portfolio using VPW, but cap the withdrawal percentage at 20% (at age 95 and beyond).
* It is important to apply VPW on a balanced portfolio, one with a sufficient ratio of bonds (nominal and inflation-indexed) to reduce the volatility of both the portfolio and withdrawals.
** VPW plans for a last withdrawal at age 99.

This is a simple, but extremely robust plan. It tries to balance the amount of stable non-portfolio income with the amount of liquidity kept under the retiree's control in the portfolio. It is anxiety repellent, as a workable plan should be.

It is a very affordable plan for long-time Bogleheads who lived below their means and retire in their 60s. The plan is more expensive for people who want to retire in their early 40s, due in part to the cost of the non-rolling TIPS ladder to cover the gap in Social Security payments for almost 30 years, but mostly due to the very high cost of the necessary supplemental inflation-indexed SPIA at retirement, as Social Security payments are lower for people with a shorter work history.
Let me insist on the "*" note: It is important to apply VPW on a balanced portfolio, one with a sufficient ratio of bonds (nominal and inflation-indexed) to reduce the volatility of both the portfolio and withdrawals.

I wouldn't apply a flexible withdrawal method on a highly volatile 80/20 stocks/bonds portfolio; I would apply it on a typical retirement portfolio, something between 30/70 stocks/bonds (like Vanguard's Target Retirement Income Fund) up to 50/50 stocks/bonds.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term domestic bonds | VCN/VXC/VLB/ZRR

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

Post by MnD » Sat Oct 20, 2018 11:28 am

longinvest wrote:
Sat Oct 20, 2018 9:26 am
MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.
I agree. The real-life consequences of bad sequences with the flexible withdrawal plan I'll be using are pretty trivial when looking at things on an after-tax basis and including other non-portfolio derived income streams. Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now. In retrospect I can't believe the deals we got in the 2008-2011 time frame.

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

Post by Leesbro63 » Sat Oct 20, 2018 11:35 am

MnD wrote:
Sat Oct 20, 2018 11:28 am
longinvest wrote:
Sat Oct 20, 2018 9:26 am
MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.
I agree. The real-life consequences of bad sequences with the flexible withdrawal plan I'll be using are pretty trivial when looking at things on an after-tax basis and including other non-portfolio derived income streams. Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now. In retrospect I can't believe the deals we got in the 2008-2011 time frame.
Unless it’s like the stagflation bad sequence of the 1970s where the cost of good and services went up despite high inflation and unemployment.

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

Post by longinvest » Sat Oct 20, 2018 11:56 am

Leesbro63 wrote:
Sat Oct 20, 2018 11:35 am
MnD wrote:
Sat Oct 20, 2018 11:28 am
longinvest wrote:
Sat Oct 20, 2018 9:26 am
MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.
I agree. The real-life consequences of bad sequences with the flexible withdrawal plan I'll be using are pretty trivial when looking at things on an after-tax basis and including other non-portfolio derived income streams. Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now. In retrospect I can't believe the deals we got in the 2008-2011 time frame.
Unless it’s like the stagflation bad sequence of the 1970s where the cost of good and services went up despite high inflation and unemployment.
Social Security, cost-of-living adjusted pensions, and inflation-indexed Single-Premium Immediate Annuities wouldn't suffer from it, neither would I-bonds and TIPS. Even nominal bonds would eventually recover if their yields went up with inflation. Taxation wouldn't be an issue in decumulation mode, for those with taxable investments. A paid off house can be lived into. I don't see the problem.

In the 70's, inflation-indexed products and securities didn't exist, yet.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term domestic bonds | VCN/VXC/VLB/ZRR

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

Post by willthrill81 » Sat Oct 20, 2018 1:28 pm

MnD wrote:
Sat Oct 20, 2018 11:28 am
Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now.
That's what happened in the Great Depression. Deflation was a bit of a saving grace for many. Between 1930-1933, cumulative deflation was almost 24%.

On a somewhat different but related note, I think that this is a big problem with Suze Orman's recent complete disdain for the FIRE concept. She assumes that being employed will somehow be less risky, but in the event of a big recession, for instance, there is no guarantee that you can maintain your employment.
“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

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

Post by MnD » Sat Oct 20, 2018 1:35 pm

Leesbro63 wrote:
Sat Oct 20, 2018 11:35 am
MnD wrote:
Sat Oct 20, 2018 11:28 am
longinvest wrote:
Sat Oct 20, 2018 9:26 am
MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.
I agree. The real-life consequences of bad sequences with the flexible withdrawal plan I'll be using are pretty trivial when looking at things on an after-tax basis and including other non-portfolio derived income streams. Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now. In retrospect I can't believe the deals we got in the 2008-2011 time frame.
Unless it’s like the stagflation bad sequence of the 1970s where the cost of good and services went up despite high inflation and unemployment.
A lot of that was the imported energy price shocks which moved through the entire economy for goods and services and couldn't be mitigated by depressed employment. The other thing was that strong unions demanded and got big wage increases when inflation hit despite stagflation. That wouldn't be the case nowadays if unemployment spiked.

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

Post by fennewaldaj » Sat Oct 20, 2018 11:35 pm

MnD wrote:
Sat Oct 20, 2018 11:28 am
longinvest wrote:
Sat Oct 20, 2018 9:26 am
MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.
I agree. The real-life consequences of bad sequences with the flexible withdrawal plan I'll be using are pretty trivial when looking at things on an after-tax basis and including other non-portfolio derived income streams. Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now. In retrospect I can't believe the deals we got in the 2008-2011 time frame.
IN fairness His baseline analysis is targeted at people who are retiring between 35 to 45 yo. As he shows in one of his post the presence of social security is not going to help you all that much (in terms of what its safe to withdraw) when its 25 years away. For someone retiring semi early at say 55 it is a bigger impact. I do tend to agree that he could spend a bit more time on the variable withdrawal strategies but perhaps that is again an issue with his target audience. Since the FIRE crowd tends to be frugal there is not a lot of room to use a variable withdrawal strategy that could cut spending by 40%. For me and my wife that will be totally fine because we plan for 40% of our budget to be travel which could be cut. In addition i am a pharmacist and it is a bit easier to work part time in my field than many other high paying jobs so that is a potential option.

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

Post by willthrill81 » Sun Oct 21, 2018 12:37 am

fennewaldaj wrote:
Sat Oct 20, 2018 11:35 pm
MnD wrote:
Sat Oct 20, 2018 11:28 am
longinvest wrote:
Sat Oct 20, 2018 9:26 am
MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.
I agree. The real-life consequences of bad sequences with the flexible withdrawal plan I'll be using are pretty trivial when looking at things on an after-tax basis and including other non-portfolio derived income streams. Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now. In retrospect I can't believe the deals we got in the 2008-2011 time frame.
IN fairness His baseline analysis is targeted at people who are retiring between 35 to 45 yo. As he shows in one of his post the presence of social security is not going to help you all that much (in terms of what its safe to withdraw) when its 25 years away. For someone retiring semi early at say 55 it is a bigger impact. I do tend to agree that he could spend a bit more time on the variable withdrawal strategies but perhaps that is again an issue with his target audience. Since the FIRE crowd tends to be frugal there is not a lot of room to use a variable withdrawal strategy that could cut spending by 40%. For me and my wife that will be totally fine because we plan for 40% of our budget to be travel which could be cut. In addition i am a pharmacist and it is a bit easier to work part time in my field than many other high paying jobs so that is a potential option.
I really don't know why ERN spent so much time and did so much analysis to demonstrate that the '4% rule of thumb' may not be safe enough for early retirees. It was originally developed for 30 year retirements, not 50+ year retirements. He could have just backtested to see what the highest SWR was for 40, 50, 60, etc. retirements. Depending on the AA, my guess is that he would probably find that around 3% fixed plus inflation was good enough.
“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
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Re: "Safe" Withdrawal Rate for Early Retirees (or any retiree)

Post by fennewaldaj » Sun Oct 21, 2018 12:58 am

willthrill81 wrote:
Sun Oct 21, 2018 12:37 am
fennewaldaj wrote:
Sat Oct 20, 2018 11:35 pm
MnD wrote:
Sat Oct 20, 2018 11:28 am
longinvest wrote:
Sat Oct 20, 2018 9:26 am
MnD wrote:
Sat Oct 20, 2018 8:43 am
The message in those articles is that a little flexibility isn't going to do much at all for you in a poor sequence of returns.
In a typical sensationalist blogging manner, these blog articles base their message on a volatile 80/20 stocks/bonds portfolio, with no accompanying Social Security, pension, or inflation-indexed Single-Premium Immediate Annuity! I would take their conclusions with a big grain of salt.
I agree. The real-life consequences of bad sequences with the flexible withdrawal plan I'll be using are pretty trivial when looking at things on an after-tax basis and including other non-portfolio derived income streams. Also in a horrible sequence of investment returns, millions of people are in real trouble and will provide goods and services at much lower prices than in a "hot" economy like now. In retrospect I can't believe the deals we got in the 2008-2011 time frame.
IN fairness His baseline analysis is targeted at people who are retiring between 35 to 45 yo. As he shows in one of his post the presence of social security is not going to help you all that much (in terms of what its safe to withdraw) when its 25 years away. For someone retiring semi early at say 55 it is a bigger impact. I do tend to agree that he could spend a bit more time on the variable withdrawal strategies but perhaps that is again an issue with his target audience. Since the FIRE crowd tends to be frugal there is not a lot of room to use a variable withdrawal strategy that could cut spending by 40%. For me and my wife that will be totally fine because we plan for 40% of our budget to be travel which could be cut. In addition i am a pharmacist and it is a bit easier to work part time in my field than many other high paying jobs so that is a potential option.
I really don't know why ERN spent so much time and did so much analysis to demonstrate that the '4% rule of thumb' may not be safe enough for early retirees. It was originally developed for 30 year retirements, not 50+ year retirements. He could have just backtested to see what the highest SWR was for 40, 50, 60, etc. retirements. Depending on the AA, my guess is that he would probably find that around 3% fixed plus inflation was good enough.
Having read some of the other FIRE blogs I think it is because a lot of them treated the 4% rule as some sacred truth that works for any retirement of any length.

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

Post by MikeG62 » Sun Oct 21, 2018 8:10 am

One Ping wrote:
Tue Oct 16, 2018 7:41 pm

I've often wondered how you determine, quantitatively, early enough that you are in a situation where you need to take corrective action and how you determine, again quantitatively, what corrective action to take. "Gut feel" is not a plan. ERN's approach attempts to put some numbers to at least parts of the problem.
Dandy wrote:
Tue Oct 16, 2018 7:48 am

...A second point is that we offer nothing? on when a starting rate of 4% should be cut back. We stress stay the course and don't market time but expect people in retirement to reduce their withdrawals pretty much on their own. Is there no rule of thumb we can offer/develop to consider a change in withdrawals? Even when you might increase them.?

Sure most people are sensible and will make adjustments so why not build that thought at the front end. We have all types of people who read this forum. Ranging from very sophisticated to the opposite.
Guyton and Klinger's financial guardrails (within their withdrawal decision rules) do precisely this - provide a quantitative threshold for determining when to cut (or increase) spending.

FWIW, I am using a modified version of G&K's rules - modified to use a much lower initial withdrawal rate with the guardrails being adjusted off of that.
Real Knowledge Comes Only From Experience

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

Post by MikeG62 » Sun Oct 21, 2018 8:18 am

vineviz wrote:
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.
SPIA's may not provide the full and complete protection one is seeking from unprecedentedly poor market returns or skyrocketing inflation. It comes down to risk retention vs. risk transfer as Michael Kitces explains quite well in this article.

https://www.kitces.com/blog/even-safety ... retention/

A few key quotes,

"...just because the risk (and/or the value) of a bond, annuity, or defined benefit plan payment is not continuously adjusted up and down on a daily basis and “marked to market” doesn’t make it unequivocally “safe” either. The odds that everything works out OK using insurance companies and defined benefits may still be highly probable… but that’s still a probability that the insurance/annuity company won’t default. And in fact, given that there is at least some probability any random insurance company might have failed in the past century, while a 4% “safe” withdrawal rate has never failed in US history, the dividing lines of “probability” versus “safety” don’t appear to be mutually exclusive at all! Either can have a probability of failure..."

“...markets and the economy in the aggregate may not support [a given] spending level in the long run, but ultimately that remains a concern of both risk retention and risk transfer strategies, for the simple reason that again both are subject to the same capital markets and the same exogenous shocks and events. The low-interest-rate environment damaging retirees today is damaging insurance companies as well, and the kinds of Great Depression and World War events that have been destructive to safe withdrawal rates throughout history around the globe have been similarly damaging to insurance companies, corporations, and governments. In other words, while both strategies can be managed in a manner to make the risks very very low, the remaining risks that can’t be “perfectly” eliminated are actually highly correlated across both philosophies!"
Real Knowledge Comes Only From Experience

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