Ideal Withdrawal Rate

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rockthisworld
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Ideal Withdrawal Rate

Post by rockthisworld » Sat Jan 25, 2020 11:29 am

4% SWR works for most 30 year periods. But I saw a video saying that 4% would probably work in most cases leaving you money left. What withdrawal rate would give someone maybe a 10% chance of running out of money after 20, 25, 30 years. Even if you did the 4% rule in 2000 it seems as if those retirees are still looking good with their nest eggs.

If I assume a 25 year retirement I was thinking of 4.2% but would it be foolish to think that 4.5% withdrawal rate if someone would begin retirement at 70 would work? I know for sure I wouldn’t want to run out before 20 years would that allow some wiggle room with the withdrawal rate?

ZMonet
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Re: Ideal Withdrawal Rate

Post by ZMonet » Sat Jan 25, 2020 12:14 pm

There are no guarantees, but you are right that in most historical scenarios 4%+ would leave you with money left over at death, sometimes huge amounts. Is history a good indicator of the future? Only you can answer that, unfortunately. You can run a simulation using websites like FIRECALC and cFIREsim to get a better sense based on the variables you enter.

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FiveK
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Re: Ideal Withdrawal Rate

Post by FiveK » Sat Jan 25, 2020 4:54 pm

rockthisworld wrote:
Sat Jan 25, 2020 11:29 am
What withdrawal rate would give someone maybe a 10% chance of running out of money after 20, 25, 30 years.
See the tables under The Trinity study numbers for what it would have been in the past.

klaus14
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Re: Ideal Withdrawal Rate

Post by klaus14 » Sat Jan 25, 2020 4:58 pm

rockthisworld wrote:
Sat Jan 25, 2020 11:29 am
4% SWR works for most 30 year periods. But I saw a video saying that 4% would probably work in most cases leaving you money left. What withdrawal rate would give someone maybe a 10% chance of running out of money after 20, 25, 30 years. Even if you did the 4% rule in 2000 it seems as if those retirees are still looking good with their nest eggs.

If I assume a 25 year retirement I was thinking of 4.2% but would it be foolish to think that 4.5% withdrawal rate if someone would begin retirement at 70 would work? I know for sure I wouldn’t want to run out before 20 years would that allow some wiggle room with the withdrawal rate?
if you really want to leave no money, delay Social Security to 70 and look into annuities for the money you have by then.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds.

dbr
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Re: Ideal Withdrawal Rate

Post by dbr » Sat Jan 25, 2020 5:05 pm

klaus14 wrote:
Sat Jan 25, 2020 4:58 pm

if you really want to leave no money, delay Social Security to 70 and look into annuities for the money you have by then.
Exactly. Annuitizing everything guarantees you will always have income and have nothing left at death. You won't even have to worry about what you do have because an annuity guarantees that your non annuity asset value is exactly zero from day one.

Lest you think this is mockery of some kind, the standard model in financial analysis for most effective use of retirement assets is the assumption all the assets are annuitized. It used to be and maybe still is that Financial Engines was designed around that assumption. Furthermore the failure of retirees to annuitize is regarded as a conundrum called "the annuity puzzle." https://www.bing.com/search?q=annuity+p ... lang=en-US

In truth there are lots of practical reasons not to annuitize everything, but financial reasoning dictates nothing else - sort of.

RetiredAL
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Re: Ideal Withdrawal Rate

Post by RetiredAL » Sat Jan 25, 2020 5:54 pm

rockthisworld wrote:
Sat Jan 25, 2020 11:29 am
4% SWR works for most 30 year periods. But I saw a video saying that 4% would probably work in most cases leaving you money left. What withdrawal rate would give someone maybe a 10% chance of running out of money after 20, 25, 30 years. Even if you did the 4% rule in 2000 it seems as if those retirees are still looking good with their nest eggs.

If I assume a 25 year retirement I was thinking of 4.2% but would it be foolish to think that 4.5% withdrawal rate if someone would begin retirement at 70 would work? I know for sure I wouldn’t want to run out before 20 years would that allow some wiggle room with the withdrawal rate?
Just a few days ago, this was published at forbes.com ......

https://www.forbes.com/sites/robertpagl ... fcdfde21cb

I personally hate manufactured number charts, heavily tilted to emphasize/prove the author's point, with little respect to reality, but it does show what a sequence of returns 'could' do.

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willthrill81
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Re: Ideal Withdrawal Rate

Post by willthrill81 » Mon Jan 27, 2020 10:47 am

You cannot have your cake and eat it too. Unless you know the date of your death and the performance of the markets between now and then, you cannot determine the 'ideal' withdrawal rate for the future. Further, what is ideal for one person might not be ideal for another. For instance, we're planning on spending more in our 50s and 60s than in our 70s and 80s, so we aren't trying to achieve static income.

If you want to maximize your guaranteed lifetime income, that's what single-premium immediate annuities are for. But they generally require you to permanently relinquish control of the annuitized assets and to relinquish all upside potential.
“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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firebirdparts
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Re: Ideal Withdrawal Rate

Post by firebirdparts » Mon Jan 27, 2020 1:39 pm

I have done no work on this, but I think about how 10 years into retirement, you would know whether or not you were hurt by a bad sequence of returns or helped by a good sequence of returns. You'd have that information 1/3 of the way through your retirement. What would you do at that point? What's the right thing to do?
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willthrill81
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Re: Ideal Withdrawal Rate

Post by willthrill81 » Tue Jan 28, 2020 12:25 am

firebirdparts wrote:
Mon Jan 27, 2020 1:39 pm
I have done no work on this, but I think about how 10 years into retirement, you would know whether or not you were hurt by a bad sequence of returns or helped by a good sequence of returns. You'd have that information 1/3 of the way through your retirement. What would you do at that point? What's the right thing to do?
If you were using a flexible withdrawal rate strategy, you would likely be making changes to your withdrawals every year and not doing so every decade.
“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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Flobes
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Re: Ideal Withdrawal Rate

Post by Flobes » Tue Jan 28, 2020 1:41 am

Here's a fun calculator:
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clockman323
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Re: Ideal Withdrawal Rate

Post by clockman323 » Tue Jan 28, 2020 11:59 am

My biggest issue with the 4% rule is most calculators assume that you lock in the withdrawal rate at the beginning and never change it.

I would cut back on discretionary spending if the market has a long bad run. The calculator keeps plugging along at 4% because that is what it was told to do.

I also don't see anything wrong with taking out a bit more if your portfolio is growing wildly. The calculator has to be a bit pessimistic, so you should have extra money if your investment grows at an average rate.

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willthrill81
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Re: Ideal Withdrawal Rate

Post by willthrill81 » Tue Jan 28, 2020 2:56 pm

clockman323 wrote:
Tue Jan 28, 2020 11:59 am
My biggest issue with the 4% rule is most calculators assume that you lock in the withdrawal rate at the beginning and never change it.
You might want to check out the 'retirement spending' chart at Portfolio Charts. It lets you model many different withdrawal rules. For instance, you could start withdrawing 4% of the initial balance but then decrease that to 3% and you could also adjust the rate of change in the withdrawals, both increases and decreases.
“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
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Re: Ideal Withdrawal Rate

Post by randomguy » Tue Jan 28, 2020 3:03 pm

rockthisworld wrote:
Sat Jan 25, 2020 11:29 am
4% SWR works for most 30 year periods. But I saw a video saying that 4% would probably work in most cases leaving you money left. What withdrawal rate would give someone maybe a 10% chance of running out of money after 20, 25, 30 years. Even if you did the 4% rule in 2000 it seems as if those retirees are still looking good with their nest eggs.

If I assume a 25 year retirement I was thinking of 4.2% but would it be foolish to think that 4.5% withdrawal rate if someone would begin retirement at 70 would work? I know for sure I wouldn’t want to run out before 20 years would that allow some wiggle room with the withdrawal rate?
You can run these numbers in firecalc. Historically your number would be around 4.5% for a 25 year retirement. Going fohrward who knows. As you shrink the time frame down, the answer basically becomes (amount of money)/years. With only a 15 or 20 year time frame, you can't count on returns from stocks or getting more than about 0% real from bonds.

This is sort of unavoidable issue of having to plan for the worst cases. The reasonable solution is in the best cases to spend more after say 10 years. Of course as an 80 year old you might not want to be spending more money. The other way of going is to spend more as a 70 year old (say 5 or 6%) knowing that if you end up on a bad path, you will have to cut spending to 2 or 3% after 5 or 10 years.

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willthrill81
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Re: Ideal Withdrawal Rate

Post by willthrill81 » Tue Jan 28, 2020 3:11 pm

randomguy wrote:
Tue Jan 28, 2020 3:03 pm
rockthisworld wrote:
Sat Jan 25, 2020 11:29 am
4% SWR works for most 30 year periods. But I saw a video saying that 4% would probably work in most cases leaving you money left. What withdrawal rate would give someone maybe a 10% chance of running out of money after 20, 25, 30 years. Even if you did the 4% rule in 2000 it seems as if those retirees are still looking good with their nest eggs.

If I assume a 25 year retirement I was thinking of 4.2% but would it be foolish to think that 4.5% withdrawal rate if someone would begin retirement at 70 would work? I know for sure I wouldn’t want to run out before 20 years would that allow some wiggle room with the withdrawal rate?
You can run these numbers in firecalc. Historically your number would be around 4.5% for a 25 year retirement. Going fohrward who knows. As you shrink the time frame down, the answer basically becomes (amount of money)/years. With only a 15 or 20 year time frame, you can't count on returns from stocks or getting more than about 0% real from bonds.

This is sort of unavoidable issue of having to plan for the worst cases. The reasonable solution is in the best cases to spend more after say 10 years. Of course as an 80 year old you might not want to be spending more money. The other way of going is to spend more as a 70 year old (say 5 or 6%) knowing that if you end up on a bad path, you will have to cut spending to 2 or 3% after 5 or 10 years.
It should be obvious, though I don't think that it always is to everyone, but the more flexibility you have with regard to your retirement spending, the less impacted you are by changes in your withdrawals. If you have non-portfolio income sources covering all of your essential spending (which is precisely where we hope to be by age 70 when we begin SS benefits), then you can probably deal just fine with big swings in your retirement spending. You can also afford to take on a more aggressive allocation. My parents' portfolio is only for discretionary spending, so they are fine with a 100% stock allocation. This issue is a big part of the reason why it's a good idea to have no debt in retirement (e.g. mortgage): it reduces your flexibility and increases your sequence of returns risk.
“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

Reamus294
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Re: Ideal Withdrawal Rate

Post by Reamus294 » Wed Jan 29, 2020 10:46 am

willthrill81 wrote:
Tue Jan 28, 2020 3:11 pm

It should be obvious, though I don't think that it always is to everyone, but the more flexibility you have with regard to your retirement spending, the less impacted you are by changes in your withdrawals.
I agree. I look at a safe withdraw rate as more of a guide. For saving for retirement, I keep a spreadsheet that shows what I plan to have at the end of each year. Some years I'll have more, some years I'll have less. If I see a trend (3-5 years) that is not inline, I'll adjust my habits/expectations. I will probably do the same in retirement.

Right now I'm planning on living the first few years of retirement a little tighter to set expectations of what the future could look like in a bad scenario, and then hopefully I will be able to increase my withdrawal rate slowly. Or maybe I'll see that I need to work more because I will want more. I am not comfortable with cutting it so close that a specific withdrawal rate is just covering my necessary expenses, I would stress every time the market took a dip. Flexibility with expectations is important to me.

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willthrill81
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Re: Ideal Withdrawal Rate

Post by willthrill81 » Wed Jan 29, 2020 11:41 am

Reamus294 wrote:
Wed Jan 29, 2020 10:46 am
willthrill81 wrote:
Tue Jan 28, 2020 3:11 pm

It should be obvious, though I don't think that it always is to everyone, but the more flexibility you have with regard to your retirement spending, the less impacted you are by changes in your withdrawals.
I agree. I look at a safe withdraw rate as more of a guide. For saving for retirement, I keep a spreadsheet that shows what I plan to have at the end of each year. Some years I'll have more, some years I'll have less. If I see a trend (3-5 years) that is not inline, I'll adjust my habits/expectations. I will probably do the same in retirement.

Right now I'm planning on living the first few years of retirement a little tighter to set expectations of what the future could look like in a bad scenario, and then hopefully I will be able to increase my withdrawal rate slowly. Or maybe I'll see that I need to work more because I will want more. I am not comfortable with cutting it so close that a specific withdrawal rate is just covering my necessary expenses, I would stress every time the market took a dip. Flexibility with expectations is important to me.
Yes, I agree that 4% barely covering your essential spending is probably not safe enough for a 30 year retirement. But if 4% includes significant discretionary spending, it's a lot safer.
“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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