Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

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JacobTeach
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Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

We know the benchmark is a 4% SWR for a 30 year retirement. This is challenged by today’s low yields, with a new range perhaps falling to 2.5% to 3.5%. This seems appropriate since it’s better to build in a margin of safety.

The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?

——————————

Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative? Please assume a willingness to be a landlord, positive cash flow, and a paid off mortgage in 5 years.

Historical data shows that longer retirements actually fare better with a higher allocation to equities. A zero percent bond allocation is even recommended. Based on this, having all equities and no real estate may be better?

This notion, however, inherently rubs me the wrong way. Diversification and collecting stable rental income that subsidizes expenses to minimize withdrawing from investments sounds great to me.

What do you think/what would you recommend?
000
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by 000 »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm What do you think/what would you recommend?
I would plan to live to 100.
konic
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by konic »

Here we go again ... race to the bottom starts in 3 .. 2 .. 1 ..
randomguy
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by randomguy »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm We know the benchmark is a 4% SWR for a 30 year retirement. This is challenged by today’s low yields, with a new range perhaps falling to 2.5% to 3.5%. This seems appropriate since it’s better to build in a margin of safety.

The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?

——————————

Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative? Please assume a willingness to be a landlord, positive cash flow, and a paid off mortgage in 5 years.

Historical data shows that longer retirements actually fare better with a higher allocation to equities. A zero percent bond allocation is even recommended. Based on this, having all equities and no real estate may be better?

This notion, however, inherently rubs me the wrong way. Diversification and collecting stable rental income that subsidizes expenses to minimize withdrawing from investments sounds great to me.

What do you think/what would you recommend?
I would calc your expected life expectancy and not that of an average that includes a lot of people who are already dead at 35....

Yes collecting stable rental income would help. What happens though if your stable rental income became unstable? That is sort of the unanswerable question. During the 1970s real estate did well. You bout a property for say 50k and you were able to raise rents with inflation while maintaining that cheap mortgage payments. And their weren't mass vacancies. You did well. In the 1930s you had the reverse situation. Deflation made it hard to service your debt and with 20% unemployment, finding renters was hard. You lost your shirt. Regionally similar things happen. You have some boom markets, some bust and a lot where you just did pretty good. It makes it really hard to do SWR calculations.

And a the very, very high level some people are good business people. Others aren't. Owning real estate is running a business. If you are good at it, you will make money. If you aren't you can get screwed. Now it isn't a crazy hard business and it isn't winner take all. But it still requires some skill.
AlohaJoe
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by AlohaJoe »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?
There's no such thing as a "Safe Withdrawal Rate" for a retirement that long. Anyone who tells you differently is lying. Just use a variable withdrawal scheme, variable percentage withdrawal from a Bogleheads contributor is one of many good choices, and accept that you cannot get rid of all uncertainty when dealing with time periods of that length.
Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative?
Real estate is a single undiversified asset. It could help or it could hurt, like all undiversified assets. Real estate is not some miracle investment that never loses money. There's no such thing as 100% guaranteed stable rental income. Just look at all the people right now who had told themselves stories like "I live in a college town and there will always be university students looking for accommodation". Or "rents in San Francisco never go down".

My favorite story about real estate investing is a couple that won Australian Property Investor of the Year in 2012 according to some preeminent magazine. Three or four years later they were filing for bankruptcy and their tenants had disappeared due to changes in the local economy.

It essentially impossible to fit real estate into any kind of "safe withdrawal" framework so don't bother trying.
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geerhardusvos
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by geerhardusvos »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm We know the benchmark is a 4% SWR for a 30 year retirement. This is challenged by today’s low yields, with a new range perhaps falling to 2.5% to 3.5%. This seems appropriate since it’s better to build in a margin of safety.

The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?

——————————

Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative? Please assume a willingness to be a landlord, positive cash flow, and a paid off mortgage in 5 years.

Historical data shows that longer retirements actually fare better with a higher allocation to equities. A zero percent bond allocation is even recommended. Based on this, having all equities and no real estate may be better?

This notion, however, inherently rubs me the wrong way. Diversification and collecting stable rental income that subsidizes expenses to minimize withdrawing from investments sounds great to me.

What do you think/what would you recommend?
I plan to retire at around age 34 with a side gig: viewtopic.php?f=2&t=323629

I plan to live on my passive income from the index funds besides my side gig and wife’s part time work. I plan for a 3.3 to 3.5% withdrawal rate and a 60 year “retirement”

Stay in equities, they will likely turn out well in the long run. Bonds probably won’t do well the next 10 years.

Real estate is a full-time job, even for those who say it’s not. I prefer to use index funds for truly passive income. If you are up for it and you live in the right area, real estate can be good. But if you live on either of the coasts I don’t recommend it. In general being a landlord can be a nightmare.
VTSAX and chill
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Watty
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by Watty »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm What do you think/what would you recommend?
It would be good to post your information using this suggested format as a guideline. It is a lot more complicated than just looking at a safe withdrawal rate.

viewtopic.php?f=1&t=6212

Your expenses will also be a lot different in different phases of life.

One huge factor is if you have an ample budget that you could reduce if you needed to. Retiring with a X% withdrawal rate on a barebones budget is real risky since you would not have any margin of error.

At least for me having a paid off house that I live in makes my retirement numbers work a lot better since it reduces my income needs and allows me to be in a lower tax bracket. It also reduces my sequence of returns risk and the home equity can be used if long term care is ever needed.

If you buy a rental property in addition to a house you live in then you could end up with a high percentage of your net worth in real estate which could be a diversification problem instead up helping you be more diversified.

One other consideration is that since you are only 35 so if you buy real estate now then it could be getting well past its prime in 50+ years so you can't really count on it providing reliable income for the rest of your life.
flaccidsteele
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by flaccidsteele »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative?
Unless you were able to score rental property at prices cheaper than dirt during the US housing crash, the odds that real estate helps is low

The Great Recession is the only reason that I bought rentals at all. Also, I’m Canadian living off USD income and have no healthcare cost concerns

Otherwise have $10m+ in US index at age 35 for retirement
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
terran
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by terran »

Unless more compelling research comes about in the meantime I plan to follow the advice of https://earlyretirementnow.com/safe-wit ... te-series/. Basically 3.25-3.5% range with a 60/40 starting allocation and a rising equity glidepath to 100% equities over about 10 years.
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HomerJ
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by HomerJ »

flaccidsteele wrote: Tue Aug 25, 2020 4:40 amOtherwise have $10m+ in US index at age 35 for retirement
How much you think it costs to live in this world?

$10 million means you can spend $100,000 a year for 100 years.

Or $153,000 a year for 65 years.

That's with 0% real returns.

Why do you think someone needs $10 million (plus) to retire at age 35?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Callisto
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by Callisto »

I'm planning on going down this road when I retire around that age. But I think it depends a lot on your area, and the house you buy specifically. Because the RE market is not as efficient as stocks, you run have the opportunity of picking up a really good deal, but also getting really screwed, which is easy if you don't know what you are doing. This is the key, because all those people you see go out of business and get destroyed by the coronavirus didn't buy suitable rental properties, and that fact was just covered up by a hot rental market.

My current rental is for short term rentals. Its a lot of work, but the returns are much higher than finding year long leases. I don't believe this is tenable long term, certainly not after I plan to retire. Aside from the workload, you have massive tenant instability, and risk of non-payment. Long term, I'm not even confident of finding people for yearly leases, though if you are able to find a good tenant and offer them a good price, that might be viable. Depends on your property, depends on the area, etc etc etc.

My area has a very large low income population, and the government subsidized housing system is pretty robust. The key benefit of working with these government programs is the government is paying a large/entire portion of the rent. They'll also help with finding tenants, though you can do it yourself and have ultimate say over who lives there. That being said, don't count on the tenants paying their portion of the rent, and your place will probably be trashed after they leave, meaning either work for you, or an expense, to get things back to livable conditions. I'll be converting my rental to government subsidized housing when I retire. You make less money, but the fact of the matter is the government will pay you consistently. That consistency is a tradeoff I'm willing to make, in exchange for lower returns.

So I think it will help, for the same reasons you've listed. It certainly helps me mentally, knowing that either I'll have a house to live in, or a comfortable spending floor.
retiredjg
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by retiredjg »

I think of 2% as being a sustainable rate over time. But I've have some backup plan in mind as well.

It is hard to know what real estate would do - that's in the future. Unknown.
sailaway
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by sailaway »

I run FIRECalc to 50 years, which will take DH to his late 90's. I do not include SS, since even if it is there, he has 30 years until he collects and my own record is miniscule (teaching and PhD stipend mean years of zeros lined up with some of the hardest working years I have had).

FIRECalc comes to a reasonable success rate at 3.8%.

Our back up includes:
-lower initial spend (this is due to the lifestyle we want, at least initially, not a plan to deprive ourselves)
-DH expects to go back to work in some capacity after exploring the above mentioned lifestyle for a few years.
-there is likely an inheritance coming, given family history probably around the time DH reaches traditional retirement age.
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Tyler9000
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by Tyler9000 »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?
I'd recommend a different mindset that shifts from depleting principal to maintaining it. The term to look for is "perpetual withdrawal rate", and you can read a quick primer here: https://portfoliocharts.com/2016/12/09/ ... etirement/

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm Historical data shows that longer retirements actually fare better with a higher allocation to equities. A zero percent bond allocation is even recommended. Based on this, having all equities and no real estate may be better?
The conclusion that high percentages of equities fared the best is usually based on studies with very limited investing options. Sure, if your only choice is a US S&P500 fund and intermediate US bonds, then high percentages of stocks look pretty appealing. But the market for portfolios is more diverse than that, and if you expand your options to things like international stocks, small cap value, long-term bonds, real estate, and commodities, the results can be quite different.

To explore that for yourself, you might try playing with the tools and portfolios at Portfolio Charts. While it doesn't account for direct personal rental income, study the retirement performance of portfolios with REITs and it might point you in the right direction.
balbrec2
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by balbrec2 »

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm We know the benchmark is a 4% SWR for a 30 year retirement. This is challenged by today’s low yields, with a new range perhaps falling to 2.5% to 3.5%. This seems appropriate since it’s better to build in a margin of safety.

The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?

——————————

Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative? Please assume a willingness to be a landlord, positive cash flow, and a paid off mortgage in 5 years.

Historical data shows that longer retirements actually fare better with a higher allocation to equities. A zero percent bond allocation is even recommended. Based on this, having all equities and no real estate may be better?

This notion, however, inherently rubs me the wrong way. Diversification and collecting stable rental income that subsidizes expenses to minimize withdrawing from investments sounds great to me.

What do you think/what would you recommend?
Will you have any fixed income from SS or pension? It seems like you will have little or none, due to your age.
Are you certain of a large inheritance? All of your income from a portfolio and real estate will be at risk. At your age at least you can
return to the world of earned income if need be. A lot of things can go wrong from 35 to whenever. Good luck
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Nestegg_User
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by Nestegg_User »

balbrec2 wrote: Tue Aug 25, 2020 11:45 am
JacobTeach wrote: Mon Aug 24, 2020 9:20 pm We know the benchmark is a 4% SWR for a 30 year retirement. This is challenged by today’s low yields, with a new range perhaps falling to 2.5% to 3.5%. This seems appropriate since it’s better to build in a margin of safety.

The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?

——————————

Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative? Please assume a willingness to be a landlord, positive cash flow, and a paid off mortgage in 5 years.

Historical data shows that longer retirements actually fare better with a higher allocation to equities. A zero percent bond allocation is even recommended. Based on this, having all equities and no real estate may be better?

This notion, however, inherently rubs me the wrong way. Diversification and collecting stable rental income that subsidizes expenses to minimize withdrawing from investments sounds great to me.

What do you think/what would you recommend?
Will you have any fixed income from SS or pension? It seems like you will have little or none, due to your age.
Are you certain of a large inheritance? All of your income from a portfolio and real estate will be at risk. At your age at least you can
return to the world of earned income if need be. A lot of things can go wrong from 35 to whenever. Good luck

OP, in original post, never mentioned any inheritance... another poster did.

AFA original question:
can't really prudently assume only "average" life expectancy, as was noted earlier there are those that do pass earlier already in the lifetime averages. I assume average plus two std dev (just above 7 years)... so 92 as likely maximum lifespan.
So with that, you would be looking at a maximum of - - nearly 60 years ! - - of potential retirement to fund. With potentially less years to even qualify for either medicare much less any significant SS benefits, and a potentially steep cost for health insurance over that period, the risk of any plan would be daunting.

If even possible, I'd be looking at about 2.5% withdrawal as a maximum... and since there's really no SS backstop, there's a serious risk if too high of equities and a major correction. Look at articles that discuss this, a major factor for failure is the need for portfolio withdrawals at a time of major market drops... the money needed (lost) due to spending can never replace the funds that would otherwise potentially getting any future market improvements.
YRT70
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by YRT70 »

Image

Historic safe withdrawal rates from ERN.
klondike
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by klondike »

konic wrote: Mon Aug 24, 2020 9:37 pm Here we go again ... race to the bottom starts in 3 .. 2 .. 1 ..
No, it is -4%
000
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by 000 »

HomerJ wrote: Tue Aug 25, 2020 8:49 am
flaccidsteele wrote: Tue Aug 25, 2020 4:40 amOtherwise have $10m+ in US index at age 35 for retirement
How much you think it costs to live in this world?

$10 million means you can spend $100,000 a year for 100 years.

Or $153,000 a year for 65 years.

That's with 0% real returns.

Why do you think someone needs $10 million (plus) to retire at age 35?
Uncertainty of healthcare costs, possibility of divorce, lawsuit, etc.
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Schlabba
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by Schlabba »

000 wrote: Tue Aug 25, 2020 2:40 pm
HomerJ wrote: Tue Aug 25, 2020 8:49 am
flaccidsteele wrote: Tue Aug 25, 2020 4:40 amOtherwise have $10m+ in US index at age 35 for retirement
How much you think it costs to live in this world?

$10 million means you can spend $100,000 a year for 100 years.

Or $153,000 a year for 65 years.

That's with 0% real returns.

Why do you think someone needs $10 million (plus) to retire at age 35?
Uncertainty of healthcare costs, possibility of divorce, lawsuit, etc.
Add babies to that list. 18 year time and money sink.

I think it should be important to realize that to go from a 4%-sized portfolio to a 3%-sized portfolio is extremely easy.
If you don't contribute anything and if you are in a bullmarket, growing your 25 times expenses into 30 times is just a matter of a year or two. Because moving from 4% to 3% is so easy the actual exact SWR for a 60 year retirement is not important. Just add in that one or two extra years and be on the safe side.

That said, according to the post above, a 75%/25% stock to bond for a 60 year retirement would have succeeded in 97% of the cases. I'd take that risk.
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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

AlohaJoe wrote: Mon Aug 24, 2020 10:08 pm
JacobTeach wrote: Mon Aug 24, 2020 9:20 pm The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?
There's no such thing as a "Safe Withdrawal Rate" for a retirement that long. Anyone who tells you differently is lying. Just use a variable withdrawal scheme, variable percentage withdrawal from a Bogleheads contributor is one of many good choices, and accept that you cannot get rid of all uncertainty when dealing with time periods of that length.
Separately, for a 45+ year retirement, would real estate that generates stable rental income be a net positive or negative?
Real estate is a single undiversified asset. It could help or it could hurt, like all undiversified assets. Real estate is not some miracle investment that never loses money. There's no such thing as 100% guaranteed stable rental income. Just look at all the people right now who had told themselves stories like "I live in a college town and there will always be university students looking for accommodation". Or "rents in San Francisco never go down".

My favorite story about real estate investing is a couple that won Australian Property Investor of the Year in 2012 according to some preeminent magazine. Three or four years later they were filing for bankruptcy and their tenants had disappeared due to changes in the local economy.

It essentially impossible to fit real estate into any kind of "safe withdrawal" framework so don't bother trying.
Thank you, I hadn’t fully fleshed out the VPW and that was helpful to understand.
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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

terran wrote: Tue Aug 25, 2020 8:44 am Unless more compelling research comes about in the meantime I plan to follow the advice of https://earlyretirementnow.com/safe-wit ... te-series/. Basically 3.25-3.5% range with a 60/40 starting allocation and a rising equity glidepath to 100% equities over about 10 years.
That’s really interesting, thank you. I hadn’t considered a glide path that increases equity allocation. It’s also interesting to factor in that if the market is flat/doesn’t perform that well in the first 10 years, you still may have sequence of returns risk. In that case, I suppose you can extend/delay the glide path...?
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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

sailaway wrote: Tue Aug 25, 2020 10:51 am I run FIRECalc to 50 years, which will take DH to his late 90's. I do not include SS, since even if it is there, he has 30 years until he collects and my own record is miniscule (teaching and PhD stipend mean years of zeros lined up with some of the hardest working years I have had).

FIRECalc comes to a reasonable success rate at 3.8%.

Our back up includes:
-lower initial spend (this is due to the lifestyle we want, at least initially, not a plan to deprive ourselves)
-DH expects to go back to work in some capacity after exploring the above mentioned lifestyle for a few years.
-there is likely an inheritance coming, given family history probably around the time DH reaches traditional retirement age.
It’s good news if 3.8% has a high probability of success for a 50 year retirement. Could you please post the link you used?
JBTX
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JBTX »

The thing about a swr is they are based upon history. It focuses on final outcome only. It doesn't really focus on the journey of how you get there. If you are going to plan a 50-60 year retirement, a lot of things will happen during that time frame.

In any swr scenario there are probably points along the way where the market bottoms out, and your withdrawal rate for that year is over your swr. It may be a lot over. But based on history, the market has always eventually recovered and bailed you out.

So if you are 60 years old, the market crashes, and your effective withdrawal rate for that year is 10%, are you going to be comfortable with that? Are you going to have faith that the market will recover fast enough to bail you out?

Now if you use a variable withdrawal rate and are willing and able to supplement with side gigs then that is more workable.
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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

Tyler9000 wrote: Tue Aug 25, 2020 10:57 am
JacobTeach wrote: Mon Aug 24, 2020 9:20 pm The average American lives till ~80, so if he/she retired at 35, retirement would last ~45 years and hopefully longer. What would you recommend for a SWR?
I'd recommend a different mindset that shifts from depleting principal to maintaining it. The term to look for is "perpetual withdrawal rate", and you can read a quick primer here: https://portfoliocharts.com/2016/12/09/ ... etirement/

JacobTeach wrote: Mon Aug 24, 2020 9:20 pm Historical data shows that longer retirements actually fare better with a higher allocation to equities. A zero percent bond allocation is even recommended. Based on this, having all equities and no real estate may be better?
The conclusion that high percentages of equities fared the best is usually based on studies with very limited investing options. Sure, if your only choice is a US S&P500 fund and intermediate US bonds, then high percentages of stocks look pretty appealing. But the market for portfolios is more diverse than that, and if you expand your options to things like international stocks, small cap value, long-term bonds, real estate, and commodities, the results can be quite different.

To explore that for yourself, you might try playing with the tools and portfolios at Portfolio Charts. While it doesn't account for direct personal rental income, study the retirement performance of portfolios with REITs and it might point you in the right direction.
I didn’t scrutinize the data but it seems like several of the portfolios’ perpetual withdrawal rate was 3%+ for a 40 year retirement. That’s heartening.
JBTX
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JBTX »

JacobTeach wrote: Tue Aug 25, 2020 5:31 pm
sailaway wrote: Tue Aug 25, 2020 10:51 am I run FIRECalc to 50 years, which will take DH to his late 90's. I do not include SS, since even if it is there, he has 30 years until he collects and my own record is miniscule (teaching and PhD stipend mean years of zeros lined up with some of the hardest working years I have had).

FIRECalc comes to a reasonable success rate at 3.8%.

Our back up includes:
-lower initial spend (this is due to the lifestyle we want, at least initially, not a plan to deprive ourselves)
-DH expects to go back to work in some capacity after exploring the above mentioned lifestyle for a few years.
-there is likely an inheritance coming, given family history probably around the time DH reaches traditional retirement age.
It’s good news if 3.8% has a high probability of success for a 50 year retirement. Could you please post the link you used?
If you are starting with zero interest rates and a historically higher valued stock market, your 50 year success rate is not going to be as high. Running historical simulations that include starting points like the late 70s/early 80s is completely inapplicable to the current situation.
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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

YRT70 wrote: Tue Aug 25, 2020 1:47 pm Image

Historic safe withdrawal rates from ERN.
Do today’s low yields invalidate that table?
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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

JBTX wrote: Tue Aug 25, 2020 5:42 pm
JacobTeach wrote: Tue Aug 25, 2020 5:31 pm
sailaway wrote: Tue Aug 25, 2020 10:51 am I run FIRECalc to 50 years, which will take DH to his late 90's. I do not include SS, since even if it is there, he has 30 years until he collects and my own record is miniscule (teaching and PhD stipend mean years of zeros lined up with some of the hardest working years I have had).

FIRECalc comes to a reasonable success rate at 3.8%.

Our back up includes:
-lower initial spend (this is due to the lifestyle we want, at least initially, not a plan to deprive ourselves)
-DH expects to go back to work in some capacity after exploring the above mentioned lifestyle for a few years.
-there is likely an inheritance coming, given family history probably around the time DH reaches traditional retirement age.
It’s good news if 3.8% has a high probability of success for a 50 year retirement. Could you please post the link you used?
If you are starting with zero interest rates and a historically higher valued stock market, your 50 year success rate is not going to be as high. Running historical simulations that include starting points like the late 70s/early 80s is completely inapplicable to the current situation.
I agree that it’s a risk. That’s why I made the post and asked what a SWR might be rather than rely on the previous studies.

Lots of good replies here that illustrate other strategies instead of a simple SWR.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JBTX »

The youngest you can quote an immediate annuity on immediate annuities.com is 40 years old. If you put in a 2% annual inflation adjustment, the payout rate ranges from 1.5% to 1.9%. Perhaps a bit apples to oranges, but it is an interesting benchmark nonetheless. Compare to a 60 year old the rates are 2.6-2.9%.

So my seat of the pants estimate of a 35swr would go as follows:

For 30 year retirement - 4%
Adjust 30 year retirement for today's market conditions - 3-3.5%
Stretch to 50 year retirement in today's market conditions 2.0-2.5%.

In reality I'd never use a fixed withdrawal rate.
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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

JBTX wrote: Tue Aug 25, 2020 6:11 pm The youngest you can quote an immediate annuity on immediate annuities.com is 40 years old. If you put in a 2% annual inflation adjustment, the payout rate ranges from 1.5% to 1.9%. Perhaps a bit apples to oranges, but it is an interesting benchmark nonetheless. Compare to a 60 year old the rates are 2.6-2.9%.

So my seat of the pants estimate of a 35swr would go as follows:

For 30 year retirement - 4%
Adjust 30 year retirement for today's market conditions - 3-3.5%
Stretch to 50 year retirement in today's market conditions 2.0-2.5%.

In reality I'd never use a fixed withdrawal rate.
Makes sense. It’s almost never fixed since you want to optimize taxes and have lumpy costs. Knowing a base SWR is helpful though, since you can calculate your average rate and see if you’re more or less on track/need to make adjustments.

2% is definitely too low though, as that’s already 50 years worth of expenses as long as you hedge against inflation.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by terran »

JacobTeach wrote: Tue Aug 25, 2020 5:27 pm
terran wrote: Tue Aug 25, 2020 8:44 am Unless more compelling research comes about in the meantime I plan to follow the advice of https://earlyretirementnow.com/safe-wit ... te-series/. Basically 3.25-3.5% range with a 60/40 starting allocation and a rising equity glidepath to 100% equities over about 10 years.
That’s really interesting, thank you. I hadn’t considered a glide path that increases equity allocation. It’s also interesting to factor in that if the market is flat/doesn’t perform that well in the first 10 years, you still may have sequence of returns risk. In that case, I suppose you can extend/delay the glide path...?
You should read through the series when you have a chance, but my understanding is that poor returns at the start of retirement are actually exactly what the rising equity glidepath is designed to combat. If you knew you'd have good initial returns you'd be better off with 100% equities the whole time, so you're giving up some of that return for the insurance of not taking a big devastating hit right at the beginning of retirement. If you do end up with poor early returns you can recoup some of the damage by buying equities at the new lower cost as you rebalance to a higher equity allocation.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by YRT70 »

JacobTeach wrote: Tue Aug 25, 2020 5:43 pm
YRT70 wrote: Tue Aug 25, 2020 1:47 pm Image

Historic safe withdrawal rates from ERN.
Do today’s low yields invalidate that table?
It's a good question. There have been many threads that have discussed it in depth. Here's one I suggest reading: viewtopic.php?t=312031
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vitaflo
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by vitaflo »

JacobTeach wrote: Tue Aug 25, 2020 5:43 pm Do today’s low yields invalidate that table?
Not any more than runaway inflation in the past would have. Inflation is the enemy of retirees, not low interest rates (by itself).

In any case, 3.5% for any length retirement is what I personally would feel comfortable with. Doubling the retirement length doesn't mean halving the SWR. It doesn't work like that.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by willthrill81 »

JacobTeach wrote: Tue Aug 25, 2020 5:43 pm
YRT70 wrote: Tue Aug 25, 2020 1:47 pm Image

Historic safe withdrawal rates from ERN.
Do today’s low yields invalidate that table?
Not necessarily. Bonds had negative real returns from 1940-1981 of roughly -1.6% annualized, and yet the '4% rule' held up fine for 30 year retirements (well, 3.8% for 1966, the very worst year).

It's true that unless interest rates keep falling or inflation drops even further that bonds (i.e. total bond market and similar instruments) will probably lose out to inflation over the next year. Consequently, if you're going to retire very early, you pretty much have to hitch your wagon to stocks. As long as your risk tolerance would allow for it, I'd say that you should have at least 70% in stocks, and closer to 90% would probably be better.

Your question regarding real estate is a good one. Karsten at Early Retirement Now, a site that I would strongly recommend that you spend a few days reading through because it's all about what you're trying to do, analyzed the impact of real estate earlier this year, and his conclusion was that even with conservative assumptions, rental real estate can improve your withdrawal rates over the long-term. Keep in mind that the fairly straightforward math underlying rental real estate does not often work out in high cost of living areas. In moderate and low cost of living areas, it's much more easy to find properties with good expected returns. It's a lot of work though, and there are many threads about posters who have done it. Some love it, and others loathe it. Most agree that, to varying extents, it's basically a part-time job unless you can afford to hire a property manager, and even then it will still periodically require your time at least.

If you're really thinking about real estate, I'd recommend that you visit Paula Pant's site, www.affordanything.com. She owns a number of properties in states other than that of her residence, and is one of the more balanced voices in the arena. I'd strongly advise you to avoid those real estate promoters who focus on cash-on-cash returns, the maximization of which requires very heavy use of leverage and can lead to a very bad outcome as many learned the hard way about a decade ago.
“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 someone retiring at 35? Would real estate help or hurt?

Post by willthrill81 »

JacobTeach wrote: Tue Aug 25, 2020 11:23 pm
JBTX wrote: Tue Aug 25, 2020 6:11 pm The youngest you can quote an immediate annuity on immediate annuities.com is 40 years old. If you put in a 2% annual inflation adjustment, the payout rate ranges from 1.5% to 1.9%. Perhaps a bit apples to oranges, but it is an interesting benchmark nonetheless. Compare to a 60 year old the rates are 2.6-2.9%.

So my seat of the pants estimate of a 35swr would go as follows:

For 30 year retirement - 4%
Adjust 30 year retirement for today's market conditions - 3-3.5%
Stretch to 50 year retirement in today's market conditions 2.0-2.5%.

In reality I'd never use a fixed withdrawal rate.
Makes sense. It’s almost never fixed since you want to optimize taxes and have lumpy costs. Knowing a base SWR is helpful though, since you can calculate your average rate and see if you’re more or less on track/need to make adjustments.

2% is definitely too low though, as that’s already 50 years worth of expenses as long as you hedge against inflation.
I agree that a 2% withdrawal rate is too low even for a 50 year retirement (and yours could be 60 years if you're only 35). Even if your portfolio only returned 2% real over the long-term, you could make 3% real fixed money withdrawals for 50 years and not run out of money.
“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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JacobTeach
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

willthrill81 wrote: Wed Aug 26, 2020 10:08 am
JacobTeach wrote: Tue Aug 25, 2020 5:43 pm
YRT70 wrote: Tue Aug 25, 2020 1:47 pm Image

Historic safe withdrawal rates from ERN.
Do today’s low yields invalidate that table?
Not necessarily. Bonds had negative real returns from 1940-1981 of roughly -1.6% annualized, and yet the '4% rule' held up fine for 30 year retirements (well, 3.8% for 1966, the very worst year).

It's true that unless interest rates keep falling or inflation drops even further that bonds (i.e. total bond market and similar instruments) will probably lose out to inflation over the next year. Consequently, if you're going to retire very early, you pretty much have to hitch your wagon to stocks. As long as your risk tolerance would allow for it, I'd say that you should have at least 70% in stocks, and closer to 90% would probably be better.

Your question regarding real estate is a good one. Karsten at Early Retirement Now, a site that I would strongly recommend that you spend a few days reading through because it's all about what you're trying to do, analyzed the impact of real estate earlier this year, and his conclusion was that even with conservative assumptions, rental real estate can improve your withdrawal rates over the long-term. Keep in mind that the fairly straightforward math underlying rental real estate does not often work out in high cost of living areas. In moderate and low cost of living areas, it's much more easy to find properties with good expected returns. It's a lot of work though, and there are many threads about posters who have done it. Some love it, and others loathe it. Most agree that, to varying extents, it's basically a part-time job unless you can afford to hire a property manager, and even then it will still periodically require your time at least.

If you're really thinking about real estate, I'd recommend that you visit Paula Pant's site, www.affordanything.com. She owns a number of properties in states other than that of her residence, and is one of the more balanced voices in the arena. I'd strongly advise you to avoid those real estate promoters who focus on cash-on-cash returns, the maximization of which requires very heavy use of leverage and can lead to a very bad outcome as many learned the hard way about a decade ago.
Thank you. This is an incredibly helpful post. The period of negative real yields gives me a bit of confidence, and ERN’s real estate analysis is fantastic.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by nigel_ht »

Yah, follow the data on ERN and maybe fudge a little toward conservative side...but the key is to estimate high on future expenses.

In a long thread elsewhere I suggested just using 33x the average income of a family of 4 in your desired retirement state. Actually do 10-20% above since humans seem happiest when they are above average. That eliminates the need to guess at expenses.

Then I would just do 75/25 and 3% WR while LBYM. Anything not spent, just don’t take out and leave it for later as more buffer.

If you’re single and don’t mind roommates then renting out a couple rooms in your own house may be a way to start up in RE. When you marry, buy a new place and continue to rent out your first house or sell...whichever suits you better.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by konic »

Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by konic »

Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by sailaway »

konic wrote: Thu Aug 27, 2020 10:48 am Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
I have seen lots of 2% advocates for quite awhile around here. Samurai is recommending .5% these days. Basically, whatever interest you can get from Ally, I guess?
konic
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by konic »

sailaway wrote: Thu Aug 27, 2020 10:51 am
konic wrote: Thu Aug 27, 2020 10:48 am Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
I have seen lots of 2% advocates for quite awhile around here. Samurai is recommending .5% these days. Basically, whatever interest you can get from Ally, I guess?
Yes, I have noticed. I was wondering about the present thread context.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by willthrill81 »

konic wrote: Thu Aug 27, 2020 12:19 pm
sailaway wrote: Thu Aug 27, 2020 10:51 am
konic wrote: Thu Aug 27, 2020 10:48 am Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
I have seen lots of 2% advocates for quite awhile around here. Samurai is recommending .5% these days. Basically, whatever interest you can get from Ally, I guess?
Yes, I have noticed. I was wondering about the present thread context.
Historically, there's been little reason to start at a withdrawal rate below 3%, no matter how long the retirement was, assuming that the portfolio had a healthy exposure to stocks.
“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 someone retiring at 35? Would real estate help or hurt?

Post by nigel_ht »

konic wrote: Thu Aug 27, 2020 10:48 am Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
For FIRE? Maybe. If the desire is to maintain the current portfolio while accounting for inflation for 30 years the WR is below 2%.

Say you have $1M and you want to “FIRE“...I wouldn’t do more than 2%...then depend on your side hustles to get you to 65 and drop the side hustles and withdraw 4% till SS at 70. That should get you to having the equivalent to a traditional $1M retirement at 65.

If you look at some of the figures from Otar the WR is below 2% to have both principal and withdrawal account for inflation. ERN numbers are higher or you can use the 60 year numbers. I’m to lazy to look them up for umpteenth time.

The difference between the two analysis is AA and expenses.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JoMoney »

I would look at an actuarial table for expected lifespan, something like this:
https://www.fidelity.com/content/apps/m ... -Table.pdf

A 35yo has an expected remaining lifespan of 48.5 years
1/48.5 = 2.0%

They could put their portfolio in TIPS, and expect to be able to withdraw a 2% of the initial balance + inflation, guaranteed by the U.S. Government for the remainder of their expected lifespan.
Presuming the early-retiree is eligible for social security, when of age for SS they could likely trade in their remaining portfolio balance for a Single Premium Immediate Annuity that would guarantee payments for the remainder of their life, they would lose the inflation protection offered by the TIPS portfolio, but they would also have social security that is inflation adjusted and would help off-set the SPIA shortfall.

The above seems about as close to 'bullet proof' as I can think of, it would be hard for me to imagine suggesting a SWR less than 2.0% given the above.
The early retiree could take more risk owning equities and other investments and hope for a higher return, but they would also have to accept the risk of a shortfall leaving them old and broke.

Edit, for example:
I just calculated a 35yo with $100,000 portfolio withdrawing $2,000 a year (2%)
For simplicity, I ignore inflation adjustment TIPS would offer the portfolio
At age 67 the remaining balance would be $36,000
I just did a quote at https://www.immediateannuities.com/ for a 67yo male, an immediate annuity purchased for $36,000 would offer $2,208 a year (with no inflation adjustment, but the theoretical retiree could also receive social security which is inflation adjusted).
Last edited by JoMoney on Thu Sep 03, 2020 8:49 pm, edited 1 time in total.
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gougou
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by gougou »

REITs are cheap now. Many high quality REITs are paying 4%+ distributions. Own some REITs and live off the distributions and your assets should be inflation protected for a long time.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by stocknoob4111 »

konic wrote: Thu Aug 27, 2020 10:48 am Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
No, but Wade Pfau is on it... :mrgreen:
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by YRT70 »

JacobTeach wrote: Wed Aug 26, 2020 11:50 pm Thank you. This is an incredibly helpful post. The period of negative real yields gives me a bit of confidence, and ERN’s real estate analysis is fantastic.
ERN had a new post up that reminded me of this thread. Perhaps it's interesting.
I talked to Taylor at Passive Wealth Strategies for Busy Professionals. Most of the discussion was about my approach to Real Estate investing through private equity funds. I’ve never written a blog post about this topic and it’s on my to-do list, so people who are interested in this topic might want to check it out until I actually write something more detailed about the topic!
https://earlyretirementnow.com/2020/08/ ... e-economy/
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by willthrill81 »

stocknoob4111 wrote: Thu Sep 03, 2020 8:47 pm
konic wrote: Thu Aug 27, 2020 10:48 am Has anyone started advocating 2% and 1% yet? We will get to the bottom soon enough ...
No, but Wade Pfau is on it... :mrgreen:
Actually, Sam Dogen of the Financial Samurai blog has already advocated .5% as the SWR for early retirees. That's right, early retirees need to have 200 years of expenses saved so they can safely withdraw those expenses for 50-60 years. It's bona fide absurdity almost certainly designed to generate clicks to help the author leave San Francisco for Hawaii. Last year, he said that his family could no longer live 'comfortably' spending a quarter of a million dollars a year. :oops:
“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 someone retiring at 35? Would real estate help or hurt?

Post by RAchip »

If you invest it all in the s&p 500 and “withdraw” the dividends (a little under 2% at this time) that is safe. It seems to me that there is ZERO chance of outliving your money if you do that. Depending on how it goes, at some point you can almost certainly start eating into the “principal” also.
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Re: Safe withdrawal rate for someone retiring at 35? Would real estate help or hurt?

Post by JacobTeach »

RAchip wrote: Sun Sep 06, 2020 9:21 pm If you invest it all in the s&p 500 and “withdraw” the dividends (a little under 2% at this time) that is safe. It seems to me that there is ZERO chance of outliving your money if you do that. Depending on how it goes, at some point you can almost certainly start eating into the “principal” also.
Are you saying forego the real estate?
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