Does a higher interest rate environment mean you need less money to retire?

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rgs92
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Does a higher interest rate environment mean you need less money to retire?

Post by rgs92 »

So for years (seems like forever) I've been reading that the very low interest rate environment meant you needed a higher starting portfolio value.
Therefore, if those days of very depressed rates are over, is your SWR (Sustainable or Safe Withdrawal Rate?) actually higher?

Basically, is 25x (4%) now safer than it was previously, and 30x or 33x (and higher) less necessary? I'm thinking the higher bond yields would help.
Thank you.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by howard71 »

I'd go with Jack Bogle's take that "nobody knows nuthin".
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by the_wiki »

Sure, if you can get 4% interest guaranteed, then you can just live off your interest at the 4% rule forever. The only question is how long will it last? Probably not as long as your retirement.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by JoeRetire »

rgs92 wrote: Thu Sep 22, 2022 12:09 pm So for years (seems like forever) I've been reading that the very low interest rate environment meant you needed a higher starting portfolio value.
Therefore, if those days of very depressed rates are over, is your SWR (Sustainable or Safe Withdrawal Rate?) actually higher?

Basically, is 25x (4%) now safer than it was previously, and 30x or 33x (and higher) less necessary? I'm thinking the higher bond yields would help.
Thank you.
Higher interest with low inflation = good!

Higher interest with high inflation = ???
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dbr
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by dbr »

rgs92 wrote: Thu Sep 22, 2022 12:09 pm So for years (seems like forever) I've been reading that the very low interest rate environment meant you needed a higher starting portfolio value.
Therefore, if those days of very depressed rates are over, is your SWR (Sustainable or Safe Withdrawal Rate?) actually higher?

Basically, is 25x (4%) now safer than it was previously, and 30x or 33x (and higher) less necessary? I'm thinking the higher bond yields would help.
Thank you.
Yes and no. Certainly higher real returns on assets enable safe spending at a higher rate than is possible with lower returns. 25x is not safer than it was previously as previously real returns on fixed income may have been higher than they are now, depending on what you mean by previously.

Also, of course, unless you are invested only in bonds you can't project the prospects just on interest rates as stocks play an even bigger roll. All bond portfolios have terrible safe withdrawal rates most of the time.

But to illustrate the math for bonds consider a 30 year ladder of 30 year TIPS. At 0% real yield on the bonds you would get a certain 3.33% inflation indexed withdrawal rate for 30 years. At -1% real yield you get 2.9% withdrawal rate, at +1% real yield you get 3.8%, and at +2% you get 4.4%. So if real yields on 30 year TIPS hit and exceed 2% it might be prudent to buy a 30 year ladder. Back in 2010 that rate was available for a brief time but it would have been a mistake to take it in hindsight at stocks delivered a CAGR of 12% between 2010 and now.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by alex_686 »

Yes, in theory.

You start with the pseudo liability, Your retirement target. i.e., $X in Y years. You then discount that value to today to get the NPV. Higher real long term rates mean a lower current NPV.

Note, right now we are talking about interest rates. You also need to figure in the extra return you get from investing in risk stocks, or the Equity Risk Premium. That is fairly high today in a historical context. I suspect that may fall. So the end result may be zero change in your contributions or asset allocations. But these things are a good thing to go over during your yearly review of your ISP.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by dbr »

the_wiki wrote: Thu Sep 22, 2022 12:22 pm Sure, if you can get 4% interest guaranteed, then you can just live off your interest at the 4% rule forever. The only question is how long will it last? Probably not as long as your retirement.
No, because the 4% would have to be after inflation, and such a rate just does not exist.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Beensabu »

rgs92 wrote: Thu Sep 22, 2022 12:09 pm So for years (seems like forever) I've been reading that the very low interest rate environment meant you needed a higher starting portfolio value.
I'd imagine that recommendation was in preparation for the thing that would happen when the very low interest rate environment ended. The starting value needed to be higher because it wasn't going to be higher anymore whenever the shift happened. As we are seeing.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by skierincolorado »

Higher real yields yes. Real is based on forward inflation expectations not a snapshot of the last 12 months. Real yields have risen substantially from -1 to +1.2 and are the highest sincd 2010

Higher nominal no.
Last edited by skierincolorado on Thu Sep 22, 2022 12:34 pm, edited 3 times in total.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by arcticpineapplecorp. »

the assumption is that one needs a higher balance because they're getting less interest from their bonds.

but what about their stocks?

over the past decade when bond interest yields were low, stock returns were quite good. (there is no universal law here, it just happened to happen that way, the future may be different).

so i think you have to be careful of accepting overly simplistic explanations.

higher bond yields help generate some of the needed returns of one's portfolio, but interest rates aren't fixed. if we get a recession instead of a soft landing, the FED may have to lower interest rates again to restart the economy depending upon the length and breadth of any such recession. Then what?

I think the 4% rule worked in many situations (not all) in the past involving all sorts of economic conditions. But it depended upon the mix of stocks and bonds and the length of time in retirement too. For instance using the 4% rule with a 30/70 allocation and 30 year retirement failed 11 times since all 30 year periods since 1871 whereas a 60/40 portfolio would have failed just 4 times over the same timeframes:

https://engaging-data.com/visualizing-4-rule/
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Fat-Tailed Contagion »

Yes, unless you factor in Inflation.
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rgs92
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by rgs92 »

Thanks for all the responses. Lots of food for thought.

As a corollary to the original question, Firecalc's (or cFireSim's) better years to start retirement are the years with both higher rates coupled with bear stock markets, such as the notorious 1982 (which was an extreme case for both stocks and bonds).
I'm thinking we are seeing a mini-1982, and thus a good time for a vanilla 60/40 or 50/50 (3-fund or target fund) starting portfolio.

Taylor recently said a bear market can be a very good time to invest, and I would add that we now now have a bear market in both stocks and bonds, so maybe this applies even more.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by dkturner »

the_wiki wrote: Thu Sep 22, 2022 12:22 pm Sure, if you can get 4% interest guaranteed, then you can just live off your interest at the 4% rule forever. The only question is how long will it last? Probably not as long as your retirement.
Right now you can get a 3.6% yield on a 30 year, non-callable, U.S. Treasury Bond. Not quite 4% yet, but moving in that direction.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Jags4186 »

the_wiki wrote: Thu Sep 22, 2022 12:22 pm Sure, if you can get 4% interest guaranteed, then you can just live off your interest at the 4% rule forever. The only question is how long will it last? Probably not as long as your retirement.
That’s not how the 4% rule works.

OP, the answer isn’t that you need less money to retire, the answer is that folks who were claiming you needed 30x, 33x, 40x or more were spouting nonsense.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by TN_Boy »

rgs92 wrote: Thu Sep 22, 2022 12:09 pm So for years (seems like forever) I've been reading that the very low interest rate environment meant you needed a higher starting portfolio value.
Therefore, if those days of very depressed rates are over, is your SWR (Sustainable or Safe Withdrawal Rate?) actually higher?

Basically, is 25x (4%) now safer than it was previously, and 30x or 33x (and higher) less necessary? I'm thinking the higher bond yields would help.
Thank you.
No. Maybe. :-). Nobody knows how safe the 4% rule (withdraw 4% of portfolio year 1, then increase withdrawal by inflation each year) will be going forward, because nobody can predict the future 30 years out.

That said, the problem with a low interest rate environment is low *real* returns (i.e. subtract inflation from nominal returns). Which is where we have been for a while. Thus many are concerned that a portfolio of stocks and bonds will not be as safe as historical data has shown it would be, due to both low bond returns AND high stock valuations. Not everybody agrees with that concern, or rather, how big a concern that is, but that is the problem.

Here in Sept 2022, nominal bonds STILL have low real returns (actually negative) as inflation is currently running higher than bond yields. (Note that TIPs have a positive real return at the moment).
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by martincmartin »

Imagine two people, Alice and Bob. Each had $1M at the start of 2022, and expenses of $38,000/yr. They satisfy the 3.8% rule and could retire. Alice decides to retire and Bob doesn't.

9 months later, both they're savings are down to $800,000. Of course, Alice is still safe, that's the point of the SWR. But Bob is in exactly the same financial condition. So Bob should be safe to retire too.

The 3.8% rule is a rule of thumb. It's not some hard and fast rule of the universe. Michael H McClung has three bands for the CAPE-10, with a lower threshold when CAPE-10 is low, for exactly this reason.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by TN_Boy »

rgs92 wrote: Thu Sep 22, 2022 12:48 pm Thanks for all the responses. Lots of food for thought.

As a corollary to the original question, Firecalc's (or cFireSim's) better years to start retirement are the years with both higher rates coupled with bear stock markets, such as the notorious 1982 (which was an extreme case for both stocks and bonds).
I'm thinking we are seeing a mini-1982, and thus a good time for a vanilla 60/40 or 50/50 (3-fund or target fund) starting portfolio.

Taylor recently said a bear market can be a very good time to invest, and I would add that we now now have a bear market in both stocks and bonds, so maybe this applies even more.
I don't think 2022 is going to be anywhere near good a year as 1982 was. The 30 years after 1982 were basically the best time ever for a US investor in stocks and bonds. Stock valuations are much higher now than in 1982. Bond yields were very high in 1982, and we saw declining inflation and interest rates over the next decades, a great thing for the bonds. I mean, everything worked and it worked well. 2022 looks nothing like 1982 to me I'm afraid, and I'm not one of the gloom and doom, 2022 investors are in terrible terrible trouble folks. But this doesn't strike me as an especially appealing time to be investing. I just don't know what else to with the money ... market timing being a proven loser in my view.

That said, I think this is an okay time for a 60/40 portfolio, because it is usually an okay time for a 60/40 portfolio.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by vineviz »

rgs92 wrote: Thu Sep 22, 2022 12:09 pm So for years (seems like forever) I've been reading that the very low interest rate environment meant you needed a higher starting portfolio value.
Therefore, if those days of very depressed rates are over, is your SWR (Sustainable or Safe Withdrawal Rate?) actually higher?

Basically, is 25x (4%) now safer than it was previously, and 30x or 33x (and higher) less necessary? I'm thinking the higher bond yields would help.
The higher yields WILL help. Just remember how we got here, though: a 60/40 portfolio is down about 15% or more so far this year.

So if you started the year with 25x expenses, now you might have just 21x expenses. That 21x should provide a similar retirement from here that the 25x retirement offered in December.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by DaufuskieNate »

vineviz wrote: Thu Sep 22, 2022 1:44 pm The higher yields WILL help. Just remember how we got here, though: a 60/40 portfolio is down about 15% or more so far this year.

So if you started the year with 25x expenses, now you might have just 21x expenses. That 21x should provide a similar retirement from here that the 25x retirement offered in December.
I think this is a nuance that is often missed. Portfolio goes down, expected returns often increase and soften the impact on your spending plans. Portfolio goes up, expected returns often decrease and moderate what you can spend. A variable withdrawal strategy, like ABW, combined with updated expected returns based on market conditions handles this quite well.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Tamalak »

I think the multiple you need now is less than the multiple you needed at the start of this year, when interest rates were in the gutter and people could only justify investing in stocks because TINA.

But I think the multiple has dropped TO 25x from a higher number, not dropped to a lower number FROM 25x.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by nisiprius »

It depends on the reason for the higher interest rate.

The first thing to do is to step back and do everything in real dollars (inflation-adjusted). It is returns relative to inflation that matter.

In the case of a near-riskless, near-zero-volatility investment, and the assumption that you need to fund a possible 40 years in retirement--the portfolio will exactly be exhausted at the end of the 40th year--then, if the investment has a return of 2.5% above inflation, to obtain an annual inflation-adjusted withdrawal of $X you will need a portfolio size of 25.73X.

(This must be calculated as "geometric difference," i.e. 2.5% above an inflation rate of 10%/year = 1.10 x 1.025 = 1.1275, i.e. 12.75% nominal, not 10% + 2.5% = 12.5%).

This is true regardless of the values of interest and inflation, only their (geometric) difference.

In other words, if you are planning to retire on a portfolio of nothing but short-term TIPS, an interest rate of 12.75% when the inflation rate is 10% is no better and no worse than an interest rate of 2.5% when the inflation rate is zero.

So, yes, a high real interest rate is better for retirees who wish to have a conservative, bond-heavy portfolio... but, unfortunately, real interest rates don't fluctuate all that much, and it all pretty much lost in the noise.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Kenkat »

You should in theory require less money now that rates are higher. Fortunately the market has arranged for you to have less money this year, so it ends up that you are pretty much in the same place you were before the bear market.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by abc132 »

I think if people argued low bond rates (and higher CAPE) lowered SWRs, they must also accept the opposite - that we are in a better position now.

I never believed their low SWR argument or tried to predict real-time expected returns, so no changes are expected for my plan.

I would ignore all the future prognosticators.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by vineviz »

abc132 wrote: Thu Sep 22, 2022 3:20 pm I never believed their low SWR argument or tried to predict real-time expected returns, so no changes are expected for my plan.
The math is immune to your belief or disbelief.

Compare the cost of building a 30 year TIPS ladder today to the cost of building the same ladder last December. Or in December 2010. You'll see the difference is very real.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Wrench »

For $1M over 30 years and a mean TIPS rate of 1.5% (roughly what it is today), the real annual payment will be $41.4K, or 4.14% of the initial premium. This is for an essentially risk free return. So in my book, higher rates are absolutely better for retirees.

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Re: Does a higher interest rate environment mean you need less money to retire?

Post by abc132 »

vineviz wrote: Thu Sep 22, 2022 3:24 pm
abc132 wrote: Thu Sep 22, 2022 3:20 pm I never believed their low SWR argument or tried to predict real-time expected returns, so no changes are expected for my plan.
The math is immune to your belief or disbelief.

Compare the cost of building a 30 year TIPS ladder today to the cost of building the same ladder last December. Or in December 2010. You'll see the difference is very real.
I'm comparing to when the SWR was 2.6% not too long ago. In a short time (< 2 years) we have gone to almost guaranteeing that 30 year retirement period at SWR=4% with TIPS at positive real values.

You don't get to cherry pick which real-time prediction you use when it is the low SWR calculations that would require drastic changes. Ignoring the SWR prediction appears to have been the best choice.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Lee_WSP »

abc132 wrote: Thu Sep 22, 2022 3:45 pm
vineviz wrote: Thu Sep 22, 2022 3:24 pm
abc132 wrote: Thu Sep 22, 2022 3:20 pm I never believed their low SWR argument or tried to predict real-time expected returns, so no changes are expected for my plan.
The math is immune to your belief or disbelief.

Compare the cost of building a 30 year TIPS ladder today to the cost of building the same ladder last December. Or in December 2010. You'll see the difference is very real.
I'm comparing to when the SWR was 2.6% not too long ago. In a short time (< 2 years) we have gone to almost guaranteeing that 30 year retirement period at SWR=4% with TIPS at positive real values.

You don't get to cherry pick which real-time prediction you use when it is the low SWR calculations that would require drastic changes. Ignoring the SWR prediction appears to have been the best choice.
That’s an interesting kink in the 4% SWR research. If 30 yr TIPS did indeed yield 5%, it’s quite clear you can have a 5% SWR for those 30 years. Since TIPS weren’t available back then, nor do we even have much data on TIPS, I kind of doubt we’ll get a great answer on how high yielding TIPS can influence the SWR.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by abc132 »

Lee_WSP wrote: Thu Sep 22, 2022 4:22 pm
abc132 wrote: Thu Sep 22, 2022 3:45 pm
vineviz wrote: Thu Sep 22, 2022 3:24 pm
abc132 wrote: Thu Sep 22, 2022 3:20 pm I never believed their low SWR argument or tried to predict real-time expected returns, so no changes are expected for my plan.
The math is immune to your belief or disbelief.

Compare the cost of building a 30 year TIPS ladder today to the cost of building the same ladder last December. Or in December 2010. You'll see the difference is very real.
I'm comparing to when the SWR was 2.6% not too long ago. In a short time (< 2 years) we have gone to almost guaranteeing that 30 year retirement period at SWR=4% with TIPS at positive real values.

You don't get to cherry pick which real-time prediction you use when it is the low SWR calculations that would require drastic changes. Ignoring the SWR prediction appears to have been the best choice.
That’s an interesting kink in the 4% SWR research. If 30 yr TIPS did indeed yield 5%, it’s quite clear you can have a 5% SWR for those 30 years. Since TIPS weren’t available back then, nor do we even have much data on TIPS, I kind of doubt we’ll get a great answer on how high yielding TIPS can influence the SWR.
Actually at 25x you only need around 1.5% real returns to last 30 years, so 100% TIPS when yields are around 1.5% do the trick.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by dbr »

abc132 wrote: Thu Sep 22, 2022 4:24 pm
Lee_WSP wrote: Thu Sep 22, 2022 4:22 pm
abc132 wrote: Thu Sep 22, 2022 3:45 pm
vineviz wrote: Thu Sep 22, 2022 3:24 pm
abc132 wrote: Thu Sep 22, 2022 3:20 pm I never believed their low SWR argument or tried to predict real-time expected returns, so no changes are expected for my plan.
The math is immune to your belief or disbelief.

Compare the cost of building a 30 year TIPS ladder today to the cost of building the same ladder last December. Or in December 2010. You'll see the difference is very real.
I'm comparing to when the SWR was 2.6% not too long ago. In a short time (< 2 years) we have gone to almost guaranteeing that 30 year retirement period at SWR=4% with TIPS at positive real values.

You don't get to cherry pick which real-time prediction you use when it is the low SWR calculations that would require drastic changes. Ignoring the SWR prediction appears to have been the best choice.
That’s an interesting kink in the 4% SWR research. If 30 yr TIPS did indeed yield 5%, it’s quite clear you can have a 5% SWR for those 30 years. Since TIPS weren’t available back then, nor do we even have much data on TIPS, I kind of doubt we’ll get a great answer on how high yielding TIPS can influence the SWR.
Actually at 25x you only need around 1.5% real returns to last 30 years, so 100% TIPS when yields are around 1.5% do the trick.
Right, and I think 3% real gives you 5%. The calculation is that if you build a 30 year ladder of TIPS and figure out how much you can spend each year from the expiring rung and the real yield from all the remaining holdings you get that. Such a plan includes that the money and the income stops at the end, but that is also the definition of what you get in a worst case in an SWR study. If a person wants a retirement that funds for 30 years and also leaves the same real value in the portfolio that one started with, then the return needs to be more. Such a case is also a perpetual portfolio.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by CletusCaddy »

dbr wrote: Thu Sep 22, 2022 12:27 pm
the_wiki wrote: Thu Sep 22, 2022 12:22 pm Sure, if you can get 4% interest guaranteed, then you can just live off your interest at the 4% rule forever. The only question is how long will it last? Probably not as long as your retirement.
No, because the 4% would have to be after inflation, and such a rate just does not exist.
4% real is actually what many experts are projecting a globally diversified stock portfolio to return going forward. No guarantee of course.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by CletusCaddy »

abc132 wrote: Thu Sep 22, 2022 4:24 pm
Lee_WSP wrote: Thu Sep 22, 2022 4:22 pm
abc132 wrote: Thu Sep 22, 2022 3:45 pm
vineviz wrote: Thu Sep 22, 2022 3:24 pm
abc132 wrote: Thu Sep 22, 2022 3:20 pm I never believed their low SWR argument or tried to predict real-time expected returns, so no changes are expected for my plan.
The math is immune to your belief or disbelief.

Compare the cost of building a 30 year TIPS ladder today to the cost of building the same ladder last December. Or in December 2010. You'll see the difference is very real.
I'm comparing to when the SWR was 2.6% not too long ago. In a short time (< 2 years) we have gone to almost guaranteeing that 30 year retirement period at SWR=4% with TIPS at positive real values.

You don't get to cherry pick which real-time prediction you use when it is the low SWR calculations that would require drastic changes. Ignoring the SWR prediction appears to have been the best choice.
That’s an interesting kink in the 4% SWR research. If 30 yr TIPS did indeed yield 5%, it’s quite clear you can have a 5% SWR for those 30 years. Since TIPS weren’t available back then, nor do we even have much data on TIPS, I kind of doubt we’ll get a great answer on how high yielding TIPS can influence the SWR.
Actually at 25x you only need around 1.5% real returns to last 30 years, so 100% TIPS when yields are around 1.5% do the trick.
20 year TIPS are already at 1.6% real!
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by abc132 »

CletusCaddy wrote: Thu Sep 22, 2022 5:04 pm
abc132 wrote: Thu Sep 22, 2022 4:24 pm
Lee_WSP wrote: Thu Sep 22, 2022 4:22 pm
abc132 wrote: Thu Sep 22, 2022 3:45 pm
vineviz wrote: Thu Sep 22, 2022 3:24 pm

The math is immune to your belief or disbelief.

Compare the cost of building a 30 year TIPS ladder today to the cost of building the same ladder last December. Or in December 2010. You'll see the difference is very real.
I'm comparing to when the SWR was 2.6% not too long ago. In a short time (< 2 years) we have gone to almost guaranteeing that 30 year retirement period at SWR=4% with TIPS at positive real values.

You don't get to cherry pick which real-time prediction you use when it is the low SWR calculations that would require drastic changes. Ignoring the SWR prediction appears to have been the best choice.
That’s an interesting kink in the 4% SWR research. If 30 yr TIPS did indeed yield 5%, it’s quite clear you can have a 5% SWR for those 30 years. Since TIPS weren’t available back then, nor do we even have much data on TIPS, I kind of doubt we’ll get a great answer on how high yielding TIPS can influence the SWR.
Actually at 25x you only need around 1.5% real returns to last 30 years, so 100% TIPS when yields are around 1.5% do the trick.
20 year TIPS are already at 1.6% real!
Right, so you could build a ladder of TIPS and guarantee about a 4% SWR. You can guarantee spending of over 50% more per year than what you were told 2 years ago, and this is after 8% inflation showed up.

I realize SWR's are worst case predictions and that we are very likely to do better than the prediction, but it is the variation in what they are telling you to spend that is the problem.
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by dbr »

abc132 wrote: Thu Sep 22, 2022 5:14 pm
CletusCaddy wrote: Thu Sep 22, 2022 5:04 pm
abc132 wrote: Thu Sep 22, 2022 4:24 pm
Lee_WSP wrote: Thu Sep 22, 2022 4:22 pm
abc132 wrote: Thu Sep 22, 2022 3:45 pm

I'm comparing to when the SWR was 2.6% not too long ago. In a short time (< 2 years) we have gone to almost guaranteeing that 30 year retirement period at SWR=4% with TIPS at positive real values.

You don't get to cherry pick which real-time prediction you use when it is the low SWR calculations that would require drastic changes. Ignoring the SWR prediction appears to have been the best choice.
That’s an interesting kink in the 4% SWR research. If 30 yr TIPS did indeed yield 5%, it’s quite clear you can have a 5% SWR for those 30 years. Since TIPS weren’t available back then, nor do we even have much data on TIPS, I kind of doubt we’ll get a great answer on how high yielding TIPS can influence the SWR.
Actually at 25x you only need around 1.5% real returns to last 30 years, so 100% TIPS when yields are around 1.5% do the trick.
20 year TIPS are already at 1.6% real!
Right, so you could build a ladder of TIPS and guarantee about a 4% SWR. You can guarantee spending of over 50% more per year than what you were told 2 years ago, and this is after 8% inflation showed up.

I realize SWR's are worst case predictions and that we are very likely to do better than the prediction, but it is the variation in what they are telling you to spend that is the problem.
Please be aware that SWR starting year by starting year has varied between 4% and 8%. The problem is you don't know what kind of year your year of retirement is until it is all over (though it becomes more and more clear as time goes on). Similarly you don't know what real yield you will be able to get on your TIPS until you get there, but a difference is that you will know what that is when you start the ladder. Another difference is that a TIPS ladder is absolutely a commitment to run out of money at the end of the ladder. An SWR plan has a very high probability of not running out of money at the end and a reasonable probability of dying with more money than you started. It is also a reasonable guess with uncertainty attached that retiring at high real yields has a chance of being a year of higher SWR.

As far as all this goes it is also a historical crap shoot how much money you will be able to accumulate by the time you retire no matter how hard you try.
abc132
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by abc132 »

dbr wrote: Thu Sep 22, 2022 5:40 pm
abc132 wrote: Thu Sep 22, 2022 5:14 pm
CletusCaddy wrote: Thu Sep 22, 2022 5:04 pm
abc132 wrote: Thu Sep 22, 2022 4:24 pm
Lee_WSP wrote: Thu Sep 22, 2022 4:22 pm

That’s an interesting kink in the 4% SWR research. If 30 yr TIPS did indeed yield 5%, it’s quite clear you can have a 5% SWR for those 30 years. Since TIPS weren’t available back then, nor do we even have much data on TIPS, I kind of doubt we’ll get a great answer on how high yielding TIPS can influence the SWR.
Actually at 25x you only need around 1.5% real returns to last 30 years, so 100% TIPS when yields are around 1.5% do the trick.
20 year TIPS are already at 1.6% real!
Right, so you could build a ladder of TIPS and guarantee about a 4% SWR. You can guarantee spending of over 50% more per year than what you were told 2 years ago, and this is after 8% inflation showed up.

I realize SWR's are worst case predictions and that we are very likely to do better than the prediction, but it is the variation in what they are telling you to spend that is the problem.
Please be aware that SWR starting year by starting year has varied between 4% and 8%. The problem is you don't know what kind of year your year of retirement is until it is all over (though it becomes more and more clear as time goes on). Similarly you don't know what real yield you will be able to get on your TIPS until you get there, but a difference is that you will know what that is when you start the ladder. Another difference is that a TIPS ladder is absolutely a commitment to run out of money at the end of the ladder. An SWR plan has a very high probability of not running out of money at the end and a reasonable probability of dying with more money than you started. It is also a reasonable guess with uncertainty attached that retiring at high real yields has a chance of being a year of higher SWR.

As far as all this goes it is also a historical crap shoot how much money you will be able to accumulate by the time you retire no matter how hard you try.
SWR was predicted at 2.6% two years ago, and I think we are otherwise in agreement.
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vineviz
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by vineviz »

abc132 wrote: Thu Sep 22, 2022 5:45 pm
SWR was predicted at 2.6% two years ago, and I think we are otherwise in agreement.
Source?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
dbr
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by dbr »

abc132 wrote: Thu Sep 22, 2022 5:45 pm
dbr wrote: Thu Sep 22, 2022 5:40 pm
abc132 wrote: Thu Sep 22, 2022 5:14 pm
CletusCaddy wrote: Thu Sep 22, 2022 5:04 pm
abc132 wrote: Thu Sep 22, 2022 4:24 pm

Actually at 25x you only need around 1.5% real returns to last 30 years, so 100% TIPS when yields are around 1.5% do the trick.
20 year TIPS are already at 1.6% real!
Right, so you could build a ladder of TIPS and guarantee about a 4% SWR. You can guarantee spending of over 50% more per year than what you were told 2 years ago, and this is after 8% inflation showed up.

I realize SWR's are worst case predictions and that we are very likely to do better than the prediction, but it is the variation in what they are telling you to spend that is the problem.
Please be aware that SWR starting year by starting year has varied between 4% and 8%. The problem is you don't know what kind of year your year of retirement is until it is all over (though it becomes more and more clear as time goes on). Similarly you don't know what real yield you will be able to get on your TIPS until you get there, but a difference is that you will know what that is when you start the ladder. Another difference is that a TIPS ladder is absolutely a commitment to run out of money at the end of the ladder. An SWR plan has a very high probability of not running out of money at the end and a reasonable probability of dying with more money than you started. It is also a reasonable guess with uncertainty attached that retiring at high real yields has a chance of being a year of higher SWR.

As far as all this goes it is also a historical crap shoot how much money you will be able to accumulate by the time you retire no matter how hard you try.
SWR was predicted at 2.6% two years ago, and I think we are otherwise in agreement.
True there were blogs like that but prediction and actually demonstrating an outcome in historical fact is two different things. It is really, really hard to predict an SWR contingent on what you think are conditions today. Too much of the outcome depends on unknown future evolution. I give those predictions zero credibility.
abc132
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by abc132 »

vineviz wrote: Thu Sep 22, 2022 5:48 pm
abc132 wrote: Thu Sep 22, 2022 5:45 pm
SWR was predicted at 2.6% two years ago, and I think we are otherwise in agreement.
Source?
I would search Wade Pfau SWR and look at your own posts there.

You can also find the recent thread where Wade himself said this was his SWR.
Tamalak
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by Tamalak »

If the 4% SWR has never failed, and the market has dropped 20%, wouldn't that make the SWR going forward 5%? :twisted:
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vineviz
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by vineviz »

abc132 wrote: Thu Sep 22, 2022 5:57 pm
vineviz wrote: Thu Sep 22, 2022 5:48 pm
abc132 wrote: Thu Sep 22, 2022 5:45 pm
SWR was predicted at 2.6% two years ago, and I think we are otherwise in agreement.
Source?
I would search Wade Pfau SWR and look at your own posts there.

You can also find the recent thread where Wade himself said this was his SWR.
I think you're imagining this number. Can you provide a source, or no?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
abc132
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Re: Does a higher interest rate environment mean you need less money to retire?

Post by abc132 »

vineviz wrote: Thu Sep 22, 2022 5:59 pm
abc132 wrote: Thu Sep 22, 2022 5:57 pm
vineviz wrote: Thu Sep 22, 2022 5:48 pm
abc132 wrote: Thu Sep 22, 2022 5:45 pm
SWR was predicted at 2.6% two years ago, and I think we are otherwise in agreement.
Source?
I would search Wade Pfau SWR and look at your own posts there.

You can also find the recent thread where Wade himself said this was his SWR.
I think you're imagining this number. Can you provide a source, or no?
Sure you posted in both threads.

Gimme a bit.

Here is a 2.8% thread. more coming...
viewtopic.php?t=345801

2.2% SWR thread.
https://bogleheads.org/forum/viewtopic.php?t=383935

From Wade himself in the 2.2% SWR thread:
" Also, that 2.2 SWR was from sometime in the spring of 2020 when long-term TIPS yields were negative. That discount rate would also lower the funded ratio as the liabilities in this example (as with most) have a higher duration."
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