If I was retiring today, I could comfortably withdraw 5% (mid-30s dad using ERN SWR Toolbox)

[TinyHouse]

After over a decade of learning from and reading this forum and other great resources about investing, I've read countless arguments and presentations about SWRs and withdraw methods. WRs vary from 3-4% typically (sometimes below 3%!!!), and withdraw methods and recommended asset allocations vary widely. But one thing is for sure, choosing your own withdraw rate once you retire is tough, and it can feel like a measure 100 times, cut once situation. But it doesn’t have to be so daunting even though Finance is personal and each situation is different. Despite the diversity, the variables for most of our situations are actually pretty similar, but the inputs to those variables are different. Retirement age, income, lifestyle, cost of living, family obligations, inheritance, health, life expectancy, goals, etc. we all have these things for the most part.

After all my research and years of learning, I feel comfortable quitting my job today since I'm financially independent, and today I would have a starting withdraw rate of around 5% and adjust dynamically from there depending on need and market conditions. Our needs and our spending won’t be perfectly smooth.

Details:
I'm in the USA, in my 30s, have a wife and kids, have a mostly VTSAX/VXUS portfolio, have 25X+ our living expenses invested, and still work currently. I could get laid off tomorrow (in tech), I could get injured, I could get fed up with my job, or any number of things could derail my career or make me stop wanting to continue working. If I did stop working, I wouldn't worry at all about spending 5% of our portfolio today. I will probably never “retire“, but I could see myself getting out of corporate America for good.

How did I arrive at ~5%? A number of tools and resources, but the one I keep coming back to is Karsten's ERN SWR Toolbox spreadsheet . I can't recommend it more highly. It's flexible, you can be as conservative as you want, and it accounts for a number of variables and scenarios. Is it perfect? No, but it's solid enough to stand alone as the only tool you use for determining WRs.

Inputs:
I use his custom “CAPE2” and take into account very discounted SS and super small side income starting in 30 years, and it says I'm around 5% starting target WR for my ~700 month time horizon (ending portfolio of $300k), and a 4% WR for 100% capital preservation. This looked more like 4.5% and 3.6% respectively back in January 2022. I will very likely have other smallish income throughout the years, should get an inheritance, etc. that all makes this even more conservative, but those items aren’t guaranteed so I didn’t include them over the next 30 years. To be clear, our budget is supported by 3.5-4% WR, but it’s nice to know we can spend up to 5% given current conditions and our variables. Since we plan on a dynamic withdrawal plan, I’ll keep coming back to the tool each year to enter in my portfolio value and check in on target spend.

Here's a video that explains how to use it: https://youtu.be/CClhsaBbTm0

So if I was to recommend tools for retirement planning (some for more precision and some for more quick, rough cutting) that I’ve come back to the most:
- Precision: ERN SWR Toolbox: https://earlyretirementnow.com/2019/12/ ... s-part-33/
- Precision: FICalc.app: https://ficalc.app/
- Rough: Rich, Broke, Dead: https://engaging-data.com/will-money-last-retire-early/
- Rough: Nesteggly https://www.nesteggly.com/investment-wi ... calculator
- Rough: FireCalc (old faithful )

Especially for traditional 30 year retirement horizons, you can probably withdraw much more than you think in the current market. Check these out and let me know your thoughts. Is anyone else using the ERN SWR toolbox to determine their spending each year? Anyone currently in retirement who is using this? Would love to hear from you.

Edit: added in more clarifying context and other tools to the list

[AlwaysLearningMore]

You are braver than I.

In a few months I actually will be retiring, and would not even consider a 5% withdrawal rate. Things look a little different when you transition from the theoretical to the practical. YMMV

[SevenBridgesRoad]

Someone much smarter than me will weigh in with a more detailed analysis. But for now, I can't imagine a reliable model that addresses a withdrawal rate for a 30(s) year old retiree. Unless you are MMM (whom I admire, but is a very unique guy).

[Normchad]

The SWR toolbox is phenomenally good. I’m very surprised it isn’t discuss more in these forums.

All the best!

[poker27]

I kinda agree, that the odds are a 5% withdrawal rate would last. However, what % of the time? 70%? 51%? Even if it would last, I can imagine the stress during turbulent markets.

All that being said, the majority of the time someone comes up with a #, they don’t factor in SS, so you may also be looking at 30 years of withdrawals.

[aristotelian]

If you have 25x expenses that's a 4% initial withdrawal rate. Counting SS is also kind of "cheating" since SWR assumes level withdrawal. I am suspicious of CAPE adjustment but you have enough cushion that you will be fine if you need to earn some.income at some point.

Is college.taken care of for the kids?

[steadyosmosis]

After over a decade of learning from and reading this forum ...

Especially for traditional 30 year retirement horizons, you can probably withdraw much more than you think. Check these out and let me know your thoughts, and take care!

Early-retired already, with perhaps more than 40 years before my funeral.
Basically a 3-fund portfolio, with overall AA ~60/40, spread across HSA, 401k, taxable, and traditional/Roth IRA accounts.
No way I am going to withdraw anywhere close to 5% annually, unless something catastrophic happens.
If said catastrophe strikes, I will likely begin working again for a paycheck.
Best of luck to you, if you enact your proposal.

[quantAndHold]

If I recall, you’re planning on retiring, with 2 young kids, on $40k. It might work. Forcing yourself to live on that small amount of money doesn’t give you any cushion if something changes. There’s a lot that can and will go wrong in the next 60 years. Inflation, market crashes, illness, disability, divorce, college expenses, drug rehab, car problems, or stuff nobody has even thought of yet. At least some of that is likely to happen.

Retiring in your mid-30’s. Have you worked enough quarters for Social Security and Medicare?

[watchnerd]

I'm in the USA, in my 30s, have a wife and kids, have a mostly VTSAX/VXUS portfolio, have 25X our living expenses invested, and still work currently.

But at 5% withdrawal rate, that will last you 20 years.

And you'll still be too young for SS.

Then what?

[TinyHouse]

I kinda agree, that the odds are a 5% withdrawal rate would last. However, what % of the time? 70%? 51%?

The whole point is that its taking into account that the current market is already 20% down, so the probability of 4.5-5% WR being successful is significantly higher.

January 2022 would have been more like 3.5% in my scenario.

[Watty]

When I was deciding if I could retire or not I ran my numbers through at least a half a dozen retirement calculators looking for a consensus that I would be generally OK and not so much at the details. Even if you like the way it works I would not depend on just one retirement calculator.

I was also Ok with a 5 to 10 percent "failure" rate since to me "failure" did not mean that I would spend mindlessly until I was broke and homeless, it meant that at some point I might need to reduce my spending by 10 or 20 percent if my portfolio was dropping faster than expected. I was OK with that since I had an ample retirement budget even if I had to reduce my spending some. For example if instead of an international trip I had to cut back and just drive for a vacation in Florida that would not be a dire hardship.

[TinyHouse]

The SWR toolbox is phenomenally good. I’m very surprised it isn’t discuss more in these forums.

All the best!

Couldn’t agree more. The SWR series is probably the best individual financial blogging that exists. Massively helpful and influential.

[MathWizard]

I kinda agree, that the odds are a 5% withdrawal rate would last. However, what % of the time? 70%? 51%?

The whole point is that its taking into account that the current market is already 20% down, so the probability of 4.5-5% WR being successful is significantly higher.

January 2022 would have been more like 3.5% in my scenario.

Are you figuring with 5% nominal or real?

The 4% rule was for inflation adjusted (real) returns.

The trinity study found high likelihood of a portfolio surviving 30 years with 7% nominal.

[TinyHouse]

If I recall, you’re planning on retiring, with 2 young kids, on $40k. It might work. Forcing yourself to live on that small amount of money doesn’t give you any cushion if something changes. There’s a lot that can and will go wrong in the next 60 years. Inflation, market crashes, illness, disability, divorce, college expenses, drug rehab, car problems, or stuff nobody has even thought of yet. At least some of that is likely to happen.

Retiring in your mid-30’s. Have you worked enough quarters for Social Security and Medicare?

Yes, our annual budget is around $40,000 per year, which is about 3.8% of our current portfolio. With other things that can come up like vacationing or unexpected things, knowing that 5% WR is likely safe given market conditions is nice.

Yes, the SS website estimates around 2500 per year for me, and a little less for my wife, definitely have worked past the initial bends. In my calculations I account for about $1000 a month starting at age 75 lol.

[TinyHouse]

I kinda agree, that the odds are a 5% withdrawal rate would last. However, what % of the time? 70%? 51%?

The whole point is that its taking into account that the current market is already 20% down, so the probability of 4.5-5% WR being successful is significantly higher.

January 2022 would have been more like 3.5% in my scenario.

Are you figuring with 5% nominal or real?

The 4% rule was for inflation adjusted (real) returns.

The trinity study found high likelihood of a portfolio surviving 30 years with 7% nominal.

Yeah, 5% real and today’s market and dollars.

[watchnerd]

Yeah, 5% real and today’s market and dollars.

5% real?

So if we have 4% inflation, you're going to withdraw 9%?

[tibbitts]

Yeah, 5% real and today’s market and dollars.

5% real?

So if we have 4% inflation, you're going to withdraw 9%?

I think he means withdraw 5%+(.04*5%) in your example.

[marcopolo]

After over a decade of learning from and reading this forum and other great resources about investing, I've read countless arguments and presentations about SWRs and withdraw methods. WRs vary from 3-4% typically (below 3%), and withdraw methods and recommended asset allocations vary widely. But one thing is for sure, choosing your own withdraw rate once you retire is tough, and it's usually a measure 100 times, cut once situation. Finance is personal and each situation is different. Despite the diversity, the variables for most of our situations are pretty similar, but the inputs to those variables are different. Retirement age, income, lifestyle, cost of living, family obligations, inheritance, health, life expectancy, goals, etc. we all have these things for the most part, and they each look a little different.

After all my research and years of learning, I feel comfortable retiring today since I'm financially independent, and today I would have a starting withdraw rate of around 5% and I would adjust that up for inflation each year. Sure, maybe I would spend more or less depending on our needs since our spending isn't perfectly smooth. I'm in the USA, in my 30s, have a wife and kids, have a mostly VTSAX/VXUS portfolio, have 25X our living expenses invested, and still work currently. I could get laid off tomorrow (in tech), I could get injured, I could get fed up with my job, or any number of things could derail my career or make me stop wanting to continue working. If I did stop working, I wouldn't worry at all about spending 5% of our portfolio.

It sounds like you are still in the planning phase. It is all still theoretical for you.
It will be interesting to see what happens when you actually have to implement your theory.
The first major flaw i see is the highlighted idea above. The reality is you will almost certainly re-evaluate your finances, withdrawal rates, and other retirement issues, several times over a 60ish year retirement horizon.

[TinyHouse]

Yeah, 5% real and today’s market and dollars.

5% real?

So if we have 4% inflation, you're going to withdraw 9%?

I think he means withdraw 5%+(.04*5%) in your example.

Yes, starting WR and then adjust for inflation in subsequent years, although in practice, I’m sure spending will be lumpy, so it just provides a ceiling for budgeting purposes

[marcopolo]

Yeah, 5% real and today’s market and dollars.

5% real?

So if we have 4% inflation, you're going to withdraw 9%?

That's not how real dollar withdrawal math works.

[watchnerd]

Yeah, 5% real and today’s market and dollars.

5% real?

So if we have 4% inflation, you're going to withdraw 9%?

That's not how real dollar withdrawal math works.

You're right.

End of day, brain tired.

[er999]

If it doesn’t work in 20 years you’ll be 56 or so and still able to get some sort of job (drive for Uber, etc). For someone who is 65 withdrawing 5% and 20 years later is 85 they’ll unlikely to have those sorts of work options available. That gives you a margin of safety, not financial but human capital.

[TinyHouse]

After over a decade of learning from and reading this forum and other great resources about investing, I've read countless arguments and presentations about SWRs and withdraw methods. WRs vary from 3-4% typically (below 3%), and withdraw methods and recommended asset allocations vary widely. But one thing is for sure, choosing your own withdraw rate once you retire is tough, and it's usually a measure 100 times, cut once situation. Finance is personal and each situation is different. Despite the diversity, the variables for most of our situations are pretty similar, but the inputs to those variables are different. Retirement age, income, lifestyle, cost of living, family obligations, inheritance, health, life expectancy, goals, etc. we all have these things for the most part, and they each look a little different.

After all my research and years of learning, I feel comfortable retiring today since I'm financially independent, and today I would have a starting withdraw rate of around 5% and I would adjust that up for inflation each year. Sure, maybe I would spend more or less depending on our needs since our spending isn't perfectly smooth. I'm in the USA, in my 30s, have a wife and kids, have a mostly VTSAX/VXUS portfolio, have 25X our living expenses invested, and still work currently. I could get laid off tomorrow (in tech), I could get injured, I could get fed up with my job, or any number of things could derail my career or make me stop wanting to continue working. If I did stop working, I wouldn't worry at all about spending 5% of our portfolio.

It sounds like you are still in the planning phase. It is all still theoretical for you.
It will be interesting to see what happens when you actually have to implement your theory.
The first major flaw i see is the highlighted idea above. The reality is you will almost certainly re-evaluate your finances, withdrawal rates, and other retirement issues, several times over a 60ish year retirement horizon.

That’s why I said “usually” because in my scenario, and in others who are planning to have the option to exit the workplace very early, we will have all sorts of lumpy, spending and weird side income and changing variables.

For us, it’s not theoretical at all. We live right now as if we are implementing and using this strategy. Our budget stays within these financial independence numbers, and I legitimately could stop working at any point, and may have to for various reasons. But instead of withdrawing from the portfolio, money keeps rolling into our checking account, which will further pad things, or give us opportunity to do something else.

[international001]

How did I arrive at ~5%? A number of tools and resources, but the one I keep coming back to is Karsten's ERN SWR Toolbox spreadsheet . I can't recommend it more highly. It's flexible, you can be as conservative as you want, and it accounts for a number of variables and scenarios. Is it perfect? No, but it's solid enough to stand alone as the only tool you use for determining WRs. I use his custom CAPE and take into account very discounted SS, and it says I'm around 5% WR for my ~700 month time horizon (ending portfolio of $500k), and a 4.2% WR for 100% capital preservation. I will very likely have other income, get an inheritance, etc. that all makes this even more conservative.

How would you account for a decade of 0% returns

[randomguy]

If it doesn’t work in 20 years you’ll be 56 or so and still able to get some sort of job (drive for Uber, etc). For someone who is 65 withdrawing 5% and 20 years later is 85 they’ll unlikely to have those sorts of work options available. That gives you a margin of safety, not financial but human capital.

That is the big difference. He is also talking a low enough spend that the McJob for 1000 hours/year would cover a good chunk of expense and SS is likely to cover like half the expenses towards the end.

5% with no spending cuts(i.e. SS) is going to have something like a 50% success rate for 50 years. You either go that's pretty good or that is horrible. The cost of going from 50% success to 95% is a lot of savings.

[marcopolo]

After over a decade of learning from and reading this forum and other great resources about investing, I've read countless arguments and presentations about SWRs and withdraw methods. WRs vary from 3-4% typically (below 3%), and withdraw methods and recommended asset allocations vary widely. But one thing is for sure, choosing your own withdraw rate once you retire is tough, and it's usually a measure 100 times, cut once situation. Finance is personal and each situation is different. Despite the diversity, the variables for most of our situations are pretty similar, but the inputs to those variables are different. Retirement age, income, lifestyle, cost of living, family obligations, inheritance, health, life expectancy, goals, etc. we all have these things for the most part, and they each look a little different.

After all my research and years of learning, I feel comfortable retiring today since I'm financially independent, and today I would have a starting withdraw rate of around 5% and I would adjust that up for inflation each year. Sure, maybe I would spend more or less depending on our needs since our spending isn't perfectly smooth. I'm in the USA, in my 30s, have a wife and kids, have a mostly VTSAX/VXUS portfolio, have 25X our living expenses invested, and still work currently. I could get laid off tomorrow (in tech), I could get injured, I could get fed up with my job, or any number of things could derail my career or make me stop wanting to continue working. If I did stop working, I wouldn't worry at all about spending 5% of our portfolio.

It sounds like you are still in the planning phase. It is all still theoretical for you.
It will be interesting to see what happens when you actually have to implement your theory.
The first major flaw i see is the highlighted idea above. The reality is you will almost certainly re-evaluate your finances, withdrawal rates, and other retirement issues, several times over a 60ish year retirement horizon.

That’s why I said “usually” because in my scenario, and in others who are planning to have the option to exit the workplace very early, we will have all sorts of lumpy, spending and weird side income and changing variables.

For us, it’s not theoretical at all. We live right now as if we are implementing and using this strategy. Our budget stays within these financial independence numbers, and I legitimately could stop working at any point, and may have to for various reasons. But instead of withdrawing from the portfolio, money keeps rolling into our checking account, which will further pad things, or give us opportunity to do something else.

Well, that is kind of my point. It is easy to say you will draw 5% and keep increasing it at inflation rate when you have money rolling in on a regular basis and are not having to actually withdraw anything from your portfolio.

It might be more challenging during times like 2008/09 when your portfolio has dropped 40%, and that 5% SWR is now more like 8.3% of your current portfolio value, and it looks like the financial systems might collapse.

My point is not that what you are planning is not feasible, but rather that you should plan to stay flexible, rather than have a "cut-once" mentality. That is particularly important when you are (1) planning for a very long retirement, (2) using a relatively high SWR, and (3) Using a budget that likely has less discretionary spending than many situations discussed here.

Good luck to you.

[TinyHouse]

If it doesn’t work in 20 years you’ll be 56 or so and still able to get some sort of job (drive for Uber, etc). For someone who is 65 withdrawing 5% and 20 years later is 85 they’ll unlikely to have those sorts of work options available. That gives you a margin of safety, not financial but human capital.

That is the big difference. He is also talking a low enough spend that the McJob for 1000 hours/year would cover a good chunk of expense and SS is likely to cover like half the expenses towards the end.

5% with no spending cuts(i.e. SS) is going to have something like a 50% success rate for 50 years. You either go that's pretty good or that is horrible. The cost of going from 50% success to 95% is a lot of savings.

What a lot of people miss and what your post above seems to as well is market conditions. When the market is down 20%, a 5% withdraw rate has historically had solid success, a lot more than 50%. If you start your retirement in 1966 or 1972 or 1999 or 2010, each of the outcomes are different because the starting market is different, it’s not just a blind, random Montecarlo.

We will likely have lots of time to continue working if that’s what we want to do, so I’m not really worried about income, it’s just nice to have the option to not work just in case.

[Normchad]

If it doesn’t work in 20 years you’ll be 56 or so and still able to get some sort of job (drive for Uber, etc). For someone who is 65 withdrawing 5% and 20 years later is 85 they’ll unlikely to have those sorts of work options available. That gives you a margin of safety, not financial but human capital.

That is the big difference. He is also talking a low enough spend that the McJob for 1000 hours/year would cover a good chunk of expense and SS is likely to cover like half the expenses towards the end.

5% with no spending cuts(i.e. SS) is going to have something like a 50% success rate for 50 years. You either go that's pretty good or that is horrible. The cost of going from 50% success to 95% is a lot of savings.

What a lot of people miss and what your post above seems to as well is market conditions. When the market is down 20%, a 5% withdraw rate has historically had solid success, a lot more than 50%. If you start your retirement in 1966 or 1972 or 1999 or 2010, each of the outcomes are different because the starting market is different, it’s not just a blind, random Montecarlo.

We will likely have lots of time to continue working if that’s what we want to do, so I’m not really worried about income, it’s just nice to have the option to not work just in case.

I also think, for some reason, a lot of people miss that 4% worked in the worst historical period ever (at that time). It’s not the normal number, it’s the worst. In some years, I think 8 or 9% worked….. 4 is very safe. 5 is not recklessly dangerous.

But everybody needs to understand what they’re doing and what risks they are taking when they open up that range of possible outcomes.

It’s true that the future might be worse than anything we’ve seen before. But a lot of folks are working a lot of extra years, and trying to build protective walls of money with an assumption that it is certain to be worse.

[TinyHouse]

That’s why I said “usually” because in my scenario, and in others who are planning to have the option to exit the workplace very early, we will have all sorts of lumpy, spending and weird side income and changing variables.

For us, it’s not theoretical at all. We live right now as if we are implementing and using this strategy. Our budget stays within these financial independence numbers, and I legitimately could stop working at any point, and may have to for various reasons. But instead of withdrawing from the portfolio, money keeps rolling into our checking account, which will further pad things, or give us opportunity to do something else.

Well, that is kind of my point. It is easy to say you will draw 5% and keep increasing it at inflation rate when you have money rolling in on a regular basis and are not having to actually withdraw anything from your portfolio.

It might be more challenging during times like 2008/09 when your portfolio has dropped 40%, and that 5% SWR is now more like 8.3% of your current portfolio value, and it looks like the financial systems might collapse.

My point is not that what you are planning is not feasible, but rather that you should plan to stay flexible, rather than have a "cut-once" mentality. That is particularly important when you are (1) planning for a very long retirement, (2) using a relatively high SWR, and (3) Using a budget that likely has less discretionary spending than many situations discussed here.

Good luck to you.

If the financial system collapses, I have other things besides money and investments that will help my family survive since we will have a lot more to be concerned about than what’s in our Vanguard portfolio. All bets are off if that happens, and not sure why you would be invested in stocks or bonds at all if you think that’s a decent possibility.

What element of my plan doesn’t look flexible? What makes you think I have a “cut once” mentality when I’m still making wood? It seems like you are making the assumption that a 5% withdrawal rate is high, failing to account for the fact that the market is down ~20%. Have you taken a look at the success of historical starting points over the last 150 years when the market was down 20% or more? Are you aware that a 5% fixed WR with a high equity portfolio has had a ~70% success rate for all starting points? It’s >90% when looking at when the market is beat up.

[Ben Mathew]

I think this is very optimistic and aggressive for a 58 year retirement, even with Social Security kicking in in the latter half.

If we use 1/CAPE as the expected stock return and 20 year TIPS yield as the expected bond return, we get expected real returns of 3.6% for stocks and 1.4% for bonds.

Expected return of a 50/50 portfolio would be 2.5%.

Even if your portfolio grew at 2.5% that rate every year like clockwork, you would run out of money after 27 years. That's without accounting for precautionary savings to address gross return risk (average return <2.5%) and sequence of return risk (poor returns came early).

Bump up expected stock return to 4.4% 5.6% based on 1/CAPE regressions, and the 50/50 portfolio grows at 3.5%. Money runs out in 29 32 years.

You would need fairly aggressive assumptions for stock and bond returns--beyond their current yields--to justify withdrawing 5% real for 58 years or even say 35 years till Social Security starts. Whether those (perhaps implicit) assumptions about expected return and the accompanying risk are justifiable is for you to decide.

Allocating more to stocks will increase the expected return of the portfolio, but will also increase the need the precautionary savings, making it difficult to increase withdrawals in the early part of retirement by all that much.

[TinyHouse]

I think this is very optimistic and aggressive for a 58 year retirement, even with Social Security kicking in in the latter half.

If you use 1/CAPE as the expected stock return and 20 year TIPS yield as the expected bond return, we get expected real returns of 3.6% for stocks and 1.4% for bonds.

Expected return of a 50/50 portfolio would be 2.5%.

Even if your portfolio grew at 2.5% that rate every year like clockwork, you would run out of money after 27 years. That's without accounting for precautionary savings to address gross return risk (average return <2.5%) and sequence of return risk (poor returns came early).

Bump up expected stock return to 4.4% based on 1/CAPE regressions, and the 50/50 portfolio grows at 2.9%. Money runs out in 29 years.

You would need fairly aggressive assumptions for stock and bond returns--beyond their current yields--to justify withdrawing 5% real for 58 years or even say 35 years till Social Security starts.

Allocating more to stocks will increase the expected return of the portfolio, but will also increase the need the precautionary savings, making it difficult to increase withdrawals in the early part of retirement by all that much.

I don’t own any bonds, and I likely never will. Most early retirees shouldn’t own bonds. I’ll stick to equities, coins, real estate, etc.

I’m doubtful I will live another 58 years, that would be well over 90 years old. Dad‘s dad died at 42, my dad had quadruple bypass surgery at 62, so we’ll see.

Again, OP is using Karsten’s adjusted cape. Using normal cape and higher inflation, it’s calculating more like 4.6% WR. The fact that we will almost certainly have other sources of income or windfalls down the road, I feel very comfortable with 5%, esp given the historical data and current market conditions. Will we have to spend 5%? thankfully not, but I wouldn’t hesitate if we had the need. 5% really isn’t as aggressive as people think.

[Wannaretireearly]

I’m mid 40s Dad.
My expenses have gone up around 50% since I was mid-30s Dad.
I have not moved house or spent any more (per year) on cars.

Travel perhaps contributes 25% to the increase. The regular payments that we’ve added last 10 years: kids clubs, college guidance counselor, summer program costs etc = roughly 25% of the increase from 10 years ago.

Yes, I’m looking forward to kids graduating HS. At least I’ll have more of my own time, if not all of my own money yet.

Bottom line, I really hope when I’m ‘mid 50s dad’ my costs have gone down from mid 40s. In fact, I’m banking on it to retire early!

[Marseille07]

If you don't have legacy motives then 5% might work just fine.

That said, what I recommend is 5% FWR not 5% SWR so that you technically never run out of money, and cutting back during the downturn is built into the withdrawal method.

[Random Musings]

Other income? Inheritence? With additional (but not defined in terms of $ or timeframe) cash flow streams, the 5% means little.

RM

[Normchad]

If we use 1/CAPE as the expected stock return and 20 year TIPS yield as the expected bond return, we get expected real returns of 3.6% for stocks and 1.4% for bonds.

Expected return of a 50/50 portfolio would be 2.5%.

Even if your portfolio grew at 2.5% that rate every year like clockwork, you would run out of money after 27 years. years.

Is this math correct? If he withdraws 5% real per year, and the portfolio grows by 2.5% real per year, wouldn’t the portfolio last 40 years?

Actually, I just whomped the math up, and it looks like you are correct!

[marcopolo]

That’s why I said “usually” because in my scenario, and in others who are planning to have the option to exit the workplace very early, we will have all sorts of lumpy, spending and weird side income and changing variables.

For us, it’s not theoretical at all. We live right now as if we are implementing and using this strategy. Our budget stays within these financial independence numbers, and I legitimately could stop working at any point, and may have to for various reasons. But instead of withdrawing from the portfolio, money keeps rolling into our checking account, which will further pad things, or give us opportunity to do something else.

Well, that is kind of my point. It is easy to say you will draw 5% and keep increasing it at inflation rate when you have money rolling in on a regular basis and are not having to actually withdraw anything from your portfolio.

It might be more challenging during times like 2008/09 when your portfolio has dropped 40%, and that 5% SWR is now more like 8.3% of your current portfolio value, and it looks like the financial systems might collapse.

My point is not that what you are planning is not feasible, but rather that you should plan to stay flexible, rather than have a "cut-once" mentality. That is particularly important when you are (1) planning for a very long retirement, (2) using a relatively high SWR, and (3) Using a budget that likely has less discretionary spending than many situations discussed here.

Good luck to you.

If the financial system collapses, I have other things besides money and investments that will help my family survive since we will have a lot more to be concerned about than what’s in our Vanguard portfolio. All bets are off if that happens, and not sure why you would be invested in stocks or bonds at all if you think that’s a decent possibility.

What element of my plan doesn’t look flexible? What makes you think I have a “cut once” mentality when I’m still making wood? It seems like you are making the assumption that a 5% withdrawal rate is high, failing to account for the fact that the market is down ~20%. Have you taken a look at the success of historical starting points over the last 150 years when the market was down 20% or more? Are you aware that a 5% fixed WR with a high equity portfolio has had a ~70% success rate for all starting points? It’s >90% when looking at when the market is beat up.

You are making a valuation argument for higher than historical SWR.

I often find myself taking exception with people using current valuations to assert that SWR will be significantly lower going forward.

You are right that equities have fallen 20% from their peak, but it is not like they fell from some normal levels. They fell 20% from extremely stretched valuations. By most measures they are still quite over-valued. Using current (higher than typical) valuation to assert that forward SWR will be higher than historical norms, on an expected basis, seems a stretch.

Having said that, I am not trying to discourage your plan. Perhaps I misread what you meant when you said choosing a SWR was a cut once activity, and that you plan to start at 5% and adjust for inflation. If what you meant is that will be your starting plan and you will adapt as events play out, then I think what you are planning is a bit aggressive (I would be more concerned about limited flexibility in your budget), but not at all unreasonable.

If nothing else, it is refreshing to have a thread that is NOT just another step in the ever-spiraling discussion to a lower and lower SWR!

Good luck to you.

[TinyHouse]

If you don't have legacy motives then 5% might work just fine.

That said, what I recommend is 5% FWR not 5% SWR so that you technically never run out of money, and cutting back during the downturn is built into the withdrawal method.

Yes, and as stated up thread, 5% is what we would feel comfortable starting with, but we know spending is lumpy, needs and markets change, and we aren’t going to spend a fixed amount per year

[Ben Mathew]

The problem with this type of graph is that it tells people that 100% stocks is the best. Fixed "safe withdrawal rate" analyses that define success and failure as binary, combined with a history where stocks have done better than bonds, yield graphs like this that give the impression that more stocks make portfolios safer. This goes against basic portfolio theory and should give people some pause.

Switch to forward looking modeling that acknowledge that stocks can do worse than bonds over long horizons, combined with flexible withdrawals that are not graded pass/fail, and you get back to the basic idea that more stocks = more risk. A more stock heavy portfolio gives you a greater distribution of potential outcomes where the expected return is higher, but the worst outcomes are worse than conservative portfolios.

[TinyHouse]

Other income? Inheritence? With additional (but not defined in terms of $ or timeframe) cash flow streams, the 5% means little.

RM

How is 5% meaningless when we are trying to make a reasonable calculation about how much money we will need from our portfolio given potential future expenses, windfalls, inheritance or income streams? Do you have any helpful recommendations about how we can better calculate a WR or position ourselves?

[TinyHouse]

The problem with this type of graph is that it tells people that 100% stocks is the best. Fixed "safe withdrawal rate" analyses that define success and failure as binary, combined with a history where stocks have done better than bonds, yield graphs like this that give the impression that more stocks make portfolios safer. This goes against basic portfolio theory and should give people some pause.

Switch to forward looking modeling that acknowledge that stocks can do worse than bonds over long horizons, combined with flexible withdrawals that are not graded pass/fail, and you get back to the basic idea that more stocks = more risk. A more stock heavy portfolio gives you a greater distribution of potential outcomes where the expected return is higher, but the worst outcomes are worse than conservative portfolios.

Ben, I can’t control how people interpret graphs. That’s like saying “that graph says there’s more crime in the inner city, so people are going to think the inner city is less safe.” Well, there are a wide range of lifestyles and outcomes to stay safe within cities, but there may very well be more crime per capita in cities.

The above chart is really helpful because it gives a ceiling, or floor, whichever way you look at it, to the withdraw rate question.

Regardless of how wild a ride it is, equities do perform better than bonds or cash over the long term. There’s no denying that. No one really knows the future, so if you bake in a little bit of flexibility, and you are faithful to the historical data and trends that we have, that’s really the best you can do.

I have yet to see any forward-looking models that are helpful. The only thing I found helpful is carefully considering historical data and current market conditions. Which is in fact exactly what Karsten has done with his toolbox without playing any games with modeling or making assumptions not supported by history. Yes, anything can happen in the future, but when considering likelihood, we only know the past.

[Ben Mathew]

If we use 1/CAPE as the expected stock return and 20 year TIPS yield as the expected bond return, we get expected real returns of 3.6% for stocks and 1.4% for bonds.

Expected return of a 50/50 portfolio would be 2.5%.

Even if your portfolio grew at 2.5% that rate every year like clockwork, you would run out of money after 27 years. years.

Is this math correct? If he withdraws 5% real per year, and the portfolio grows by 2.5% real per year, wouldn’t the portfolio last 40 years?

Actually, I just whomped the math up, and it looks like you are correct!

[Ben Mathew]

I have yet to see any forward-looking models that are helpful. The only thing I found helpful is honestly considering historical data and current market conditions. Which is in fact exactly what Karsten has done with his toolbox without playing any games with modeling or making assumptions not supported by history. Yes, anything can happen in the future, but when, considering likelihood, we only know the past.

We don't only know the past. We also know what the current yields of stocks and bonds are, and we know that they are significantly lower than what prevailed historically. I think it's important to include that information in our financial planning.

[TinyHouse]

I have yet to see any forward-looking models that are helpful. The only thing I found helpful is honestly considering historical data and current market conditions. Which is in fact exactly what Karsten has done with his toolbox without playing any games with modeling or making assumptions not supported by history. Yes, anything can happen in the future, but when, considering likelihood, we only know the past.

We don't only know the past. We also know what the current yields of stocks and bonds are, and we know that they are significantly lower than what prevailed historically. I think it's important to include that information in our financial planning.

How would you do that beyond what Karsten has done in his SWR toolbox? What other variables about the current market would you like to see implemented?

[Chadnudj]

After all my research and years of learning, I feel comfortable retiring today since I'm financially independent, and today I would have a starting withdraw rate of around 5% and I would adjust that up for inflation each year.....

I'm in the USA, in my 30s, have a wife and kids, have a mostly VTSAX/VXUS portfolio, have 25X our living expenses invested, and still work currently.....

I use his custom CAPE and take into account very discounted SS...

So you're not retiring in your 30s and using a 5% SWR at all, are you?

I'm being facetious, but looking at your facts, you're just saying you MIGHT be able to swing it if everything went well, not that you would. Which is probably smart, because for even a relatively few additional years of work you could have that portfolio up over 30X living expenses -- 4 years at 5% per year would get you there, representing slightly more than a 20% total return. At that point, you'll have enough to be safe AND need a lower SWR.

For instance, if your annual expenses were $100k, 25X is $2.5 million, and taking out 5% per year of that would be $125k -- covering your expenses and giving you a $25k extra amount for whatever. But that same $125k is just 4.2% roughly of $3 million.

You're fortunate and blessed -- you're close to having enough that, keeping your spending constant at current levels, you might have enough. But might as well keep working because in your 30s, you'll want a lower SWR and it won't take much in additional years to get to 4% or 3% or even 2% (which is so low as to basically ensure you'll never run out).

(If you want to back off frugality a bit and live it up within reason, though? At 25X, that's a good time to do so. Just don't spend down that 25X quite yet...let it grow)

[randomguy]

Regardless of how wild a ride it is, equities do perform better than bonds or cash over the long term. There’s no denying that. No one really knows the future, so if you bake in a little bit of flexibility, and you are faithful to the historical data and trends that we have, that’s really the best you can do.

Oh really?

https://www.portfoliovisualizer.com/bac ... tion2_2=40

There is no denying the 100% stock person went broke when the person with bonds didn't. On average 100% stocks does well. But the worst cases are much worse....

Again you need to decide if you can handle the failure case or not. With 5%, there is a good chance of failure. That isn't an issue if you have a plan to handle it (i.e. if you are down after a decade you get a job). It is bad if you don't.

[TinyHouse]

Regardless of how wild a ride it is, equities do perform better than bonds or cash over the long term. There’s no denying that. No one really knows the future, so if you bake in a little bit of flexibility, and you are faithful to the historical data and trends that we have, that’s really the best you can do.

Oh really?

https://www.portfoliovisualizer.com/bac ... tion2_2=40

There is no denying the 100% stock person went broke when the person with bonds didn't. On average 100% stocks does well. But the worst cases are much worse....

Again you need to decide if you can handle the failure case or not. With 5%, there is a good chance of failure. That isn't an issue if you have a plan to handle it (i.e. if you are down after a decade you get a job). It is bad if you don't.

Cherry picking year 2000, nice! Anyone can find periods were bonds outperformed stocks, even over 10 to 20 years, but that doesn’t mean it’s usually the case. And the ERN SWR toolbox wouldn’t recommend 5% WR at the market peak of 2000, 2007, or 2022…

[Chadnudj]

Cherry picking year 2000, nice! Anyone can find periods were bonds outperformed stocks, even over 10 to 20 years, but that doesn’t mean it’s usually the case. And the ERN SWR toolbox wouldn’t recommend 5% WR at the market peak of 2000, 2007, or 2022…

It wouldn't? You're sure of that? Because that toolbox was built/adjusted after 2000, 2007, and 2022....which is why it NOW says 5% wouldn't be recommended/sufficient given conditions identical to those present in those years.

You're putting an awful lot of faith in one random back-tested toolbox's infallibility going forward into a global market that none of us can completely predict.

But also -- if you have 25X expenses, why would you NEED 5%? Your expenses are X, so 4% would be sufficient at 25X. If X is not your expense, and instead your expense is some higher amount Y, if you need 5% of your portfolio to hit Y, then you only have 20Y, and not 25X.

[Patzer]

Check these out and let me know your thoughts, and take care!

I am tracking towards using 4.5% at 46 in 5 years, 54K annual spend, eligible for 35K Social Security at 70 (though I am assuming a 75% payout).
I calculate my success rate at 99%, with a portfolio of:
US Total Market 47.60%
Small Cap Value (AVUV) 9.80%
International Developed 12.60%
Gold 5%
I-Bonds 5%
10 Year Treasuries 19%
Cash 1%
In ERN, for assets it doesn't have, I have simulated the results backwards based on comparable historical data.

I think 5% in your 30s is a bit aggressive, especially with 100% stocks.
You are taking on a lot of sequence of return risk, so the first 10-15 years is your real danger zone. After that you if things went well you are probably set for life.
If things really tank in that first 10-15 years you could always go back to work, but getting a job again in 10 years, versus keeping your job now probably has a significant pay difference, so maybe it's worth continuing to work another year or two get down to something a little lower than 5%.
You can always ramp up spending later in life if you make too much money, or give your kids more of a head start in the world.

Another possibility is you simply don't commit to retiring, but decide to take a year or two off and see how much you like not working.
If you want to go back to work or the markets completely tank, it will still be easy with a two year gap on your resume.
Or maybe, you are happy not working regularly, but do some contract work here and there or find some other passion you like that makes a few bucks part-time. I have a number of hobbies that I occasionally make money with and could monetize further if I wanted to and wasn't working.

You are in a really good place with how much savings you have and how young you are (human capital), so I do think you will figure out whatever challenges come your way if you do go for 5%.

You may find this post I wrote a while back interesting:
viewtopic.php?t=390773

I am open to any thoughts/criticisms you have on my strategy. My SWR is optimized for the 95-99% success rates, not for total return, hence bonds, gold, and International, which have all historically underperformed on the average, but give better worst case scenario results.

[JBTX]

I suspect odds are 5% would work, but the probability of failure is too high for my tastes. Even if it does work over many decades there will probably ups and downs and times where you are hoping and praying that markets recover to get you back on track. Assuming it does recover, as it usually does, mathematically that would be considered a success. But for me, I don’t want to live that way. I don’t don’t want to be white knuckling the downturns.

Also, it seems like you are locking in choices at a young age and assuming nothing materially bad happens along the way.

Having said that, I don’t have all the answers, and can’t predict the future. So hopefully it works out for you.

[halfnine]

If OP had retired about a year ago at the market peak and had done so at a 4% WR then they would be withdrawing essentially the same amount of money out now with a 5% WR. So, arguably, the plan should hold up just as well continuing forward. And, technically, should last just a tad bit longer as the current portfolio should be larger as it hadn't been reduced by an extra year of expenses.