Instead of SWR, why don't we do what endowments do (5% withdrawal from time-averaged portfolio value)?

[gwu11]

During the BH conference, I learned that endowments are taking a totally different approach to their sustainable withdrawals.

Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years, and withdraw 5% of that (no inflation adjustment). This seems to be a modified variation of the VPW withdrawal strategy, but seems like a reasonable middle ground:

1. While there is no explicit inflation adjustment, there is an implicit inflation adjustment because stocks usually outpace inflation.
2. As with VPW, the risk of running out of money is unlikely, as you are taking a fixed percentage off the portfolio (almost), so you can do this in perpetuity.
3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.

What am I missing? Why is this method not being researched more?

[QBoy]

Economic theory indeed suggests that something like this endowment approach is optimal. See

https://en.wikipedia.org/wiki/Merton%27 ... io_problem

It does require a willingness to adjust consumption in response to market movements.

[hammockhiker]

During the BH conference, I learned that endowments are taking a totally different approach to their sustainable withdrawals.

Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years, and withdraw 5% of that (no inflation adjustment). This seems to be a modified variation of the VPW withdrawal strategy, but seems like a reasonable middle ground:

1. While there is no explicit inflation adjustment, there is an implicit inflation adjustment because stocks usually outpace inflation.
2. As with VPW, the risk of running out of money is unlikely, as you are taking a fixed percentage off the portfolio (almost), so you can do this in perpetuity.
3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.

What am I missing? Why is this method not being researched more?

I've been modeling something similar to prepare for life in retirement, though I arbitrarily chose a three year look-back. Five years might make even more sense, so I'll add another column to my spreadsheet and ponder the results. My spreadsheet assumes a fixed percentage withdrawal up to age 75 and then switches to RMDs using the IRS RMD table (since no matter what my preference for withdrawals would be, the IRS regulations will tell me what to withdraw from my tIRA after a certain point.)

A fixed percentage withdrawal is attractive because it's simple. It might be emotionally jarring to realize that one's income drops with a severe market downturn, but there's also the emotional satisfaction of knowing that actually running out of money is unlikely.

[exodusing]

There's nothing magic about 5 years and 5%. Choosing a fixed percentage guarantees you'll never run out of money. Averaging smooths income.

Similar approaches have been suggested for many years. FWIW, I suggested fixed percentage averaged in another thread last month (viewtopic.php?p=8082684#p8082684)

I'd like to see a source for the claim this is what endowments do this, including the cited numbers.

[sailaway]

Some endowments use 4% SWR. Heck, some use 4% of the initial investment without inflation adjustments. This latter is fairly common for scholarships.

[Mr. Rumples]

I use five years in this manner: my ending year balance, my five year average return (not a generic preset one), the five year average inflation rate and then see how long it will last until I die - I am using 100 as my family lives a long time, but each year the number of years of course goes down. It fluctuates with all these moving items, but I can live with that. I plug the numbers into this: https://www.mycalculators.com/ca/retcalc2m.html

Endowments design their strategies around perpetuity; I don't plan on living forever.

[rossington]

One's SWR will always correlate with the size of the portfolio plus outside income.

[longinvest]

3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.

Gwu11, when VPW is properly used, retirement income can be significantly more stable than portfolio fluctuations. Here's the outcome of using VPW with a 60/40 stocks/bonds portfolio along with a small pension since mid-2019, while delaying Social Security until mid-2024. The chart is from the ongoing forward test thread:




Initial portfolio balance, before withdrawal: $1,000,000

Historical Annual Retirement Income

• 2019: $76,406 (annualized) -- $38,203 in 6 months, starting retirement in July
• 2020: $76,743
• 2021: $82,388
• 2022: $83,394
• 2023: $79,595
• 2024: $80,734 (annualized) -- $67,278 in 10 months

[HeavyChevy]

One BH has posted that he/she takes 5% of the previous year's portfolio value as of November. Had used that method for some time. Same thing but omits the averaging so bigger possible swings in year-to-year income.

[rkhusky]

These simple rules are for doing back testing, not for real life.

In retirement, I withdraw what I need to for living and entertainment (ie needs and wants). I am not in bondage to any rules. If my portfolio drops significantly, I will adjust spending.

[bikeeagle1]

It seems to me that the idea in the OP has you out of phase with market movements, in a way that I would find difficult to live with.

For example, during periods with unusually high returns (think 1999), it would have you withdrawing less than a simple strategy based on current portfolio size. Similarly, in a period with unusually low returns (think 2008), it would have you withdrawing more than a simple strategy.

I guess I'm a natural contrarian, but I would rather have withdrawn more than usual in 1999, and less in 2008.

For someone in retirement, I'm thinking something like this:

1. Measure the total return CAGR of the SPX over the last 5 years.
2. Subtract 10% from the result of step 1.
3. Add that result to 4%.
4. Withdraw that percent.
5. Spend 4%, and deposit any unspent withdrawals from step 4 in a cash bucket for future spending.
6. If the result from step 3 is negative, don't withdraw from the account. Spend from the cash bucket from step 5.
7. Based on risk tolerance, limit the size of the cash bucket to both a maximum and minimum size, based on a certain number of years' worth of spending and/or a certain percentage of the overall portfolio. Reinvest any excess cash back into the portfolio.
8. Enjoy a long and healthy SWAN retirement.

Example, using today's numbers (as of 11/1/2024):

1. SPY total return 5-year CAGR = 15.89%
2. 15.89 -10 = 5.89%
3. 5.89 + 4 = 9.89%
4. Withdraw 9.89% (if doing annual withdrawals).
5. Deposit 4% into checking account and spend. Deposit 5.89% into MM fund (ref step 7).
6. N/A
7. Consider current size of cash bucket. Deposit if below range. Reinvest in portfolio if above range.
8. Done until next time!

Personally, I would also be comfortable using the 10-year average return, which would change the above example to:

1. SPY total return 10-year CAGR = 13.28%.
2. 13.28 - 10 = 3.28%.
3. 3.28 + 4 = 7.28%.
4. Withdraw 7.28%.
5. Spend 4%
6. N/A
7. Deposit 3.28% into MM fund (if needed).
8. Enjoy!

[DaufuskieNate]

This approach is especially well-suited to endowments that receive on-going contributions. Many times these contributions are lumpy, so averaging assets over five years is a good approach. It self adjusts for a portfolio that is growing or shrinking over time based on contributions as well as market performance.

[dkturner]

We have been retired since late 2011. I calculated hypothetical spending based on 3% of the 5 prior year average size of our portfolio and was surprised to discover that the total spending for the ensuing 13 years would have been almost exactly the total of our dividend and interest income (99.1%) for those 13 years. The actual drawdown from our portfolio was substantially less than the 3% amount (66.1% ) so we have been reinvesting the surplus - which gives us a cushion for rainy days.

[HomeStretch]

If you want to withdraw 5% as your SWR, do some analysis to see if it is suitable for your portfolio.

Endowments may invest differently than the average retail investor which impacts/returns/SWR. Also, endowment disclosures may state policy is not to exceed annual distributions of 5% using some sort of rolling average endowment balance. But that doesn’t mean that they actually distribute and spend 5% (it can be less or more). There is also some discussion/disclosure change (at least at smaller organizations) about whether 5% is still a sustainable #.

[TheTimeLord]

My understanding is endowments also use Risk Based Portfolio management which may or may not be suitable for individual investors. Also, is an endowment looking to be perpetual as opposed to people who are mortal?

[snackdog]

Has anyone backtested this?

[WhyNotUs]

During the BH conference, I learned that endowments are taking a totally different approach to their sustainable withdrawals.

Endowments have distribution requirements that drive the 5%. It is a little more complicated but in essence they do not have a choice. Endowments do go dry and that may have been part of the initial thinking. The big endowments hire people to try to earn more than 5% in order to grant longer, that may or may not be a good thing for society. That leads the endowments into riskier investments, private equity, real estate deals, etc. In essence, they are not required to be sustainable.

One can withdraw whatever rate they like, the research by Bengen looked at a 50 year period and said that if you used the types of investments that the average Joe uses, you could withdraw 4% for 30 years. That does not mean that during any specific 30 year period one could not have taken 5 or 6% and been okay.

[Normchad]

I don’t want my portfolio to last forever like an endowment does. I only need this to last until I drop dead.

[Ben Mathew]

Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years, and withdraw 5% of that (no inflation adjustment).

This is effectively amortization based withdrawal (ABW) with an amortization rate of 5% and an infinite horizon. An infinite horizon may be appropriate for endowments, but doesn't make sense for individuals. Individuals should amortize the portfolio over their remaining lifetimes, with an adjustment for legacy goals if desired.

3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.

Using an average of the portfolio balance over the last five years is a way to delay the needed spending adjustment. You can delay spending adjustments in many ways including for example by simply capping adjustments. But however you do it, the cost of delaying spending adjustments is that it increases the chance of a more severe spending cut eventually. This increases overall spending risk. The lowest spending risk is achieved by a full and immediate adjustment in response to portfolio performance. So it's a tradeoff—adjust quickly or adjust more.

[nisiprius]

In 2008, Vanguard launched a fund--actually a family of three funds--that did almost exactly that. They were called the Managed Payout Funds, later merged into one fund.* They made a monthly payment, governed not as a percentage of the fund's current value, but based on a formula involving a moving average over the previous three years.

Traditional retirement income funds provide a relatively stable income by being weighted heavily toward less volatile assets, namely bonds. These funds were intended to benefit from a much higher stock allocation. The increased risk was supposed to be mitigated by move average payout system, and by the use of a Yale-model portfolio incorporating factor tilts, alternatives, and low correlation assets. The goal--carefully stated as a goal or an aim, not a guarantee--for the "Growth & Distribution focus" fund was a target payout of 5% of the portfolio value and no loss in real value over the long term, either in payout or capital value of the portfolio.

In other words, in exchange for some variation in payout, they hoped to provide 5% real forever--versus 4% real for your lifetime. As far as I know, Vanguard never explained or justified or provided data backing the 5% number.

The fund suffered severe losses like everything else in 2008-2009, but worse than traditional retirement funds because of its high stock allocation--despite all the low correlation blarney. In 2014 they decided the 5% target wasn't sustainable and cut it to 4%. In 2020, they threw in the towel, canceled the payout feature, and renamed it the "Vanguard Managed Allocation Fund." In 2022, they shuttered the fund.

The fund never attracted much in assets--when it was closed it was in the neighborhood of $1 billion.

In my personal opinion, it was not only a black eye for Vanguard, but a conspicuous real-world failure of the "Yale model," of the concept of diversification through inclusion of alternatives, and of flexible withdrawal systems. (Doubtless advocates of those ideas will say it was only because Vanguard didn't implement them well. The "alternatives" weren't really in place at the time of the 2008-2009 crash, for example. But they were serious enough about it to create a Cayman Islands subsidiary to operate the Vanguard Alternative Strategies fund, which I think was intended mainly to be used as a holding in the Managed Payout fund).


*There was a Distribution Focus with a 7% payout target, a Growth & Distribution Focus with a 5% target, and a Growth Focus with a 3% target. In 2014 they were merged into the Growth & Distribution Focus fund, and the target cut from 5% to 4%.

[HooCares]

If you over save you can do lots of different withdrawal strategies. Some may work out better than others. It’s those who are just getting by who cannot take risk and must be more conservative with their withdrawals, ironically leading to a likely larger portfolio at the end.

[CalPoppy]

I think it’s a valid withdrawal method. If course it works best if one has low core expenses and/or core expenses covered by safe income like social security or pensions - particularly if not smoothing withdrawal amounts.

Boglehead MnD uses a 5% withdrawal method, and here’s their real life results:

5% portfolio withdrawal rate: 5+ year update
viewtopic.php?t=430990

[WoodSpinner]

One's SWR will always correlate with the size of the portfolio plus outside income.

Can you elaborate?

A SWR does not Correlate with either of those things from my understanding.

SWR is a Real Withdrawal rate based in the balance of the portfolio when you start taking distributions. It does not adjust to the size of the portfolio after that.

Outside income affects Cashflow Needs but has no impact on a SWR.

Portfolio Investments, Years of Distributions absolutely affect the SWR.

What am I misunderstanding?

WoodSpinner

[TheTimeLord]

I think it’s a valid withdrawal method. If course it works best if one has low core expenses and/or core expenses covered by safe income like social security or pensions - particularly if not smoothing withdrawal amounts.

Boglehead MnD uses a 5% withdrawal method, and here’s their real life results:

5% portfolio withdrawal rate: 5+ year update
viewtopic.php?t=430990

Not sure one person's experience over 5 years is statistically relevant.

[CalPoppy]

I think it’s a valid withdrawal method. If course it works best if one has low core expenses and/or core expenses covered by safe income like social security or pensions - particularly if not smoothing withdrawal amounts.

Boglehead MnD uses a 5% withdrawal method, and here’s their real life results:

5% portfolio withdrawal rate: 5+ year update
viewtopic.php?t=430990

Not sure one person's experience over 5 years is statistically relevant.

It’s not. However, that doesn’t mean there aren’t things to learn from their experience/approach. And it’s good to learn from actual experiences in addition to theoretical posts.

[mgensler]

5% is the minimum distribution for foundations. If a foundation distributes less, then the IRS will levy an excise tax. https://www.501c3.org/kb/private-founda ... quirement/

[TheTimeLord]

5% is the minimum distribution for foundations. If a foundation distributes less, then the IRS will levy an excise tax. https://www.501c3.org/kb/private-founda ... quirement/

https://www.bbh.com/us/en/insights/capi ... 20donors.

Unlike foundations, which are required to spend a minimum amount each year, endowments are not subject to a minimum spending requirement. The endowment board has broad discretion to establish the spend rate, subject to any limitations imposed by donors. In setting a spending rate, the endowment board must act prudently in accordance with its duties of loyalty and care. For most states, a spending rate in excess of 7% creates a presumption of imprudence. This presumption is intended to protect against spending the endowment funds too quickly.

[rossington]

One's SWR will always correlate with the size of the portfolio plus outside income.

Can you elaborate?

A SWR does not Correlate with either of those things from my understanding.

SWR is a Real Withdrawal rate based in the balance of the portfolio when you start taking distributions. It does not adjust to the size of the portfolio after that.

Outside income affects Cashflow Needs but has no impact on a SWR.

Portfolio Investments, Years of Distributions absolutely affect the SWR.

What am I misunderstanding?

WoodSpinner

Hello WoodSpinner,
Beyond expenses if you’re having a good year and the portfolio has increased in value you may be able to comfortably increase your SWR. Conversely the opposite can happen too, so the way I look at it the larger the portfolio the more spending flexibility and vice versa.

[dkturner]

Has anyone backtested this?

I’m working on creating a spreadsheet which looks at a hypothetical $10,000 portfolio composed of the S&P 500 and 5 year U.S. Treasuries (60/40) going back to 1928.

[WoodSpinner]

Can you elaborate?

A SWR does not Correlate with either of those things from my understanding.

SWR is a Real Withdrawal rate based in the balance of the portfolio when you start taking distributions. It does not adjust to the size of the portfolio after that.

Outside income affects Cashflow Needs but has no impact on a SWR.

Portfolio Investments, Years of Distributions absolutely affect the SWR.

What am I misunderstanding?

WoodSpinner

Hello WoodSpinner,
Beyond expenses if you’re having a good year and the portfolio has increased in value you may be able to comfortably increase your SWR. Conversely the opposite can happen too, so the way I look at it the larger the portfolio the more spending flexibility and vice versa.

I actually agree with the spirit of your post, BUT am concerned with calling it a SWR since is not how a traditional SWR approach (Bengen, Trinity etc.) works ….

That said, there are many adaptations and variations to a SWR (Guyton-Klingon, GuardRails etc.) but these represent a distinct approach with a different set of risks and backtesting.

My apologies if this feels like a NIT, but I have had to help a number of folks who didn’t really understand the details and want the Terminology clear.

WoodSpinner

[CalPoppy]

I actually agree with the spirit of your post, BUT am concerned with calling it a SWR since is not how a traditional SWR approach (Bengen, Trinity etc.) works ….

That said, there are many adaptations and variations to a SWR (Guyton-Klingon, GuardRails etc.) but these represent a distinct approach with a different set of risks and backtesting.

My apologies if this feels like a NIT, but I have had to help a number of folks who didn’t really understand the details and want the Terminology clear.

WoodSpinner

It's a good point. Technically this would be under the umbrella term of "withdrawal method" and more specifically a "constant-percentage" withdrawal method.

Per the Bogleheads wiki:
https://www.bogleheads.org/wiki/Withdrawal_methods

[CalPoppy]

Has anyone backtested this?

Yes. See here viewtopic.php?t=430990

[goodenyou]

If there is a low SWR in relation to essential spending needs, then one can have the luxury of decreasing withdrawals to a low percentage in times of market volatility.

The 4% fixed real consumption is predicated on the full faith that the market will rebound during one's retirement horizon, and that the retiree will have the temerity to stay the course.

Money wished to be spent and accumulated is life unlived. The challenge is front-loading retirement to spend when you can enjoy it while young enough, and not dying as a very rich person, unless legacy was part of your plan.

[exodusing]

The 4% fixed real consumption is predicated on the full faith that the market will rebound during one's retirement horizon, and that the retiree will have the temerity to stay the course.

It not only has to rebound, but it can't stay low for an extended period while you are taking necessary withdrawals (see sequence of returns risk). It's not just a "temerity" problem.

4% fixed real is also predicated on our limited useful past history being a very good predictor of the future.

[goodenyou]

The 4% fixed real consumption is predicated on the full faith that the market will rebound during one's retirement horizon, and that the retiree will have the temerity to stay the course.

It not only has to rebound, but it can't stay low for an extended period while you are taking necessary withdrawals (see sequence of returns risk). It's not just a "temerity" problem.

4% fixed real is also predicated on our limited useful past history being a very good predictor of the future.

The 4% real studies included SORR in the historical data. The problem is believing that “this time is different “ because the Farmer’s Almanac method of financial planning may not be accurate.

[White Coat Investor]

During the BH conference, I learned that endowments are taking a totally different approach to their sustainable withdrawals.

Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years, and withdraw 5% of that (no inflation adjustment). This seems to be a modified variation of the VPW withdrawal strategy, but seems like a reasonable middle ground:

1. While there is no explicit inflation adjustment, there is an implicit inflation adjustment because stocks usually outpace inflation.
2. As with VPW, the risk of running out of money is unlikely, as you are taking a fixed percentage off the portfolio (almost), so you can do this in perpetuity.
3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.

What am I missing? Why is this method not being researched more?

It's a fine method, has been studied, and is not significantly than all the other reasonable methods out there.

There is one significant difference between a retiree and the an endowment. The retiree will die. Thus, a constant percentage method of higher than 5% is likely still safe.

5% might sound like it's higher than the "classic" 4%, but after a few years of inflation or poor market returns it isn't necessarily.

[exodusing]

It not only has to rebound, but it can't stay low for an extended period while you are taking necessary withdrawals (see sequence of returns risk). It's not just a "temerity" problem.

4% fixed real is also predicated on our limited useful past history being a very good predictor of the future.

[1]The 4% real studies included SORR in the historical data. [2]The problem is believing that “this time is different “ because the Farmer’s Almanac method of financial planning may not be accurate.

1] Right, but you didn't mention that in your first quoted post.

2] We have three or four independent 30 year data points that might be reliable and comparable to markets, economies, etc. today. How much faith we should have in three or four data points being good predictor of the future is left in the eye of the beholder.

[dcabler]

During the BH conference, I learned that endowments are taking a totally different approach to their sustainable withdrawals.

Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years, and withdraw 5% of that (no inflation adjustment). This seems to be a modified variation of the VPW withdrawal strategy, but seems like a reasonable middle ground:

1. While there is no explicit inflation adjustment, there is an implicit inflation adjustment because stocks usually outpace inflation.
2. As with VPW, the risk of running out of money is unlikely, as you are taking a fixed percentage off the portfolio (almost), so you can do this in perpetuity.
3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.

What am I missing? Why is this method not being researched more?

It's a fine method, has been studied, and is not significantly than all the other reasonable methods out there.

There is one significant difference between a retiree and the an endowment. The retiree will die. Thus, a constant percentage method of higher than 5% is likely still safe.

5% might sound like it's higher than the "classic" 4%, but after a few years of inflation or poor market returns it isn't necessarily.

Mathematically, a fixed percentage without inflation adjustments will last forever. In this case, if returns are below 5% for an extended period, withdrawals will drop in both absolute and inflation adjusted terms. There's nothing to prevent the withdrawal from eventually going well below what you need for basic expenses and even remaining there. Past results can not be projected into the future to give the probabilities of future success with this or any other withdrawal method.

Cheers.

[White Coat Investor]

It's a fine method, has been studied, and is not significantly than all the other reasonable methods out there.

There is one significant difference between a retiree and the an endowment. The retiree will die. Thus, a constant percentage method of higher than 5% is likely still safe.

5% might sound like it's higher than the "classic" 4%, but after a few years of inflation or poor market returns it isn't necessarily.

Mathematically, a fixed percentage without inflation adjustments will last forever. In this case, if returns are below 5% for an extended period, withdrawals will drop in both absolute and inflation adjusted terms. There's nothing to prevent the withdrawal from eventually going well below what you need for basic expenses and even remaining there. Past results can not be projected into the future to give the probabilities of future success with this or any other withdrawal method.

Cheers.

Absolutely true, although 5% is actually a pretty low place to start those as I recall. I thought you could do this with 5.5-6% and do okay. I can't recall the numbers from the studies though. I just recall it was well more than 4%.

[dcabler]

Mathematically, a fixed percentage without inflation adjustments will last forever. In this case, if returns are below 5% for an extended period, withdrawals will drop in both absolute and inflation adjusted terms. There's nothing to prevent the withdrawal from eventually going well below what you need for basic expenses and even remaining there. Past results can not be projected into the future to give the probabilities of future success with this or any other withdrawal method.

Cheers.

Absolutely true, although 5% is actually a pretty low place to start those as I recall. I thought you could do this with 5.5-6% and do okay. I can't recall the numbers from the studies though. I just recall it was well more than 4%.

My recollection is also that the studies using past data also show up well north of 4%, but one needs to define what success means for this sort of withdrawal method. It's no longer simply staying solvent before you pass on.

[RyeBourbon]

Hello WoodSpinner,
Beyond expenses if you’re having a good year and the portfolio has increased in value you may be able to comfortably increase your SWR. Conversely the opposite can happen too, so the way I look at it the larger the portfolio the more spending flexibility and vice versa.

I actually agree with the spirit of your post, BUT am concerned with calling it a SWR since is not how a traditional SWR approach (Bengen, Trinity etc.) works ….

That said, there are many adaptations and variations to a SWR (Guyton-Klingon, GuardRails etc.) but these represent a distinct approach with a different set of risks and backtesting.

My apologies if this feels like a NIT, but I have had to help a number of folks who didn’t really understand the details and want the Terminology clear.

WoodSpinner

This is my complaint. So many folks on here say" My SWR is ..." when they mean "my withdrawal rate is"

We don't know the SWR a priori for a given retirement year. It could be 3.2% or it could be 6.5%, one doesn't know until it fails or you get to the end of the test period.

[sailaway]

I actually agree with the spirit of your post, BUT am concerned with calling it a SWR since is not how a traditional SWR approach (Bengen, Trinity etc.) works ….

That said, there are many adaptations and variations to a SWR (Guyton-Klingon, GuardRails etc.) but these represent a distinct approach with a different set of risks and backtesting.

My apologies if this feels like a NIT, but I have had to help a number of folks who didn’t really understand the details and want the Terminology clear.

WoodSpinner

This is my complaint. So many folks on here say" My SWR is ..." when they mean "my withdrawal rate is"

We don't know the SWR a priori for a given retirement year. It could be 3.2% or it could be 6.5%, one doesn't know until it fails or you get to the end of the test period.

I view SWR as shorthand for a system of using original portfolio value and allowing for inflation when put into practice.

I get your ick when I see folks say their SWR has ranged 2.2 to 6%: they are clearly referring to a withdrawal rate that has nothing to do with such a system.

[Gecko10x]

This is my complaint. So many folks on here say" My SWR is ..." when they mean "my withdrawal rate is"

We don't know the SWR a priori for a given retirement year. It could be 3.2% or it could be 6.5%, one doesn't know until it fails or you get to the end of the test period.

Yes! Pet peeve of mine.

[Greg in Idaho]

These simple rules are for doing back testing, not for real life.

In retirement, I withdraw what I need to for living and entertainment (ie needs and wants). I am not in bondage to any rules. If my portfolio drops significantly, I will adjust spending.

Not just for backtesting...they also serve as fodder for endless debates online...

[rs9876lg]

This is my complaint. So many folks on here say" My SWR is ..." when they mean "my withdrawal rate is"

We don't know the SWR a priori for a given retirement year. It could be 3.2% or it could be 6.5%, one doesn't know until it fails or you get to the end of the test period.

Yes! Pet peeve of mine.

What about folks who tell us that their expenses are covered by social security and pension and add on to the existing pile. Then they compute the percentage of the expenses and the pile and say they have that SWR!

[rossington]

Hello WoodSpinner,
Beyond expenses if you’re having a good year and the portfolio has increased in value you may be able to comfortably increase your SWR. Conversely the opposite can happen too, so the way I look at it the larger the portfolio the more spending flexibility and vice versa.

I actually agree with the spirit of your post, BUT am concerned with calling it a SWR since is not how a traditional SWR approach (Bengen, Trinity etc.) works ….

That said, there are many adaptations and variations to a SWR (Guyton-Klingon, GuardRails etc.) but these represent a distinct approach with a different set of risks and backtesting.

My apologies if this feels like a NIT, but I have had to help a number of folks who didn’t really understand the details and want the Terminology clear.

WoodSpinner

Hello WoodSpinner,
How are you defining SWR?
Isn't the SWR for all individuals different?

[dcabler]

I actually agree with the spirit of your post, BUT am concerned with calling it a SWR since is not how a traditional SWR approach (Bengen, Trinity etc.) works ….

That said, there are many adaptations and variations to a SWR (Guyton-Klingon, GuardRails etc.) but these represent a distinct approach with a different set of risks and backtesting.

My apologies if this feels like a NIT, but I have had to help a number of folks who didn’t really understand the details and want the Terminology clear.

WoodSpinner

Hello WoodSpinner,
How are you defining SWR?
Isn't the SWR for all individuals different?

Generally speaking, SWR is usually defined as the percentage withdrawal for the first year. Then that's adjusted each year based on the prior year's inflation rate. In other words, it's a fixed "real withdrawal percentage" used for the entirety of a retirement, with the operative word being "fixed". If you're making adjustments beyond the inflation adjustment each year based on good/bad years, then this is no longer SWR but a variable rate withdrawal method.

The SWR percentage itself can different for each person based on their AA and/or how much margin they feel comfortable with vs. what backtesting is telling them would have worked in the past.

Cheers.

[livesoft]

As far as endowments go: At least most university endowments continue to get donations. I don't see anybody donating to my personal nest egg used for my retirement expenses. That's a HUGE difference.

I am on the finance committee of a non-profit. We have received money that is meant to be completely spent within a certain number of years. My point is that some parts of an endowment are not meant to last in perpetuity. That is the same as my personal nest egg since I will die eventually.

[WoodSpinner]

I actually agree with the spirit of your post, BUT am concerned with calling it a SWR since is not how a traditional SWR approach (Bengen, Trinity etc.) works ….

That said, there are many adaptations and variations to a SWR (Guyton-Klingon, GuardRails etc.) but these represent a distinct approach with a different set of risks and backtesting.

My apologies if this feels like a NIT, but I have had to help a number of folks who didn’t really understand the details and want the Terminology clear.

WoodSpinner

Hello WoodSpinner,
How are you defining SWR?
Isn't the SWR for all individuals different?

The
I use Bengen’s and the Trinity Studies approach as the definition of SWR. This is the origin of the 4% Rule of Thumb.

A SWR (SafeMax) is a Data Mining Artifact based on the historical performance of a portfolio over a specified period (say 30 years). It uses the Portfolio Balance as of the Retirement Date, applies the SWR factor and is then adjusted for inflation over the specified period.

You can NEVER know the SWR accurately until after you are passed — until then you can take a reasonable risk based on historical periods.

WoodSpinner

[seajay]

Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years

A variation is to look at the preferred asset allocations last 5 years real gains prior to the SWR start date. If the portfolio has doubled up in value quickly/recently then starting with a lower SWR% expectation is reasonable.