Does the 4% rule apply at any age?

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RenoJay
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Does the 4% rule apply at any age?

Post by RenoJay » Sat Feb 13, 2010 12:44 pm

I have often read that a retiree with a balanced portfolio can, with relative safety, withdraw 4% per year without too much concern about going broke. Does this rule assume a certain age of the retiree? I'm 38 and wondering if the 4% rule is safe for me.

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Post by conundrum » Sat Feb 13, 2010 1:02 pm

With a retirement horizon of 40 to 50 years plus I believe most studies would recommend a much lower withdrawal rate. From reading here, books (including Otar's new book), websites (including Bob's excellent website), reading the articles and looking at various calculators (including FIREcalc) I suspect a reasonable withdrawal would be closer to the lower end of the 2-3% range. When we looked at a safe withdrawal rate for us at about age 50, we decided on 3% (not inflation adjusted).

Drum

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Post by nisiprius » Sat Feb 13, 2010 1:13 pm

No.

The classic studies like the Trinity study don't mention age specifically, but deal with the chances of portfolio exhaustion over some specific period of time. The tradition is "thirty years." That is, it's assumed that the 65-year-old retiree needs income for a maximum of thirty years.

The Trinity study has tables for periods of time for 15, 20, 25, and 30 years. The authors say merely that "These payout periods are consistent with the life expectancy of most retirees." They give no guide as to what period you should use, and really brush aside the problem of variable longevity.

Common sense says that you'd darn well better plan for a longer period of time than your life expectancy, which is just the statistical average.
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Post by richard » Sat Feb 13, 2010 1:15 pm

The usual sources of the 4% rule are studies of withdrawing over a 30 year period and are based on past data. They are not aimed at shorter periods and are likely not tremendously useful for 30 year periods either. The Trinity study may be the most widely cited study.

For longer periods, a lower rate is better.

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Thanks for the excellent and speedy replies. This helps!

Post by RenoJay » Sat Feb 13, 2010 1:29 pm

See title...

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Post by walkinwood » Sat Feb 13, 2010 3:15 pm

If you mean that you withdraw 4% of your portfolio value at the start of each year - sure! Be ready for a volatile budget!

However, when people usually refer to the 4% SWR, they mean an inflation adjusted withdrawal equal to 4% of the initial portfolio. There is no consideration given to the value of the portfolio after that initial calculation. I would not feel comfortable using this methodology for 30+ years since that was the period used in Bengen's papers and the Trinity study.

Bob Clyatt advocated a variation of the 4% of portfolio value rule called the 4%/95% rule in his book Work Less, Live More. Google it for more details.

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Post by KyleAAA » Sat Feb 13, 2010 4:02 pm

The 4% SWR rule-of-thumb generally refers to 30-year investment periods. If your money has to last longer, you'd probably do well to withdraw less money. I personally feel safe with a 3% withdrawal rate for pretty much any age unless you are 100% in cash or something like that.

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Re: Does the 4% rule apply at any age?

Post by bob90245 » Sat Feb 13, 2010 4:28 pm

RenoJay wrote:I'm 38 and wondering if the 4% rule is safe for me.
The benchmark to compare with is what an insurer believes would last your lifetime. So I entered your information into Vanguard's Quote Page:

Primary Annuitant -- Birth date: 02/01/1972 Sex: M
Quote Expiration Date: 02/20/2010
Benefit Commencement Date: 04/01/2010
State of Residence: AL
Payments per Year: 1
Total Premium Amount: $100,000.00

Initial Payment Amount for Fixed Single Life Annuity with inflation adjustments: $2,857.44

Cancellation Option Selected: No


So based on what an insurer can offer (they pool the risk with your 38-year-old peers), it appears that the maximum safe withdrawal rate for a 38-year-old is 2.8%. If you were to fashion a portfolio yourself, you'll likely need a more conservative SWR.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by Electron » Sat Feb 13, 2010 5:59 pm

The Bogleheads' Guide to Retirement Planning has a section and chart on this very topic. The chart presents some percentages that I had not seen before.

The chart shows a 3% Withdrawal rate for age 50 and below, 3.3% for age 55, 3.5% for age 60, 4% for age 65, 4.5% for age 70, 5% for age 75, and 6% for age 80.

I assume that these rates represent the initial withdrawal rate for a given age and are increased each year for inflation. The table brings up an interesting question on whether one could increase the withdrawal rate at some later point. I don't believe that would be recommended because investment returns can become negative at any time. Perhaps there could be exceptions if one's portfolio did extremely well in the early years.

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Re: Does the 4% rule apply at any age?

Post by docneil88 » Mon Feb 15, 2010 5:04 pm

bob90245 wrote:So based on what an insurer can offer (they pool the risk with your 38-year-old peers), it appears that the maximum safe withdrawal rate for a 38-year-old is 2.8%. If you were to fashion a portfolio yourself, you'll likely need a more conservative SWR.
An argument for a more conservative SWR in this case would be that the insurer based their payout % on the average life expectancy of a pool of 38-year-old males, whereas RenoJay's portfolio isn't spreading the risk like that. RenoJay probably needs a SWR that would get him to 95 or beyond.

On the other hand, within RenoJay's portfolio he can include more equities than the insurance co. does to back up their guarantees. That'd increase the expected return, but also increase the risk. Best, Neil

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Post by ausgenf » Mon Feb 15, 2010 11:50 pm

When I did the same exercise for myself (I am 36), I came up with a max SWR of 2.5%. This is based on current annuity rates, FIREcalc (retirement calculator), and a number of books I've read such as "unveiling the retirement myth" by Otar.

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Re: Does the 4% rule apply at any age?

Post by anjou » Tue Feb 16, 2010 3:22 am

bob90245 wrote:
RenoJay wrote:I'm 38 and wondering if the 4% rule is safe for me.
The benchmark to compare with is what an insurer believes would last your lifetime. So I entered your information into Vanguard's Quote Page:

...

So based on what an insurer can offer (they pool the risk with your 38-year-old peers), it appears that the maximum safe withdrawal rate for a 38-year-old is 2.8%. If you were to fashion a portfolio yourself, you'll likely need a more conservative SWR.
Very nice way of estimating SWR. Thank you Bob.

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Post by Orion » Tue Feb 16, 2010 12:14 pm

As hinted above, use FIREcalc or a similar tool to run the numbers for your circumstances. Then you might adjust these numbers up or down depending on how you feel about the market/economy, how well you sleep at night etc. For example, while FIREcalc will run the numbers and report the worst case historically, including the great depression, the stagflation era etc. some people want to prepare for even worse. However, what might be worse than the worst history has to offer (or better!) is only limited by your imagination so to some extent you just have to pick what feels right to you.

Don't forget the budget side. For example, my health insurance premiums have gone up 20-22% every year for the last 10 years.

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Post by conundrum » Tue Feb 16, 2010 12:30 pm

Orion

We run our numbers on FIREcalc every year. We essentially reretire each year using the FIREcalc numbers as a guideline.

Drum

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Post by MWCA » Tue Feb 16, 2010 12:31 pm

Great deal of faith is put into FireCalc Ive noticed. :)
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Post by Orion » Tue Feb 16, 2010 1:03 pm

conundrum wrote:Orion

We run our numbers on FIREcalc every year. We essentially reretire each year using the FIREcalc numbers as a guideline.

Drum
FIRECalc and similar tools account for what would happen if you retired right before the stock crashes of 1929 etc. So, if you plan a budget based on that, then the next year the market does actually crash, then you run the tool again and generate a new number based on what would happen if the stock market crash happened the next year, and the next,...repeat... Well I think the tool developer would say that the tool might be somewhat meaningless if used like this.

However it does provide an extremely conservative SWR and if that's what makes you sleep at night, and you can afford to eat based on those numbers, that's very good. On the other hand, withdrawing any percentage of your current portfolio (below 100%) will cause the portfolio never to go to zero so I'm not sure that the percentage FIRECalc comes up with is "right" percentage for this style.

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Post by Orion » Tue Feb 16, 2010 1:08 pm

MWCA wrote:Great deal of faith is put into FireCalc Ive noticed. :)
To my knowledge FIRECalc is an accurate tool for doing the calculations that generated "the 4% rule". So since the OP was asking if 4% applies to him, I think telling him to plug his own numbers into the tool is a good answer. Of course, if you don't believe that using the worst historical case is a guide for picking a safe withdrawal rate, then you want to look at other tools.

Before FIRECalc, the simulation was available as an Excel spreadsheet (still is, actually) so I think a lot of people have looked over the math. But, no tool knows the future. Bernstein has even warned that the probability (based on the past) of your country/financial/banking etc. system surviving a 50 year retirement is a long way from 100%

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Post by conundrum » Tue Feb 16, 2010 1:37 pm

Orion

Agree that using FIREcalc as we describe above is not precisely the way it is intended to be used. We realize that using a fixed % withdrawal (non inflation adjusted) will not run out of money. However, even with a fixed rate withdrawal, if the rate chosen is too high the $ amount of withdrawals will quickly decrease (ex. 50% withdrawal rate as extreme). We chose our withdrawal rate based on multiple sources (including Otar's new book) in addition to FIREcalc. We use FIREcalc to slowly increase our fixed % withdrawal as our life expectancy decreases. A conservative plan but the one we are the most comfortable with.

Thanks for your thoughts.

Drum

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Post by Cb » Tue Feb 16, 2010 2:08 pm

A few thoughts on FIREcalc:

If you model very long (>42 year) periods in FIREcalc, you remove the late 60's failures from the results, generating higher 'safe' SWRs.

If you want to model flat % of portfolio withdrawal strategies, model a $0 annual draw, but add x.x% to the Portfolio Expense Ratio. The result will always be 100% Safety, but watch the variability of the annual draws in the detailed results section.

Similarly, you can model hybrid withdrawal strategies...such as 2.5% of initial balance, plus some percentage of remaining portfolio, by boosting the Portfolio Expense Ratio.

Input the desired inflation adjusted % (to cover your fixed expenses)

...plus some additional % to the ER that you'll allow to float along with the portfolio balance (to discretionary expenses)

Allowing a percent or two of your annual withdrawal to float according to market conditions boosts the overall SWR appreciably. Just put off your Hawaiian vacations, kitchen remodelings and car replacements until up years.

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Post by conundrum » Tue Feb 16, 2010 2:21 pm

Cb

Interesting idea. I'll give it a try.

Thanks

Drum

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Post by lazyday » Tue Feb 16, 2010 3:46 pm

Depends on a lot of things, like how much risk you're willing to take, if you have social security coming, any pension at all, willing to ever work again, how you invest, your health, lifestyle/expenses, family size and stability, IMO how expensive the market is, etc.

In general, I'd say no to 4% at 38 with today's market. But I'd also say that 2.5 or 3 may be too conservative for a 38 year old, depending on the above factors.

There's days or weeks worth of reading on this topic at the early retirement forums, such as early retirement.org, easy to find with google.

--Of course Bogleheads may have a different perspective; Don't mean to discourage posting, just referring OP to a huge source of info.

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Post by bob90245 » Tue Feb 16, 2010 3:53 pm

lazyday wrote:Depends on a lot of things, like how much risk you're willing to take, if you have social security coming, any pension at all, willing to ever work again, how you invest, your health, lifestyle/expenses, family size and stability, IMO how expensive the market is, etc.

In general, I'd say no to 4% at 38 with today's market. But I'd also say that 2.5 or 3 may be too conservative for a 38 year old, depending on the above factors.
You bring up an interest point. However, only under rare circumstances will a pension or social security be a meaningful addition to one's income stream at retirement age if a person had already left the workforce at age 38.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by ddb » Tue Feb 16, 2010 3:54 pm

Yes, the 4% rule applies at any age. Specifically, regardless of your age, a 4% initial withdrawal + annual inflation has a high chance of providing sustainable income for 30 years, based on historical backtesting and assuming zero portfolio costs.

So...big deal, right?

Of course, if your anticipated "needs" period is longer and/or you decide to factor in today's deadful fixed income yields and/or you realize that the traditional 4% rule assumes a zero-cost strategy, you might want to revise it [a lot] lower.

I think it's safe to say that I'm not a big fan of the 4% rule, at least not in its traditional sense. I actually think that 4% withdrawal is a great starting point for a retiree, provided s/he has the ability to make adjustments upward or downward depending on portfolio performance and/or inflation.

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Post by Orion » Tue Feb 16, 2010 4:39 pm

There are places to include your expense ratios in the tools, but it's a good idea to go beyond the listed ERs and include the internal expenses (like the bid/ask spread times the turnover.) Somewhere there's a post or page that gives some estimates of these for various classes of funds. Alternately you could stick as close as possible to the tools' data by using a cheap S&P 500 index fund, but keep in mind that tools use the S&P 500 due to having many years of data, not because it's necessarily the optimal retirement investment.

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Post by jh » Tue Feb 16, 2010 5:44 pm

...
Last edited by jh on Tue Mar 30, 2010 2:37 pm, edited 1 time in total.

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Re: Does the 4% rule apply at any age?

Post by KlangFool » Tue Feb 16, 2010 5:49 pm

bob90245 wrote:
RenoJay wrote:I'm 38 and wondering if the 4% rule is safe for me.
The benchmark to compare with is what an insurer believes would last your lifetime. So I entered your information into Vanguard's Quote Page:

Primary Annuitant -- Birth date: 02/01/1972 Sex: M
Quote Expiration Date: 02/20/2010
Benefit Commencement Date: 04/01/2010
State of Residence: AL
Payments per Year: 1
Total Premium Amount: $100,000.00

Initial Payment Amount for Fixed Single Life Annuity with inflation adjustments: $2,857.44

Cancellation Option Selected: No


So based on what an insurer can offer (they pool the risk with your 38-year-old peers), it appears that the maximum safe withdrawal rate for a 38-year-old is 2.8%. If you were to fashion a portfolio yourself, you'll likely need a more conservative SWR.
Bob,

Thank you on pointing out a good resource for checking thing out.

KlangFool

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Post by lazyday » Sun Aug 08, 2010 3:28 pm

bob90245 wrote:However, only under rare circumstances will a pension or social security be a meaningful addition to one's income stream at retirement age if a person had already left the workforce at age 38.
(Sorry I just noticed your reply Bob.)

Really? If getting SS, then eligible in only 25 years or so, and one who could retire near 38 might have made 10-15 years of high SS payments. Of course I wouldn't depend too much on things staying the same that long, and I haven't looked at SS numbers closely.

Don't some military and other government pensions only require 20 years of service? Might be a big % of very early retirees.

Just nitpicking I suppose, retiring around 38 is rare, period!


Klang and others,

To get some balance, it might help to look back to older threads on this topic, either here, or better on ER (Early Retirement) forums.

When the stock market was doing well and was expensive, there were posts with people trying to extend SWR to 6% or higher, and 4% was usually the minimum, even for very young ER. Those who tried to post for lower numbers were sometimes ridiculed.

Today, with a more reasonably priced stock market, 4% seems the max, and we often see 2.5% mentioned, even for 60+ y.o. retirees. Belt and suspenders safety is nice, but not if you hate your job and needlessly die working.

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Post by Ozonewanderer » Sun Aug 08, 2010 11:15 pm

I think we've got at least two different 4% rules here. My understanding of the one most commonly referenced is:
-- Take 4% of a given portfolio in the first year.
-- For each subsequent year's withdrawal take the prior year's withdrawal amount and increase it by the past year's inflation percentage.
Historical back testing of a 60% stock/40% bond portfolio has shown that with this withdrawal rate your original portfolio has a 90% probability of surviving for at least 30 years.

There's another 4% rule that simply says take 4% of your total portfolio each year. That can continue for forever. However your annual withdrawal goes up and down like the market and it is hard to budget one's lifestyle for such an income stream.

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Post by nonnie » Mon Aug 09, 2010 7:57 pm

walkinwood wrote: Bob Clyatt advocated a variation of the 4% of portfolio value rule called the 4%/95% rule in his book Work Less, Live More. Google it for more details.
Thanks for this reminder; I'd totally forgotten about this book and have just pulled it from my bookshelf to see what he says-- and I really need advice on SWR--every day there seems to be another method.

Nonnie

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Re: Does the 4% rule apply at any age?

Post by natureexplorer » Mon Aug 09, 2010 8:21 pm

bob90245 wrote:
RenoJay wrote:I'm 38 and wondering if the 4% rule is safe for me.
The benchmark to compare with is what an insurer believes would last your lifetime. So I entered your information into Vanguard's Quote Page:

Primary Annuitant -- Birth date: 02/01/1972 Sex: M
Quote Expiration Date: 02/20/2010
Benefit Commencement Date: 04/01/2010
State of Residence: AL
Payments per Year: 1
Total Premium Amount: $100,000.00

Initial Payment Amount for Fixed Single Life Annuity with inflation adjustments: $2,857.44

Cancellation Option Selected: No


So based on what an insurer can offer (they pool the risk with your 38-year-old peers), it appears that the maximum safe withdrawal rate for a 38-year-old is 2.8%. If you were to fashion a portfolio yourself, you'll likely need a more conservative SWR.
I agree that this is an important "benchmark". However I would add that if you are planning to use a lower SWR than what you would get from an annuity, then why not buy an annuity? In other words, this should present a low-end member. That is consistent with the 3% SWR suggest by the Boglehead book referred to above. Another figure to compare with is the real yield on long-term TIPS, which has always been as low as now.

However, many of these rule-of-thumg SWR figures ignore taxes and where you portfolio is in a taxable account or entirely in a tax-advantaged account, which makes a huge difference.

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Re: Does the 4% rule apply at any age?

Post by grayfox » Mon Aug 09, 2010 11:35 pm

RenoJay wrote:I have often read that a retiree with a balanced portfolio can, with relative safety, withdraw 4% per year without too much concern about going broke. Does this rule assume a certain age of the retiree? I'm 38 and wondering if the 4% rule is safe for me.
I would plan to have to withdraw to age 100. So at age 38, that would be 62 years of withdrawals.

Let's assume that you get 2% real IRR on your drawdown portfolio.

To spend your portfolio down to zero in 62 years, you would take out 2.83%. This is from Excel's PMT function. [I would re-run this calculation every year to stay on track.]

So a 1,000,000 portfolio would give 28,300 in income the first year. Not much income for a millionaire!

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Post by walkinwood » Tue Aug 10, 2010 3:59 pm

nonnie wrote:
walkinwood wrote: Bob Clyatt advocated a variation of the 4% of portfolio value rule called the 4%/95% rule in his book Work Less, Live More. Google it for more details.
Thanks for this reminder; I'd totally forgotten about this book and have just pulled it from my bookshelf to see what he says-- and I really need advice on SWR--every day there seems to be another method.

Nonnie
If you want a recap of all the methods out there, try Bob's page at
http://www.bobsfinancialwebsite.com/

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Post by grayfox » Wed Aug 11, 2010 12:41 am

BTW, I don't know if everyone is aware of this, but there is an exact formula for calculating the maximum withdrawal rate (MWR).

If you use the MWR you will end up with exactly zero at the end of the period.
If you take out less than the MWR you will have a surplus at the end.
If you take out more than the MWR, you will have a shortage and run out prematurely

Here it is: The Magic Sum
http://gummy-stuff.org/magic_sum.htm

The only difficulty is you must know the whole sequence of returns, plus the sequence of inflation rates. Or equivalently, the sequence of real returns.

So if you can determine these numbers, either by clairvoyance or other scientific means, and apply the Magic Sum you will know exactly how much you can take out.

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Post by cjking » Wed Aug 11, 2010 11:01 am

Most people are estimating a sustainable income of a lot less than 4%. I don't disagree, in the implied context of some sort of Boglehead portfolio that is being run down, however...

Suppose $1 million is invested in a REIT which owns approximately 100 commercial properties with little or no leverage. The dividend yield is north of 6%, though underlying rent net of ongoing expenses is only 4.3%. Is a withdrawal rate of net rents (currently 4.3%) indefinitely sustainable?

Suppose $1 million is invested in S&P 500 tracker and the smoothed earnings yield (1/PE10) is 4.3%. Is an income of that smoothed yield indefinitely sustainable?

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Post by lazyday » Wed Aug 11, 2010 4:34 pm

If I were a 38 year old retiring, I wouldn't plan to run down my portfolio. Sounds like a recipe for disaster.

Instead, I'd look to the current global dividends of somewhere around 2.5%+, which I would expect to rise faster than inflation, and expected total real return from global equities of something like 4 to 8%, with risk of bad sequence of returns softened by dividends and probably fixed income. If appropriate, add in social security and/or pension for future years. Add excess for health care and other unknowns, or have a reasonable backup plan (perhaps tested) like returning to work or living abroad cheaply.

I'd use Firecalc and spreadsheeting, review of investing history such as Four Pillars and Shiller's website data, common sense and Art to arrive at a WR for planning purposes.

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Re: Does the 4% rule apply at any age?

Post by ObliviousInvestor » Thu Aug 12, 2010 4:18 pm

natureexplorer wrote:
bob90245 wrote:
RenoJay wrote:I'm 38 and wondering if the 4% rule is safe for me.
The benchmark to compare with is what an insurer believes would last your lifetime. So I entered your information into Vanguard's Quote Page:

Primary Annuitant -- Birth date: 02/01/1972 Sex: M
Quote Expiration Date: 02/20/2010
Benefit Commencement Date: 04/01/2010
State of Residence: AL
Payments per Year: 1
Total Premium Amount: $100,000.00

Initial Payment Amount for Fixed Single Life Annuity with inflation adjustments: $2,857.44

Cancellation Option Selected: No


So based on what an insurer can offer (they pool the risk with your 38-year-old peers), it appears that the maximum safe withdrawal rate for a 38-year-old is 2.8%. If you were to fashion a portfolio yourself, you'll likely need a more conservative SWR.
I agree that this is an important "benchmark". However I would add that if you are planning to use a lower SWR than what you would get from an annuity, then why not buy an annuity? In other words, this should present a low-end member.
A single premium immediate fixed annuity should always allow for a higher withdrawal rate than you can safely get from a stock/bond portfolio. That's the point. If you're planning on using a withdrawal rate greater than you can get from a SPIA, you're likely in trouble.
Mike Piper, author/blogger

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Safe withdrawal rates

Post by Taylor Larimore » Thu Aug 12, 2010 4:35 pm

RenoJay wrote:I have often read that a retiree with a balanced portfolio can, with relative safety, withdraw 4% per year without too much concern about going broke. Does this rule assume a certain age of the retiree? I'm 38 and wondering if the 4% rule is safe for me.
I don't know of any safe withdrawal rate studies for 50-70 years of retirement, however, these are safe withdrawal rates (SWR) according to Monte Carlo Simulations published in Larry Swedroe's latest book, "The only guide you'll ever need for the right financial plan":

AGE..SWR
55........3%
60........4%
65........4%
70........5%
75........6%
80........7%
85........8%
90........9%
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Re: Does the 4% rule apply at any age?

Post by cjking » Fri Aug 13, 2010 3:37 am

ObliviousInvestor wrote: A single premium immediate fixed annuity should always allow for a higher withdrawal rate than you can safely get from a stock/bond portfolio. That's the point. If you're planning on using a withdrawal rate greater than you can get from a SPIA, you're likely in trouble.
The truth of this depends on the length of time involved. A simple annuity is in asset allocation terms an investment in government bonds, and a big part of the payout is return of capital. Over a long enough period of time, the extra return from investing in real assets such as equities or property, assuming you combat volatility by not running down the portfolio, can outweigh the loss of both return of capital and insurance bonuses that come from not taking the annuity.

I doubt a 38 year old could buy an inflation-linked simple annuity, but if they could I imagine the payout would at most be 3%. On the other hand, a 100% equity portfolio or 100% property portfolio might currently support an income approaching 4%, one third higher, without consuming capital.

We should also not lose site of the fact that asset allocation and annuitisation are separate issues. It may be possible to have assets invested outside of an annuity in a bond portfolio similar to one that the insurance company would use to back a simple annuity, and it is possible to have an annuity that is backed by a 100% investment in equities or property.

The theoretical maximum income would be to have a 100% equity/property portfolio inside an annuity, but in reality at age 38 (and most ages below 70) the extra annuity product charges would easily overwhelm the mortality bonus adavantage the annuity gives.

(I have in mind a UK annuity product that allows a range of funds for asset allocation purposes, where the product charges are 1% up-front on annuitisation and an extra 0.3% a year thereafter. Using some sample figures from a sales brochure to estimate the size of mortality bonuses, annuitisation doesn't confer much advantage below age 80, for that product.)

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Re: Does the 4% rule apply at any age?

Post by natureexplorer » Fri Aug 13, 2010 9:36 am

ObliviousInvestor wrote:A single premium immediate fixed annuity should always allow for a higher withdrawal rate than you can safely get from a stock/bond portfolio. That's the point. If you're planning on using a withdrawal rate greater than you can get from a SPIA, you're likely in trouble.
If that's the case, why keep your own portfolio and not just buy a SPIA?

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Re: Does the 4% rule apply at any age?

Post by dbr » Fri Aug 13, 2010 10:13 am

natureexplorer wrote:
ObliviousInvestor wrote:A single premium immediate fixed annuity should always allow for a higher withdrawal rate than you can safely get from a stock/bond portfolio. That's the point. If you're planning on using a withdrawal rate greater than you can get from a SPIA, you're likely in trouble.
If that's the case, why keep your own portfolio and not just buy a SPIA?
There have been academic papers (as usual my downfall is not keeping this stuff where I can provide references) that question this as the "annuity conundrum." Many advisors would suggest that the retirement solution is exactly putting everything in an annuity. Financial Engines does retirement planning based on exactly that assumption.

Here are some reasons:

1. A retiree still needs a lump sum resource to handle unexpected expenses or to provide the ability to choose lump sum expenditures. Also some retirement resources appear as lump sums, such as inheritances, downsizing the home, etc.

2. People fear insurance company risk. State guarantees are inadequate and not convincing.

3. Choices for true COLA'd SPIAs are few and far between.

4. People have legacy motives that cannot be met if the assets are surrendered to an SPIA.

5. People psychologically resist "giving up" their assets.

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Re: Does the 4% rule apply at any age?

Post by ObliviousInvestor » Fri Aug 13, 2010 1:59 pm

dbr wrote:
natureexplorer wrote:
ObliviousInvestor wrote:A single premium immediate fixed annuity should always allow for a higher withdrawal rate than you can safely get from a stock/bond portfolio. That's the point. If you're planning on using a withdrawal rate greater than you can get from a SPIA, you're likely in trouble.
If that's the case, why keep your own portfolio and not just buy a SPIA?
There have been academic papers (as usual my downfall is not keeping this stuff where I can provide references) that question this as the "annuity conundrum." Many advisors would suggest that the retirement solution is exactly putting everything in an annuity. Financial Engines does retirement planning based on exactly that assumption.

Here are some reasons:

1. A retiree still needs a lump sum resource to handle unexpected expenses or to provide the ability to choose lump sum expenditures. Also some retirement resources appear as lump sums, such as inheritances, downsizing the home, etc.

2. People fear insurance company risk. State guarantees are inadequate and not convincing.

3. Choices for true COLA'd SPIAs are few and far between.

4. People have legacy motives that cannot be met if the assets are surrendered to an SPIA.

5. People psychologically resist "giving up" their assets.
Yes, exactly. In my experience, #4 on dbr's list is the deal breaker for most people.

To flip the question around, if SPIAs didn't allow for a higher SWR, why would anybody ever purchase one given the drawbacks dbr has outlined?
Mike Piper, author/blogger

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Re: Does the 4% rule apply at any age?

Post by natureexplorer » Fri Aug 13, 2010 5:55 pm

ObliviousInvestor wrote:
dbr wrote:
natureexplorer wrote:
ObliviousInvestor wrote:A single premium immediate fixed annuity should always allow for a higher withdrawal rate than you can safely get from a stock/bond portfolio. That's the point. If you're planning on using a withdrawal rate greater than you can get from a SPIA, you're likely in trouble.
If that's the case, why keep your own portfolio and not just buy a SPIA?
There have been academic papers (as usual my downfall is not keeping this stuff where I can provide references) that question this as the "annuity conundrum." Many advisors would suggest that the retirement solution is exactly putting everything in an annuity. Financial Engines does retirement planning based on exactly that assumption.

Here are some reasons:

1. A retiree still needs a lump sum resource to handle unexpected expenses or to provide the ability to choose lump sum expenditures. Also some retirement resources appear as lump sums, such as inheritances, downsizing the home, etc.

2. People fear insurance company risk. State guarantees are inadequate and not convincing.

3. Choices for true COLA'd SPIAs are few and far between.

4. People have legacy motives that cannot be met if the assets are surrendered to an SPIA.

5. People psychologically resist "giving up" their assets.
Yes, exactly. In my experience, #4 on dbr's list is the deal breaker for most people.

To flip the question around, if SPIAs didn't allow for a higher SWR, why would anybody ever purchase one given the drawbacks dbr has outlined?
Are you asking this question for real? An annuity is an insurance product. Beyond the credit quality of the insurer, you have insured yourself against outliving your portfolio or living below your means (assuming we are talking about an inflation-indexed annuity). It takes figuring an SWR completely out of the equation. Since all these risks are removed I would expect a lower rate than with an individual portfolio. Why am I supposed to take the risk of investing in equities and bonds if using an annuity means more money for me every month? I understand that if you want to leave money to your heirs, that's fine, but even then you might as well as put some into an annuity and put the rest into an annuity. Because you are essentially saying that an annuity has a higher expected return than a stock/bond portfolio (which I doubt).

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Re: Does the 4% rule apply at any age?

Post by cjking » Sun Aug 15, 2010 3:14 pm

natureexplorer wrote:Because you are essentially saying that an annuity has a higher expected return than a stock/bond portfolio (which I doubt).
The underlying assets in a mainstream annuity do indeed have lower returns, but that doesn't necessarily mean you get a lower income. If you want to generate a smooth income from a volatile portfolio with 0% chance of running out of money, then the various compromises you have to make, such as aiming to fund your maximum (rather than average) life expectancy, and lowering withdrawal rates or tilting to bonds to minimise sequence-of-returns problems, all combine so that you easily end up with a lower sustainable withdrawal rate than you could have got from an annuity.

See my comments earlier in the thread for when a portfolio does have higher returns than an annuity - essentially over very long periods, longer than the standard retirement.

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Post by natureexplorer » Sun Aug 15, 2010 3:24 pm

cjking, thanks for your comments.

Essentially it all sounds like a strong argument in favor of annuities.

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Re: Safe withdrawal rates

Post by Leif » Sun Aug 15, 2010 11:14 pm

Taylor Larimore wrote:
RenoJay wrote:I have often read that a retiree with a balanced portfolio can, with relative safety, withdraw 4% per year without too much concern about going broke. Does this rule assume a certain age of the retiree? I'm 38 and wondering if the 4% rule is safe for me.
I don't know of any safe withdrawal rate studies for 50-70 years of retirement, however, these are safe withdrawal rates (SWR) according to Monte Carlo Simulations published in Larry Swedroe's latest book, "The only guide you'll ever need for the right financial plan":

AGE..SWR
55........3%
60........4%
65........4%
70........5%
75........6%
80........7%
85........8%
90........9%
Thanks. I can add that to my collection.

Code: Select all

Couch Potato Portfolio Withdrawal Rates (book Yes, you can still retire confortably).  % is % safety.

Years	95%	99%	100%
45	 5.5%	 4.7%	3.1%
40	 5.6%	 4.7%	3.1%
35	 5.9%	 5.0%	3.2%
30	 6.2%	 5.3%	3.5%
25	 6.6%	 5.6%	3.7%
20	 7.5%	 6.4%	4.1%
15	 8.9%	 7.9%	5.6%
10	12.2%	10.9%	8.6%

Single person life expectancy from IRS (MRD) 
Age	Life Exp.	% Withdraw
55	29.6		 3.4%
60	25.2		 4.0%
65	21.0		 4.8%
70	17.0		 5.9%
75	13.4		 7.5%
80	10.2		 9.8%
85	 7.6		13.2%
90	 5.5		18.2%

A dynamic and adaptive approach to Distribution Planning and Monitoring - 40/60 Stock/Bond		
Years	Withdrawal    Risk
30	 5%		 4.26%
25	 6%		 5.29%
20	 7%		 3.74%
15	 8%		 4.78%
10	10%		 3.79%

Spending from a Portfolio - (Vanguard Publication).  40-60% in stocks/bonds.  85% success.

Years	Withdrawal
40	 4.25%
35	 4.50%
30	 4.75%
25	 5.25%
20	 6.00%
15	 7.25%
10	10.50%

Spending from a Portfolio -(Vanguard Publication).  40-60% in stocks/bonds.  75% success.
Years	Withdrawal
40	 4.75%
35	 4.75%
30	 5.25%
25	 5.75%
20	 6.75%
15	 8.75%
10	11.50%

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Re: Does the 4% rule apply at any age?

Post by freebeer » Sun Aug 15, 2010 11:56 pm

natureexplorer wrote: I understand that if you want to leave money to your heirs, that's fine, but even then you might as well as put some into an annuity and put the rest into an annuity. Because you are essentially saying that an annuity has a higher expected return than a stock/bond portfolio (which I doubt).
A life annuity should always be able to provide greater income than portfolio withdrawals because it stops paying those who die younger, and that money goes towards paying those who live longer. The internal rate of return of the annuity's investments vs. whatever investments you might make on your own is a second-order question, although an important one (as is the question of how close to actuarially "fair" the annuity is, i.e. how much of the mortality credits are skimmed off into profits for the insurance company. At a young age an annuity may not provide a huge boost over an SWR because the mortality credits factor is less. If you buy an annuity at age 78, believe me you will get more income than you can safely take from your portfolio if you want to plan on the possibility of living to 100. Because only a small fraction of 78 year olds will live to 100, so the funds of those who die will turn into payments to that minority.

This all goes out the window if you are talking about annuities that repay principal or a portion therof (aka "death benefits"), which would be the only scenario for your heirs to be involved. Then, insurance company fees and profits, plus ultra conservative investment choices, would likely make annuitization a lose.

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Life expectency tables

Post by Taylor Larimore » Mon Aug 16, 2010 5:34 am

Hi Leif:

You have a very usefull "collection." Thank you for sharing it with us.
"Simplicity is the master key to financial success." -- Jack Bogle

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