What is a 4% SWR?

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Jay
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What is a 4% SWR?

Post by Jay »

I've seen what I can only assume are multiple differing opinions on how a 4% SWR is calculated, so I'm curious which one is the generally accepted definition (if there is one).

Does it imply taking 4% of whatever the starting value of a portfolio is every year on January 1st?

Does it mean you take an inflation adjusted 4% of the initial starting value, regardless of whether this is more or less than 4% of the current balance?

Or does it mean something else altogether?

Which model was used for things like the Trinity study?
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CyberBob
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Post by CyberBob »

4% initial withdrawal, adjusted for inflation (but not taxes or investment costs).
The Trinity Study also has tables for withdrawals not adjusted for inflation, which makes a higher than 4% withdrawal look okay (but at the risk of continually reduced purchasing power). See link below.

So, for example, with a $500,000 portfolio and 3% inflation each year, you would have withdrawals of:

$20,000 ($500,000 x 4%)
$20,600 (initial $20,000 + 3% inflation adjustment)
$21,218 (previous years $20,600 + 3% inflation adjustment)
etc.

For more information, check out this link.

Bob
Last edited by CyberBob on Sun Nov 04, 2007 9:49 am, edited 1 time in total.
livesoft
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Post by livesoft »

Didn't the Trinity 4% SWR assume that portfolio expenses were 0.0%?
earlyout
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Taxes and expenses from the 4%

Post by earlyout »

I think the common understanding of the "not adjusted for transaction costs and taxes" caveat in the Trinity study is that taxes and investment expenses are paid from the 4% withdrawn from the portfolio. The 4% is not adjusted upward to pay these costs.

EO
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Mel Lindauer
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Post by Mel Lindauer »

livesoft wrote:Didn't the Trinity 4% SWR assume that portfolio expenses were 0.0%?
The Trinity Study's authors state:
The study did not adjust for taxes or transaction costs. An investor's own experience would differ depending on how much of his assets were in tax-deferred accounts, and the extent to which transaction costs could be held to a minimum using low-cost index funds.
Regards,

Mel
steve88
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Post by steve88 »

Just have a quick question on swr withdrawal. If you withdraw 4% on a lets say 500000(20000), would that 500000 still grow if its in a growth fund?

sorry if this is too basic but this is my first experience with swr. thanks
Sidney
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Post by Sidney »

The Trinity Study's authors state:
Quote:
The study did not adjust for taxes or transaction costs. An investor's own experience would differ depending on how much of his assets were in tax-deferred accounts, and the extent to which transaction costs could be held to a minimum using low-cost index funds.

With a little work, one should be able to get expenses down to around 15bp. Mine are now about 12 wall-to-wall. Taxes is the bigger worry when it comes to costs.

rgds,

Sid
I always wanted to be a procrastinator.
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Sheepdog
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Post by Sheepdog »

steve88 wrote:Just have a quick question on swr withdrawal. If you withdraw 4% on a lets say 500000(20000), would that 500000 still grow if its in a growth fund?

sorry if this is too basic but this is my first experience with swr. thanks
The account could grow or it may not. That is why the SWR is recommended at 4% to have the money last. The 500k could grow to 600k or more in a bull market or could drop to 400k or less in a bear market. The study says, I believe, that you stay on the inflation adjusted withdrawal plan which was outlined above.

I follow a varying different approach which involves withdrawing an amount each year based on my year end balance and not adjust for inflation. I can vary my spending habits each year to keep my plan. I take out 4.5% each year based on my year end investment values. If I have more, I can take out more to spend. If I have less, I spend less by reducing discretionary spending to stay on budget. If I can do that, I will leave with money still in the pot.Jim
Time is the school in which we learn, time is the fire in which we burn.~ Delmore Schwartz
Sidney
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Post by Sidney »

could drop to 400k or less
Indeed. If it is in an equity fund, you need to imagine that it could drop to $250K easily in a bear market.
I always wanted to be a procrastinator.
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