New Math for Retirees and the 4% Withdrawal Rule

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JMacDonald
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New Math for Retirees and the 4% Withdrawal Rule

Post by JMacDonald »

NY Times article: http://www.nytimes.com/2015/05/09/your- ... -news&_r=0
“Because interest rates are so low now, while stock markets are also very highly valued, we are in uncharted waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases,” said Wade Pfau, a professor of retirement income at the American College of Financial Services and another researcher within the financial planning community.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by The Wizard »

Most of that article is a rehash of what's been beaten to death on this forum already.
I did find it interesting that Mr. Bengen, who invented the 4% "rule", employs TWO financial advisors to manage his money.
Looks like he's not quite a Boglehead yet...
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NYT article on 4% retirement

Post by bengal22 »

[Thread merged into here, see below. --admin LadyGeek]

Interesting read.

http://www.nytimes.com/2015/05/09/your- ... below&_r=0

Interview with the creator of the 4% rule.
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Re: NYT article on 4% retirement

Post by 1210sda »

Thank you for posting this.
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Re: NYT article on 4% retirement

Post by Leesbro63 »

Interesting that Mr. Bengen, only age 67, who created the 4% ruled based on staying the course, seems to have quit managing money, including his own. Perhaps this has something to do with it, from Nov 5, 2008:

"Self-Discovery

Bengen also is keeping his clients out of equities. Normally, he says, he believes in traditional asset allocation, but ``this is one of those rare instances when duck-and-cover is appropriate.''

http://www.bloomberg.com/apps/news?pid= ... refer=home

I've looked and nowhere can I find if and when he advised his clients (and, I assume, with his own money) on the "safe to buy back in" signal.
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Re: NYT article on 4% retirement

Post by nisiprius »

We let these guys off too easily. The reduction in consensus estimates for "safe" or "sustainable" withdrawal rates between 1994 and 2015 invalidates the idea and methodology of trying to estimate these rates.

It does not take Monte Carlo simulation to say, "using real dollars, if my retirement portfolio earns 0% real, which is a fairly conservative assumption, and I withdraw equal amounts in real dollars every year, then I can provide for 20 years of 5% withdrawals, or 25 years at 4%, or 30 years at 3.33%."

Nor does it take Monte Carlo simulation to handle things the same way we handle varying income and expenses in our pre-retirement life: Taylor Larimore:
We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.
The only point in even trying to go through the exercise is if it shows that you can prudently withdraw at a meaningfully higher than 3.33%, or meaningfully higher than Taylor Larimore's intuition. And that these higher rates include a sufficient "margin of ignorance" to protect against a future that may not be a close duplicate of anything that occurred in the past.

You just can't get away with saying "well, we said 4% then, but things don't look as good now as they did then." These studies incorporate periods of time back to (typically) either 1926 (CRSP data) or 1870 (CRSP supplemented by Cowles data). The claim was NOT "based on how things look in 1999, 4% should be OK." The claim was "4% includes a fat margin of safety for all economic and market conditions ever previously experienced.

Either one of two things is true.

a) Financial data is so poorly behaved, so "fractal," that a sample of 89 or 145 years of past data cannot yield predictions that are more reliable than "1 / chosen estimate of maximum remaining lifetime," or "Taylor Larimore's intuition," or

b) The financial and economic outlook in the U.S. in 2015 is not just worse than 1994, it is worse than any previous time in recorded U.S. financial history since 1870. Worse than the Long Depression of 1873-96, Panic of 1907, Great Depression of 1929-1945, Great Recession of 2008-2009, worse than any of those.

Of course, there's no problem if those who present SWR studies are simply doing pleasant calculations for the intellectual joy of watching numbers dance, and have never seriously suggested it as financial advice that anyone should act on.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by LadyGeek »

bengal22 had a duplicate thread, which I've merged into here. The combined thread is in the Personal Finance (Not Investing) forum (retirement planning).

The wiki has some background info: Safe withdrawal rates
Wiki wrote:* October 1994

The paper that started it all: Determining Withdrawal Rates Using Historical Data by William P. Bengen
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by Leesbro63 »

Rick Ferri says that he advises his clients to "spend the income"...dividends and interest from, I assume, balanced portfolios. That's my plan. And if things are going well and I want to splurge beyond that once in a while, then fine.
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Re: NYT article on 4% retirement

Post by Independent »

nisiprius wrote: The claim was "4% includes a fat margin of safety for all economic and market conditions ever previously experienced.
This seems a little too strong to me. I think of FireCalc as a "typical" backtesting calculator. It shows a 5% failure rate over 30 years. There are some past years when a new retiree couldn't sustain 4% over 30 years.

The question is whether it seems likely that we're in one of those years.
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Re: NYT article on 4% retirement

Post by midareff »

[quote="nisiprius"]We let these guys off too easily. The reduction in consensus estimates for "safe" or "sustainable" withdrawal rates between 1994 and 2015 invalidates the idea and methodology of trying to estimate these rates.

It does not take Monte Carlo simulation to say, "using real dollars, if my retirement portfolio earns 0% real, which is a fairly conservative assumption, and I withdraw equal amounts in real dollars every year, then I can provide for 20 years of 5% withdrawals, or 25 years at 4%, or 30 years at 3.33%."

That is the truth Nisi but you have omitted a very important consideration. While we know that the SS component of your retirement has a CPI-U COLA a simple traditional 3% inflation rate would have reduced your real dollars year by year so that your end withdrawals would be worth near 10% of what they had been in real dollar purchasing power. That would also make the significance of inflation risk very large for early retirement years.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by spectec »

Leesbro63 wrote:Rick Ferri says that he advises his clients to "spend the income"...dividends and interest from, I assume, balanced portfolios. That's my plan. And if things are going well and I want to splurge beyond that once in a while, then fine.
I like this advice. Rather than locking into a pre-determined withdrawal percentage which may or may not succeed (and failure may not be known until it's too late), it allows for changing conditions. Spending the income forces one to look at what's actually happening rather than any theoretical plan which isn't necessarily connected to real-world events & circumstances.

Plus, if one chooses to splurge once in a while, they are aware of the potential consequences and never get blind-sided. I've seen a few situations where the retiree was saying they don't know where it all went. This was after-the-fact and much too late to take any meaningful corrective action. Even a ship on auto-pilot requires constant monitoring & occasional manual intervention.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by Sidney »

Leesbro63 wrote:Rick Ferri says that he advises his clients to "spend the income"...dividends and interest from, I assume, balanced portfolios. That's my plan. And if things are going well and I want to splurge beyond that once in a while, then fine.
This means you need to have discipline to maintain an appropriate allocation and not move stuff around to chase income.
I always wanted to be a procrastinator.
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Re: NYT article on 4% retirement

Post by z0r »

midareff wrote:That is the truth Nisi but you have omitted a very important consideration. While we know that the SS component of your retirement has a CPI-U COLA a simple traditional 3% inflation rate would have reduced your real dollars year by year so that your end withdrawals would be worth near 10% of what they had been in real dollar purchasing power. That would also make the significance of inflation risk very large for early retirement years.
The math for a 30 year period at 3% is 1/((1+.03)^30) = 41% purchasing power remaining
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by DaufuskieNate »

Leesbro63 wrote:Rick Ferri says that he advises his clients to "spend the income"...dividends and interest from, I assume, balanced portfolios. That's my plan. And if things are going well and I want to splurge beyond that once in a while, then fine.
In following this advice, one needs a solid understanding of what "income" is. Sounds easy at first. But, if you spend the interest payments on a premium bond, you are spending some of your invested capital. Same applies to a lot of funds that routinely distribute both capital and income. There are also some who use this philosophy to write options on stocks they own in order to improve their "income." What they are really doing is cashing in on future capital gains, often in a tax inefficient manner.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by spectec »

Great points. But that looks a lot like engaging in irrational behavior in order to produce phantom "income" when in actuality they are either taking on more risk/transaction costs, or eroding principal through the back door. Either of those self-delusional behaviors can occur no matter what sort of withdrawal method one employs.

But I see what you're getting at. It is extremely important to have a rational and financially sound definition of "income".
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by musbane »

Nisiprious stated that with a zero % real return, 4% / year would last 25 years. This is true. There is no degradation due to inflation.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by DaufuskieNate »

musbane wrote:Nisiprious stated that with a zero % real return, 4% / year would last 25 years. This is true. There is no degradation due to inflation.
True enough. But if inflation takes off over the next 25 years, what are they odds that some portfolios will have a negative real return?
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by DaufuskieNate »

spectec wrote:But that looks a lot like engaging in irrational behavior in order to produce phantom "income" when in actuality they are either taking on more risk/transaction costs, or eroding principal through the back door. Either of those self-delusional behaviors can occur no matter what sort of withdrawal method one employs.
I agree with this statement, especially as it pertains to strategies like option writing. On the other hand, premium bonds are very common in the market today with these low market interest rates. It would be pretty easy to treat those coupon payments as 100% income. I bet more than a few brokers wouldn't even be able to understand the concept.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by HomerJ »

JMacDonald wrote:NY Times article: http://www.nytimes.com/2015/05/09/your- ... -news&_r=0
“Because interest rates are so low now, while stock markets are also very highly valued, we are in uncharted waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases,” said Wade Pfau, a professor of retirement income at the American College of Financial Services and another researcher within the financial planning community.
Wade Pfau has been saying that since 2011-2012... Anyone who retired in the last 3 years has had no problem withdrawing 4%... :)

My opinion is that 4% worked during the Great Depression and World War II, and 3.7% worked even during 70s where we had double-digit inflation, rising interest rates, and a stock market that went nowhere for 16 years (DOW was 1000 in 1966, and still 1000 in 1982).

So people saying that going forward we should drop to 3% or even 2.5% are basically predicting the next 20-30 years will be absolutely horrible, economically speaking... Worse than anything we've ever seen in the last 150 years.

Me, I see 1 billion Chinese and Indians joining the middle-class over the next 20 years, and all wanting to buy Cokes and washing machines.
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Re: NYT article on 4% retirement

Post by HomerJ »

nisiprius wrote:The financial and economic outlook in the U.S. in 2015 is not just worse than 1994, it is worse than any previous time in recorded U.S. financial history since 1870. Worse than the Long Depression of 1873-96, Panic of 1907, Great Depression of 1929-1945, Great Recession of 2008-2009, worse than any of those
This is exactly my point.

Makes me laugh that people can say this with a straight face... I guess they don't realize that is what they are saying when they recommend 2.5% or 3% SWRs.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by TheEternalVortex »

DaufuskieNate wrote:
musbane wrote:Nisiprious stated that with a zero % real return, 4% / year would last 25 years. This is true. There is no degradation due to inflation.
True enough. But if inflation takes off over the next 25 years, what are they odds that some portfolios will have a negative real return?
30-year TIPS yield 0.9%, so you should be good to go if that meets your needs.
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Re: NYT article on 4% retirement

Post by midareff »

z0r wrote:
midareff wrote:That is the truth Nisi but you have omitted a very important consideration. While we know that the SS component of your retirement has a CPI-U COLA a simple traditional 3% inflation rate would have reduced your real dollars year by year so that your end withdrawals would be worth near 10% of what they had been in real dollar purchasing power. That would also make the significance of inflation risk very large for early retirement years.
The math for a 30 year period at 3% is 1/((1+.03)^30) = 41% purchasing power remaining
My bad. Don't have any interest in living on that % either although a 3% adjustment for 30 years against the same base year is a 10% residual.
Last edited by midareff on Sun May 10, 2015 6:59 am, edited 1 time in total.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by itstoomuch »

I estimate that at RMD we (65/68) will have a perpetual 5%-5.5%, SWR, regardless of markets. The taxation on this SWR will be quite high. Most of working lives we were in the lowest brackets.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by 1210sda »

itstoomuch wrote:I estimate that at RMD we (65/68) will have a perpetual 5%-5.5%, SWR, regardless of markets. The taxation on this SWR will be quite high. Most of working lives we were in the lowest brackets.
:oops:
Don't forget "RMD" does not mean you have to spend it, just withdraw it from your tax adv account.

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Re: NYT article on 4% retirement

Post by Cosmo »

z0r wrote:
midareff wrote:That is the truth Nisi but you have omitted a very important consideration. While we know that the SS component of your retirement has a CPI-U COLA a simple traditional 3% inflation rate would have reduced your real dollars year by year so that your end withdrawals would be worth near 10% of what they had been in real dollar purchasing power. That would also make the significance of inflation risk very large for early retirement years.
The math for a 30 year period at 3% is 1/((1+.03)^30) = 41% purchasing power remaining
Either way, this is just a valid reason for delaying SS.

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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by rgs92 »

The main point of these new studies is that low interest rates change everything for the worse for your portfolio over time so you need to withdraw less. But the upside is that
1. Inflation is lower so you will need to withdraw less over time to keep up with it;
2. Stocks will be higher because companies have reduced borrowing expenses;
3. Overall real growth and productivity in the economy will be helped, further helping capital gains.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by lack_ey »

HomerJ wrote:
nisiprius wrote:The financial and economic outlook in the U.S. in 2015 is not just worse than 1994, it is worse than any previous time in recorded U.S. financial history since 1870. Worse than the Long Depression of 1873-96, Panic of 1907, Great Depression of 1929-1945, Great Recession of 2008-2009, worse than any of those
This is exactly my point.

Makes me laugh that people can say this with a straight face... I guess they don't realize that is what they are saying when they recommend 2.5% or 3% SWRs.
On the other hand, you'd have run broke in many other countries over some 30-year periods, even ignoring the cases that involve devastation from world wars. Of course, these days this can be hedged against with global diversification.

And obviously most people don't actually follow static withdrawal strategies. That's just a convenience for modeling and research and a baseline to understand.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by rgs92 »

And furthermore, if you are in a situation where you have an income stream from pensions or annuities which are fixed (not inflation adjusted), a low-interest / low inflation environment is just what the doctor ordered.
I think a lot of people are in this situation, with a mix of fixed income streams plus a portfolio (myself included here).
This means you can be a *little* more generous with what you take from your portfolio, and take some more risk.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by Christine_NM »

rgs92 wrote:And furthermore, if you are in a situation where you have an income stream from pensions or annuities which are fixed (not inflation adjusted), a low-interest / low inflation environment is just what the doctor ordered.
I think a lot of people are in this situation, with a mix of fixed income streams plus a portfolio (myself included here).
This means you can be a *little* more generous with what you take from your portfolio, and take some more risk.
Right. Many retirees can't complain about low rates and stable prices. We should save our breath to complain if/when hyperinflation ever takes hold. In a very few years new retirees will not remember how life-changing inflation can be -- we will have forgotten what the real enemy is.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by HomerJ »

lack_ey wrote:
HomerJ wrote:
nisiprius wrote:The financial and economic outlook in the U.S. in 2015 is not just worse than 1994, it is worse than any previous time in recorded U.S. financial history since 1870. Worse than the Long Depression of 1873-96, Panic of 1907, Great Depression of 1929-1945, Great Recession of 2008-2009, worse than any of those
This is exactly my point.

Makes me laugh that people can say this with a straight face... I guess they don't realize that is what they are saying when they recommend 2.5% or 3% SWRs.
On the other hand, you'd have run broke in many other countries over some 30-year periods, even ignoring the cases that involve devastation from world wars. Of course, these days this can be hedged against with global diversification.

And obviously most people don't actually follow static withdrawal strategies. That's just a convenience for modeling and research and a baseline to understand
Yes, spending less if times are bad is an easy hedge... Usually I assume that when people say 4% withdrawal rate, they are not talking about bare survival, but that 4% includes vacations, and eating out, and tickets to events, and a new car now and then... All those things can be cut back a bit if necessary...

There is also an option of buying a SPIA if your portfolio is failing...

If you retire at 62, and at 77, you see your portfolio has dropped by 50%, you can use a big chunk of the money to buy a 8%-9% SPIA... Sure, your heirs get nothing, but it's a legitimate Plan B.

And of course, the elephant in the room no one wants to talk about is your odds of even living 30 years in retirement. Not that many people make it into their 90s. Enough do, that your plan should reasonably try to last 30+ years, but a lot of things have to go wrong for a 4% withdrawal rate to leave you totally broke late in retirement.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by Dandy »

Any withdrawal strategy is really only a starting point. If you think there is a withdrawal plan you can pick at 60 that will serve you to age 90 -- good luck. Returns, sequence of returns, interest rates, inflation, deflation, changes in personal expenses, taxes etc. are among the major issues we will all have to deal with.

So pick a reasonable plan but every once in awhile check your health, expenses and portfolio to see what adjustments need to be made. Minor adjustments made early usually have a large positive effect. Frankly, I believe that is what most people do whether they plan to or not. In a bad year they cut back on discretionary spending almost without thought. In a good year they spend a bit more.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by Will do good »

HomerJ wrote:
lack_ey wrote:
HomerJ wrote:
nisiprius wrote:The financial and economic outlook in the U.S. in 2015 is not just worse than 1994, it is worse than any previous time in recorded U.S. financial history since 1870. Worse than the Long Depression of 1873-96, Panic of 1907, Great Depression of 1929-1945, Great Recession of 2008-2009, worse than any of those
This is exactly my point.

Makes me laugh that people can say this with a straight face... I guess they don't realize that is what they are saying when they recommend 2.5% or 3% SWRs.
On the other hand, you'd have run broke in many other countries over some 30-year periods, even ignoring the cases that involve devastation from world wars. Of course, these days this can be hedged against with global diversification.

And obviously most people don't actually follow static withdrawal strategies. That's just a convenience for modeling and research and a baseline to understand
Yes, spending less if times are bad is an easy hedge... Usually I assume that when people say 4% withdrawal rate, they are not talking about bare survival, but that 4% includes vacations, and eating out, and tickets to events, and a new car now and then... All those things can be cut back a bit if necessary...

There is also an option of buying a SPIA if your portfolio is failing...

If you retire at 62, and at 77, you see your portfolio has dropped by 50%, you can use a big chunk of the money to buy a 8%-9% SPIA... Sure, your heirs get nothing, but it's a legitimate Plan B.

And of course, the elephant in the room no one wants to talk about is your odds of even living 30 years in retirement. Not that many people make it into their 90s. Enough do, that your plan should reasonably try to last 30+ years, but a lot of things have to go wrong for a 4% withdrawal rate to leave you totally broke late in retirement.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by nisiprius »

My point is: given the various uncertainties we've all been discussing, how does it add any value to do any quantitative simulations and come up with numbers like "3.7%," or "4.3% if you follow my newly proposed glide path that increases stock allocation in the first 7 years of retirement, then reduces it again in," or "4.2% if you add the square root of the moving average of the last 7 years' return," etc.

2% is probably safe. 6% probably isn't. Any plan is safer if you cut back in bad times than if you go on blindly spending by the rule. But we knew all that already.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by jebmke »

I agree, decimal point is spurious accuracy.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by HomerJ »

nisiprius wrote:2% is probably safe. 6% probably isn't. Any plan is safer if you cut back in bad times than if you go on blindly spending by the rule. But we knew all that already.
My point is that 4% is already accounting for "worst case"... Just like you said, 4% wasn't generated from the good times in the past... 6% would have worked fine for many of the 30-year periods in the last 100 years... 6% may actually "probably" be safe... (i.e. more than 50% of the time, 6% works)

And on the other extreme... If 2% isn't safe, then no one is safe... If 2% doesn't work, then we're in a world where money doesn't matter (Mad Max times).
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by john94549 »

One thing these studies do not address, insofar as I can tell, is how to "calculate" a SWR for folks who defer touching their stock/bond portfolios until age 85 or thereabouts. I might be wrong, but the standard assumption seems to be folks will "withdraw" across their portfolio as a whole at age 65 or 66. Perhaps this is a flawed assumption.

There's no rule that one has to withdraw a certain percent from all assets. We plan to fund the first fifteen years or so of retirement solely from IRA CDs (age 70 - 85). Our balanced stock/bond funds should click right along until we're 85, should we live that long. My tummy tells me a SWR at that point might be the balance/15 years, since no one in either of our families has lived past 98 1/2.

Of course, even this plan needs a "Plan B" (for assisted living/LTC or whatever), which we have. My wife thinks I over-analyze this stuff, then complains about running out of money.

Can't win, I guess.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by Independent »

john94549 wrote:One thing these studies do not address, insofar as I can tell, is how to "calculate" a SWR for folks who defer touching their stock/bond portfolios until age 85 or thereabouts..
The "studies" may not talk about that, but the calculators are flexible.
For example, if I ask FireCalc to give me the highest initial withdrawal with a 95% success rate, over a 15 year horizon, it comes back with 6.2%.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by john94549 »

Independent wrote:
For example, if I ask FireCalc to give me the highest initial withdrawal with a 95% success rate, over a 15 year horizon, it comes back with 6.2%.
Obviously, that was my "back-of-the-envelope" calculation as well. That said, it might assuage my wife's concerns.

Thank you kindly.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by HomerJ »

john94549 wrote:One thing these studies do not address, insofar as I can tell, is how to "calculate" a SWR for folks who defer touching their stock/bond portfolios until age 85 or thereabouts.
Well, that's because no one who waits until 85 to pull money out should even worry about withdrawal rates...

Spend what you want at that age...

Since you could probably buy a SPIA paying 15% at that point, you could easily blow through 2/3 of your money if you wanted, and then buy a SPIA that would give you the equivalent of a 5% SWR on the original amount (and that's AFTER you blow through 2/3 of your nest-egg for fun).

(Actually, that's not entirely true... Don't insurance companies stop selling SPIAs once you get TOO old?)
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by trueblueky »

HomerJ wrote:
john94549 wrote:One thing these studies do not address, insofar as I can tell, is how to "calculate" a SWR for folks who defer touching their stock/bond portfolios until age 85 or thereabouts.
Well, that's because no one who waits until 85 to pull money out should even worry about withdrawal rates...

Spend what you want at that age...

Since you could probably buy a SPIA paying 15% at that point, you could easily blow through 2/3 of your money if you wanted, and then buy a SPIA that would give you the equivalent of a 5% SWR on the original amount (and that's AFTER you blow through 2/3 of your nest-egg for fun).

(Actually, that's not entirely true... Don't insurance companies stop selling SPIAs once you get TOO old?)
I put plugged 90-year-old male with $100,000 into immediateannuities.com and it said $1594/month.

I don't know why an insurance company would stop selling an annuity because of old age, but there may be an extreme advanced age that their actuaries haven't studied.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by randomguy »

HomerJ wrote:
john94549 wrote:One thing these studies do not address, insofar as I can tell, is how to "calculate" a SWR for folks who defer touching their stock/bond portfolios until age 85 or thereabouts.
Well, that's because no one who waits until 85 to pull money out should even worry about withdrawal rates...

Spend what you want at that age...

Since you could probably buy a SPIA paying 15% at that point, you could easily blow through 2/3 of your money if you wanted, and then buy a SPIA that would give you the equivalent of a 5% SWR on the original amount (and that's AFTER you blow through 2/3 of your nest-egg for fun).

(Actually, that's not entirely true... Don't insurance companies stop selling SPIAs once you get TOO old?)
I doubt it. You might get a SPIA that pays out 15%. It will not be inflation adjusted. If that 85 year old turns into a 100 year old (yeah a 1 in 1000chance), it might matter. It gets even worse for the people think annuitizing at 75 is some magic bullet. They now run the risk of having 25 years of inflation eating up them. Maybe the historically low inflation of the last 20 years is here to stay. Maybe we return to the historical norms. Do you want to bet your retirement on it?
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by HomerJ »

randomguy wrote:
HomerJ wrote:
john94549 wrote:One thing these studies do not address, insofar as I can tell, is how to "calculate" a SWR for folks who defer touching their stock/bond portfolios until age 85 or thereabouts.
Well, that's because no one who waits until 85 to pull money out should even worry about withdrawal rates...

Spend what you want at that age...

Since you could probably buy a SPIA paying 15% at that point, you could easily blow through 2/3 of your money if you wanted, and then buy a SPIA that would give you the equivalent of a 5% SWR on the original amount (and that's AFTER you blow through 2/3 of your nest-egg for fun).

(Actually, that's not entirely true... Don't insurance companies stop selling SPIAs once you get TOO old?)
I doubt it. You might get a SPIA that pays out 15%. It will not be inflation adjusted. If that 85 year old turns into a 100 year old (yeah a 1 in 1000chance), it might matter. It gets even worse for the people think annuitizing at 75 is some magic bullet. They now run the risk of having 25 years of inflation eating up them. Maybe the historically low inflation of the last 20 years is here to stay. Maybe we return to the historical norms. Do you want to bet your retirement on it?
Yes, of course I want to "bet my retirement" on it... I'm betting that I will not live to 100, AND returns will not be so bad that 4% SWR fails, AND that inflation will not be so high that my SPIA will be worthless after 25 years. Because all those things have to happen for me to lose my bet.

And even if I lose that bet, at least I had a very good retirement up until 90 or so, and slowly had to cut back as I approached 100 and ended up depending just on Social Security (I guess that could disappear too, so I better plan for that too!)

See, the only way to NOT "bet my retirement" on it, is to not retire at all, I guess... I suppose I could work until I'm 75 so I can manage a 1.5% SWR in retirement, even though the odds are pretty high I'll drop dead at 78 and barely get to enjoy any retirement at all...

Don't you have to take into account THOSE odds as well? The odds that trying to save enough just in case you live to 100, AND you retire into the worse economy in the last 150 years in the U.S., AND inflation sky-rockets, means you work 10-15 years longer than you probably needed to?
Last edited by HomerJ on Sun May 10, 2015 12:48 am, edited 2 times in total.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by HomerJ »

trueblueky wrote:I put plugged 90-year-old male with $100,000 into immediateannuities.com and it said $1594/month.
19%.... nice.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by lack_ey »

Just saying, but there are SPIAs with payouts that adjust for inflation. Supposedly the pricing is a bit steep (more than the fair rate suggested by inflation estimates), but that's possibly because of the relative unpopularity these days. Maybe it's different in the future.
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by Ron »

HomerJ wrote:
trueblueky wrote:I put plugged 90-year-old male with $100,000 into immediateannuities.com and it said $1594/month.
19%.... nice.
Don't forget that the quote includes a return of a portion of the premium you paid (your own money), so it really isn't a 19% return when calculated strictly as an IRR.

Just as a comparison, my life/joint life SPIA purchased at age 59 (when I retired) has an IRR of 4.79%. It was easy to calculate, plugging into Excel the premium paid, the monthly payment, and the number of guaranteed years of payout. That 4.79% may increase but only if I/wife/both live longer than the 28 year life term of the contract. In that case, the IRR increases until we both are gone since payments continue (at 100%) if either/both live longer than age 87. Since neither of us will be around, we won't worry about calculation of the final actual return :twisted: . If we both pass before age 87, payments continue to our contingent beneficiary (our son).

As far as the discussion of inflation, that was a concern upon my purchase of the SPIA. However in my case there were three reasons to purchase one at such a "young" age. First, it acted as a traditional company pension plan - since I did not have one. Most non-governmental defined benefit plans do not have a COLA, and do lose purchasing power over time. A non-COLA'ed SPIA acts in the same manner. The second reason was that I/wife wished to delay our respective SS claims until age 70. However, we did not want to only draw from our retirement portfolios for income and hold more cash than needed just to ensure that downturns in the market would adversely affect our retirement income. The SPIA helps in that manner. The third reason is that since most of our retirement portfolio is held in tax-deferred vehicles, this allows us a period of time (11 years for me, six for my wife) to draw down from our respective retirement portfolios and reduce the amount of anticipated RMD's at age 70.5 while the SPIA removes the amount of the premium from RMD consideration in the future.

BTW, as it turns out, inflation has not been much of a factor in our plan. While I did have a concern in 2007 when the SPIA was purchased upon my retirement at age 59 (since I/we lived through the early '80's), we looked at it as a marginal risk. Since the SPIA was going to allow us to "trade up" to a COLA annuity (i.e. SS) without major risk to our total retirement investments and we will look at the SPIA as just "icing on the cake" when added to SS, we feel it is/was a good financial decision. BTW, we both collect age 70 SS in just under three years, while my wife currently collects a 50% spousal benefit.

FWIW,

- Ron
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Re: New Math for Retirees and the 4% Withdrawal Rule

Post by dbr »

I wonder why these discussions do not dwell more on the risk of telling people they have to work longer/have more money than they really do in order to retire. What is the cost to a lifetime of working to age 70 when one might have retired at age 60? It might be a nice "ultra-safety" concept to say 2.5% is the new safe, but when that translates into you need $1.6 million to retire instead of $1 million, the issue is not insignificant.

But then, that circles back to the fact that studying the dynamics of portfolios and actually planning a retirement are two different things.
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Re: NYT article on 4% retirement

Post by grayfox »

nisiprius wrote:We let these guys off too easily. The reduction in consensus estimates for "safe" or "sustainable" withdrawal rates between 1994 and 2015 invalidates the idea and methodology of trying to estimate these rates.
While taking a couple of Stanford courses on Retirement & Pensions and Investing, I learned that most financial economists scoff at rules of thumb like the "4% Rule" and "Safe Withdrawal Rate". It's simply impossible to take reliable inflation-adjusted withdrawals from a portfolio of assets with fluctuating prices and unknown future returns, e.g. a stock and bond portfolio.

When Stanford professors and Nobel laureates, who are all way smarter and more knowledgable than me, and spend decades studying these things, say that 4% Rule is a unsound, that's good enough for me.

It's long since time to put those ideas into the dustbin.
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Re: NYT article on 4% retirement

Post by Leesbro63 »

grayfox wrote:
nisiprius wrote:We let these guys off too easily. The reduction in consensus estimates for "safe" or "sustainable" withdrawal rates between 1994 and 2015 invalidates the idea and methodology of trying to estimate these rates.
While taking a couple of Stanford courses on Retirement & Pensions and Investing, I learned that most financial economists scoff at rules of thumb like the "4% Rule" and "Safe Withdrawal Rate". It's simply impossible to take reliable inflation-adjusted withdrawals from a portfolio of assets with fluctuating prices and unknown future returns, e.g. a stock and bond portfolio.

When Stanford professors and Nobel laureates, who are all way smarter and more knowledgable than me, and spend decades studying these things, say that 4% Rule is a unsound, that's good enough for me.

It's long since time to put those ideas into the dustbin.
This might be true. But in the real world, what are a zillion current and future retirees to do? There HAS to be SOME rule of thumb from which to start. We know the SWR isn't 10% and we know that no one would do it if it was 1%. So is the answer 7%? 2%? There HAS to be some approx place to start.
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Re: NYT article on 4% retirement

Post by midareff »

Leesbro63 wrote:
grayfox wrote:
nisiprius wrote:We let these guys off too easily. The reduction in consensus estimates for "safe" or "sustainable" withdrawal rates between 1994 and 2015 invalidates the idea and methodology of trying to estimate these rates.
While taking a couple of Stanford courses on Retirement & Pensions and Investing, I learned that most financial economists scoff at rules of thumb like the "4% Rule" and "Safe Withdrawal Rate". It's simply impossible to take reliable inflation-adjusted withdrawals from a portfolio of assets with fluctuating prices and unknown future returns, e.g. a stock and bond portfolio.

When Stanford professors and Nobel laureates, who are all way smarter and more knowledgable than me, and spend decades studying these things, say that 4% Rule is a unsound, that's good enough for me.

It's long since time to put those ideas into the dustbin.
This might be true. But in the real world, what are a zillion current and future retirees to do? There HAS to be SOME rule of thumb from which to start. We know the SWR isn't 10% and we know that no one would do it if it was 1%. So is the answer 7%? 2%? There HAS to be some approx place to start.
When the future world is full of unknowns and unknowables a rule of thumb vanishes into a world of methods based on speculation. The speculation is, among others; how long you and your wife/partner will live, the returns of the future markets, inflation, war, flood, famine and pestilence, your desire to leave an inheritance, your real long term health care costs and so on. Every person's situation is and will be different so the only rule of thumb possible is be flexible. You might get someuseful information from Jim Otar's book, Unveiling the Retirement Myth. I understand it is available as a download from his website for a few $.
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Re: NYT article on 4% retirement

Post by nisiprius »

Leesbro63 wrote:...This might be true. But in the real world, what are a zillion current and future retirees to do? There HAS to be SOME rule of thumb from which to start. We know the SWR isn't 10% and we know that no one would do it if it was 1%. So is the answer 7%? 2%? There HAS to be some approx place to start.
In the real world, what do people do all of their lives before they retire? Do they decide how much they can afford to spend based on Monte Carlo simulations of the average rate and standard deviation of salary growth of radiology technicians in Rochester, Minnesota and then stick to it no matter how much they actually made last year?

Or, do they make intelligent guesses based on their financial intuition about short-term income prospects, while constantly adjusting on the spending side of the equation?

Sure, there's a rule of thumb, as I'd said before. Just take the size of your portfolio and divided it by your chosen guess for maximum lifespan. That's 3-1/3 percent for a 30-year retirement. Any difference between that and 4% or 3.8% or 4.3% or whatever the researchers say is within the margin of error.

The only thing SWR studies do show is that the claims like 7% made by Peter Lynch in 1995, or 8% by Dave Ramsey today, are crazy-optimistic.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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