2.5% Withdrawal for 50 Years With 50/50 Portfolio?

[VictoriaF]

No, I would not be comfortable. The stock market has helped me to accumulate the assets. But I would not rely on it paying my living expenses for the rest of my life.

Victoria

It's very reassuring to have SS and/or a good pension for part of retirement expenses, but do you really think a 2.5% withdrawal rate is unsafe, even for a long retirement? If so, why do you think that?

The unsafe part is not the 2.5% withdrawal rate but the 50/50 portfolio stipulated by the OP. He might fund his retirement with a mix of TIPS and annuities and keep the leftovers in the stock market.

Victoria

Okay, so you believe a 2.5% withdrawal rate over 50 years is not safe enough. I don't know that I agree but wanted to make sure I understood. Would 2.5% be safe for 30 years? 40 years? Would 1% be safe for 50 years? You sort of bypassed my question, by arguing for creating a "safe" income floor (which I don't necessarily disagree with, I just wanted to get back to what is a reasonable withdrawal).

Is it the duration or the withdrawal rate you don't like?

How much would you put in TIPs? Without bothering to check, I"m pretty sure trying to buy SPIAs at age 40 wouldn't work well. So the "safe" money would have to be TIPs, I think.

I am not looking at the withdrawal rate. I am looking at the safety of the assets underlying one's retirement. If the OP could create a 50-year TIPS ladder paying him $75k/year he would have a safe retirement. If the OP purchased an SPIA paying him $75k with generous inflation adjustments, he would have a safe retirement.

SWR is a heuristic for getting a ballpark figure for how much you need to retire. SWR is not a good heuristic for assuming that you will have a financialy secure retirement. Stocks are not safe. No amount of the past history will make them safe. No amount of academic papers will make them safe. When you pull the plug and retire for good, you need safe money to carry you for your planned length of retirement. And you better plan for a longer retirement than your statistical life expectancy.

Victoria

[MikeG62]

No, I would not be comfortable. The stock market has helped me to accumulate the assets. But I would not rely on it paying my living expenses for the rest of my life.

Victoria

It's very reassuring to have SS and/or a good pension for part of retirement expenses, but do you really think a 2.5% withdrawal rate is unsafe, even for a long retirement? If so, why do you think that?

The unsafe part is not the 2.5% withdrawal rate but the 50/50 portfolio stipulated by the OP. He might fund his retirement with a mix of TIPS and annuities and keep the leftovers in the stock market.

Victoria

Okay, so you believe a 2.5% withdrawal rate over 50 years is not safe enough. I don't know that I agree but wanted to make sure I understood. Would 2.5% be safe for 30 years? 40 years? Would 1% be safe for 50 years? You sort of bypassed my question, by arguing for creating a "safe" income floor (which I don't necessarily disagree with, I just wanted to get back to what is a reasonable withdrawal).

Is it the duration or the withdrawal rate you don't like?

How much would you put in TIPs? Without bothering to check, I"m pretty sure trying to buy SPIAs at age 40 wouldn't work well. So the "safe" money would have to be TIPs, I think.

I am not looking at the withdrawal rate. I am looking at the safety of the assets underlying one's retirement. If the OP could create a 50-year TIPS ladder paying him $75k/year he would have a safe retirement. If the OP purchased an SPIA paying him $75k with generous inflation adjustments, he would have a safe retirement.

SWR is a heuristic for getting a ballpark figure for how much you need to retire. SWR is not a good heuristic for assuming that you will have a financialy secure retirement. Stocks are not safe. No amount of the past history will make them safe. No amount of academic papers will make them safe. When you pull the plug and retire for good, you need safe money to carry you for your planned length of retirement. And you better plan for a longer retirement than your statistical life expectancy.

Victoria

SPIA's are highly likely to pay out, but that does not mean they are absolutely and unequivocally "safer" than a broadly diversified investment portfolio (same goes for pension obligations).

It comes down to risk retention vs. risk transfer as Michael Kitces explains quite well in this article...

https://www.kitces.com/blog/even-safety ... retention/

A few key quotes,

"...just because the risk (and/or the value) of a bond, annuity, or defined benefit plan payment is not continuously adjusted up and down on a daily basis and “marked to market” doesn’t make it unequivocally “safe” either. The odds that everything works out OK using insurance companies and defined benefits may still be highly probable… but that’s still a probability that the insurance/annuity company won’t default. And in fact, given that there is at least some probability any random insurance company might have failed in the past century, while a 4% “safe” withdrawal rate has never failed in US history, the dividing lines of “probability” versus “safety” don’t appear to be mutually exclusive at all! Either can have a probability of failure..."

“...markets and the economy in the aggregate may not support [a given] spending level in the long run, but ultimately that remains a concern of both risk retention and risk transfer strategies, for the simple reason that again both are subject to the same capital markets and the same exogenous shocks and events. The low-interest-rate environment damaging retirees today is damaging insurance companies as well, and the kinds of Great Depression and World War events that have been destructive to safe withdrawal rates throughout history around the globe have been similarly damaging to insurance companies, corporations, and governments. In other words, while both strategies can be managed in a manner to make the risks very very low, the remaining risks that can’t be “perfectly” eliminated are actually highly correlated across both philosophies!"

[infotrader]

I wonder that, given the historical return of the market and you do it correctly, is it possible to assume that you can withdraw from this portfolio permanently, I mean: having the same portfolio balance or even more after 50 years?

[michaeljc70]

I wonder that, given the historical return of the market and you do it correctly, is it possible to assume that you can withdraw from this portfolio permanently, I mean: having the same portfolio balance or even more after 50 years?

I don't have specific data on that in front of me. I have read that when you can make it 50 years, the chances are very close to (if not the same) as withdrawing in perpetuity.

Using the 4% SWR over 3o years, there are some interesting stats:

“In fact, even when starting with a 4% initial withdrawal rate, less than 10% of the time does the retiree ever finish with less than the starting principal. And it has only happened four times in the ‘modern era’ of markets: for retirees who started a 30-year retirement time horizon in 1929, 1937, 1965, and 1966.”

“Over 2/3rds of the time the retiree finishes the 30-year time horizon still having more-than-double their starting principal. The median wealth at the end – on top of the 4% rule with inflation-adjusted spending – is almost 2.8X starting principal. In other words, it’s overwhelmingly more likely that retirees will have opportunities to ratchet their spending higher than a 4% rule, than ever need to spend that conservatively in the first place!”

https://www.madfientist.com/safe-withdrawal-rate/

[Da5id]

I wonder that, given the historical return of the market and you do it correctly, is it possible to assume that you can withdraw from this portfolio permanently, I mean: having the same portfolio balance or even more after 50 years?

Sure. A 2.5% SWR historically is perpetual. e.g., https://portfoliocharts.com/portfolio/classic-60-40/ and look at the "perpetual" line in the graph, it settles in at about 3.5%. But the number of 50 year periods is pretty limited, and they mostly overlap. Whether it is perpetual going forward for someone retiring today can't be known.

[wrongfunds]

If the OP purchased an SPIA paying him $75k with generous inflation adjustments, he would have a safe retirement.

MikeG already wrote a nice reply about it.

My question to the BH community is "why there is so much emphasis on safety without really understanding the basic underlying reasoning as to how and who is providing it? There are really no guarantees in the life regardless of number of trailing zeros on your portfolio balance".

Every single topic about retirement and/or spending and/or portfolio requirement gets very contentious because understanding of this aspect is so elusive.

[HomerJ]

Using the 4% SWR over 3o years, there are some interesting stats:

“In fact, even when starting with a 4% initial withdrawal rate, less than 10% of the time does the retiree ever finish with less than the starting principal. And it has only happened four times in the ‘modern era’ of markets: for retirees who started a 30-year retirement time horizon in 1929, 1937, 1965, and 1966.”

“Over 2/3rds of the time the retiree finishes the 30-year time horizon still having more-than-double their starting principal. The median wealth at the end – on top of the 4% rule with inflation-adjusted spending – is almost 2.8X starting principal. In other words, it’s overwhelmingly more likely that retirees will have opportunities to ratchet their spending higher than a 4% rule, than ever need to spend that conservatively in the first place!”

https://www.madfientist.com/safe-withdrawal-rate/

This.

Look how well 4% (with a balanced stocks/bonds portfolio) has done in the past. And that includes the Great Depression years, and 60s-70s years where the stock market went nowhere for 16 years, interest rates went up, AND we had double-digit inflation for a couple of years.

2.5% that doesn't even represent bare-bones survival (the OP could cut back a bit if he needed to) is ridiculously conservative.

Like I said before, it's basically just living off your dividends. He probably wouldn't have to sell much principal at all each year.

[HomerJ]

A couple (male/female) who are 40 each can get 4.3% SPIA.

The OP could take half his money (split among multiple insurance companies) and guarantee himself a 2.15% withdrawal rate for life. ($64,000)

AND still have $1.5 million left over (throwing off $30,000 in dividends)

[onthecusp]

I'd be absolutely comfortable with that.

I'd expect to have over 4 million in 10 years and reassess my spending or giving upward.

Even after a 35% drawdown in a horrible market next year you would be under a 4% withdrawal going forward. At 50/50 it would be hard to lose 35% in one year.

[gr7070]

My question to the BH community is "why there is so much emphasis on safety without really understanding the basic underlying reasoning as to how and who is providing it?

Because safety is an emotional quality. It's no longer an objective discussion. One person's safety is another person's irrational reaction.

Like the person above suggesting that equites are unsafe, but annuities are safe. If AIG can go under any annuity can fail.

[dbr]

My question to the BH community is "why there is so much emphasis on safety without really understanding the basic underlying reasoning as to how and who is providing it?

Because safety is an emotional quality. It's no longer an objective discussion. One person's safety is another person's irrational reaction.

Like the person above suggesting that equites are unsafe, but annuities are safe. If AIG can go under any annuity can fail.

Yes, and one should take that into allowance. With annuities a person would probably not purchase everything from one company nor indeed all at the same time. There is still an element of luck regarding prevailing rates at the time one buys. One would not depend entirely on an annuity to deal with this proposal. One would not take CPI inflation as the given measure of what one's personal costs might become over time.

More than anything one would think about Plan B, what one might do if one falls short.

The whole thing is also a question of attitude. Is a poster asking for certain answers or about judgements? I think the OP is actually correct in asking for perspective regarding this proposal and that should not be turned into Jeremiads about how one must go to safe extremes or nothing.

[VictoriaF]

It's very reassuring to have SS and/or a good pension for part of retirement expenses, but do you really think a 2.5% withdrawal rate is unsafe, even for a long retirement? If so, why do you think that?

The unsafe part is not the 2.5% withdrawal rate but the 50/50 portfolio stipulated by the OP. He might fund his retirement with a mix of TIPS and annuities and keep the leftovers in the stock market.

Victoria

Okay, so you believe a 2.5% withdrawal rate over 50 years is not safe enough. I don't know that I agree but wanted to make sure I understood. Would 2.5% be safe for 30 years? 40 years? Would 1% be safe for 50 years? You sort of bypassed my question, by arguing for creating a "safe" income floor (which I don't necessarily disagree with, I just wanted to get back to what is a reasonable withdrawal).

Is it the duration or the withdrawal rate you don't like?

How much would you put in TIPs? Without bothering to check, I"m pretty sure trying to buy SPIAs at age 40 wouldn't work well. So the "safe" money would have to be TIPs, I think.

I am not looking at the withdrawal rate. I am looking at the safety of the assets underlying one's retirement. If the OP could create a 50-year TIPS ladder paying him $75k/year he would have a safe retirement. If the OP purchased an SPIA paying him $75k with generous inflation adjustments, he would have a safe retirement.

SWR is a heuristic for getting a ballpark figure for how much you need to retire. SWR is not a good heuristic for assuming that you will have a financialy secure retirement. Stocks are not safe. No amount of the past history will make them safe. No amount of academic papers will make them safe. When you pull the plug and retire for good, you need safe money to carry you for your planned length of retirement. And you better plan for a longer retirement than your statistical life expectancy.

Victoria

SPIA's are highly likely to pay out, but that does not mean they are absolutely and unequivocally "safer" than a broadly diversified investment portfolio (same goes for pension obligations).

It comes down to risk retention vs. risk transfer as Michael Kitces explains quite well in this article...

https://www.kitces.com/blog/even-safety ... retention/

A few key quotes,

"...just because the risk (and/or the value) of a bond, annuity, or defined benefit plan payment is not continuously adjusted up and down on a daily basis and “marked to market” doesn’t make it unequivocally “safe” either.

Continuous adjustment and asset safety are unrelated issues. Some financiers measure asset risk by the variance of their distribution over time, but variance is not a measure of safety.

The odds that everything works out OK using insurance companies and defined benefits may still be highly probable… but that’s still a probability that the insurance/annuity company won’t default. And in fact, given that there is at least some probability any random insurance company might have failed in the past century, while a 4% “safe” withdrawal rate has never failed in US history, the dividing lines of “probability” versus “safety” don’t appear to be mutually exclusive at all! Either can have a probability of failure..."

The fact that insurance companies may fail does not put them on the same level of risk as stock markets. Markets are far riskier.

Note that the alternatives I have listed were not limited to SPIA but also included TIPS and I Bonds, which are guaranteed by the U.S. government.

“...markets and the economy in the aggregate may not support [a given] spending level in the long run, but ultimately that remains a concern of both risk retention and risk transfer strategies, for the simple reason that again both are subject to the same capital markets and the same exogenous shocks and events. The low-interest-rate environment damaging retirees today is damaging insurance companies as well, and the kinds of Great Depression and World War events that have been destructive to safe withdrawal rates throughout history around the globe have been similarly damaging to insurance companies, corporations, and governments. In other words, while both strategies can be managed in a manner to make the risks very very low, the remaining risks that can’t be “perfectly” eliminated are actually highly correlated across both philosophies!"

The cited paragraph is full of demagoguery. Kitces uses aggressive language to push ideas that are nuanced and not universally true. His "simple" reason is not simple. The retiree and insurance companies are not "damaged." The events are not "destructive."

I am not interested in the opinions of Kitces and other financial experts, because financial expertise is a chimera. To earn their living financial experts have to keep coming up with new ideas and formulas, but these ideas have no value in planning one's retirement.

Victoria

[VictoriaF]

If the OP purchased an SPIA paying him $75k with generous inflation adjustments, he would have a safe retirement.

MikeG already wrote a nice reply about it.

My question to the BH community is "why there is so much emphasis on safety without really understanding the basic underlying reasoning as to how and who is providing it? There are really no guarantees in the life regardless of number of trailing zeros on your portfolio balance".

Every single topic about retirement and/or spending and/or portfolio requirement gets very contentious because understanding of this aspect is so elusive.

You omitted my name from the quote; I have inserted it above.

My question to you is "why do you take my statement and assign it to the BH community?"

Why do you assume that I, or other Bogleheads pursuing safety, do not understand how safety is provided?

Nobody is claiming that there are guarantees in life. My claim is that the stock market and other financial markets are risky, risks can show up in various forms, and nothing in the past history predicts the future performance.

Every Bogleheads topic brings up a variety of opinions, and that's the beauty of the Forum. Before my initial post in this thread, everybody was responding with "yes" to the OP. I was the first one to say "no" and explain why I am saying "no." The reason for my "no" is not to raise contention but to point out that safety should be provided by the safest means available. Markets are not such means.

Victoria

[TN_Boy]

A couple (male/female) who are 40 each can get 4.3% SPIA.

The OP could take half his money (split among multiple insurance companies) and guarantee himself a 2.15% withdrawal rate for life. ($64,000)

AND still have $1.5 million left over (throwing off $30,000 in dividends)

I haven't gotten a quote, but surely that 4.3% is not indexed to inflation?? After 30 years, $64,000 is worth more like $32,000 at 2% inflation. The stock/bond mix is likely to have an *expected* return after taxes and inflation much better than an SPIA (or TIPS).

We are of course arguing about the relative safety of the various approaches. Expected returns are not guaranteed.

[michaeljc70]

A few things that come to mind after reading the last few posts:

-There could be black swan type events that haven't happened before. Many other unforeseen things can happen on a micro or macro level. We could get hit by a bus or tsunami or meteor tomorrow. I prefer to focus on the positive and the odds that my money will be around longer than I will be.

-I am curious, those that are so concerned about safety, did you accumulate money using equities?

[wrongfunds]

guaranteed by the U.S. government

May I ask what happens if in 50 years the current world order changes? Or do you believe that given the history, such an event is impossible to occur?

[marcopolo]

If the OP purchased an SPIA paying him $75k with generous inflation adjustments, he would have a safe retirement.

MikeG already wrote a nice reply about it.

My question to the BH community is "why there is so much emphasis on safety without really understanding the basic underlying reasoning as to how and who is providing it? There are really no guarantees in the life regardless of number of trailing zeros on your portfolio balance".

Every single topic about retirement and/or spending and/or portfolio requirement gets very contentious because understanding of this aspect is so elusive.

You omitted my name from the quote; I have inserted it above.

My question to you is "why do you take my statement and assign it to the BH community?"

Why do you assume that I, or other Bogleheads pursuing safety, do not understand how safety is provided?

Nobody is claiming that there are guarantees in life. My claim is that the stock market and other financial markets are risky, risks can show up in various forms, and nothing in the past history predicts the future performance.

Every Bogleheads topic brings up a variety of opinions, and that's the beauty of the Forum. Before my initial post in this thread, everybody was responding with "yes" to the OP. I was the first one to say "no" and explain why I am saying "no." The reason for my "no" is not to raise contention but to point out that safety should be provided by the safest means available. Markets are not such means.

Victoria

I understand your desire to seek safety. You say stocks are not safe, OK no argument there. But, what makes you believe other investments (TIPS, iBonds) are safe(er).
Throughout history, many nations have defaulted on their debts, or did so effectively by devaluing their currency. Who is to say that will not happen in the US? It is not at all clear to me that a widely diversified global stock/bond portfolio is less safe than a TIPS/iBond/SPIA approach. If anything that seems to be putting all your eggs in one basket.

[VictoriaF]

If the OP purchased an SPIA paying him $75k with generous inflation adjustments, he would have a safe retirement.

MikeG already wrote a nice reply about it.

My question to the BH community is "why there is so much emphasis on safety without really understanding the basic underlying reasoning as to how and who is providing it? There are really no guarantees in the life regardless of number of trailing zeros on your portfolio balance".

Every single topic about retirement and/or spending and/or portfolio requirement gets very contentious because understanding of this aspect is so elusive.

You omitted my name from the quote; I have inserted it above.

My question to you is "why do you take my statement and assign it to the BH community?"

Why do you assume that I, or other Bogleheads pursuing safety, do not understand how safety is provided?

Nobody is claiming that there are guarantees in life. My claim is that the stock market and other financial markets are risky, risks can show up in various forms, and nothing in the past history predicts the future performance.

Every Bogleheads topic brings up a variety of opinions, and that's the beauty of the Forum. Before my initial post in this thread, everybody was responding with "yes" to the OP. I was the first one to say "no" and explain why I am saying "no." The reason for my "no" is not to raise contention but to point out that safety should be provided by the safest means available. Markets are not such means.

Victoria

I understand your desire to seek safety. You say stocks are not safe, OK no argument there. But, what makes you believe other investments (TIPS, iBonds) are safe(er).
Throughout history, many nations have defaulted on their debts, or did so effectively by devaluing their currency. Who is to say that will not happen in the US? It is not at all clear to me that a widely diversified global stock/bond portfolio is less safe than a TIPS/iBond/SPIA approach. If anything that seems to be putting all your eggs in one basket.

I agree with you about the perils of history. All assets and obligations of the tzarist Russia have disappeared after the Soviet Revolution of 1917. Note that when such monumental events happen, they don't selectively affect pensions and bonds, while leaving markets unperturbed. Everything suffers. And let's not forget about potential meteorite strikes, nuclear explosions and other catastrophic events that would eradicate everything.

My main point is not that TIPS and I Bonds are absolutely safe; they are much safer, in relative terms, than stocks. If I want to plan a safe 50-year retirement, meaning that I don't want to depend on a paying job for my expenses, I will rely on the safest means available to me for the necessary expenses. And I will invest the assets remaining after my relative safety has been provisioned.

I agree with you about diversification. Depending on one's asset level, it may be prudent to have several houses around the globe, e.g., in Boston, Sydney, and Stockholm, and keep some gold coins that could be exchanged for food.

Non-financial means of diversification are maximizing your cognitive and physical health and learning languages. If you are a healthy 80-year old, you can survive an emergency migration and create a new life in a new place. If you know several key languages, e.g., English, Mandarin, Russian, and Spanish, you can understand most people in the world.

Victoria

[bb]

Part of the debate here seems to be concepts of safe and flexibility. The OP asked about safety yet the ensuing discussion brought in concept spending being flexible. Victoria focused on safety. Focusing on safety or emphasizing flexibility seems to drive two vastly different discussions.

[HomerJ]

A couple (male/female) who are 40 each can get 4.3% SPIA.

The OP could take half his money (split among multiple insurance companies) and guarantee himself a 2.15% withdrawal rate for life. ($64,000)

AND still have $1.5 million left over (throwing off $30,000 in dividends)

I haven't gotten a quote, but surely that 4.3% is not indexed to inflation?? After 30 years, $64,000 is worth more like $32,000 at 2% inflation. The stock/bond mix is likely to have an *expected* return after taxes and inflation much better than an SPIA (or TIPS).

We are of course arguing about the relative safety of the various approaches. Expected returns are not guaranteed.

It is not indexed to inflation, but he's starting with $94,000 a year instead of $75,000... And he'll have $1.5 million left over (plus growth) to buy another SPIA in 10-15-20 years.

It's absolutely the best plan for the OP. He is way too nervous and conservative to handle a portfolio, especially during the next downturn.

My opinion is the best thing for him is the plan above. Put half the money in SPIAs to generate a solid floor, spend/save the dividends coming from the left over $1.5 million, and don't touch (except to rebalance) the $1.5 million for 10-15 years.

[bb]

I would be really surprised if anyone with 3M would put 1/2 into a SPIA.

[Snowjob]

God yes retire now,

Your biggest risk is not retiring soon enough! Don't worry about the doomsday scenario that will basically wipe out everyone... you could die of a heart attack or cancer before you end up enjoying it.