4% SWR - how confident are you?

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stocknoob4111
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4% SWR - how confident are you?

Post by stocknoob4111 » Wed Feb 20, 2019 1:29 pm

How confident are you with the 4% SWR and is this based on a 30 year retirement plan or as some people are saying this can apply to an infinite time period. There seems to be mixed opinions all over the place regarding this.

For instance, if I retire at 50 with $1M, take out $40k/yr until 65, then collect SS after that and take out $20k/yr from my portfolio and the balance rely on SS, what do you think is the confidence that this plan will work? So essentially, 4% for first 15 years, 2% thereafter (percentages based on initial portfolio balance and inflation adjusted yearly)

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Re: 4% SWR - how confident are you?

Post by dbr » Wed Feb 20, 2019 1:45 pm

One should never be confident that plans set in concrete can be relied on for very long. Stuff happens.

But, for the little bit of information that you provide I would say the general idea is plausible. You can run a model of that in FireCalc and it comes out at 100% successful (ie no failures in the years simulated). You can test the sensitivity by, for example, increasing the spend rate. At $50k/year the success rate drops to about 80%. At $45k/year it is 90%. That is an analysis that tells you the idea is plausible but might be on the edge. If you want to believe that FireCalc models generate more optimistic results than you can expect today, then you might choose to be cautious.

Of course you say nothing about how severe the consequences might be to you if you can't take that much money or what Plan B is if things don't turn out as you like. You also say nothing about how important it is to you to retire that early rather than work and save longer. Another piece of missing information is how plausible it is that retiring on $40K/year in today's dollars would be an acceptable retirement. If this is just hypothetical then it is also a little bit meaningless. Are the to be other sources of income. How close to the edge is all this, etc.?

Retirement has to be planned by successive approximation, which also continues after retirement as life goes on.
Last edited by dbr on Wed Feb 20, 2019 1:47 pm, edited 1 time in total.

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Re: 4% SWR - how confident are you?

Post by cadreamer2015 » Wed Feb 20, 2019 1:47 pm

I'm very confident that the 4% SWR for a 30 year retirement is a good starting place for determining if you are financially ready for retirement. I don't think anyone slavishly uses the 4% + inflation strategy over an entire retirement. If you are able/willing to adjust spending down or not take inflation increases when the market drops, I think the 4% rule of thumb is even safer.

BUT

I think it would be too risky (for me, YMMV) to pull the rip chord on retirement at age 60+ with assets just barely able to support a 4% SWR. I might not have predicted retirement spending exactly correctly. One of us might live more than 30 years. I haven't retired fully yet and our necessary withdrawal rate is less than 3%. There are lots of potential errors.

So I would say that the 4% SWR rule of thumb, or Assets 25x required income (which is essentially the same thing) is a useful point to start thinking about being financially prepared for a 30 year retirement, but nothing more than that. And for those planning a longer retirement/earlier retirement date, a lower withdrawal rate is prudent/necessary.
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Re: 4% SWR - how confident are you?

Post by FiveK » Wed Feb 20, 2019 1:52 pm

stocknoob4111 wrote:
Wed Feb 20, 2019 1:29 pm
How confident are you with the 4% SWR and is this based on a 30 year retirement plan or as some people are saying this can apply to an infinite time period. There seems to be mixed opinions all over the place regarding this.

For instance, if I retire at 50 with $1M, take out $40k/yr until 65, then collect SS after that and take out $20k/yr from my portfolio and the balance rely on SS, what do you think is the confidence that this plan will work? So essentially, 4% for first 15 years, 2% thereafter (percentages based on initial portfolio balance and inflation adjusted yearly)
A 4% withdrawal ratio has a very good chance of being a safe withdrawal ratio.

The situation you describe has a better chance.

See Mr. Money Mustache, SWR, and equity allocation - Bogleheads.org for more.

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Re: 4% SWR - how confident are you?

Post by inbox788 » Wed Feb 20, 2019 1:53 pm

I put it in Firecalc back to back and the worst outcome is below. Realize that you're looking at back to back worst outcomes which is extremely unlikely, so you shouldn't worry. I'd say it's an acceptable plan.
FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

FIRECalc looked at the 133 possible 15 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 133 cycles. The lowest and highest portfolio balance at the end of your retirement was $273,507 to $3,761,393, with an average at the end of $1,428,071. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 15 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.
then
FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

FIRECalc looked at the 133 possible 15 year periods in the available data, starting with a portfolio of $273,507 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 133 cycles. The lowest and highest portfolio balance at the end of your retirement was $-153,184 to $712,180, with an average at the end of $159,476. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 15 years. FIRECalc found that 31 cycles failed, for a success rate of 76.7%.

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Re: 4% SWR - how confident are you?

Post by LadyGeek » Wed Feb 20, 2019 2:15 pm

This thread is now in the Personal Finance (Not Investing) forum (retirement planning).
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Re: 4% SWR - how confident are you?

Post by LiterallyIronic » Wed Feb 20, 2019 2:23 pm

I am very confident that if I have $600,000, that I could take out $2,000 per month every month for the rest of my life. I would only give myself an inflation adjustment if the stock market is doing well.

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Re: 4% SWR - how confident are you?

Post by longinvest » Wed Feb 20, 2019 3:05 pm

stocknoob4111 wrote:
Wed Feb 20, 2019 1:29 pm
How confident are you with the 4% SWR and is this based on a 30 year retirement plan or as some people are saying this can apply to an infinite time period.
I would use our wiki's Variable percentage withdrawal (VPW) method, instead, which is mathematically guaranteed to never prematurely deplete the portfolio. I would combine it with non-portfolio income (like Social Security and a pension).

Someone with significant bequest motives could target a last withdrawal age of 119 (in other words, lookup withdrawal percentages in the VPW Table using "age minus 20"). According to Wikipedia's List of the verified oldest people page, the oldest undisputed verified person died before the age of 120.

Those without such ambitious bequest motives should simply use the VPW Table as-is and at age 80 (only when strictly necessary) use part (not all!) of the residual portfolio to buy enough inflation-indexed Single-Premium Immediate Annuity (inflation-indexed SPIA) so that non-portfolio income (including Social Security and pension) is sufficient to live comfortable independently of future portfolio withdrawals. After age 80, portfolio withdrawals should be for fun spending (travel, gifts) or for unanticipated liquidity needs.
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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 4:29 pm

stocknoob4111 wrote:
Wed Feb 20, 2019 1:29 pm
How confident are you with the 4% SWR and is this based on a 30 year retirement plan or as some people are saying this can apply to an infinite time period. There seems to be mixed opinions all over the place regarding this.
First of all, it's historical fact that the '4% rule of thumb', which calls for withdrawing 4% of your first year's starting balance and then adjusting that dollar amount for inflation in each subsequent year (i.e. fixed real dollar withdrawals), would not have worked indefinitely in every starting year in the historic record. There have been three 30 year periods in the U.S. where the portfolio would be completely exhausted or nearly so after 30 years of such withdrawals. But there have been some periods where the portfolio would have grown so much so quickly that this would indeed have a high likelihood of lasting indefinitely. You just don't know when you retire what kind of returns and sequence of returns you will experience.
stocknoob4111 wrote:
Wed Feb 20, 2019 1:29 pm
For instance, if I retire at 50 with $1M, take out $40k/yr until 65, then collect SS after that and take out $20k/yr from my portfolio and the balance rely on SS, what do you think is the confidence that this plan will work? So essentially, 4% for first 15 years, 2% thereafter (percentages based on initial portfolio balance and inflation adjusted yearly)
That is a very safe approach. According to FIRECalc, for a 60/40 portfolio using 4% fixed real dollar withdrawals for a 15 year period, the worst period in U.S. history would have left you with an inflation-adjusted $292k at the end of the 15 year period (the average ending balance would have been $1.26 million). If you took that $292k and withdrew $20k each year, the worst historic period for a 60/40 portfolio would have supported those withdrawals for nearly 11 more years. So even if we had stacked the two worst case historic periods together, your strategy would have still worked for almost 26 years.

But in reality, no one is actually adhering to strictly fixed withdrawals. Everyone makes adjustments to their withdrawals based on their portfolio's performance, life circumstances, etc. There are many flexible withdrawal strategies, and since you should have a high degree of confidence in your basic strategy if you were using fixed withdrawals, you should have even more confidence that you'll be fine with flexible withdrawals.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by stocknoob4111 » Wed Feb 20, 2019 4:31 pm

Thanks for the responses... I was trying to explore what is safely possible. There are a lot of people very confident with the 4% SWR. My plan is actually to retire at 55 but if I hit my goal of a $1M by 50 which may happen then i've been thinking maybe I can do it earlier as well. I live on a shoestring and my burn rate even right now is much lower than a 4% SWR on $1M so we'll see.
longinvest wrote:
Wed Feb 20, 2019 3:05 pm
I would use our wiki's Variable percentage withdrawal (VPW) method,
That looks interesting, will check it out, thanks for the link!


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Re: 4% SWR - how confident are you?

Post by midareff » Wed Feb 20, 2019 4:40 pm

Not at all....

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Re: 4% SWR - how confident are you?

Post by 4nursebee » Wed Feb 20, 2019 4:51 pm

I take the 4% rule as take 4% of what the balance is, so not 40k per year. If I had to put a confidence interval on this I would say I am 50% confident that would work. To increase my confidence that such a thing would work, I plan on having a couple years living expenses. During bad market years it would be easy to hold off on pulling so much out and this could be balanced by pulling out more during better years. I would say this would increase my confidence above 60%.
Having a pension (or two) for good portion of needs really increases confidence.
Having an annuity does so also.
Having RE really increases.
Having SS really increases things.

So, therefore, I am 100% confident that after building up a nice cash position, and having the above income sources, that the rest of our needs can be met with a 4% SWR (we will do higher with a VPW).
4nursebee

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Re: 4% SWR - how confident are you?

Post by Rus In Urbe » Wed Feb 20, 2019 5:05 pm

Not very. That's why we are going into retirement with less than 3%SWR plus several backup income plans (like untapped SS), as well as the room to shrink expenses, if need be.
I think it would be too risky (for me, YMMV) to pull the rip chord on retirement at age 60+ with assets just barely able to support a 4% SWR. I might not have predicted retirement spending exactly correctly.
+1 AGREE WHOLEHEARTEDLY.

A lot of folks on this thread mention FIRECalc. I love FIRECalc as much as the next BH. It's fun to play with. It gives you a great sense of how various scenarios (spending models, income sources, inflation rates) would affect your stash into the future, all back-tested against the historical stock market returns for as long as records have been kept.

Back-tested.
There's the rub.
It's worth keeping in mind that not everything that could happen in the future has happened in the past.

So----confident at 4%SWR?
Well, 4% is more secure than 5% and less than 3%.
And that's about all I can say with confidence.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 5:40 pm

4nursebee wrote:
Wed Feb 20, 2019 4:51 pm
I take the 4% rule as take 4% of what the balance is, so not 40k per year. If I had to put a confidence interval on this I would say I am 50% confident that would work.
What you're referring to is not the '4% rule'. It is 4% as a percentage-of-the-portfolio, a totally different withdrawal method.

Percentage-of-portfolio withdrawals are mathematically guaranteed to never fail. This is because it is always possible to withdraw X% of whatever is left in a portfolio. The problem with this approach is that your withdrawals could become too small to satisfy your needs. But historically, such an approach would be very conservative, more conservative than the '4% rule'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by 4nursebee » Wed Feb 20, 2019 5:48 pm

willthrill81 wrote:
Wed Feb 20, 2019 5:40 pm
4nursebee wrote:
Wed Feb 20, 2019 4:51 pm
I take the 4% rule as take 4% of what the balance is, so not 40k per year. If I had to put a confidence interval on this I would say I am 50% confident that would work.
What you're referring to is not the '4% rule'. It is 4% as a percentage-of-the-portfolio, a totally different withdrawal method.

Percentage-of-portfolio withdrawals are mathematically guaranteed to never fail. This is because it is always possible to withdraw X% of whatever is left in a portfolio. The problem with this approach is that your withdrawals could become too small to satisfy your needs. But historically, such an approach would be very conservative, more conservative than the '4% rule'.
Awesome, ne'er fail is right up my alley!
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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 5:49 pm

Rus In Urbe wrote:
Wed Feb 20, 2019 5:05 pm
Not very. That's why we are going into retirement with less than 3%SWR plus several backup income plans (like untapped SS), as well as the room to shrink expenses, if need be.
I think it would be too risky (for me, YMMV) to pull the rip chord on retirement at age 60+ with assets just barely able to support a 4% SWR. I might not have predicted retirement spending exactly correctly.
+1 AGREE WHOLEHEARTEDLY.

A lot of folks on this thread mention FIRECalc. I love FIRECalc as much as the next BH. It's fun to play with. It gives you a great sense of how various scenarios (spending models, income sources, inflation rates) would affect your stash into the future, all back-tested against the historical stock market returns for as long as records have been kept.

Back-tested.
There's the rub.
It's worth keeping in mind that not everything that could happen in the future has happened in the past.

So----confident at 4%SWR?
Well, 4% is more secure than 5% and less than 3%.
And that's about all I can say with confidence.
It's certainly true that we must always consider backtested data with a grain of salt. But at the same time, the historical data includes some very rough scenarios (e.g. WW2, staglation, high inflation, many recessions, high unemployment, etc.). The year 2000 was the worst starting year for the '4% rule', and yet it's on pace to work out fine.

We must also weigh the opportunity cost with trying to buy even greater security with the guaranteed loss of time, an irrecoverable asset, in building a bigger portfolio. Is it worth working five more years to go from a 4% WR to a 3%?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by bikechuck » Wed Feb 20, 2019 5:51 pm

I am in the Larry Swedroe camp that 3% is the new 4% given today's high equity valuations and low interest rate environment.

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Re: 4% SWR - how confident are you?

Post by Stormbringer » Wed Feb 20, 2019 5:54 pm

It isn't guaranteed, and the prospects get worse if you go beyond 30 years. If you need to get 4%, and can't get by on less for a few years in a terrible market, you should probably look at an inflation-adjusted SPIA which has about a 4% payout ratio.
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Re: 4% SWR - how confident are you?

Post by visualguy » Wed Feb 20, 2019 6:21 pm

willthrill81 wrote:
Wed Feb 20, 2019 5:49 pm
Is it worth working five more years to go from a 4% WR to a 3%?
Maybe not, and it may not even be an option for many at that age to work 5 more years.

Many here diversify with direct real estate as a way to reduce this risk. Instead of having the entire portfolio in stocks/bonds, have half in that and half in direct rental real estate, for example. It's easier to deal with that than to work for another 5 years...

The uncertainty and high volatility of stocks coupled with the low returns of bonds make it problematic to put everything in a Boglehead portfolio.

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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 6:30 pm

visualguy wrote:
Wed Feb 20, 2019 6:21 pm
willthrill81 wrote:
Wed Feb 20, 2019 5:49 pm
Is it worth working five more years to go from a 4% WR to a 3%?
Maybe not, and it may not even be an option for many at that age to work 5 more years.

Many here diversify with direct real estate as a way to reduce this risk. Instead of having the entire portfolio in stocks/bonds, have half in that and half in direct rental real estate, for example. It's easier to deal with that than to work for another 5 years...

The uncertainty and high volatility of stocks coupled with the low returns of bonds make it problematic to put everything in a Boglehead portfolio.
A big part of it depends on how flexible you can be with your withdrawals. For instance, if 50% of your withdrawals are used for discretionary spending, then you could cut back from the initial 4% to 3% or even lower if needed.

And yes, having multiple uncorrelated income streams in retirement is not a bad idea at all. Rental properties, SS benefits, portfolio withdrawals, a possible pension, maybe even an annuity, etc. I'd personally be all for investing in rental properties right now, but my DW will have none of it, even if we used a management company.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by bhsince87 » Wed Feb 20, 2019 6:42 pm

stocknoob4111 wrote:
Wed Feb 20, 2019 4:31 pm
Thanks for the responses... I was trying to explore what is safely possible. There are a lot of people very confident with the 4% SWR. My plan is actually to retire at 55 but if I hit my goal of a $1M by 50 which may happen then i've been thinking maybe I can do it earlier as well. I live on a shoestring and my burn rate even right now is much lower than a 4% SWR on $1M so we'll see.
longinvest wrote:
Wed Feb 20, 2019 3:05 pm
I would use our wiki's Variable percentage withdrawal (VPW) method,
That looks interesting, will check it out, thanks for the link!
There is also a VPW for Advanced Users, but I can't find a link to it right now.

It allows you to model your exact scenario. You can input inflation adjusted annuities of various amounts coming on line at different points in time, which is perfect for Social Security, like you are asking about.

It also allows input of non-inflation adjusted annuities.

As an example, I am expecting a $10k per year non-cola'd pension at age 65, and will delay SS to age 70.

Age 53 now, and $3 million in assets, Advanced VPW calculates I can safely withdrawal about $160k per year now , versus the 120k 4% approach.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: 4% SWR - how confident are you?

Post by longinvest » Wed Feb 20, 2019 6:46 pm

bhsince87 wrote:
Wed Feb 20, 2019 6:42 pm
stocknoob4111 wrote:
Wed Feb 20, 2019 4:31 pm
Thanks for the responses... I was trying to explore what is safely possible. There are a lot of people very confident with the 4% SWR. My plan is actually to retire at 55 but if I hit my goal of a $1M by 50 which may happen then i've been thinking maybe I can do it earlier as well. I live on a shoestring and my burn rate even right now is much lower than a 4% SWR on $1M so we'll see.
longinvest wrote:
Wed Feb 20, 2019 3:05 pm
I would use our wiki's Variable percentage withdrawal (VPW) method,
That looks interesting, will check it out, thanks for the link!
There is also a VPW for Advanced Users, but I can't find a link to it right now.
There's a link on the wiki page.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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Re: 4% SWR - how confident are you?

Post by Rus In Urbe » Wed Feb 20, 2019 7:08 pm

willthrill81 » Wed Feb 20, 2019 5:49 pm
We must also weigh the opportunity cost with trying to buy even greater security with the guaranteed loss of time, an irrecoverable asset, in building a bigger portfolio. Is it worth working five more years to go from a 4% WR to a 3%?
A very good point, willthrill81.

But it depends on whether you like (find meaning in) your work. I do. A lot. It's not a waste of my time. So, yeah, totally worth it. 8-)

However, cost/benefit is a different calculation for those whose work is only about the wages.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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Re: 4% SWR - how confident are you?

Post by smitcat » Wed Feb 20, 2019 7:10 pm

Rus In Urbe wrote:
Wed Feb 20, 2019 7:08 pm
willthrill81 » Wed Feb 20, 2019 5:49 pm
We must also weigh the opportunity cost with trying to buy even greater security with the guaranteed loss of time, an irrecoverable asset, in building a bigger portfolio. Is it worth working five more years to go from a 4% WR to a 3%?
A very good point, willthrill81.

But it depends on whether you like (find meaning in) your work. I do. A lot. It's not a waste of my time. So, yeah, totally worth it. 8-)

However, cost/benefit is a different calculation for those whose work is only about the wages.
+1 - absolutely agree

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Re: 4% SWR - how confident are you?

Post by warowits » Wed Feb 20, 2019 7:13 pm

I am highly confident in the 4% rule to determine when you have enough to retire. The railing against 4% based on current valuations borders on a mental illness around here.

Once you have enough though a variable percentage withdrawal method seems best for determining a ceiling on that years withdrawal. Combining VPW with a spia, SS or pension seems far superior to the 4% rule when withdrawing money.
Last edited by warowits on Wed Feb 20, 2019 7:34 pm, edited 1 time in total.

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Re: 4% SWR - how confident are you?

Post by jginseattle » Wed Feb 20, 2019 7:17 pm

3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.

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Re: 4% SWR - how confident are you?

Post by bhsince87 » Wed Feb 20, 2019 7:30 pm

longinvest wrote:
Wed Feb 20, 2019 6:46 pm
bhsince87 wrote:
Wed Feb 20, 2019 6:42 pm
stocknoob4111 wrote:
Wed Feb 20, 2019 4:31 pm
Thanks for the responses... I was trying to explore what is safely possible. There are a lot of people very confident with the 4% SWR. My plan is actually to retire at 55 but if I hit my goal of a $1M by 50 which may happen then i've been thinking maybe I can do it earlier as well. I live on a shoestring and my burn rate even right now is much lower than a 4% SWR on $1M so we'll see.
longinvest wrote:
Wed Feb 20, 2019 3:05 pm
I would use our wiki's Variable percentage withdrawal (VPW) method,
That looks interesting, will check it out, thanks for the link!
There is also a VPW for Advanced Users, but I can't find a link to it right now.
There's a link on the wiki page.
Thanks. Guess I should have went there instead of trying google!
Retirement: When you reach a point where you have enough. Or when you've had enough.

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Re: 4% SWR - how confident are you?

Post by marcopolo » Wed Feb 20, 2019 7:31 pm

jginseattle wrote:
Wed Feb 20, 2019 7:17 pm
3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.
4% was derived from significant back testing, given all its limitations.

What is the 3% based upon?

I have read a lot of hand waving arguments about high valuations and low bond yields. You could argue that CAPE is about twice it's historical average, similar with bond yields. So, why not 2%? And, if you want to be conservative why not 1%?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: 4% SWR - how confident are you?

Post by jginseattle » Wed Feb 20, 2019 7:38 pm

marcopolo wrote:
Wed Feb 20, 2019 7:31 pm
jginseattle wrote:
Wed Feb 20, 2019 7:17 pm
3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.
4% was derived from significant back testing, given all its limitations.

What is the 3% based upon?

I have read a lot of hand waving arguments about high valuations and low bond yields. You could argue that CAPE is about twice it's historical average, similar with bond yields. So, why not 2%? And, if you want to be conservative why not 1%?
I would do 2% if I could. I'm using 3%.

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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 7:43 pm

marcopolo wrote:
Wed Feb 20, 2019 7:31 pm
jginseattle wrote:
Wed Feb 20, 2019 7:17 pm
3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.
4% was derived from significant back testing, given all its limitations.

What is the 3% based upon?
Speculation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by sixtyforty » Wed Feb 20, 2019 7:45 pm

jginseattle wrote:
Wed Feb 20, 2019 7:17 pm
3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.
When I start to see all the "experts" come together on a forecast, something tells me it will probably go the other way.
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci

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jose
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Re: 4% SWR - how confident are you?

Post by jose » Wed Feb 20, 2019 7:48 pm

I am in the same situation as the O.P. and this is my plan based on 2 factors:

1. Mathematical certainty of VPW.
VPW 4% during bridge, perhaps reducing to 3% after SS. This is an asymptotic function that, as others have said, will never deplete the portfolio. I mean, mathematically the earth will disappear billions of years from now, the sun will be extinguished, and your portfolio will still be somewhere there in the financial time-space.

2. Irrelevance of external events in retirement portfolio decisions.
So what can go wrong? Other things that are not really portfolio failure, like massive systemic collapses of any kind. For example the entire free market economy and stock market disappears, nuclear wars, or who knows what. These risks are irrelevant because those situations would be bad regardless of any factor. Any portfolio of any size with any withdrawal rate will fail. And if you do not retire and keep working, you will lose your job. And if you put the money in the bank, the bank will not be there... So, that discussion is irrelevant. And sorry to say... we will most likely die before any of that happens, which is the whole point of retirement.

3. What I plan to do.
Given the mathematical certainty of VPW and the irrelevance of external events in portfolio decisions, I say go with 4% VPW of whatever you have and enjoy your life with the money you have. What is the worst case scenario? Perhaps a 20% decline in your real withdrawal amount, so instead of $40k it will be $32k. Well, if that happens, cancel that cruise. The most important risk is to worry too much and not enjoy your life while you can. :wink:

Please check my logic and let me know if I am missing something.

Jose

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Re: 4% SWR - how confident are you?

Post by AerialWombat » Wed Feb 20, 2019 7:53 pm

These SWR threads always make me laugh a tad bit.

I’ve put my own assumptions through the Monte Carlo grinder, and I’m planning on a 5% withdrawal rate, and I expect to never exhaust it.
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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 8:46 pm

jose wrote:
Wed Feb 20, 2019 7:48 pm
I am in the same situation as the O.P. and this is my plan based on 2 factors:

1. Mathematical certainty of VPW.
VPW 4% during bridge, perhaps reducing to 3% after SS. This is an asymptotic function that, as others have said, will never deplete the portfolio. I mean, mathematically the earth will disappear billions of years from now, the sun will be extinguished, and your portfolio will still be somewhere there in the financial time-space.
Just to be clear, VPW around here is used to refer to the 'variable percentage withdrawal approach'. What you are describing is a more or less fixed percentage-of-portfolio approach.

But yes, such an approach guarantees that you won't experience ruin.
jose wrote:
Wed Feb 20, 2019 7:48 pm
2. Irrelevance of external events in retirement portfolio decisions.
So what can go wrong? Other things that are not really portfolio failure, like massive systemic collapses of any kind. For example the entire free market economy and stock market disappears, nuclear wars, or who knows what. These risks are irrelevant because those situations would be bad regardless of any factor. Any portfolio of any size with any withdrawal rate will fail. And if you do not retire and keep working, you will lose your job. And if you put the money in the bank, the bank will not be there... So, that discussion is irrelevant. And sorry to say... we will most likely die before any of that happens, which is the whole point of retirement.

3. What I plan to do.
Given the mathematical certainty of VPW and the irrelevance of external events in portfolio decisions, I say go with 4% VPW of whatever you have and enjoy your life with the money you have. What is the worst case scenario? Perhaps a 20% decline in your real withdrawal amount, so instead of $40k it will be $32k. Well, if that happens, cancel that cruise. The most important risk is to worry too much and not enjoy your life while you can. :wink:

Please check my logic and let me know if I am missing something.

Jose
The risk with a percentage-of-portfolio approach is that your portfolio and withdrawals will shrink to the point that the latter is insufficient to meet your needs. Your withdrawals will be as volatile as your portfolio. Historically, a 20% decline in your portfolio's inflation-adjusted value would be expected to occur at least once over a significant retirement period with a 40/60 portfolio, with larger declines anticipated with a larger equity allocation.

You might be interested in using the time value of money formula instead.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by badger42 » Wed Feb 20, 2019 8:55 pm

We use 4% as a ballpark planning number with no concerns, but are more likely to use both 4% inflation adjusted and vpw as guardrails, at least early on (use the lower of the two). However, our plan has quite a bit of flexibility in spending levels (>50% discretionary - in a down year do a national park road trip instead of flying to the Bahamas, eat steak at home instead of out, etc) so withdrawal rates are guardrails, not set in stone.

Edit: this is also for a 40+ year likely retirement. But that's also lots of room to course correct (and why we hold 70% equity)

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Re: 4% SWR - how confident are you?

Post by heyyou » Wed Feb 20, 2019 8:58 pm

how confident are you?
I'm confident that the 4% SWR is not as good as almost all of the newer retirement spending plans that have been developed to address the specific faults of the SWR method. How does your 25 year old car, phone, or computer, compare to the current ones?

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Re: 4% SWR - how confident are you?

Post by emoore » Wed Feb 20, 2019 9:32 pm

willthrill81 wrote:
Wed Feb 20, 2019 7:43 pm
marcopolo wrote:
Wed Feb 20, 2019 7:31 pm
jginseattle wrote:
Wed Feb 20, 2019 7:17 pm
3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.
4% was derived from significant back testing, given all its limitations.

What is the 3% based upon?
Speculation.
Exactly. 4% is the worst case and people still want to use 3% or even 2%. I guess that's fine if they want to work longer but I think it's dangerous to try to convince people that 3% is the new 4%. Makes people work longer than they might have.

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Re: 4% SWR - how confident are you?

Post by emoore » Wed Feb 20, 2019 9:33 pm

heyyou wrote:
Wed Feb 20, 2019 8:58 pm
how confident are you?
I'm confident that the 4% SWR is not as good as almost all of the newer retirement spending plans that have been developed to address the specific faults of the SWR method. How does your 25 year old car, phone, or computer, compare to the current ones?
That's not a fair or good comparison. You can't compare a SWR with electronics.

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Re: 4% SWR - how confident are you?

Post by HomerJ » Wed Feb 20, 2019 9:36 pm

stocknoob4111 wrote:
Wed Feb 20, 2019 1:29 pm
How confident are you with the 4% SWR and is this based on a 30 year retirement plan or as some people are saying this can apply to an infinite time period. There seems to be mixed opinions all over the place regarding this.

For instance, if I retire at 50 with $1M, take out $40k/yr until 65, then collect SS after that and take out $20k/yr from my portfolio and the balance rely on SS, what do you think is the confidence that this plan will work? So essentially, 4% for first 15 years, 2% thereafter (percentages based on initial portfolio balance and inflation adjusted yearly)
15 years of 4%, then 2% after that?

I'm 99.9% confident in that. Of course, World War III or a world-wild plague or an asteroid changes everything.

But that's pretty damn solid
The J stands for Jay

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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 9:38 pm

emoore wrote:
Wed Feb 20, 2019 9:32 pm
willthrill81 wrote:
Wed Feb 20, 2019 7:43 pm
marcopolo wrote:
Wed Feb 20, 2019 7:31 pm
jginseattle wrote:
Wed Feb 20, 2019 7:17 pm
3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.
4% was derived from significant back testing, given all its limitations.

What is the 3% based upon?
Speculation.
Exactly. 4% is the worst case and people still want to use 3% or even 2%. I guess that's fine if they want to work longer but I think it's dangerous to try to convince people that 3% is the new 4%. Makes people work longer than they might have.
Going from a 4% WR to a 3% WR requires a 1/3 larger portfolio (i.e. 25X to 33.3X). It could easily take 5-10 additional years for an investor to reach that level. That time is irrecoverable and represents a guaranteed 'loss' in return for additional safety that hasn't been needed for typical retirees over the course of the last 90 years. And all of this is aside from the fact that (1) virtually no one is actually used fixed real dollar withdrawals like the '4% rule' in lieu of flexible withdrawals, affording them even more safety, and (2) most typical retirees (i.e. age ~65) aren't going to survive 30 years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by HomerJ » Wed Feb 20, 2019 9:44 pm

Rus In Urbe wrote:
Wed Feb 20, 2019 5:05 pm
It's worth keeping in mind that not everything that could happen in the future has happened in the past.
This is correct. If the next 30 years are worse than the Great Depression, and we have more than 25% unemployment, 4% might fail.

Of course, for me, "failure" means I take a few less vacations a year.

There is zero chance I will ever be hungry or living under a bridge.

My WORST case is a dream for 80% of the world's population.

If 4% is bare-bones survival, I'd admit I'd be nervous. If 4% includes vacations and expensive hobbies, then I would go with 4% every time.

And if 4% doesn't even count in SS, then I'm back to 99.9% confident, only worried about asteroids, etc.
The J stands for Jay

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Re: 4% SWR - how confident are you?

Post by willthrill81 » Wed Feb 20, 2019 9:55 pm

HomerJ wrote:
Wed Feb 20, 2019 9:44 pm
Rus In Urbe wrote:
Wed Feb 20, 2019 5:05 pm
It's worth keeping in mind that not everything that could happen in the future has happened in the past.
This is correct. If the next 30 years are worse than the Great Depression, and we have more than 25% unemployment, 4% might fail.

Of course, for me, "failure" means I take a few less vacations a year.

There is zero chance I will ever be hungry or living under a bridge.

My WORST case is a dream for 80% of the world's population.

If 4% is bare-bones survival, I'd admit I'd be nervous. If 4% includes vacations and expensive hobbies, then I would go with 4% every time.

And if 4% doesn't even count in SS, then I'm back to 99.9% confident, only worried about asteroids, etc.
And then there's the greatest equalizer of them all:
Image

The odds are high that a 65 year old won't need their portfolio for 30 years. And even for an opposite gender couple of that age, there's an 84% likelihood according to the SSA that they'll both be gone by age 95. There's a whopping 20% likelihood that a 65 year old man won't even make it to 74.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% SWR - how confident are you?

Post by MindBogler » Wed Feb 20, 2019 10:19 pm

willthrill81 wrote:
Wed Feb 20, 2019 9:55 pm
The odds are high that a 65 year old won't need their portfolio for 30 years. And even for an opposite gender couple of that age, there's an 84% likelihood according to the SSA that they'll both be gone by age 95. There's a whopping 20% likelihood that a 65 year old man won't even make it to 74.
A sobering reminder, willthrill81. Unfortunately, I think too many people on this forum, and in general, overestimate their life expectancy. I have centenarians on both sides of the family tree but I do not expect to live that long. If I do, hopefully I will do so in relatively good health. I've seen people pass too early as well as too late. I work to live and don't live to work. Time is short and life is fleeting. Someone once told me, "No whining on the yacht." I think that sums up what arguing about a 3-5% safe withdrawal rate amounts to. We should just be happy to be alive (and yes, short of HomerJ's asteroids, a 4% withdrawal will work just fine).

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Re: 4% SWR - how confident are you?

Post by Watty » Wed Feb 20, 2019 11:21 pm

stocknoob4111 wrote:
Wed Feb 20, 2019 1:29 pm
How confident are you with the 4% SWR and is this based on a 30 year retirement plan or as some people are saying this can apply to an infinite time period. There seems to be mixed opinions all over the place regarding this.
You could put all your money into a TIPs ladder and with a 3.33% withdrawal rate and it would last 30 years. 4% is a pretty low bar. People that talk about a 3% rate should rethink that.

In addition to their portfolio many people also have a paid off house or home equity that they can tap if their portfolio runs short.

(Note: the math is actually more complex. TIPs yield nearly 1%, and they are taxed on the inflation adjustment each year so during higher inflation the interest may not cover the taxes on the inflation adjustment. They would work best in a retirement account where you could use the interest to have maybe a 3.5%+ withdrawal rate.)

The downside is that the 4% SWR is just an academic study for a reasonableness check and was not intended to be a spending model that people would actually follow since your spending will be different at different ages.

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Re: 4% SWR - how confident are you?

Post by MP123 » Thu Feb 21, 2019 12:07 am

Wade Pfau has an interesting table in his book How Much can I Spend in Retirement showing SWRs from other countries.

Japan is .3%. Yes, point three percent. A little unsettling. And the 4% "rule" is based on a pretty small set of data with a lot of overlap in the thirty year rolling periods which are mostly centered around the middle of the 20th century. Perhaps a unique time in American history. On the other hand much higher withdrawal rates (like 8%) have been successful for some thirty year stretches. If you get lucky and retire at the right time...

4% seems like a reasonable ballpark guess but I certainly wouldn't consider it a rule.

Pfau's book is excellent and available free in the Prime Library if you have a Kindle.

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Re: 4% SWR - how confident are you?

Post by Will do good » Thu Feb 21, 2019 12:30 am

willthrill81 wrote:
Wed Feb 20, 2019 7:43 pm
marcopolo wrote:
Wed Feb 20, 2019 7:31 pm
jginseattle wrote:
Wed Feb 20, 2019 7:17 pm
3% is the new 4% rule - Larry Swedroe. William Bernstein has also recommended this for those under 70.
4% was derived from significant back testing, given all its limitations.

What is the 3% based upon?
Speculation.
+1
Like Homer says, if your 4% is not bare bones spending you would most likely be fine.

Consider that the median retirement savings for Americans between age 55 and 64 was $107,000, yet we don't see massive amount of elderly homeless people on the streets, they may not be traveling in style at retirement but most will make it ok. So for most 4% is pretty safe.

For those in the late 50's and willing to work extra to get to 3% or 2%, hope you will get to enjoy retirement one day.

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Re: 4% SWR - how confident are you?

Post by visualguy » Thu Feb 21, 2019 12:37 am

MP123 wrote:
Thu Feb 21, 2019 12:07 am
Wade Pfau has an interesting table in his book How Much can I Spend in Retirement showing SWRs from other countries.

Japan is .3%. Yes, point three percent. A little unsettling. And the 4% "rule" is based on a pretty small set of data with a lot of overlap in the thirty year rolling periods which are mostly centered around the middle of the 20th century. Perhaps a unique time in American history. On the other hand much higher withdrawal rates (like 8%) have been successful for some thirty year stretches. If you get lucky and retire at the right time...

4% seems like a reasonable ballpark guess but I certainly wouldn't consider it a rule.

Pfau's book is excellent and available free in the Prime Library if you have a Kindle.
Does it show any countries other than the US where the 4% "rule" worked?

I read somewhere that the SWR for ex-US is quite a bit lower than 4%.

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Re: 4% SWR - how confident are you?

Post by pdavi21 » Thu Feb 21, 2019 12:50 am

Assuming you live to about 85 (which is currently unlikely, no offense), you would be withdrawing about 15*40k + 20*20k = 1 million. Your inflation adjusted investment return (excluding the effect of volatility) must be negative to lose in this scenario.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: 4% SWR - how confident are you?

Post by michaeljc70 » Thu Feb 21, 2019 12:51 am

I'm very confident based on the original study and revised study. Of course, the original study called for 50-75% in equities for best results. With a 4% SWR (over 30 years) and 75/25, it had 100% success at the time. 50/50 had 96% success at the time. In the update in 2018, 75/25 had 98% chance of success and 50/50 had a 100% success rate. Of course, success means it worked in a historical context. If things vary greatly from the past, things can go off the rails. Will things be worse than the Great Depression, two world wars and a financial crisis? Some may say yes, but I am pretty confident the answer is no.

On top of that, most people (at least on this forum) can cut their expenses if they need to. It is nice to also have one or more backups. For me, my backups include potential inheritance not taken into account in retirement planning and/or reverse mortgage/selling my home.

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