Safe withdrawal rate at 38 years old

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kolea
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Re: Safe withdrawal rate at 38 years old

Post by kolea » Tue Jan 08, 2019 3:27 pm

willthrill81 wrote:
Tue Jan 08, 2019 1:58 pm
First of all, the 'safe withdrawal rate' research assumes that you'll increase your spending every year to keep pace with inflation, regardless of how your portfolio performs. That is not realistic; everyone makes changes to their withdrawals based on portfolio performance. As such, the 'failure' that some have referred to should not be 'run out of money' but much closer to something like 'need to make reductions to our withdrawals'.
That is not right in all cases. I ran RIP models before retiring and am confident that my withdrawal rate is solid so we don't change anything when the market hiccups. But our withdrawal rate is about 3% now and will go down to about 2.2% when I start on SS.

Before retiring I put a lot of research into withdrawal strategies and had one I liked but ultimately it is not being used. Reason is, I discovered that (a) our spending is spikey, sometimes way more than the target WR and sometimes way less, so what's the point of an elaborate scheme if you cannot follow it? And (b) we do not spend up to a target WR anyway, we pretty much live within our budget, it's just that the budget has lots of unplanned costs (replacing a car, a new roof, a major house repair, etc.) that occur quite randomly, so while the average is still accurate, the annual variations are significant.

My conclusion to all of this is that if your retirement budget is hovering around the maximum safe WR for your situation, then VWR and other schemes can help. But if you are way under, I am not sure I see the point any more.
Kolea (pron. ko-lay-uh). Golden plover.

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Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Tue Jan 08, 2019 3:31 pm

kolea wrote:
Tue Jan 08, 2019 3:27 pm
willthrill81 wrote:
Tue Jan 08, 2019 1:58 pm
First of all, the 'safe withdrawal rate' research assumes that you'll increase your spending every year to keep pace with inflation, regardless of how your portfolio performs. That is not realistic; everyone makes changes to their withdrawals based on portfolio performance. As such, the 'failure' that some have referred to should not be 'run out of money' but much closer to something like 'need to make reductions to our withdrawals'.
That is not right in all cases. I ran RIP models before retiring and am confident that my withdrawal rate is solid so we don't change anything when the market hiccups. But our withdrawal rate is about 3% now and will go down to about 2.2% when I start on SS.

Before retiring I put a lot of research into withdrawal strategies and had one I liked but ultimately it is not being used. Reason is, I discovered that (a) our spending is spikey, sometimes way more than the target WR and sometimes way less, so what's the point of an elaborate scheme if you cannot follow it? And (b) we do not spend up to a target WR anyway, we pretty much live within our budget, it's just that the budget has lots of unplanned costs (replacing a car, a new roof, a major house repair, etc.) that occur quite randomly, so while the average is still accurate, the annual variations are significant.

My conclusion to all of this is that if your retirement budget is hovering around the maximum safe WR for your situation, then VWR and other schemes can help. But if you are way under, I am not sure I see the point any more.

This is sort of what I am looking at. I would plan to be far below the WR% in actual expenses most of the time. But there's going to be times where we take a ten-day trip to Disney and stay at the Four Seasons. Travel would be the biggest non-regular expense. But we can always adjust the frequency and types of vacations.

Frisco Kid
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Re: Safe withdrawal rate at 38 years old

Post by Frisco Kid » Tue Jan 08, 2019 3:41 pm

How many years of current expenses would the sale price of your company represent? You could have a 60 year time horizon to cover.

BanquetBeer
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Re: Safe withdrawal rate at 38 years old

Post by BanquetBeer » Tue Jan 08, 2019 3:56 pm

Yea, I’d go for about 3.5% and plan to cut down to 2-3% in down times.

But also don’t mind leaving significant assets on the table for the next generation. (Based on Firecalc since people are in the mood to challenge). 2% flat is a waste of current/near term utility.

If you have enough - you can save for big ticket items like you would a salary.

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willthrill81
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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Tue Jan 08, 2019 4:08 pm

kolea wrote:
Tue Jan 08, 2019 3:27 pm
willthrill81 wrote:
Tue Jan 08, 2019 1:58 pm
First of all, the 'safe withdrawal rate' research assumes that you'll increase your spending every year to keep pace with inflation, regardless of how your portfolio performs. That is not realistic; everyone makes changes to their withdrawals based on portfolio performance. As such, the 'failure' that some have referred to should not be 'run out of money' but much closer to something like 'need to make reductions to our withdrawals'.
That is not right in all cases. I ran RIP models before retiring and am confident that my withdrawal rate is solid so we don't change anything when the market hiccups. But our withdrawal rate is about 3% now and will go down to about 2.2% when I start on SS.
So if Great Depression Part 2 hits, you'll maintain your fixed withdrawals?

If your portfolio doubles in real value in five years, you'll maintain your fixed withdrawals?

If so, you're a unicorn. :!:
“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

Random Poster
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Re: Safe withdrawal rate at 38 years old

Post by Random Poster » Tue Jan 08, 2019 4:16 pm

Jefferson wrote:
Tue Jan 08, 2019 2:45 pm
I think what I'm trying to get at (and perhaps not articulating it very well) is what kind of income we could reasonably expect from this money. I'm trying to figure out a range (in dollars) by starting with a percentage.
I'd go with 2.5%, based on a portfolio comprised of 40% Total US Market, 10% Total International Market, and 50% Total Bond Market (or something similar to it), with the thought being that 2.5% is roughly the dividend and interest yield on such a portfolio, and so one could "reasonably expect" to receive that yield and income on a relatively reliable basis.

And in years where the combined yield on a 50/50 portfolio is less than 2.5%, you could sell a little to make-up any shortfalls, and in years where the combined yield is greater than 2.5%, you just reinvest the difference.

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Re: Safe withdrawal rate at 38 years old

Post by KyleAAA » Tue Jan 08, 2019 4:20 pm

3-3.25% should be pretty much bulletproof regardless of how long you need the portfolio to last, especially at 80/20 (I wouldn’t recommend going too much below 70/30 for a time horizon that long).

kolea
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Re: Safe withdrawal rate at 38 years old

Post by kolea » Tue Jan 08, 2019 4:22 pm

willthrill81 wrote:
Tue Jan 08, 2019 4:08 pm
kolea wrote:
Tue Jan 08, 2019 3:27 pm
willthrill81 wrote:
Tue Jan 08, 2019 1:58 pm
First of all, the 'safe withdrawal rate' research assumes that you'll increase your spending every year to keep pace with inflation, regardless of how your portfolio performs. That is not realistic; everyone makes changes to their withdrawals based on portfolio performance. As such, the 'failure' that some have referred to should not be 'run out of money' but much closer to something like 'need to make reductions to our withdrawals'.
That is not right in all cases. I ran RIP models before retiring and am confident that my withdrawal rate is solid so we don't change anything when the market hiccups. But our withdrawal rate is about 3% now and will go down to about 2.2% when I start on SS.
So if Great Depression Part 2 hits, you'll maintain your fixed withdrawals?

If your portfolio doubles in real value in five years, you'll maintain your fixed withdrawals?

If so, you're a unicorn. :!:
Well psychologically it might be hard but the RIP tool includes all 30-year sequences from 1926 onward, which includes the great depression. The success rate was 100% for a higher WR than we have. And that was run six years ago; our life expectancy now is that much less, our assets are higher, so yes, I probably would stick to the withdrawal plan in the event of a depression.
Kolea (pron. ko-lay-uh). Golden plover.

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Watty
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Re: Safe withdrawal rate at 38 years old

Post by Watty » Tue Jan 08, 2019 4:27 pm

KlangFool wrote:
Tue Jan 08, 2019 2:51 pm
Jefferson wrote:
Tue Jan 08, 2019 2:45 pm
All of these responses have been very helpful. Thank you!

I think what I'm trying to get at (and perhaps not articulating it very well) is what kind of income we could reasonably expect from this money. I'm trying to figure out a range (in dollars) by starting with a percentage.

There is certainly risk here. But I've always lived with risk. My company is e-commerce and it has grown very quickly. But what comes up can go down. This is an opportunity to cash out at a high level. The S&P 500 could be a lot less risky than my company still being profitable in 20-30 years.

The big question is standard of living. We've gotten used to living a certain way (albeit always within our means and with a healthy savings rate). I don't want to do this if there is a high risk of that standard of living being reduced significantly.
I believe that 2% is very safe.

KlangFool
+1 with an emphasis on very.

If you put it all under your mattress and pulled out 2% of the original amount per year it would last 50 years.

In reality inflation would be a problem but if your investments can keep up with inflation after taxes then that would still last 50 years but there would be some small sequence of returns risk if you have a bad streak of investment returns early in your retirement.

If you also have a lot of money in retirement accounts where taxes are not an issue then you could buy a TIPS ladder in that to cover some expenses.

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willthrill81
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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Tue Jan 08, 2019 4:31 pm

Watty wrote:
Tue Jan 08, 2019 4:27 pm
KlangFool wrote:
Tue Jan 08, 2019 2:51 pm
Jefferson wrote:
Tue Jan 08, 2019 2:45 pm
All of these responses have been very helpful. Thank you!

I think what I'm trying to get at (and perhaps not articulating it very well) is what kind of income we could reasonably expect from this money. I'm trying to figure out a range (in dollars) by starting with a percentage.

There is certainly risk here. But I've always lived with risk. My company is e-commerce and it has grown very quickly. But what comes up can go down. This is an opportunity to cash out at a high level. The S&P 500 could be a lot less risky than my company still being profitable in 20-30 years.

The big question is standard of living. We've gotten used to living a certain way (albeit always within our means and with a healthy savings rate). I don't want to do this if there is a high risk of that standard of living being reduced significantly.
I believe that 2% is very safe.

KlangFool
+1 with an emphasis on very.

If you put it all under your mattress and pulled out 2% of the original amount per year it would last 50 years.

In reality inflation would be a problem but if your investments can keep up with inflation after taxes then that would still last 50 years but there would be some small sequence of returns risk if you have a bad streak of investment returns early in your retirement.

If you also have a lot of money in retirement accounts where taxes are not an issue then you could buy a TIPS ladder in that to cover some expenses.
Frankly, I believe that any WR under 3% is probably too conservative for anyone who doesn't want to bequeath the majority of their assets. But that's just me.
“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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grayfox
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Re: Safe withdrawal rate at 38 years old

Post by grayfox » Tue Jan 08, 2019 5:52 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
As I recall, the Trinity study was for a 30-year retirement. At age 38, you are looking at more like 60 years.

Suppose you want to withdraw inflation-adjusted $40,000 per year for 60 years. Here's an idea. Divide your Portfolio into two parts: one part P1 for the first 30 years and a second part P2 for the second 30 years.

Assuming you trust the 4% Rule from the Trinity Study, P1 needs to be $1,000,000.
Withdraw inflation-adjusted $40,000 per year for the first 30 years from P1.

For P2, put a sum of money into some investment that will have an inflation adjusted value of $1,000,000 at the end of 30 years. E.g. 30 year TIPS. Currently yielding 1.15% real. I calculate that you would have to put about $709,616 into 30 year TIPS.
After 30-years, the TIPS mature. Take the $1,000,000 in P2 and follow the 4% rule for the second 30 years.

:arrow: Total required is P1+P2 = $1,709,616. Initial Withdrawal rate = 40,000 / 1,709,616 = 2.34%.

:idea: With this approach, there's a 5% chance that the first 1 million will run out before 30 years. But you are also guaranteed to have $1,000,000 in 30 years to start the second half of your retirement.
Last edited by grayfox on Tue Jan 08, 2019 6:10 pm, edited 1 time in total.

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willthrill81
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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Tue Jan 08, 2019 6:09 pm

grayfox wrote:
Tue Jan 08, 2019 5:52 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
As I recall, the Trinity study was for a 30-year retirement. At age 38, you are looking at more like 60 years.

Suppose you want to withdraw inflation-adjusted $40,000 per year for 60 years. Here's an idea. Divide your Portfolio into two parts: one part P1 for the first 30 years and a second part P2 for the second 30 years.

Assuming you trust the 4% Rule from the Trinity Study, P1 needs to be $1,000,000. Withdraw inflation-adjusted $40,000 per year for the first 30 years from P1.

For P2, put a sum of money into some investment that will have an inflation adjusted value of $1,000,000 at the end of 30 years. E.g. 30 year TIPS. Currently yielding 1.15% real. I calculate that you would have to put about $709,616 into 30 year TIPS. After 30-years, take the $1,000,000 in P2 and follow the 4% rule for the second 30 years.

:arrow: Total required is P1+P2 = $1,709,616. Initial Withdrawal rate = 40,000 / 1,709,616 = 2.34%.
According to FIRECalc, a 60/40 AA with a fixed 4.0% withdrawal rate had a success rate of 95.8% over 30 years. Over 60 years, the same AA had a 97% success rate for a 3.4% WR. That's more than a third higher than 2.34%, which is well below what most would consider to the likely perpetual withdrawal rate.
“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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grayfox
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Re: Safe withdrawal rate at 38 years old

Post by grayfox » Tue Jan 08, 2019 6:10 pm

But how many data points are there for 60 years?

The latest 60-year period would be 1958-2018. Then you have to go all the way back to 1898 to get a non-overlapping period.

That's reaching back a long way in time. The further back in time, the less relevant the data. The markets have changed a lot over the decades.

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willthrill81
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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Tue Jan 08, 2019 6:38 pm

grayfox wrote:
Tue Jan 08, 2019 6:10 pm
But how many data points are there for 60 years?

The latest 60-year period would be 1958-2018.
That's reaching back a long way in time. The further back in time, the less relevant the data. The markets have changed a lot over the decades.
The same argument could be made of the Trinity study you cited and similar ones.

Historically, a WR of approximately 3% (or a little higher) would have at least left you with the same inflation-adjusted capital after 20 years or more as you started with. Portfolio Charts confirms that the perpetual withdrawal rate since 1970 (which is convenient since you seem to prefer more recent data) for a 60/40 portfolio was 3.5% over a 30 year period, and there was virtually no fluctuation in this number from 26 year to 40 year periods.

The only way a 2.34% WR would make sense is if the desired AA was 100% TIPS at current yields.
“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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Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Tue Jan 08, 2019 7:28 pm

I see lots of posts that reference an allocation, such as 60/40. Are those calculations done assuming that the bond portion is Total Bond Market? Since this entire amount would be in a taxable account, the dividends alone would likely put me in a high tax bracket. Wouldn’t it make more sense to have a national muni fund and a treasury fund to save on taxes? Does that change the math at all, or mean that the stock portion should be slightly increased?

Thanks again for all of the responses!
Last edited by Jefferson on Tue Jan 08, 2019 8:08 pm, edited 2 times in total.

Wricha
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Re: Safe withdrawal rate at 38 years old

Post by Wricha » Tue Jan 08, 2019 7:31 pm

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
Jefferson,
This guy is a few years older than you. I think this guy is about the best on safe withdrawal rates for younger folks. He has a 27 part series on safe withdrawal rates.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

I did not read the whole thread so this maybe redundant.

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willthrill81
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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Tue Jan 08, 2019 8:12 pm

Jefferson wrote:
Tue Jan 08, 2019 7:28 pm
I see lots of posts that reference an allocation, such as 60/40. Are those calculations done assuming that the bond portion is Total Bond Market? Since this entire amount would be in a taxable account, the dividends alone would likely put me in the top tax bracket. Wouldn’t it make more sense to have a national muni fund and a treasury fund to save on taxes? Does that change the math at all, or mean that the stock portion should be slightly increased?

Thanks again for all of the responses!
If you're likely to be in the top tax brackets, a muni bond fund will likely be preferable, but it's not going to significantly change your 'safe' withdrawal rate. The amount of the withdrawal is your 'gross pay', out of which taxes must be paid. For instance, a 4% withdrawal on a $1 million portfolio is $40k, and taxes would have to be paid on that $40k withdrawal, reducing your net (i.e. spendable) income.

Frankly, if the stock dividends and interest thrown off by a 60/40 are going to put you in the top tax brackets, you have no worries at all. You could make a significant cut in your withdrawals if needed down the road and still have more than adequate 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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Jefferson
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Re: Safe withdrawal rate at 38 years old

Post by Jefferson » Tue Jan 08, 2019 8:43 pm

willthrill81 wrote:
Tue Jan 08, 2019 8:12 pm
Jefferson wrote:
Tue Jan 08, 2019 7:28 pm
I see lots of posts that reference an allocation, such as 60/40. Are those calculations done assuming that the bond portion is Total Bond Market? Since this entire amount would be in a taxable account, the dividends alone would likely put me in the top tax bracket. Wouldn’t it make more sense to have a national muni fund and a treasury fund to save on taxes? Does that change the math at all, or mean that the stock portion should be slightly increased?

Thanks again for all of the responses!
If you're likely to be in the top tax brackets, a muni bond fund will likely be preferable, but it's not going to significantly change your 'safe' withdrawal rate. The amount of the withdrawal is your 'gross pay', out of which taxes must be paid. For instance, a 4% withdrawal on a $1 million portfolio is $40k, and taxes would have to be paid on that $40k withdrawal, reducing your net (i.e. spendable) income.

Frankly, if the stock dividends and interest thrown off by a 60/40 are going to put you in the top tax brackets, you have no worries at all. You could make a significant cut in your withdrawals if needed down the road and still have more than adequate withdrawals.

I misspoke. We are in the top tax bracket now. Dividends could put us into a high tax bracket, but not the top one. I did some mental math wrong. I don’t mean to get the discussion off track. Just want to clarify.

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Re: Safe withdrawal rate at 38 years old

Post by skime » Tue Jan 08, 2019 10:52 pm

Starfish wrote:
Mon Jan 07, 2019 7:01 pm
skime wrote:
Mon Jan 07, 2019 5:25 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
50x any and all annual expenses - i.e. 2% or less at any allocation
Based on...? Research, links, clairvoyance?
Look at any research done on SWR. 2% withdrawal rate doesn't fail.

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Watty
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Re: Safe withdrawal rate at 38 years old

Post by Watty » Tue Jan 08, 2019 11:28 pm

Wricha wrote:
Tue Jan 08, 2019 7:31 pm
He has a 27 part series on safe withdrawal rates.
:shock:

Just shoot me.

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Re: Safe withdrawal rate at 38 years old

Post by Starfish » Wed Jan 09, 2019 12:05 am

skime wrote:
Tue Jan 08, 2019 10:52 pm
Starfish wrote:
Mon Jan 07, 2019 7:01 pm
skime wrote:
Mon Jan 07, 2019 5:25 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
50x any and all annual expenses - i.e. 2% or less at any allocation
Based on...? Research, links, clairvoyance?
Look at any research done on SWR. 2% withdrawal rate doesn't fail.
I did not say it does, but neither does 1%, 0.5%, 0.75%, 1.134%, 2.1%, 2.2%, 2.5%, 3% etc. You just pulled the number from the hat.

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Re: Safe withdrawal rate at 38 years old

Post by Starfish » Wed Jan 09, 2019 12:07 am

Wricha wrote:
Tue Jan 08, 2019 7:31 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
Jefferson,
This guy is a few years older than you. I think this guy is about the best on safe withdrawal rates for younger folks. He has a 27 part series on safe withdrawal rates.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

I did not read the whole thread so this maybe redundant.
Completely useless. Any forum can tell you from the top post that 3-4% is "safe", and all the data is based on useless assumptions. On history. There is not even 1 valid sample in this "statistic".

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Re: Safe withdrawal rate at 38 years old

Post by AlphaLess » Wed Jan 09, 2019 12:36 am

Watty wrote:
Tue Jan 08, 2019 4:27 pm
+1 with an emphasis on very.

If you put it all under your mattress and pulled out 2% of the original amount per year it would last 50 years.
Agree on 'very'.
Disagree on the Bank of Mattress. Inflation could be a killer.
But if your mattress pays inflation-like return with low risk, then sure.
"You can get more with a kind word and a gun than with just a kind word." George Washington

JBTX
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Re: Safe withdrawal rate at 38 years old

Post by JBTX » Wed Jan 09, 2019 12:55 am

As a benchmark I put in this quote:

https://www.immediateannuities.com/clie ... 426337.pdf

For an inflation adjusted immediate annuity you would get 2.25% for 2 40 year olds.

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FiveK
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Re: Safe withdrawal rate at 38 years old

Post by FiveK » Wed Jan 09, 2019 2:01 am

Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
What is a safe withdrawal rate for...?
Mr. Money Mustache, SWR, and equity allocation - Bogleheads.org is another thread you may find interesting.

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Re: Safe withdrawal rate at 38 years old

Post by msk » Wed Jan 09, 2019 3:24 am

I am not interested in a declining portfolio. I want my portfolio to keep pace with inflation forever, both for myself and for my heirs. After a lot of playing around with Shiller's data going back to 1871 and Monte Carlo simulations in portfoliovisualiser I have come to the following conclusions:

1. A 100% stocks portfolio can withstand a 5% withdrawal of the portfolio balance each year (inclusive of dividends) forever, and the annual withdrawals will of course yoyo up and down with market performance but will, on average, keep up with inflation forever.

2. A 100% bonds portfolio can perform similarly with a 2.5% withdrawal rate annually, Median forecast from Monte Carlo simulations.

NB Because the withdrawals are based on the portfolio balance, each portfolio will last forever. I keep 100% stocks, worldwide by market weight. To be ready for sharp market drops, be sure that you are OK living on a 5% withdrawal after a 50% market drop. I.e. on 2.5% of your portfolio value at start. To have a portfolio last forever you need to cap the percentage withdrawal even if the market falls 90% and not be silly by maintaining an inflation-adjusted $ amount from the previous year regardless of market performance.

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Re: Safe withdrawal rate at 38 years old

Post by Yukon » Wed Jan 09, 2019 4:44 am

I like Bill Bernstein's quote on withdrawal rates: "Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and at 5%, you’re eating Alpo in your old age"
Don't Work Forever.

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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Wed Jan 09, 2019 11:11 am

Yukon wrote:
Wed Jan 09, 2019 4:44 am
I like Bill Bernstein's quote on withdrawal rates: "Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and at 5%, you’re eating Alpo in your old age"
That quote of Bernstein's is beyond ridiculous. Historically, a 4% fixed WR has never failed in the U.S. (well, maybe 3.8%), and Bernstein says that's 'pushing it'? A 3% WR is probably the perpetual withdrawal rate or very close to it, and he calls it 'probably safe'? And while I agree that a 5% WR is probably too ambitious for a 30 year retirement, a 70/30 AA would have supported a 5% fixed WR for 30 years 67% of the time. That's far from 'you're eating Alpo'.
“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: Safe withdrawal rate at 38 years old

Post by willthrill81 » Wed Jan 09, 2019 11:12 am

Watty wrote:
Tue Jan 08, 2019 11:28 pm
Wricha wrote:
Tue Jan 08, 2019 7:31 pm
He has a 27 part series on safe withdrawal rates.
:shock:

Just shoot me.
I can summarize the whole series in one sentence: a 4% fixed withdrawal rate (i.e. '4% rule') is probably not a good starting point for early retirees (i.e. those planning for a retirement longer than 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: Safe withdrawal rate at 38 years old

Post by yousha » Wed Jan 09, 2019 11:15 am

4% is fine for me! My preference is 5%.

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Re: Safe withdrawal rate at 38 years old

Post by ThrustVectoring » Wed Jan 09, 2019 2:28 pm

A big personal factor that people don't take into account is how much your minimum non-discretionary spending is, compared with your discretionary spending.

Safe withdrawal rate calculations tend to assume that you're pulling out non-discretionary spending only. 35 or 40 times your non-discretionary spending will almost certainly last forever - 25 times will last 30 years 95% of the time, and you have a large buffer above that.

If the large amount of cash from the business sale is more than you expect or want to spend, I'd go for a really straightforward strategy that lets you spend discretionary cash without any sort of headache or worry. I'd go with three accounts: at least a year of mandatory expenses in cash, a gigantic pile of stocks (60% VTI / 40% VXUS is my personal recommendation, but basically whatever index fund strategy you like works), and another cash account that collects the dividends that you can spend on whatever you want. This strategy will wind up with an absolutely enormous inheritance for your heirs or for charitable purposes, but it's probably not a great idea to spend way too much money on discretionary stuff just because you can.
Current portfolio: 60% VTI / 40% VXUS

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Re: Safe withdrawal rate at 38 years old

Post by Yukon » Wed Jan 09, 2019 2:45 pm

willthrill81 wrote:
Wed Jan 09, 2019 11:11 am
Yukon wrote:
Wed Jan 09, 2019 4:44 am
I like Bill Bernstein's quote on withdrawal rates: "Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and at 5%, you’re eating Alpo in your old age"
That quote of Bernstein's is beyond ridiculous. Historically, a 4% fixed WR has never failed in the U.S. (well, maybe 3.8%), and Bernstein says that's 'pushing it'? A 3% WR is probably the perpetual withdrawal rate or very close to it, and he calls it 'probably safe'? And while I agree that a 5% WR is probably too ambitious for a 30 year retirement, a 70/30 AA would have supported a 5% fixed WR for 30 years 67% of the time. That's far from 'you're eating Alpo'.
I completely agree it's conservative. I also believe the context of his quote is more in discussing a perpetual withdrawal rate (similar to what the OP is considering) vs. the running out of money in 30 years portfolio. Is it beyond ridiculous for the 38 yo OP to be more conservative than a typical retirement?
Don't Work Forever.

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Re: Safe withdrawal rate at 38 years old

Post by delamer » Wed Jan 09, 2019 2:54 pm

msk wrote:
Wed Jan 09, 2019 3:24 am
I am not interested in a declining portfolio. I want my portfolio to keep pace with inflation forever, both for myself and for my heirs. After a lot of playing around with Shiller's data going back to 1871 and Monte Carlo simulations in portfoliovisualiser I have come to the following conclusions:

1. A 100% stocks portfolio can withstand a 5% withdrawal of the portfolio balance each year (inclusive of dividends) forever, and the annual withdrawals will of course yoyo up and down with market performance but will, on average, keep up with inflation forever.

2. A 100% bonds portfolio can perform similarly with a 2.5% withdrawal rate annually, Median forecast from Monte Carlo simulations.

NB Because the withdrawals are based on the portfolio balance, each portfolio will last forever. I keep 100% stocks, worldwide by market weight. To be ready for sharp market drops, be sure that you are OK living on a 5% withdrawal after a 50% market drop. I.e. on 2.5% of your portfolio value at start. To have a portfolio last forever you need to cap the percentage withdrawal even if the market falls 90% and not be silly by maintaining an inflation-adjusted $ amount from the previous year regardless of market performance.
I agree that some flexibility is required in managing withdrawals as assets wax/wane.

But 100% stocks with each year’s income dependent on the vagaries of the stock market is more than I, or many people, could handle.

If your base expenses were covered by Social Security/pensions/annuities, then it might be tolerable. But otherwise, most people are better served by having a number of years of (net) expenses in cash/short term bonds to maintain a fairly constant income.

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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Wed Jan 09, 2019 3:08 pm

Yukon wrote:
Wed Jan 09, 2019 2:45 pm
willthrill81 wrote:
Wed Jan 09, 2019 11:11 am
Yukon wrote:
Wed Jan 09, 2019 4:44 am
I like Bill Bernstein's quote on withdrawal rates: "Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and at 5%, you’re eating Alpo in your old age"
That quote of Bernstein's is beyond ridiculous. Historically, a 4% fixed WR has never failed in the U.S. (well, maybe 3.8%), and Bernstein says that's 'pushing it'? A 3% WR is probably the perpetual withdrawal rate or very close to it, and he calls it 'probably safe'? And while I agree that a 5% WR is probably too ambitious for a 30 year retirement, a 70/30 AA would have supported a 5% fixed WR for 30 years 67% of the time. That's far from 'you're eating Alpo'.
I completely agree it's conservative. I also believe the context of his quote is more in discussing a perpetual withdrawal rate (similar to what the OP is considering) vs. the running out of money in 30 years portfolio. Is it beyond ridiculous for the 38 yo OP to be more conservative than a typical retirement?
A 38 year old should certainly be more conservative than 65 year old, but the quote says nothing about the perpetual withdrawal rate. If it did, it would be much more realistic.
“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: Safe withdrawal rate at 38 years old

Post by randomguy » Wed Jan 09, 2019 4:08 pm

willthrill81 wrote:
Wed Jan 09, 2019 11:11 am
Yukon wrote:
Wed Jan 09, 2019 4:44 am
I like Bill Bernstein's quote on withdrawal rates: "Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and at 5%, you’re eating Alpo in your old age"
That quote of Bernstein's is beyond ridiculous. Historically, a 4% fixed WR has never failed in the U.S. (well, maybe 3.8%), and Bernstein says that's 'pushing it'? A 3% WR is probably the perpetual withdrawal rate or very close to it, and he calls it 'probably safe'? And while I agree that a 5% WR is probably too ambitious for a 30 year retirement, a 70/30 AA would have supported a 5% fixed WR for 30 years 67% of the time. That's far from 'you're eating Alpo'.
Bill is really conservative. And honestly Alpo is more expensive than rice beans😁

People keep looking for certainty that doesnt exist. The errors in the models we use are larger than the 10% success differences we are talking about. If you have zero ability to reduce expenses, the less than 3% for a 60 year term can make sense. If you can cut expenses by 30%, 4 and 5% can work fine.

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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Wed Jan 09, 2019 4:44 pm

randomguy wrote:
Wed Jan 09, 2019 4:08 pm
willthrill81 wrote:
Wed Jan 09, 2019 11:11 am
Yukon wrote:
Wed Jan 09, 2019 4:44 am
I like Bill Bernstein's quote on withdrawal rates: "Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and at 5%, you’re eating Alpo in your old age"
That quote of Bernstein's is beyond ridiculous. Historically, a 4% fixed WR has never failed in the U.S. (well, maybe 3.8%), and Bernstein says that's 'pushing it'? A 3% WR is probably the perpetual withdrawal rate or very close to it, and he calls it 'probably safe'? And while I agree that a 5% WR is probably too ambitious for a 30 year retirement, a 70/30 AA would have supported a 5% fixed WR for 30 years 67% of the time. That's far from 'you're eating Alpo'.
Bill is really conservative. And honestly Alpo is more expensive than rice beans😁

People keep looking for certainty that doesnt exist. The errors in the models we use are larger than the 10% success differences we are talking about. If you have zero ability to reduce expenses, the less than 3% for a 60 year term can make sense. If you can cut expenses by 30%, 4 and 5% can work fine.
Absolutely. I wouldn't think twice about someone who started with a 5% withdrawal rate but had the willingness and ability to rein in their spending by 30% or more if the need arose. Frankly, that's roughly what we're planning to do. I anticipate that our essential spending needs will only comprise about 2% of our portfolio by the time I reach my planned retirement age of 55. So if we start at close to 5%, we could more than cut our spending in half if needed to just fund the basics for a while. And all of that is completely aside from whatever SS benefits we get later on, which would cover our essential spending if we deferred until age 70, even with the anticipated 30% haircut.
“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: Safe withdrawal rate at 38 years old

Post by aristotelian » Wed Jan 09, 2019 4:58 pm

mike_slc wrote:
Mon Jan 07, 2019 3:03 pm

Just FYI you will get radically different answers on this site vs other sites. People here will give answers like 1%, which is irrational. The last time I checked, foundations use 2.25% as their safe perpetual withdrawal rate. Personally I would go with 2.75% and a paid off house at age 38 and factor out things like college expenses from that, but even that is probably paranoid safe. 3% is probably fine. Make sure to full read this entire series:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
To give you a sense of how irrational people here can be, private foundations are required to spend at least 5%. Most spend a bit more. And their endowments continue to grow. Yale University targets 5.25%. Now, these are calculated on a rolling basis, with various smoothing rules for down markets. From time to time they have to cut budgets, but generally their spending grows faster than SWR.

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Re: Safe withdrawal rate at 38 years old

Post by Leesbro63 » Wed Jan 09, 2019 5:03 pm

aristotelian wrote:
Wed Jan 09, 2019 4:58 pm
mike_slc wrote:
Mon Jan 07, 2019 3:03 pm

Just FYI you will get radically different answers on this site vs other sites. People here will give answers like 1%, which is irrational. The last time I checked, foundations use 2.25% as their safe perpetual withdrawal rate. Personally I would go with 2.75% and a paid off house at age 38 and factor out things like college expenses from that, but even that is probably paranoid safe. 3% is probably fine. Make sure to full read this entire series:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
To give you a sense of how irrational people here can be, private foundations are required to spend at least 5%. Most spend a bit more. And their endowments continue to grow. Yale University targets 5.25%. Now, these are calculated on a rolling basis, with various smoothing rules for down markets. From time to time they have to cut budgets, but generally their spending grows faster than SWR.
Totally apples and oranges. Because private foundations / endowments have an infinite life expectancy and CONTINUES TO RAISE NEW MONEY. Versus a retiree who has a finite life expectancy and no ability (or desire) to raise new money. And if a foundation fails, no one individual starves. In most cases, foundations and endowments provide supplemental money to an institution that has a primary source of income. Versus a retiree who depends on his SWR to eat and pay the utilites.

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Re: Safe withdrawal rate at 38 years old

Post by randomguy » Wed Jan 09, 2019 5:13 pm

aristotelian wrote:
Wed Jan 09, 2019 4:58 pm
mike_slc wrote:
Mon Jan 07, 2019 3:03 pm

Just FYI you will get radically different answers on this site vs other sites. People here will give answers like 1%, which is irrational. The last time I checked, foundations use 2.25% as their safe perpetual withdrawal rate. Personally I would go with 2.75% and a paid off house at age 38 and factor out things like college expenses from that, but even that is probably paranoid safe. 3% is probably fine. Make sure to full read this entire series:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
To give you a sense of how irrational people here can be, private foundations are required to spend at least 5%. Most spend a bit more. And their endowments continue to grow. Yale University targets 5.25%. Now, these are calculated on a rolling basis, with various smoothing rules for down markets. From time to time they have to cut budgets, but generally their spending grows faster than SWR.
That is a much more conservative guideline than a 4% SWR. Run the math on how little spending a private foundation would have done in the 1966-1981 time frame versus someone following the 4% rule.

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Re: Safe withdrawal rate at 38 years old

Post by aristotelian » Wed Jan 09, 2019 5:24 pm

Leesbro63 wrote:
Wed Jan 09, 2019 5:03 pm

Totally apples and oranges. Because private foundations / endowments have an infinite life expectancy and CONTINUES TO RAISE NEW MONEY. Versus a retiree who has a finite life expectancy and no ability (or desire) to raise new money. And if a foundation fails, no one individual starves. In most cases, foundations and endowments provide supplemental money to an institution that has a primary source of income. Versus a retiree who depends on his SWR to eat and pay the utilites.
I did not bring up the comparison, just correcting a number that someone had thrown out there. However, many foundations survive off of old money without fundraising (I happen to work for one).

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Re: Safe withdrawal rate at 38 years old

Post by aristotelian » Wed Jan 09, 2019 5:29 pm

randomguy wrote:
Wed Jan 09, 2019 5:13 pm


That is a much more conservative guideline than a 4% SWR. Run the math on how little spending a private foundation would have done in the 1966-1981 time frame versus someone following the 4% rule.
I'm not sure about that. SWR is only adjusted for inflation. If the portfolio is growing faster than inflation, I would think the fixed 5.25% grows faster than SWR. Am I thinking about it incorrectly? Certainly, there are probably scenarios when SWR grows faster.

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Re: Safe withdrawal rate at 38 years old

Post by TxInjun » Wed Jan 09, 2019 6:40 pm

jainn wrote:
Mon Jan 07, 2019 8:26 pm
We like this blog post, regarding CAPE withdrawals, which is a variable/option using cfiresim.
Thank you for bringing this up, jainn- I hadn’t seen this before. Very interesting to incorporate CAPE in the calculation.
We prefer to use the most conservative method available (CAPE 1.00/.05), mostly out of fear due to us living on our portfolio at a youngish age with 3 kids and have no plans returning to the work force.

https://earlyretirementnow.com/2017/08/ ... sed-rules/
2 questions:
- I see that 1/0.5 is the most conservative of the choices, but not sure how that was arrived at - any insight?
- Do you see this formula as a perpetual WR? It’s always tied to latest principal, so it will work “forever “, do I understand that correctly?

Thanks again,

TxIn

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Re: Safe withdrawal rate at 38 years old

Post by lostdog » Wed Jan 09, 2019 7:03 pm

ThrustVectoring wrote:
Wed Jan 09, 2019 2:28 pm
A big personal factor that people don't take into account is how much your minimum non-discretionary spending is, compared with your discretionary spending.

Safe withdrawal rate calculations tend to assume that you're pulling out non-discretionary spending only. 35 or 40 times your non-discretionary spending will almost certainly last forever - 25 times will last 30 years 95% of the time, and you have a large buffer above that.

If the large amount of cash from the business sale is more than you expect or want to spend, I'd go for a really straightforward strategy that lets you spend discretionary cash without any sort of headache or worry. I'd go with three accounts: at least a year of mandatory expenses in cash, a gigantic pile of stocks (60% VTI / 40% VXUS is my personal recommendation, but basically whatever index fund strategy you like works), and another cash account that collects the dividends that you can spend on whatever you want. This strategy will wind up with an absolutely enormous inheritance for your heirs or for charitable purposes, but it's probably not a great idea to spend way too much money on discretionary stuff just because you can.
+1

So simple.
100% VTWAX

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Re: Safe withdrawal rate at 38 years old

Post by randomguy » Wed Jan 09, 2019 7:53 pm

aristotelian wrote:
Wed Jan 09, 2019 5:29 pm
randomguy wrote:
Wed Jan 09, 2019 5:13 pm


That is a much more conservative guideline than a 4% SWR. Run the math on how little spending a private foundation would have done in the 1966-1981 time frame versus someone following the 4% rule.
I'm not sure about that. SWR is only adjusted for inflation. If the portfolio is growing faster than inflation, I would think the fixed 5.25% grows faster than SWR. Am I thinking about it incorrectly? Certainly, there are probably scenarios when SWR grows faster.
You are thinking about it incorrectly.:) Yes in good (and probably bad times eventually) times the 5% spending will spend more money. But we only really care about the tough times:) Think about something like a 50% drop in the market

year 1: 1 million -50k = 950k/2 = 475k
year 2: 475- 23.5k

So you only spend 73.5k compared to the 4%ers 80k (even worse with inflation). The x% method tend to be pretty self correcting as you take out less in bad times in more in good. The tough part for the 4% rule was you were taking out something like ~90k out of a ~700k portfolio in 1981 which didn't leave quite enough money to ride the bull market (i.e. your 14% return wasn't enough to grow the portfolio with 3% inflation over the next 15 years) to recovery.

The general point is that 5% for a foundation has nothing to do with a 4% SWR. They are both percentages but don't have a whole lot else in common. It is hard to compare a portfolio that gives out different amounts of money with one that gives out a steady stream.

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Re: Safe withdrawal rate at 38 years old

Post by jainn » Thu Jan 10, 2019 10:14 am

TxInjun wrote:
Wed Jan 09, 2019 6:40 pm
jainn wrote:
Mon Jan 07, 2019 8:26 pm
We like this blog post, regarding CAPE withdrawals, which is a variable/option using cfiresim.
Thank you for bringing this up, jainn- I hadn’t seen this before. Very interesting to incorporate CAPE in the calculation.
We prefer to use the most conservative method available (CAPE 1.00/.05), mostly out of fear due to us living on our portfolio at a youngish age with 3 kids and have no plans returning to the work force.

https://earlyretirementnow.com/2017/08/ ... sed-rules/
2 questions:
- I see that 1/0.5 is the most conservative of the choices, but not sure how that was arrived at - any insight?
- Do you see this formula as a perpetual WR? It’s always tied to latest principal, so it will work “forever “, do I understand that correctly?

Thanks again,

TxIn
I believe the two sites, earlyretirementnow and cfiresim, feel it is a perpetual/forever portfolio based on their backtesting and analysis. You'll see the ERN site also notices how conservative that is, compared to higher withdrawal rate results that include portfolio depletion, so they provide additional formulas that are less conservative.

Here is a paper from Jim Otar called
Perpetual Distribution Rates for Foundations, Endowments and Charitable Trusts: A Non-Gaussian Analysis
http://www.retirementoptimizer.com/Whit ... rpDist.pdf

Executive Summary
In this paper, we analyze various perpetual distribution scenarios. These are applicable to foundations, endowments, charitable trusts and any type of distribution planning where perpetuity is the prime objective.

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Re: Safe withdrawal rate at 38 years old

Post by willthrill81 » Thu Jan 10, 2019 10:37 am

jainn wrote:
Thu Jan 10, 2019 10:14 am
TxInjun wrote:
Wed Jan 09, 2019 6:40 pm
jainn wrote:
Mon Jan 07, 2019 8:26 pm
We like this blog post, regarding CAPE withdrawals, which is a variable/option using cfiresim.
Thank you for bringing this up, jainn- I hadn’t seen this before. Very interesting to incorporate CAPE in the calculation.
We prefer to use the most conservative method available (CAPE 1.00/.05), mostly out of fear due to us living on our portfolio at a youngish age with 3 kids and have no plans returning to the work force.

https://earlyretirementnow.com/2017/08/ ... sed-rules/
2 questions:
- I see that 1/0.5 is the most conservative of the choices, but not sure how that was arrived at - any insight?
- Do you see this formula as a perpetual WR? It’s always tied to latest principal, so it will work “forever “, do I understand that correctly?

Thanks again,

TxIn
I believe the two sites, earlyretirementnow and cfiresim, feel it is a perpetual/forever portfolio based on their backtesting and analysis. You'll see the ERN site also notices how conservative that is, compared to higher withdrawal rate results that include portfolio depletion, so they provide additional formulas that are less conservative.

Here is a paper from Jim Otar called
Perpetual Distribution Rates for Foundations, Endowments and Charitable Trusts: A Non-Gaussian Analysis
http://www.retirementoptimizer.com/Whit ... rpDist.pdf

Executive Summary
In this paper, we analyze various perpetual distribution scenarios. These are applicable to foundations, endowments, charitable trusts and any type of distribution planning where perpetuity is the prime objective.
Once you go much beyond a 30 year withdrawal period, the safe withdrawal rate begins to approach the perpetual withdrawal rate (i.e. which has been close to 3%), as this graph I put together not long ago shows (all U.S. assets, data from FIRECalc).

Image
“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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