Larry Swedroe: 3% is the new 4%

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visualguy
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Re: Larry Swedroe: 3% is the new 4%

Post by visualguy » Wed Sep 11, 2019 7:22 pm

willthrill81 wrote:
Wed Sep 11, 2019 7:11 pm
I still don't see your point. What's wrong with starting your withdrawals at 4% and then cutting back to 3% if needed? Why take '3% medicine' if you're still healthy?
Nothing wrong with it, but it doesn't allow you to retire earlier or save less money. It's still the same retirement portfolio size. In one case, you have a lower multiple and higher planned-for expenses, and in the other case you have a higher multiple with lower planned-for expenses. In both cases, you need to save more than if you could rely on the 4% rule, which is Larry's point.

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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 » Wed Sep 11, 2019 7:47 pm

visualguy wrote:
Wed Sep 11, 2019 7:22 pm
willthrill81 wrote:
Wed Sep 11, 2019 7:11 pm
I still don't see your point. What's wrong with starting your withdrawals at 4% and then cutting back to 3% if needed? Why take '3% medicine' if you're still healthy?
Nothing wrong with it, but it doesn't allow you to retire earlier or save less money. It's still the same retirement portfolio size. In one case, you have a lower multiple and higher planned-for expenses, and in the other case you have a higher multiple with lower planned-for expenses. In both cases, you need to save more than if you could rely on the 4% rule, which is Larry's point.
Even if we knew that 4% would absolutely succeed, it wouldn't change our plans at all. We would still want significant discretionary spending in retirement. We aren't purposefully padding our retirement 'just in case'.
“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

visualguy
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Re: Larry Swedroe: 3% is the new 4%

Post by visualguy » Wed Sep 11, 2019 8:21 pm

willthrill81 wrote:
Wed Sep 11, 2019 7:47 pm
visualguy wrote:
Wed Sep 11, 2019 7:22 pm
willthrill81 wrote:
Wed Sep 11, 2019 7:11 pm
I still don't see your point. What's wrong with starting your withdrawals at 4% and then cutting back to 3% if needed? Why take '3% medicine' if you're still healthy?
Nothing wrong with it, but it doesn't allow you to retire earlier or save less money. It's still the same retirement portfolio size. In one case, you have a lower multiple and higher planned-for expenses, and in the other case you have a higher multiple with lower planned-for expenses. In both cases, you need to save more than if you could rely on the 4% rule, which is Larry's point.
Even if we knew that 4% would absolutely succeed, it wouldn't change our plans at all. We would still want significant discretionary spending in retirement. We aren't purposefully padding our retirement 'just in case'.
I think you mentioned before that you expect 50% of your expenses to be discretionary. That certainly gives you a large margin of safety, but I don't think this is typical. Mine will probably be 20%-25%. If I wanted to bump it up to 50%, it would take years of additional work (the same as increasing the multiple). 50% is pretty unrealistic for most in HCOL/VHCOL areas. Also, I really don't want to give up those 20%-25% (even though they are discretionary), particularly in the first 10-12 years of retirement.

marcopolo
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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo » Wed Sep 11, 2019 8:27 pm

visualguy wrote:
Wed Sep 11, 2019 7:22 pm
willthrill81 wrote:
Wed Sep 11, 2019 7:11 pm
I still don't see your point. What's wrong with starting your withdrawals at 4% and then cutting back to 3% if needed? Why take '3% medicine' if you're still healthy?
Nothing wrong with it, but it doesn't allow you to retire earlier or save less money. It's still the same retirement portfolio size. In one case, you have a lower multiple and higher planned-for expenses, and in the other case you have a higher multiple with lower planned-for expenses. In both cases, you need to save more than if you could rely on the 4% rule, which is Larry's point.
Seems to me the big difference is in your resulting lifestyle.

In the first case you are able to spend more money doing the things you enjoy and only need to cut back in the small percentage of cases where really bad things happen.

In the second scenario you have assumed the low-probability, really bad things, will happen and have curtailed your spending up front. In the vast majority of cases you will end up with a huge unspent nest egg. Your heirs will be happy, which might be a fine goal.

I think either scenario is really just personal preference. Which is why none of this discussion is likely to change anyone's mind.
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: Larry Swedroe: 3% is the new 4%

Post by randomguy » Thu Sep 12, 2019 8:22 am

marcopolo wrote:
Wed Sep 11, 2019 8:27 pm
visualguy wrote:
Wed Sep 11, 2019 7:22 pm
willthrill81 wrote:
Wed Sep 11, 2019 7:11 pm
I still don't see your point. What's wrong with starting your withdrawals at 4% and then cutting back to 3% if needed? Why take '3% medicine' if you're still healthy?
Nothing wrong with it, but it doesn't allow you to retire earlier or save less money. It's still the same retirement portfolio size. In one case, you have a lower multiple and higher planned-for expenses, and in the other case you have a higher multiple with lower planned-for expenses. In both cases, you need to save more than if you could rely on the 4% rule, which is Larry's point.
Seems to me the big difference is in your resulting lifestyle.

In the first case you are able to spend more money doing the things you enjoy and only need to cut back in the small percentage of cases where really bad things happen.

In the second scenario you have assumed the low-probability, really bad things, will happen and have curtailed your spending up front. In the vast majority of cases you will end up with a huge unspent nest egg. Your heirs will be happy, which might be a fine goal.

I think either scenario is really just personal preference. Which is why none of this discussion is likely to change anyone's mind.
It should be pointed out that if the SWR is 3% and you start at 4%, you don't get to cut back to 3%. You will need to cut back to 2.5% or 2% since you will have spend more money during the time it takes you to cut back. And I am not sure I would call 25%+ cuts "small".:) For most people that is most of their discretionary spending budget.

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HomerJ
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Re: Larry Swedroe: 3% is the new 4%

Post by HomerJ » Thu Sep 12, 2019 8:57 am

randomguy wrote:
Thu Sep 12, 2019 8:22 am
It should be pointed out that if the SWR is 3% and you start at 4%, you don't get to cut back to 3%. You will need to cut back to 2.5% or 2% since you will have spend more money during the time it takes you to cut back. And I am not sure I would call 25%+ cuts "small".:) For most people that is most of their discretionary spending budget.
Yeah, but none of us actually believe 3%.

We can accept that 4% may not be 100% safe, and we may have to cut back a bit if there's a market crash early on, but none of us expect to have to cut all the way to 3%.

Heck, just stop taking the inflation adjustment makes a huge difference.

And there's always Plan C.

Halfway through retirement, if your money is depleting faster than you expected, one can always get a SPIA.

At 70+, SPIAs pay near 8% and higher...

Sure, not a great plan... the money is GONE, and your heirs won't inherit much, but it can help you keep up your lifestyle if you absolutely refuse to cut back.

There is a logical lower limit to SWRs. You only need 0% real return for 3.33% to work for 30 years. At some point, you're basically just predicting World War III, or a pandemic that sweeps the globe, etc. Something that breaks all the current systems.

Which is possible, but 3% (or even 2%) won't be 100% safe in such a situation. Nothing is 100% safe.
The J stands for Jay

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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 » Thu Sep 12, 2019 9:21 am

HomerJ wrote:
Thu Sep 12, 2019 8:57 am
randomguy wrote:
Thu Sep 12, 2019 8:22 am
It should be pointed out that if the SWR is 3% and you start at 4%, you don't get to cut back to 3%. You will need to cut back to 2.5% or 2% since you will have spend more money during the time it takes you to cut back. And I am not sure I would call 25%+ cuts "small".:) For most people that is most of their discretionary spending budget.
Yeah, but none of us actually believe 3%.

We can accept that 4% may not be 100% safe, and we may have to cut back a bit if there's a market crash early on, but none of us expect to have to cut all the way to 3%.

Heck, just stop taking the inflation adjustment makes a huge difference.

And there's always Plan C.

Halfway through retirement, if your money is depleting faster than you expected, one can always get a SPIA.

At 70+, SPIAs pay near 8% and higher...

Sure, not a great plan... the money is GONE, and your heirs won't inherit much, but it can help you keep up your lifestyle if you absolutely refuse to cut back.

There is a logical lower limit to SWRs. You only need 0% real return for 3.33% to work for 30 years. At some point, you're basically just predicting World War III, or a pandemic that sweeps the globe, etc. Something that breaks all the current systems.

Which is possible, but 3% (or even 2%) won't be 100% safe in such a situation. Nothing is 100% safe.
As I've pointed out repeatedly, Derek Tharp found that just taking a 3% spending cut (basically foregoing an inflation adjustment), which is about as painless as any cut can be, when stocks were down boosted the historic SWR to above 4.5%. So if you're starting at 4% and do this, it's going to be roughly equivalent to a 3.5-3.6% SWR, which has historically been just above the perpetual withdrawal rate.

And yes, 'bailing out' to a SPIA is a definite fallback option. So is a reverse mortgage.

Part of our fallback option is deferring SS to age 70, when just 65% of our currently projected benefits would cover all of our essential spending, which is basically an 'income flooring' approach. And deferring until age 70 also carries the benefit of giving us lots of time (~15 years) to make Roth conversions. Win-win.
“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

Seasonal
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Re: Larry Swedroe: 3% is the new 4%

Post by Seasonal » Thu Sep 12, 2019 9:55 am

MathIsMyWayr wrote:
Tue Sep 10, 2019 8:07 am
Seasonal wrote:
Tue Sep 10, 2019 7:53 am
HomerJ wrote:
Mon Sep 09, 2019 12:48 pm
(Technically, something worse than the Great Depression, since 4% worked for the Great Depression, and one COULD have continued to take European river cruises)
There is no necessary connection between the economy and the market. It's quite possible for one to do well and the other poorly.
Only for a short term. Over a longer term, they are related with each other.
They might be.

"Related" covers a rather broad range of outcomes.

Expectations of profits of existing companies play a rather large part in market performance. GDP is largely actual revenue of existing and new companies.

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Re: Larry Swedroe: 3% is the new 4%

Post by protagonist » Thu Sep 12, 2019 10:00 am

Random Walker wrote:
Sat Feb 02, 2019 10:08 pm
One point he makes is that the new rule of thumb for retirement withdrawal rate is 3% as opposed to the 4% derived from Trinity study: current equity valuations generous and expected future returns modest, bond yields lower.

4 hoarsemen of retirement apocalypse:low bond yields, higher equity valuations, shaky social security, longer life expectancies..

Dave
Low bond yields would probably be associated with low inflation so yield in real terms would not significantly differ, no? If you get 3% on a CD and inflation is 2% you are doing better than if you get 7% on a CD and inflation is 6%.
I would guess that very few retirees have ever heard of recommended withdrawal rates, yet the ones I know are doing just fine if they are generally sensible about their money.
The only people I think that need to think about this are ones who are prone to overspending and need to set limits.
It's a bit like overeating I suppose. Most of us don't have to set limits if we are not prone to obesity....we don't think about it much. But if one has a problem then a strict diet and counting calories becomes important.

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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy » Thu Sep 12, 2019 10:05 am

HomerJ wrote:
Thu Sep 12, 2019 8:57 am
randomguy wrote:
Thu Sep 12, 2019 8:22 am
It should be pointed out that if the SWR is 3% and you start at 4%, you don't get to cut back to 3%. You will need to cut back to 2.5% or 2% since you will have spend more money during the time it takes you to cut back. And I am not sure I would call 25%+ cuts "small".:) For most people that is most of their discretionary spending budget.
Yeah, but none of us actually believe 3%.

We can accept that 4% may not be 100% safe, and we may have to cut back a bit if there's a market crash early on, but none of us expect to have to cut all the way to 3%.

Heck, just stop taking the inflation adjustment makes a huge difference.

And there's always Plan C.

Halfway through retirement, if your money is depleting faster than you expected, one can always get a SPIA.

At 70+, SPIAs pay near 8% and higher...

Sure, not a great plan... the money is GONE, and your heirs won't inherit much, but it can help you keep up your lifestyle if you absolutely refuse to cut back.

There is a logical lower limit to SWRs. You only need 0% real return for 3.33% to work for 30 years. At some point, you're basically just predicting World War III, or a pandemic that sweeps the globe, etc. Something that breaks all the current systems.

Which is possible, but 3% (or even 2%) won't be 100% safe in such a situation. Nothing is 100% safe.
Sure they pay 8% nominal. But if you have less than half your starting money left, that might not be enough. Everyone likes to throw out if things go wrong, just buy an annuity. It isn't remotely clear if it actually works in the bad cases.

You only get that lower limit if you avoid taking on risk. If you buy a TIPS ladder your lower SWR is 3.33%. If you invest 50/50 you take on the risk of lower SWRs. Now if you are a 2%er and not worried about leaving behind a huge pile of cash, buying a 4% real annuity with half the money and investing the rest is going to give you an above 2% SWR.

randomguy
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Re: Larry Swedroe: 3% is the new 4%

Post by randomguy » Thu Sep 12, 2019 10:23 am

willthrill81 wrote:
Thu Sep 12, 2019 9:21 am


As I've pointed out repeatedly, Derek Tharp found that just taking a 3% spending cut (basically foregoing an inflation adjustment), which is about as painless as any cut can be, when stocks were down boosted the historic SWR to above 4.5%. So if you're starting at 4% and do this, it's going to be roughly equivalent to a 3.5-3.6% SWR, which has historically been just above the perpetual withdrawal rate.
It didn't boost the historical SWR to 4.5%. You were able to take out 4.5% in the first year but you had to cut spending to ~3.6% for year 15+. 3% sounds painless. But 6 3% cuts really adds up. So instead of a steady 4% you got a bit more money early, and less money late. That might be a good tradeoff. You just need to make sure you can live with the minimum the scheme can put out. I am guessing if you ran this scheme using Larry's simulation, you would see income bottom out down around 2.5%.

You always will be faced with a tradeoff. The more you take early on, the deeper/longer your cuts will need to be. It is unavoidable. The more your willing to cut, the more aggressive you can be early on.

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willthrill81
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Re: Larry Swedroe: 3% is the new 4%

Post by willthrill81 » Thu Sep 12, 2019 10:27 am

randomguy wrote:
Thu Sep 12, 2019 10:23 am
willthrill81 wrote:
Thu Sep 12, 2019 9:21 am


As I've pointed out repeatedly, Derek Tharp found that just taking a 3% spending cut (basically foregoing an inflation adjustment), which is about as painless as any cut can be, when stocks were down boosted the historic SWR to above 4.5%. So if you're starting at 4% and do this, it's going to be roughly equivalent to a 3.5-3.6% SWR, which has historically been just above the perpetual withdrawal rate.
It didn't boost the historical SWR to 4.5%.
Yes, I should have said that it boosted the starting WR to 4.5% (4.56% actually).
“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

marcopolo
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Re: Larry Swedroe: 3% is the new 4%

Post by marcopolo » Thu Sep 12, 2019 12:05 pm

randomguy wrote:
Thu Sep 12, 2019 8:22 am
marcopolo wrote:
Wed Sep 11, 2019 8:27 pm
visualguy wrote:
Wed Sep 11, 2019 7:22 pm
willthrill81 wrote:
Wed Sep 11, 2019 7:11 pm
I still don't see your point. What's wrong with starting your withdrawals at 4% and then cutting back to 3% if needed? Why take '3% medicine' if you're still healthy?
Nothing wrong with it, but it doesn't allow you to retire earlier or save less money. It's still the same retirement portfolio size. In one case, you have a lower multiple and higher planned-for expenses, and in the other case you have a higher multiple with lower planned-for expenses. In both cases, you need to save more than if you could rely on the 4% rule, which is Larry's point.
Seems to me the big difference is in your resulting lifestyle.

In the first case you are able to spend more money doing the things you enjoy and only need to cut back in the small percentage of cases where really bad things happen.

In the second scenario you have assumed the low-probability, really bad things, will happen and have curtailed your spending up front. In the vast majority of cases you will end up with a huge unspent nest egg. Your heirs will be happy, which might be a fine goal.

I think either scenario is really just personal preference. Which is why none of this discussion is likely to change anyone's mind.
It should be pointed out that if the SWR is 3% and you start at 4%, you don't get to cut back to 3%. You will need to cut back to 2.5% or 2% since you will have spend more money during the time it takes you to cut back. And I am not sure I would call 25%+ cuts "small".:) For most people that is most of their discretionary spending budget.
I didn't say the cuts were small, I said the probability of needing to make them is small.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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