Will we be OK at 3% WR?

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tibbitts
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Re: Will we be OK at 3% WR?

Post by tibbitts » Wed Nov 06, 2019 8:47 pm

marcopolo wrote:
Wed Nov 06, 2019 8:29 pm
Thesaints wrote:
Wed Nov 06, 2019 7:41 pm

The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
Perhaps at least some of your concern about low WR stems from this fundamental miss-understanding of SWR studies. They are NOT based on AVERAGE returns. They are best on the WORST CASE scenario over a given time period. So, for instance things like retiring at the beginning of the Grear Depression are covered. The limiting case for most SWR studies is typically high inflation (like the 70s in the US), or devastation of the economy due to major war on their soil. Rarely does poor performance due to high valuations, low interest rate result in that kind failure.
But they were also based on the U.S.-only market returns, and have been limited to durations that will exceed the retirements that many Bogleheads are planning for.

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HomerJ
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Re: Will we be OK at 3% WR?

Post by HomerJ » Wed Nov 06, 2019 8:55 pm

Thesaints wrote:
Wed Nov 06, 2019 7:41 pm
KnowNth wrote:
Wed Nov 06, 2019 6:28 pm
Really? Even 3% is debatable now? What's next, 2.5% is too aggressive?
The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
This is incorrect, and indicates you don't understand the subject.

SAFE WITHDRAWALS are based on the past WORST times, not the average times.

Average times, one could pull 6%-7% a year and never go broke.

4% is based on the worst historical times for a 60/40 portfolio.

We do not need anything close to historical average returns for 4% withdrawals to work.

Yes, the next 30 years could be even worse than the Great Depression and 25% unemployment. It is possible. If 4% is bare-bones survival, perhaps one should try to work longer...

But if 4% includes some discretionary spending like multiple vacations or expensive restaurants or sporting events or theater tickets, etc. then it totally makes sense to use 4% as a safe withdrawal rate. The odds are very high that you will be able to spend MORE as time goes by, the odds are small that you will break even at 4%, and the odds are tiny (but non-zero) that you might have to cut back from 4 trips a year to 2 trips a year.

That worst case isn't likely and isn't too painful.

Working another 5-10 years to get down to 2%-3% is probably not worth it.

I think most of the 2% crowd here are just very very rich (and wisely frugal). They hit 4% at 45, and it was no big sacrifice to work until 57 and 2% withdrawals. But that doesn't mean 2% is necessary.

It's not. It's silly conservative. If you're 55+ and you have 25x expenses (with discretionary fun stuff in there), there's no need to keep working another 10 years and risk dying at your desk to get down to 2.5% or 3%.

It's a bad trade-off (unless your goal is to make your kids as rich as possible)
Last edited by HomerJ on Wed Nov 06, 2019 9:27 pm, edited 5 times in total.
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HomerJ
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Re: Will we be OK at 3% WR?

Post by HomerJ » Wed Nov 06, 2019 8:58 pm

Grt2bOutdoors wrote:
Wed Nov 06, 2019 8:24 pm
Leesbro63 wrote:
Wed Nov 06, 2019 8:18 pm
KnowNth wrote:
Wed Nov 06, 2019 6:28 pm
Really? Even 3% is debatable now? What's next, 2.5% is too aggressive?
I agree with this. If 3% isn't safe enough, then most people can really forget about retirement planning. I mean, how many people can and will save 33x what they spend, let alone even more (for a <3% SWR)? The whole idea about using 4% is that it's ALREADY conservative.
This was published in 2015 by Wade Pfau. https://www.onefpa.org/journal/Pages/AU ... Study.aspx
Wade Pfau makes several bad assumptions, not least of which is he assumes a 1% financial advisor fee, which Bogleheads do not have.

Pfau has been saying 2%-3% is the new 4% since 2011. Yet he still has a job as a forecasting economist.
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HomerJ
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Re: Will we be OK at 3% WR?

Post by HomerJ » Wed Nov 06, 2019 9:03 pm

tibbitts wrote:
Wed Nov 06, 2019 8:47 pm
marcopolo wrote:
Wed Nov 06, 2019 8:29 pm
Thesaints wrote:
Wed Nov 06, 2019 7:41 pm

The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
Perhaps at least some of your concern about low WR stems from this fundamental miss-understanding of SWR studies. They are NOT based on AVERAGE returns. They are best on the WORST CASE scenario over a given time period. So, for instance things like retiring at the beginning of the Grear Depression are covered. The limiting case for most SWR studies is typically high inflation (like the 70s in the US), or devastation of the economy due to major war on their soil. Rarely does poor performance due to high valuations, low interest rate result in that kind failure.
But they were also based on the U.S.-only market returns, and have been limited to durations that will exceed the retirements that many Bogleheads are planning for.
They do not exceed the durations that many Bogleheads will GET... You can plan for a 50-year retirement at age 52.... You're probably not going to get it, and you're absolutely wasting your time and making a bad trade-off working an extra 5-10 years to make absolutely sure you can still take 5 cruises a year at age 102 (if you live that long - which you won't)
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wander
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Re: Will we be OK at 3% WR?

Post by wander » Wed Nov 06, 2019 9:17 pm

3% is doable for me but I don't want to rely on ACA so here I am still working.

marcopolo
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Re: Will we be OK at 3% WR?

Post by marcopolo » Wed Nov 06, 2019 9:18 pm

tibbitts wrote:
Wed Nov 06, 2019 8:47 pm
marcopolo wrote:
Wed Nov 06, 2019 8:29 pm
Thesaints wrote:
Wed Nov 06, 2019 7:41 pm

The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
Perhaps at least some of your concern about low WR stems from this fundamental miss-understanding of SWR studies. They are NOT based on AVERAGE returns. They are best on the WORST CASE scenario over a given time period. So, for instance things like retiring at the beginning of the Grear Depression are covered. The limiting case for most SWR studies is typically high inflation (like the 70s in the US), or devastation of the economy due to major war on their soil. Rarely does poor performance due to high valuations, low interest rate result in that kind failure.
But they were also based on the U.S.-only market returns, and have been limited to durations that will exceed the retirements that many Bogleheads are planning for.
This is not correct.

There have been numerous studies of SWR in various countries as well as globally invested, as well as numerous discussion on this forum about them. US results are near the top. Almost all the countries with low SWR are limited by years where the country was bombed to near oblivion.
Once in a while you get shown the light, in the strangest of places if you look at it right.

tibbitts
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Re: Will we be OK at 3% WR?

Post by tibbitts » Wed Nov 06, 2019 9:34 pm

HomerJ wrote:
Wed Nov 06, 2019 9:03 pm
tibbitts wrote:
Wed Nov 06, 2019 8:47 pm
marcopolo wrote:
Wed Nov 06, 2019 8:29 pm
Thesaints wrote:
Wed Nov 06, 2019 7:41 pm

The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
Perhaps at least some of your concern about low WR stems from this fundamental miss-understanding of SWR studies. They are NOT based on AVERAGE returns. They are best on the WORST CASE scenario over a given time period. So, for instance things like retiring at the beginning of the Grear Depression are covered. The limiting case for most SWR studies is typically high inflation (like the 70s in the US), or devastation of the economy due to major war on their soil. Rarely does poor performance due to high valuations, low interest rate result in that kind failure.
But they were also based on the U.S.-only market returns, and have been limited to durations that will exceed the retirements that many Bogleheads are planning for.
They do not exceed the durations that many Bogleheads will GET... You can plan for a 50-year retirement at age 52.... You're probably not going to get it, and you're absolutely wasting your time and making a bad trade-off working an extra 5-10 years to make absolutely sure you can still take 5 cruises a year at age 102 (if you live that long - which you won't)
True, the vast majority of Bogleheads won't reach 95 or 100, which are probably the typical planning ages today. I'm pretty sure I won't, although one of my parents did. But I just reitreed a year early (61, while my employer's normal retirement is 62) - and took a considerable financial hit to do that, so I'm not making that 5-10 year tradeoff. About the cruises, it might be cheaper to live on a cruise ship than in some assisted living facilities, so maybe those 102-year-olds will just take one long cruise, and not merely 5 cruises a year.

Luckywon
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Re: Will we be OK at 3% WR?

Post by Luckywon » Wed Nov 06, 2019 9:54 pm

tibbitts wrote:
Wed Nov 06, 2019 8:47 pm
marcopolo wrote:
Wed Nov 06, 2019 8:29 pm
Thesaints wrote:
Wed Nov 06, 2019 7:41 pm

The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
Perhaps at least some of your concern about low WR stems from this fundamental miss-understanding of SWR studies. They are NOT based on AVERAGE returns. They are best on the WORST CASE scenario over a given time period. So, for instance things like retiring at the beginning of the Grear Depression are covered. The limiting case for most SWR studies is typically high inflation (like the 70s in the US), or devastation of the economy due to major war on their soil. Rarely does poor performance due to high valuations, low interest rate result in that kind failure.
But they were also based on the U.S.-only market returns, and have been limited to durations that will exceed the retirements that many Bogleheads are planning for.
Not sure I am reading into your comment correctly, but are you stating that the SWR studies, being based on U.S. only market returns, may underestimate the potential for running out of money due to lower returns of international? If so, I would question this. I believe most people buy international to diversify. Having international in your equities may or may not reduce the average return, but it surely should reduce the chance of a catastrophe (i.e. running out of money).

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Re: Will we be OK at 3% WR?

Post by AlohaJoe » Wed Nov 06, 2019 10:37 pm

marcopolo wrote:
Wed Nov 06, 2019 9:18 pm
There have been numerous studies of SWR in various countries as well as globally invested, as well as numerous discussion on this forum about them. US results are near the top. Almost all the countries with low SWR are limited by years where the country was bombed to near oblivion.
To elaborate on this (remember the OP is asking about a 3% withdrawal rate). According Wade Pfau[1], 3% withdrawals worked in:
  • New Zealand
  • The Netherlands
  • Australia
  • Canada
  • Sweden
  • South Africa
  • The United States
  • The United Kingdom
  • Ireland
  • Spain
  • Denmark
  • Finland
  • Switzerland
  • Norway
Where did 3% withdrawals fail?
  • Belgium, if you retired in 1937.
  • France, if you retired in 1943.
  • Japan, if you retired in 1946.
  • Austria, if you retired in 1946.
  • Italy, if you retired in 1944.
  • Germany...lots of failures.
And that's based on the worst possible case. If you allow a 5% failure rate, then every country but Germany has a withdrawal rate higher than 3%. Germany doesn't make the cut thanks to WW1 and WW2.

[1]: "Does International Diversification Improve Safe Withdrawal Rates?" (March 4, 2014)

tibbitts
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Re: Will we be OK at 3% WR?

Post by tibbitts » Wed Nov 06, 2019 10:40 pm

Luckywon wrote:
Wed Nov 06, 2019 9:54 pm
tibbitts wrote:
Wed Nov 06, 2019 8:47 pm
marcopolo wrote:
Wed Nov 06, 2019 8:29 pm
Thesaints wrote:
Wed Nov 06, 2019 7:41 pm

The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
Perhaps at least some of your concern about low WR stems from this fundamental miss-understanding of SWR studies. They are NOT based on AVERAGE returns. They are best on the WORST CASE scenario over a given time period. So, for instance things like retiring at the beginning of the Grear Depression are covered. The limiting case for most SWR studies is typically high inflation (like the 70s in the US), or devastation of the economy due to major war on their soil. Rarely does poor performance due to high valuations, low interest rate result in that kind failure.
But they were also based on the U.S.-only market returns, and have been limited to durations that will exceed the retirements that many Bogleheads are planning for.
Not sure I am reading into your comment correctly, but are you stating that the SWR studies, being based on U.S. only market returns, may underestimate the potential for running out of money due to lower returns of international? If so, I would question this. I believe most people buy international to diversify. Having international in your equities may or may not reduce the average return, but it surely should reduce the chance of a catastrophe (i.e. running out of money).
I'm only saying that if the studies had been done using the mix of assets Bogleheads actually hold, the results would have been higher failure rates than in the domestic-only studies that have been done. So you would have wound up with maybe a 3.5% SWR rather than the oft-quoted 4%.

visualguy
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Re: Will we be OK at 3% WR?

Post by visualguy » Wed Nov 06, 2019 10:42 pm

AlohaJoe wrote:
Wed Nov 06, 2019 10:37 pm
marcopolo wrote:
Wed Nov 06, 2019 9:18 pm
There have been numerous studies of SWR in various countries as well as globally invested, as well as numerous discussion on this forum about them. US results are near the top. Almost all the countries with low SWR are limited by years where the country was bombed to near oblivion.
To elaborate on this (remember the OP is asking about a 3% withdrawal rate). According Wade Pfau[1], 3% withdrawals worked in:
  • New Zealand
  • The Netherlands
  • Australia
  • Canada
  • Sweden
  • South Africa
  • The United States
  • The United Kingdom
  • Ireland
  • Spain
  • Denmark
  • Finland
  • Switzerland
  • Norway
Where did 3% withdrawals fail?
  • Belgium, if you retired in 1937.
  • France, if you retired in 1943.
  • Japan, if you retired in 1946.
  • Austria, if you retired in 1946.
  • Italy, if you retired in 1944.
  • Germany...lots of failures.
And that's based on the worst possible case. If you allow a 5% failure rate, then every country but Germany has a withdrawal rate higher than 3%. Germany doesn't make the cut thanks to WW1 and WW2.

[1]: "Does International Diversification Improve Safe Withdrawal Rates?" (March 4, 2014)
This study was for a 30-year retirement. OP has to plan for 40+ years.

Luckywon
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Re: Will we be OK at 3% WR?

Post by Luckywon » Wed Nov 06, 2019 11:03 pm

tibbitts wrote:
Wed Nov 06, 2019 10:40 pm
Luckywon wrote:
Wed Nov 06, 2019 9:54 pm
tibbitts wrote:
Wed Nov 06, 2019 8:47 pm
marcopolo wrote:
Wed Nov 06, 2019 8:29 pm
Thesaints wrote:
Wed Nov 06, 2019 7:41 pm

The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.
Perhaps at least some of your concern about low WR stems from this fundamental miss-understanding of SWR studies. They are NOT based on AVERAGE returns. They are best on the WORST CASE scenario over a given time period. So, for instance things like retiring at the beginning of the Grear Depression are covered. The limiting case for most SWR studies is typically high inflation (like the 70s in the US), or devastation of the economy due to major war on their soil. Rarely does poor performance due to high valuations, low interest rate result in that kind failure.
But they were also based on the U.S.-only market returns, and have been limited to durations that will exceed the retirements that many Bogleheads are planning for.
Not sure I am reading into your comment correctly, but are you stating that the SWR studies, being based on U.S. only market returns, may underestimate the potential for running out of money due to lower returns of international? If so, I would question this. I believe most people buy international to diversify. Having international in your equities may or may not reduce the average return, but it surely should reduce the chance of a catastrophe (i.e. running out of money).
I'm only saying that if the studies had been done using the mix of assets Bogleheads actually hold, the results would have been higher failure rates than in the domestic-only studies that have been done. So you would have wound up with maybe a 3.5% SWR rather than the oft-quoted 4%.
Is this necessarily the case? A mix of assets may reduce average returns but reduce the risk of severe decline. That's the point of diversification.

marcopolo
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Re: Will we be OK at 3% WR?

Post by marcopolo » Wed Nov 06, 2019 11:07 pm

visualguy wrote:
Wed Nov 06, 2019 10:42 pm
AlohaJoe wrote:
Wed Nov 06, 2019 10:37 pm
marcopolo wrote:
Wed Nov 06, 2019 9:18 pm
There have been numerous studies of SWR in various countries as well as globally invested, as well as numerous discussion on this forum about them. US results are near the top. Almost all the countries with low SWR are limited by years where the country was bombed to near oblivion.
To elaborate on this (remember the OP is asking about a 3% withdrawal rate). According Wade Pfau[1], 3% withdrawals worked in:
  • New Zealand
  • The Netherlands
  • Australia
  • Canada
  • Sweden
  • South Africa
  • The United States
  • The United Kingdom
  • Ireland
  • Spain
  • Denmark
  • Finland
  • Switzerland
  • Norway
Where did 3% withdrawals fail?
  • Belgium, if you retired in 1937.
  • France, if you retired in 1943.
  • Japan, if you retired in 1946.
  • Austria, if you retired in 1946.
  • Italy, if you retired in 1944.
  • Germany...lots of failures.
And that's based on the worst possible case. If you allow a 5% failure rate, then every country but Germany has a withdrawal rate higher than 3%. Germany doesn't make the cut thanks to WW1 and WW2.

[1]: "Does International Diversification Improve Safe Withdrawal Rates?" (March 4, 2014)
This study was for a 30-year retirement. OP has to plan for 40+ years.
If you look at the study, the "world portfolio" is about 3.5% for 30 years. that also looks about average for the "non-bombed to oblivion" countries.
3.5% WR equates to ~28.5x of expenses. The OP is talking about 3%, which is 33.3x expenses. If you took the difference (~4.8x expenses) and let it grow for the 30 years you would end up with something close to 10x with 2% real returns, and then add that to whatever is left from the original 28.5x withdrawn over 30 years (remember, most often you will have a significant amount leftover), it does not seem unreasonable that would last the additional 10 years or so that is needed.

But, yes if we get 0% real returns for the next 40 years all of this falls apart. If you think that is a likely outcome, why would anyone invest in the markets? Do you?
Once in a while you get shown the light, in the strangest of places if you look at it right.

Luckywon
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Re: Will we be OK at 3% WR?

Post by Luckywon » Wed Nov 06, 2019 11:42 pm

The real danger to OP is not portfolio returns. A personal catastrophe causing high expenses such as a large legal judgement, divorce, dementia requiring years of LTC, probably even kidnapping/ransom are more likely to cause OP's portfolio to fail.

CFM300
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Re: Will we be OK at 3% WR?

Post by CFM300 » Thu Nov 07, 2019 1:02 am

JoeRetire wrote:
Wed Nov 06, 2019 6:15 am
CFM300 wrote:
Wed Nov 06, 2019 12:58 am
Firecalc.com shows zero failures for 3% inflation-adjusted withdrawals over 30, 40, and 50 years, using the default settings/assumptions.
So you are assuming facts not in evidence.
Nope. I made no assumptions.
JoeRetire wrote:
Wed Nov 06, 2019 6:15 am
The OP hasn't yet stated how the assets are invested.
Correct. Which is why I was sure to point out that the Firecalc results were based on their default settings/assumptions.

Thesaints
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Re: Will we be OK at 3% WR?

Post by Thesaints » Thu Nov 07, 2019 2:31 am

HomerJ wrote:
Wed Nov 06, 2019 8:55 pm
This is incorrect, and indicates you don't understand the subject.

SAFE WITHDRAWALS are based on the past WORST times, not the average times.
Not really. They were calculated using sequences of past market returns. By definition those sequences, on average, have an aveage market return.
Average times, one could pull 6%-7% a year and never go broke.
Maybe it is not me the one who does not understand. If you get a constant 6% return, then you can safely withdraw 6%/year for the rest of the eternity. If you get an average 6% return, by doing the same you could go broke in a short time, depending on volatility of returns (the higher the volatility, the higher the chance of depleting your capital earlier).

4% is based on the worst historical times for a 60/40 portfolio.
No, it is based on simulating many sequences of returns using past market data. That's why in a number of cases capital was depleted earlier and in some others it actually increased. IIRC, with a 4% WR the capital lasted at least 30 years in a little more than 90% of the cases.

But if 4% includes some discretionary spending like multiple vacations or expensive restaurants or sporting events or theater tickets, etc. then it totally makes sense to use 4% as a safe withdrawal rate. The odds are very high that you will be able to spend MORE as time goes by, the odds are small that you will break even at 4%, and the odds are tiny (but non-zero) that you might have to cut back from 4 trips a year to 2 trips a year.
Here we fully agree. If one has to be frugal when withdrawing 4%, that is a non-starter especially for younger people. If one can live large instead, that's certainly a good risk reducer.

marcopolo
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Re: Will we be OK at 3% WR?

Post by marcopolo » Thu Nov 07, 2019 2:56 am

Thesaints wrote:
Thu Nov 07, 2019 2:31 am
HomerJ wrote:
Wed Nov 06, 2019 8:55 pm
This is incorrect, and indicates you don't understand the subject.

SAFE WITHDRAWALS are based on the past WORST times, not the average times.
Not really. They were calculated using sequences of past market returns. By definition those sequences, on average, have an aveage market return.
Average times, one could pull 6%-7% a year and never go broke.
Maybe it is not me the one who does not understand. If you get a constant 6% return, then you can safely withdraw 6%/year for the rest of the eternity. If you get an average 6% return, by doing the same you could go broke in a short time, depending on volatility of returns (the higher the volatility, the higher the chance of depleting your capital earlier).

4% is based on the worst historical times for a 60/40 portfolio.
No, it is based on simulating many sequences of returns using past market data. That's why in a number of cases capital was depleted earlier and in some others it actually increased. IIRC, with a 4% WR the capital lasted at least 30 years in a little more than 90% of the cases.

But if 4% includes some discretionary spending like multiple vacations or expensive restaurants or sporting events or theater tickets, etc. then it totally makes sense to use 4% as a safe withdrawal rate. The odds are very high that you will be able to spend MORE as time goes by, the odds are small that you will break even at 4%, and the odds are tiny (but non-zero) that you might have to cut back from 4 trips a year to 2 trips a year.
Here we fully agree. If one has to be frugal when withdrawing 4%, that is a non-starter especially for younger people. If one can live large instead, that's certainly a good risk reducer.
You are either talking about something other than what is commonly discussed here as SWR studies (Bengen, Trinity, and similar follow-ups), or you have serious miss-understanding of what thise studies actually did.

That may be causing some the difference of opinions here.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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FiveK
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Re: Will we be OK at 3% WR?

Post by FiveK » Thu Nov 07, 2019 3:09 am

Thesaints wrote:
Thu Nov 07, 2019 2:31 am
4% is based on the worst historical times for a 60/40 portfolio.
No, it is based on simulating many sequences of returns using past market data. That's why in a number of cases capital was depleted earlier and in some others it actually increased. IIRC, with a 4% WR the capital lasted at least 30 years in a little more than 90% of the cases.
If "simulating many sequences of returns" is another way of saying "using Monte Carlo methods" then that is an incorrect description of how Bengen and the Trinity profs did their work.

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JoeRetire
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Re: Will we be OK at 3% WR?

Post by JoeRetire » Thu Nov 07, 2019 6:31 am

CFM300 wrote:
Thu Nov 07, 2019 1:02 am
JoeRetire wrote:
Wed Nov 06, 2019 6:15 am
CFM300 wrote:
Wed Nov 06, 2019 12:58 am
Firecalc.com shows zero failures for 3% inflation-adjusted withdrawals over 30, 40, and 50 years, using the default settings/assumptions.
So you are assuming facts not in evidence.
Nope. I made no assumptions.
Fair enough.

By that logic, I suppose you could have stated that Firecalc shows 100% failure using a different set of assumptions, and still not have assumed anything.

At best it would be misleading advice. At worst it would simply be wrong.

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willthrill81
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Re: Will we be OK at 3% WR?

Post by willthrill81 » Thu Nov 07, 2019 8:16 am

Thesaints wrote:
Thu Nov 07, 2019 2:31 am
HomerJ wrote:
Wed Nov 06, 2019 8:55 pm
Average times, one could pull 6%-7% a year and never go broke.
Maybe it is not me the one who does not understand. If you get a constant 6% return, then you can safely withdraw 6%/year for the rest of the eternity. If you get an average 6% return, by doing the same you could go broke in a short time, depending on volatility of returns (the higher the volatility, the higher the chance of depleting your capital earlier).
It's true that volatility, all else being equal, reduces the SWR. But it still seems that you have a flawed understanding of historic SWRs. Take a look at the chart below that Kitces created back in 2012.

Image
https://www.kitces.com/blog/what-return ... ased-upon/

This illustrates what HomerJ was referring to. During most of the 30 year historic periods, a retiree with a 30 year horizon could begin withdrawing 6% or more, at times over 10%, of their portfolio, adjust that dollar amount for inflation in subsequent years, and not run out of money in fewer than 30 years. In fact, in that graph, there were only about 12 periods where the SWR was under 5%.

Kitces noted in that same post that the returns of the first 15 years of a 30 year retirement were very strongly correlated with the 30 year SWR (r = .91). He also noted this.
The average real return on a 60/40 (re-)balanced portfolio associated with the worst safe withdrawal rate scenarios in history was a mere 0.86% average annual compound growth rate over the first 15 years of retirement.
So those decrying 4% withdrawals are saying that the possibility of a 60/40 portfolio returning less than .86% real over the next 15 years is high enough that a lower than 4% starting withdrawal rate is warranted. I do not believe that the data we have now, which imply stock returns of 4-5% real over the next decade and 0-1% real returns for bonds, indicate that the possibility of lower than 1% real portfolio returns over the next 15 years to be high enough to justify 'taking the medicine' of delaying retirement and/or starting at a lower 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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willthrill81
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Re: Will we be OK at 3% WR?

Post by willthrill81 » Thu Nov 07, 2019 8:20 am

JoeRetire wrote:
Thu Nov 07, 2019 6:31 am
CFM300 wrote:
Thu Nov 07, 2019 1:02 am
JoeRetire wrote:
Wed Nov 06, 2019 6:15 am
CFM300 wrote:
Wed Nov 06, 2019 12:58 am
Firecalc.com shows zero failures for 3% inflation-adjusted withdrawals over 30, 40, and 50 years, using the default settings/assumptions.
So you are assuming facts not in evidence.
Nope. I made no assumptions.
Fair enough.

By that logic, I suppose you could have stated that Firecalc shows 100% failure using a different set of assumptions, and still not have assumed anything.

At best it would be misleading advice. At worst it would simply be wrong.
There's nothing misleading about FIRECalc. They state the following on the home page.
If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds.
That seems perfectly reasonable to me and a great many others as well. Yes, they rightly included the word "likely" because the future is unknowable, but to the extent that it 'rhymes' with the past, it is a useful tool.
“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: Will we be OK at 3% WR?

Post by EddyB » Thu Nov 07, 2019 8:29 am

JoeRetire wrote:
Thu Nov 07, 2019 6:31 am
CFM300 wrote:
Thu Nov 07, 2019 1:02 am
JoeRetire wrote:
Wed Nov 06, 2019 6:15 am
CFM300 wrote:
Wed Nov 06, 2019 12:58 am
Firecalc.com shows zero failures for 3% inflation-adjusted withdrawals over 30, 40, and 50 years, using the default settings/assumptions.
So you are assuming facts not in evidence.
Nope. I made no assumptions.
Fair enough.

By that logic, I suppose you could have stated that Firecalc shows 100% failure using a different set of assumptions, and still not have assumed anything.

At best it would be misleading advice. At worst it would simply be wrong.
I’m not sure what your point is, but CFM300 just told the OP that a specific (but fairly common) allocation has never failed over those periods at the OP’s stated withdrawal rate. No assumption involved, and useful information for the OP (unless you assume that the OP cannot choose a 60/40 portfolio).

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Re: Will we be OK at 3% WR?

Post by Garfieldthecat » Thu Nov 07, 2019 10:24 am

Thesaints wrote:
Wed Nov 06, 2019 7:41 pm
KnowNth wrote:
Wed Nov 06, 2019 6:28 pm
Really? Even 3% is debatable now? What's next, 2.5% is too aggressive?
The historical average returns, on which past SWR determinations are based, are 10% for stocks and 7% for bonds. Good luck trying to get anything close to that now.

That said, mostly the issue is for the "FIRE crowd" i.e. relatively young people banking on the "4% withdrawal rule" over time periods spanning several decades. Risk of shortfall raises exponentially.
Unless I'm mistaken, SWR is based on the worst case periods of our history (ie Great Depression and Stagflation), it isn't based on any average. SWR is the withdrawal rate that would let you not run out of money in retirement for any 30 year period (Normally 30 years, as per Trinity and other studies).

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Re: Will we be OK at 3% WR?

Post by flyingaway » Thu Nov 07, 2019 10:46 am

Grt2bOutdoors wrote:
Wed Nov 06, 2019 8:05 pm
flyingaway wrote:
Wed Nov 06, 2019 9:56 am
livesoft wrote:
Wed Nov 06, 2019 7:10 am
I always wonder what the backstory is that causes a long-time member of the forum who has many posts to ask a question like the one posed here. Just imagine if livesoft asked that question or nisiprius! Wouldn't you wonder what was going on in their lives?
In fact, we I read a post or comment, I first look at how many posts or comments this person has made so far.
I'd better not ask any more questions then. :shock:
I hope I expressed my idea clear: The more posts a person has made, IMHO, the more reliable a person's posts are.

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Re: Will we be OK at 3% WR?

Post by Admiral » Thu Nov 07, 2019 10:53 am

I still say the entire premise of this discussion is not realistic.

If/when the stock market crashes 40% and stays down for a period of years, who is going to keep their SWR at 4% (plus inflation) forever? It simply will not happen. You can show this retired person all the historical charts in the world showing that they can continue at 4%, and it will not matter. They will cut back. And it won't be that difficult. Why? Because presumably their 4% WR is not a bare-bones, no-fat-left-to-trim lifestyle but one that includes some discretionary purchases.

Someone pulling $40k from $1m is not going to end up on the street if they have to pull $30k for some number of years. And if one has saved a lot less, then one would assume they are able to live as they want on a lot less as well.

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Re: Will we be OK at 3% WR?

Post by saveinvestbecomefree » Thu Nov 07, 2019 11:35 am

Luckywon wrote:
Wed Nov 06, 2019 6:20 pm
Stinky wrote:
Wed Nov 06, 2019 11:34 am
saveinvestbecomefree wrote:
Wed Nov 06, 2019 11:24 am
Stinky wrote:
Wed Nov 06, 2019 10:13 am
Luckywon wrote:
Wed Nov 06, 2019 2:10 am
Sorry to bring you bad news, but at a 3% withdrawal rate, adjusted for inflation, you are far, far more likely to die than outlive your money.
Huh? So you mean that OP is more likely than not to die broke at a 3% withdrawal rate?

What’s your basis for making this statement?
I think what is meant here is just the opposite....that your probability of dying far exceeds your probability of portfolio failure at a 3% withdrawal rate. When discussing portfolio failure rates over decades as we age, we often forget that the risk of dying goes up significantly over that time period. A tiny % chance of portfolio failure (if the worst times in history are repeated) is not the thing to stress about when you statistically have a 20%+ chance of dying in the next few years.
Thanks. I see what saveinvestbecomefree is saying.

I was thrown off by the “sorry to bring you bad news” comment. To me, “bad news” is running out of money before running out of life.

My bad. :oops:
Not your bad Stinky I was purposefully being a bit misleading. As saveinvestbecomefree states much more clearly, OP should be more concerned with dying with loads of money in the bank rather than outliving their money. I like this tool which graphs the incidence of dying vs going broke with various inputs.

http://engaging-data.com/will-money-last-retire-early/
I like this graphical tool as well! Here is another nice tool from Vanguard that let's you calculate the probability of life failure (i.e. likelihood of dying) to superimpose on your probability of portfolio failure over the same time period. I find this view helps put the often overemphasized worry of portfolio failure at very low SWR numbers into perspective. You're much more likely to run out of time than money at some point.

https://personal.vanguard.com/us/insigh ... ement-tool

My personal view based on everything I've researched, is that 4% for a standard 30 year retirement is quite safe especially if you have some room in your budget to make minimally painful spending cuts. If you're looking at early retirement, 3.5% should be fine (with a heavy stock allocation) but 3% is even better since there is more uncertainty in spending forecasts and you should have a higher stock allocation for such a long period. Below 3%, even for very early retirement and certainly for a regular retirement, means you are being more fearful than history/data supports and you've sacrificed a lot more of your life working than you reasonably needed to. Of course if this gives you peace of mind then it's fine, as long as you accept that your decision is more emotional than data-driven/necessary.

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Re: Will we be OK at 3% WR?

Post by evilityb » Thu Nov 07, 2019 11:57 am

I think someone already posted a link to one of the articles in this blog series. Of all of the safe withdrawal rate stuff out there, this is the most thorough I've seen, along with CAPE valuation done by a blogger at Kitces.com.

This is the article series: https://earlyretirementnow.com/2016/12/ ... t-1-intro/

If you aren't comfortable living off of your retirement assets and it's causing you to lose sleep, I suggest supplementing your income with a part time job, at least for a little while. Good luck.
Make sure the fortune that you seek is the fortune that you need - Ben Harper

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Re: Will we be OK at 3% WR?

Post by 4nursebee » Thu Nov 07, 2019 12:14 pm

I like this as my authority and answer.

https://www.bogleheads.org/wiki/Variabl ... withdrawal
4nursebee

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Re: Will we be OK at 3% WR?

Post by White Coat Investor » Thu Nov 07, 2019 12:16 pm

bhsince87 wrote:
Tue Nov 05, 2019 11:23 pm
What's your opinion? Ages 54 and 52.

Will 3% be OK going forward?

Throw it all out there. I'd like to hear both sides.

Currently living on interest and dividends, which is about 2.2%

Are we sacrificing lifestyle enjoyment for paranoia, or a just a sense of safety?
If you want a guarantee, buy a SPIA. Otherwise, realize that you're probably going to be okay spending 4.5-6%. So even spending just 4% is a move to reduce the risk of running out of money. 3.5% is very conservative. 3% is paranoid. 2.2% guarantees you will leave a massive inheritance by spending much less than you could have.

Good luck with your decision. But if you feel like you're sacrificing right now to spend 2.2%, you need to either buy a SPIA, get more comfortable with uncertainty and jack that spending rate up, or go back to work.

Realize that the right answer is not a fixed percentage too. Use a variable strategy. If sequence of returns risk shows up, then dial things back. If not, enjoy yourself.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Will we be OK at 3% WR?

Post by CnC » Thu Nov 07, 2019 12:44 pm

bhsince87 wrote:
Tue Nov 05, 2019 11:23 pm
What's your opinion? Ages 54 and 52.

Will 3% be OK going forward?

Throw it all out there. I'd like to hear both sides.

Currently living on interest and dividends, which is about 2.2%

Are we sacrificing lifestyle enjoyment for paranoia, or a just a sense of safety?

Short answer yes, long answer is what difference in life will .8% make and will your paranoia bother you more than the .8% make you happy.


Both are going to be completely safe 99% of the time. One might be safe 99.87% of the time and the other might be safe 99.65% of the time. The only events that will put a dent in your chances of surviving on 3% and less are major civilization changing events. And your retirement portfolio will likely be the least of your worries.

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Re: Will we be OK at 3% WR?

Post by CnC » Thu Nov 07, 2019 12:53 pm

visualguy wrote:
Wed Nov 06, 2019 10:42 pm
AlohaJoe wrote:
Wed Nov 06, 2019 10:37 pm
marcopolo wrote:
Wed Nov 06, 2019 9:18 pm
There have been numerous studies of SWR in various countries as well as globally invested, as well as numerous discussion on this forum about them. US results are near the top. Almost all the countries with low SWR are limited by years where the country was bombed to near oblivion.
To elaborate on this (remember the OP is asking about a 3% withdrawal rate). According Wade Pfau[1], 3% withdrawals worked in:
  • New Zealand
  • The Netherlands
  • Australia
  • Canada
  • Sweden
  • South Africa
  • The United States
  • The United Kingdom
  • Ireland
  • Spain
  • Denmark
  • Finland
  • Switzerland
  • Norway
Where did 3% withdrawals fail?
  • Belgium, if you retired in 1937.
  • France, if you retired in 1943.
  • Japan, if you retired in 1946.
  • Austria, if you retired in 1946.
  • Italy, if you retired in 1944.
  • Germany...lots of failures.
And that's based on the worst possible case. If you allow a 5% failure rate, then every country but Germany has a withdrawal rate higher than 3%. Germany doesn't make the cut thanks to WW1 and WW2.

[1]: "Does International Diversification Improve Safe Withdrawal Rates?" (March 4, 2014)
This study was for a 30-year retirement. OP has to plan for 40+ years.
So you ignore the only failures were from losing world wars with the comment that he needs it to last a bit longer. :oops:


If you are losing a world war and being invaded it doesn't matter how long you are planning your retirement...

Some of the "statistics" people spout on here are so far removed from reality it's just silly.

Somehow some people think it's appropriate to plan for refusing to cut any expenses while living to 100 during the Black swan event where your country is invaded and surrenders to a foreign party.

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Re: Will we be OK at 3% WR?

Post by CFM300 » Thu Nov 07, 2019 1:39 pm

JoeRetire wrote:
Thu Nov 07, 2019 6:31 am
CFM300 wrote:
Thu Nov 07, 2019 1:02 am
JoeRetire wrote:
Wed Nov 06, 2019 6:15 am
CFM300 wrote:
Wed Nov 06, 2019 12:58 am
Firecalc.com shows zero failures for 3% inflation-adjusted withdrawals over 30, 40, and 50 years, using the default settings/assumptions.
So you are assuming facts not in evidence.
Nope. I made no assumptions.
Fair enough.

By that logic, I suppose you could have stated that Firecalc shows 100% failure using a different set of assumptions, and still not have assumed anything.

At best it would be misleading advice. At worst it would simply be wrong.
There's nothing misleading or wrong about stating Firecalc results when the statement explicitly mentions the assumptions made.

And it's actually great advice. If the OP only wants to withdraw 3%, then Firecalc has a set of assumptions (which happen to be their default settings/assumptions) that show 100% historical success.

I honestly don't understand your issue or concern. Analogy:

Doctor: You have disease X.
JoeRetire: What's my prognosis?
Doctor: You will be cured, assuming you take this medicine.
JoeRetire: You're assuming facts not in evidence! I haven't stated that I will take the medicine!

The doctor isn't assuming that you'll take the medicine. The doctor is giving you a prognosis based on an assumption. And yes, that's different from actually making the assumption.

Read the doctor's prognosis -- and my original statement to the OP -- as conditional:

IF you do such-and-such, then such-and-such is the likely result.

Stating a conditional is not the same as affirming the antecedent of the conditional.

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Re: Will we be OK at 3% WR?

Post by dknightd » Thu Nov 07, 2019 1:52 pm

bhsince87 wrote:
Tue Nov 05, 2019 11:23 pm
What's your opinion? Ages 54 and 52.

Will 3% be OK going forward?
I would think so.

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Re: Will we be OK at 3% WR?

Post by JoeRetire » Thu Nov 07, 2019 1:55 pm

willthrill81 wrote:
Thu Nov 07, 2019 8:20 am
JoeRetire wrote:
Thu Nov 07, 2019 6:31 am
CFM300 wrote:
Thu Nov 07, 2019 1:02 am
JoeRetire wrote:
Wed Nov 06, 2019 6:15 am
CFM300 wrote:
Wed Nov 06, 2019 12:58 am
Firecalc.com shows zero failures for 3% inflation-adjusted withdrawals over 30, 40, and 50 years, using the default settings/assumptions.
So you are assuming facts not in evidence.
Nope. I made no assumptions.
Fair enough.

By that logic, I suppose you could have stated that Firecalc shows 100% failure using a different set of assumptions, and still not have assumed anything.

At best it would be misleading advice. At worst it would simply be wrong.
There's nothing misleading about FIRECalc. They state the following on the home page.
If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds.
That seems perfectly reasonable to me and a great many others as well. Yes, they rightly included the word "likely" because the future is unknowable, but to the extent that it 'rhymes' with the past, it is a useful tool.
Read what I wrote again. I didn't say Firecalc was misleading. I said that implying that the OP was safe by using a set of assumptions that may or may not apply was misleading at best.

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JoeRetire
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Re: Will we be OK at 3% WR?

Post by JoeRetire » Thu Nov 07, 2019 2:04 pm

CFM300 wrote:
Thu Nov 07, 2019 1:39 pm
IF you do such-and-such, then such-and-such is the likely result.

Stating a conditional is not the same as affirming the antecedent of the conditional.
Got it.

You'll never run out of money if you spend 10% per year of your remaining balance.
You can spend 8% of your assets per year, assuming you get a constant real return of over 8%.
You can spend 10% of your current asset balance if you die within 10 years.

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Re: Will we be OK at 3% WR?

Post by CFM300 » Thu Nov 07, 2019 2:14 pm

JoeRetire wrote:
Thu Nov 07, 2019 2:04 pm
CFM300 wrote:
Thu Nov 07, 2019 1:39 pm
IF you do such-and-such, then such-and-such is the likely result.

Stating a conditional is not the same as affirming the antecedent of the conditional.
Got it.

You'll never run out of money if you spend 10% per year of your remaining balance.
You can spend 8% of your assets per year, assuming you get a constant real return of over 8%.
You can spend 10% of your current asset balance if you die within 10 years.
Those all sound generally correct to me. And note that none of them make any assumptions about the OP's allocation or situation.
:sharebeer

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Re: Will we be OK at 3% WR?

Post by CFM300 » Thu Nov 07, 2019 2:16 pm

JoeRetire wrote:
Thu Nov 07, 2019 1:55 pm
I said that implying that the OP was safe by using a set of assumptions that may or may not apply was misleading at best.
Yeah, but nobody did that. At "worst" I was implying that the OP would very likely be safe, IF s/he followed the Firecalc assumptions.

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Re: Will we be OK at 3% WR?

Post by Thesaints » Thu Nov 07, 2019 8:19 pm

"If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured."

Throughout the period used for backtesting stocks return was 10% and bond returns 7%: History is not a good guide for the future anymore.

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Re: Will we be OK at 3% WR?

Post by willthrill81 » Thu Nov 07, 2019 8:22 pm

Thesaints wrote:
Thu Nov 07, 2019 8:19 pm
Throughout the period used for backtesting stocks return was 10% and bond returns 7%: History is not a good guide for the future anymore.
That's clearly false because the entire period being referenced is not used to arrive at 3% or 4% withdrawal rates, only the very worst such periods. So in order to cast serious doubt on such withdrawal rates, one must believe that the next 30-40 years will be worse than the worst of the last ~100 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: Will we be OK at 3% WR?

Post by Thesaints » Thu Nov 07, 2019 8:29 pm

willthrill81 wrote:
Thu Nov 07, 2019 8:22 pm
Thesaints wrote:
Thu Nov 07, 2019 8:19 pm
Throughout the period used for backtesting stocks return was 10% and bond returns 7%: History is not a good guide for the future anymore.
That's clearly false because the entire period being referenced is not used to arrive at 3% or 4% withdrawal rates, only the very worst such periods. So in order to cast serious doubt on such withdrawal rates, one must believe that the next 30-40 years will be worse than the worst of the last ~100 years.
That's not true. They simply did backtesting using past market returns and observed that withdrawing x% left money on the account after 30 years in a sufficiently high number of cases.
That's all the study consists of. It is very simple and essentially flawed for practical use.
Not very different from observing that wheat always mature at the end of August and counting on the annual harvest. And continuing to count on the harvest even when it has not rained for 6 months.

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Re: Will we be OK at 3% WR?

Post by willthrill81 » Thu Nov 07, 2019 8:51 pm

Thesaints wrote:
Thu Nov 07, 2019 8:29 pm
willthrill81 wrote:
Thu Nov 07, 2019 8:22 pm
Thesaints wrote:
Thu Nov 07, 2019 8:19 pm
Throughout the period used for backtesting stocks return was 10% and bond returns 7%: History is not a good guide for the future anymore.
That's clearly false because the entire period being referenced is not used to arrive at 3% or 4% withdrawal rates, only the very worst such periods. So in order to cast serious doubt on such withdrawal rates, one must believe that the next 30-40 years will be worse than the worst of the last ~100 years.
That's not true. They simply did backtesting using past market returns and observed that withdrawing x% left money on the account after 30 years in a sufficiently high number of cases.
What specific part of what I said do you believe is not true?
“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: Will we be OK at 3% WR?

Post by Thesaints » Thu Nov 07, 2019 9:04 pm

"the entire period being referenced is not used to arrive at 3% or 4% withdrawal rates, only the very worst such periods"

I'm not even sure of what that means, since the study conclusion is that 4% was sustainable in 95% (? iirc) of cases.
If they used the very worst period, either it fails, or it is successful.

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Re: Will we be OK at 3% WR?

Post by FiveK » Thu Nov 07, 2019 9:17 pm

Thesaints wrote:
Thu Nov 07, 2019 9:04 pm
"the entire period being referenced is not used to arrive at 3% or 4% withdrawal rates, only the very worst such periods"

I'm not even sure of what that means, since the study conclusion is that 4% was sustainable in 95% (? iirc) of cases.
If they used the very worst period, either it fails, or it is successful.
What do you think the returns were in the worst period that was successful?

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Re: Will we be OK at 3% WR?

Post by willthrill81 » Thu Nov 07, 2019 9:18 pm

Thesaints wrote:
Thu Nov 07, 2019 9:04 pm
"the entire period being referenced is not used to arrive at 3% or 4% withdrawal rates, only the very worst such periods"

I'm not even sure of what that means, since the study conclusion is that 4% was sustainable in 95% (? iirc) of cases.
If they used the very worst period, either it fails, or it is successful.
Bengen found in 1994 that the failure rate of the '4% rule' was 0%, and Kitces did as well in 2012 as I noted above. The authors of the so-called 'Trinity study' found something like a 95% success rate because they used different data, shorter-term bonds IIRC. But even so, they found that 3.8% never failed, and rather than call it the '3.8% rule', most have rounded it up very slightly to 4% as a matter of convention and discussion. No one I've heard of is actually employing a SWR approach, only using it as a rough guideline as to how much to start withdrawing given an anticipated ~30 year retirement, which is precisely what Bengen advocated way back in 1994.
“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: Will we be OK at 3% WR?

Post by CFM300 » Thu Nov 07, 2019 9:50 pm

Thesaints wrote:
Thu Nov 07, 2019 9:04 pm
"the entire period being referenced is not used to arrive at 3% or 4% withdrawal rates, only the very worst such periods"

I'm not even sure of what that means, since the study conclusion is that 4% was sustainable in 95% (? iirc) of cases.
If they used the very worst period, either it fails, or it is successful.
You might find this link interesting and useful:

https://portfoliocharts.com/portfolio/withdrawal-rates/

Not only does it explain (albeit briefly) the back-testing methodologies employed in previous studies, it has a fantastic calculator that allows you to see both the safe withdrawal rate (which means "did not run out of money in worst case") and the perpetual withdrawal rate (which means "sustained initial principal in worst case").

The default setting is 60/40 (TSM / intermediate-term bonds). It shows a safe withdrawal rate of 4.5% and a perpetual withdrawal rate of 3.5% over 30 years.

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bhsince87
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Re: Will we be OK at 3% WR?

Post by bhsince87 » Thu Nov 07, 2019 10:02 pm

Thank you to everyone who responded to this question!

Reading through every response, I have received clarification and a new understanding of my problem.

I am letting my emotions overcome logic, data, and common sense.

I had a big response with lots of details ready to go, but I killed it. But it made me see more clearly that I'm being a dummy here, so it wasn't a waste of time for me. But there's no need to waste any more of you all's time.

Thanks again for putting in the effort that helped me work through my issues!
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: Will we be OK at 3% WR?

Post by HomerJ » Thu Nov 07, 2019 11:14 pm

Thesaints wrote:
Thu Nov 07, 2019 8:19 pm
"If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured."

Throughout the period used for backtesting stocks return was 10% and bond returns 7%: History is not a good guide for the future anymore.
Dude, you're completely wrong how this works.

They looked at 1900-1930, 1901-1931,1902-1932,1903-1933, etc.

The WORST case was 3.8% (1966-1996).

The AVERAGE 30-year period you could pull 6%-7%... The GOOD 30 year periods, you could pull 8%-10%.

The WORST case 30-year periods did not see 10% stock returns and 7% bond returns... That's why the WORST case 30-year periods were low... Because those 30-year periods had LOW stock and bond returns (and bad sequence of returns)

Using 4% is considered safe because even if stock and bond returns are historically low, 4% should still work. 4% does not require one to get 10% stock returns and 7% bond returns over the next 30 years.

This is really simple math. Seriously, think about it.

1% real returns is all one needs for 4% to work. No one here is counting on 10% and 7% nominal stock and bond returns.
Last edited by HomerJ on Fri Nov 08, 2019 1:46 pm, edited 1 time in total.
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Re: Will we be OK at 3% WR?

Post by JackoC » Fri Nov 08, 2019 10:47 am

HomerJ wrote:
Thu Nov 07, 2019 11:14 pm
Thesaints wrote:
Thu Nov 07, 2019 8:19 pm
"If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured."

Throughout the period used for backtesting stocks return was 10% and bond returns 7%: History is not a good guide for the future anymore.
Dude, you're completely wrong how this works.
They looked at 1900-1930, 1901-1931,1902-1932,1903-1933, etc.
The WORST case was 3.8% (1966-1996).
The AVERAGE 30-year period you could pull 6%-7%... The GOOD 30 year periods, you could pull 8%-10%.
The WORST case 30-year periods did not see 10% stock returns and 7% bond returns... That's why the WORST case 30-year periods were low... Because those 30-year periods had LOW stock and bond returns.
Using 4% is considered safe because even if stock and bond returns are historically low, 4% should still work. 4% does not require one to get 10% stock returns and 7% bond returns over the next 30 years.

This is really simple math. Seriously, think about it.

1% real returns is all one needs for 4% to work. No one here is counting on 10% and 7% nominal stock and bond returns.
I agree entirely with the last statement, simple spreadsheet or financial calculator function shows you what constant return results in zero left after X years. 3% SWR lasts 41 yrs at 1% real after tax return, 33 yrs at 0% real after tax return, 2.2% SWR, OP's current strategy, lasts 61 yrs at 1% constant real after tax return, 45 yrs at 0% constant real after tax return. Those are low returns and/or long times.

OTOH, plenty of people in favor of tools like firecalc do say stuff like 'it's likely your portfolio will 2 times bigger after 30 yrs at that SWR' or whatever and that *is* based on the whole distribution of past returns not just worst cases. And therefore pretty much irrelevant because we can see pretty clearly IMO that expected returns now are lower than the past geometric average of realized returns.

And as to the lower tail of the distribution, 1900-1931, 1901-1932, 1903-1933 etc are almost entirely correlated to one another, it's really just looking at *one* event from a limited number of different angles. The data in firecalc, and that's available anywhere for a world anything like now, is really pretty small: a small number of *independent non-overlapping* 30-40 yr periods. In general I put low stock in firecalc, which isn't to say I 'know' some alternative answer.

So are we just left with calculating how long money will last at what we believe is a sufficiently low constant return? I think so actually. I think people are probably better off sticking with simple math, and focusing on the fact that they are guessing the most important thing: the worst plausible general return environment over their remaining lives. People invented tools like firecalc to deal with higher order questions like sequence of returns. But I think it causes a forest v trees problem for a lot of people.

Also the question of 'cutting back if necessary' is closely related to the lowest long term return equivalent you're willing to assume. If you assume 1% long term real return is the floor, prepare for it, and returns are less than that, that's a bad situation for everybody. It will be easier psychologically to cut back in hard times (for everyone) than when your own plan doesn't work but everyone else seems to be sailing along. The goal isn't literally to survive, one way or another we're extremely unlikely to die from lack of money IMO, the goal is be satisfied (on the financial front at least). And satisfaction for human beings has a big relative component.

My bottom line, 4% SWR from an early 60's retirement, with good life expectancy prospects, contains significant possibility of having to cut back when everyone else isn't desperate. Because expected returns are now lower, and that tends to imply the lower tail of the distribution is worse also, though we just don't know. But maybe cutting back later is fine: depends on the person. And any amount significantly below 4% is probably fine, even 3.5% is significantly less than 4%. 2.2% strongly implies a goal (though unstated by OP AFAIK) of leaving a significant minimum % of current assets behind as inheritance. Which is just a different formula.

dayzero
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Re: Will we be OK at 3% WR?

Post by dayzero » Fri Nov 08, 2019 11:37 am

3% - conservative

2.2% - irrational

CnC
Posts: 840
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Re: Will we be OK at 3% WR?

Post by CnC » Fri Nov 08, 2019 2:02 pm

Thesaints wrote:
Thu Nov 07, 2019 8:19 pm
"If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured."

Throughout the period used for backtesting stocks return was 10% and bond returns 7%: History is not a good guide for the future anymore.
You are absolutely right, I mean everyone knew in 2009 there was no way they would be getting 10% stock returns over the next 10 years...

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