My New Retirement Thinking: LMP or 2% SWR

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dcabler
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by dcabler »

TimeTheMarket wrote: Wed Oct 30, 2024 7:47 am
Chili Powder wrote: Tue Oct 29, 2024 11:15 pm To be blunt, I think this is bad advise. The 4% rule has something like a 1% chance of running out of money after 30 years based on historical data. Your life expectancy is less than 30 years at 48 years old for a man and 53 years old for a woman. Financial risks aren't the only types of risks out there. To me this thread is basically people being excessively pessimistic about finances, while ignoring the fact that they are working too long and taking higher health/death risks than they need to. It's important to remember that people who died before 75 aren't going to post about what a big mistake it was working to save up for a 2% withdraw rate.
I agree with this. All of us are long term planners to a degree but some of us trust far too much in our health. I am exceptionally healthy now and work on it quite diligently, but I could be hit by a car later while riding my bike or get a terminal cancer diagnosis next month. Remember perfect is the enemy of good enough.

If you're looking for reasons to spend your working & retired life in perpetual fear of the future, pushing off retirement as far as possible, and having an almost 100% chance of dying with a ton of money this 2% idea seems like the right approach. Why not 1.8% or 1.5%? We can find scenarios justifying them.

Actually, the second post in the thread was a poignant one. In real life we're able to make adjustments. Maybe you put off the vacation or patio install if the market has gone to hell one year.

The difference between 4% and 2% could be another *decade* of working, so instead of retiring at 60 you retire at 70, then summarily die from congestive heart disease shortly thereafter.
Time to bring out the Rich, Broke or Dead link.
https://engaging-data.com/will-money-last-retire-early/

Cheers.
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TN_Boy
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by TN_Boy »

TimeTheMarket wrote: Wed Oct 30, 2024 7:47 am
Chili Powder wrote: Tue Oct 29, 2024 11:15 pm To be blunt, I think this is bad advise. The 4% rule has something like a 1% chance of running out of money after 30 years based on historical data. Your life expectancy is less than 30 years at 48 years old for a man and 53 years old for a woman. Financial risks aren't the only types of risks out there. To me this thread is basically people being excessively pessimistic about finances, while ignoring the fact that they are working too long and taking higher health/death risks than they need to. It's important to remember that people who died before 75 aren't going to post about what a big mistake it was working to save up for a 2% withdraw rate.
I agree with this. All of us are long term planners to a degree but some of us trust far too much in our health. I am exceptionally healthy now and work on it quite diligently, but I could be hit by a car later while riding my bike or get a terminal cancer diagnosis next month. Remember perfect is the enemy of good enough.

If you're looking for reasons to spend your working & retired life in perpetual fear of the future, pushing off retirement as far as possible, and having an almost 100% chance of dying with a ton of money this 2% idea seems like the right approach. Why not 1.8% or 1.5%? We can find scenarios justifying them.

Actually, the second post in the thread was a poignant one. In real life we're able to make adjustments. Maybe you put off the vacation or patio install if the market has gone to hell one year.

The difference between 4% and 2% could be another *decade* of working, so instead of retiring at 60 you retire at 70, then summarily die from congestive heart disease shortly thereafter.
I think the 4% "guideline" (aka 25x expenses) is a great resource for seeing about where you are in terms of retirement planning.

I would not retire when I hit 25x if that withdrawal rate didn't have a lot of discretionary spending in it. 4% almost always worked in the US for 30 years, but some of "success" retirements left you with almost nothing. If your retirement is longer than 30 years, well, 4% is riskier. International investors looked more like 3.5% or less (if you throw out countries that were bombed into rubble in WW 2 for example).

And many people do want to leave a legacy even if they don't set aside money explicitly. Or they worry about LTC costs.

TLDR; 4% is not extremely safe in some scenarios. But working until you hit 2% (or an even a lower rate) is, for most of us, risking a lot of time versus money. Dying early in or before retirement ... actually happens. Our choice was to retire at 25x expenses ... but with a lot of discretionary spending .... and then SS will kick in reducing the withdrawal percent to well under a 4% rule amount. That was safe enough.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by kd2008 »

It is no secret that I find this thread pointless and irksome. My very wise mother, who has literally lived all the worst times of 20th century, has wisely said a spoonful of adaptability and of entrepreneural initiative can overcome any challenges, especially economic ones. Upon retirement she had a very modest pension, no stocks. She parlayed her paid off home into 20x her starting point at retirement by changing residences at the most opportune times.

Relational and health challenges are way more intractable.

This thread acts as if 2% is better than 4% and there is no opportunity cost involved and as if it will actually solve the "problem."
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by TN_Boy »

kd2008 wrote: Wed Oct 30, 2024 9:09 am It is no secret that I find this thread pointless and irksome. My very wise mother, who has literally lived all the worst times of 20th century, has wisely said a spoonful of adaptability and of entrepreneural initiative can overcome any challenges, especially economic ones. Upon retirement she had a very modest pension, no stocks. She parlayed her paid off home into 20x her starting point at retirement by changing residences at the most opportune times.

Relational and health challenges are way more intractable.

This thread acts as if 2% is better than 4% and there is no opportunity cost involved and as if it will actually solve the "problem."
Sure it is safer. And extra money may be needed to help with health challenges. If you get sick and can't be all entrepreneurial then extra dollars in the portfolio looks pretty good.

The opportunity cost depends. If you have to work five or ten more years to go from 4% to 2% then that's a big tradeoff. If you enjoyed your career and simply stopped "when it was time," looked around and said, "yeah, we can pull 2% and get the lifestyle we want" then the opportunity cost was minimal. Not everybody is desperate to retire; many enjoy their careers.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by exodusing »

A question for those who say 4% inflation adjusted, but be prepared to adjust: what are your criteria for adjusting? What market performance would cause an adjustment, how much would you adjust, etc.? Or is it just a matter of doing whatever feels right at the time and hoping for the best?
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Leesbro63
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Leesbro63 »

exodusing wrote: Wed Oct 30, 2024 9:22 am A question for those who say 4% inflation adjusted, but be prepared to adjust: what are your criteria for adjusting? What market performance would cause an adjustment, how much would you adjust, etc.? Or is it just a matter of doing whatever feels right at the time and hoping for the best?
The "4% SWR Rule" (it's really just a guideline) is that you adjust every year. That history has shown that, at retirement, you can spend up to 4% of your initial retirement stash every year and adjust for inflation. That your "real" spending limit will always go up (or down) with inflation. As many have pointed out, few, if any, blindly follow an SWR approach, without taking into account major changes in personal and systemic finances.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Leesbro63 »

For what it's worth, I accept the heat that I'm getting from many who feel that having to work until they reach 50x spending (2% SWR) is too big a price to pay. But if you'll re-read my title to this subject, it starts with "LMP (Liability Matching Portfolio or..)". I'm saying that I've reached a new appreciation for Dr. Bernstein's thinking that guaranteed retirement spending, if it can be done, has a lot of merit. But I'm also noting that for large taxable portfolios, it's harder to do than for tax-sheltered portfolios or smaller taxable portfolios. Put another way, I'm AM saying that I think doing a 4% SWR retirement is too risky, because you lost 80% of your money in the first 15 years of a 1966 retirement. I'm suggesting two ways to rectify that. Only one is the 2%SWR.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

It's amusing the number of people who think they're going to live to 85 and beyond...and that working a sedentary job for many, many years is going to get them there.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by TN_Boy »

goonie wrote: Wed Oct 30, 2024 10:04 am It's amusing the number of people who think they're going to live to 85 and beyond...and that working a sedentary job for many, many years is going to get them there.
I don't think it that amusing. For one thing, often the question is how long at least one of a couple lives, which is not uncommonly past 85.

I know fit healthy people that didn't make it anywhere near 85, while relatively sedentary people lived into their 80s (maybe early 90s!) with all their cognitive abilities basically intact. Unless/until you get a dire diagnosis, you really don't know how long you will live. Worrying about this, while it can be badly overdone, is reasonable.
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KEotSK66
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

Based on my portfolio value when I retired my draw % is 1.50%, that's not better or worse than someone's 4.00%. :?:

1.50% meets my wants and needs just as 4.00% meets that other person's wants and needs, I have no opportunity cost and 1.50% solves my problem.

(I actually use(d) dollar amounts.)
Last edited by KEotSK66 on Wed Oct 30, 2024 12:37 pm, edited 1 time in total.
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exodusing
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by exodusing »

Leesbro63 wrote: Wed Oct 30, 2024 9:36 am
exodusing wrote: Wed Oct 30, 2024 9:22 am A question for those who say 4% inflation adjusted, but be prepared to adjust: what are your criteria for adjusting? What market performance would cause an adjustment, how much would you adjust, etc.? Or is it just a matter of doing whatever feels right at the time and hoping for the best?
The "4% SWR Rule" (it's really just a guideline) is that you adjust every year. That history has shown that, at retirement, you can spend up to 4% of your initial retirement stash every year and adjust for inflation. That your "real" spending limit will always go up (or down) with inflation. As many have pointed out, few, if any, blindly follow an SWR approach, without taking into account major changes in personal and systemic finances.
Adjusting for inflation is built-in to the traditional 4% rule/guideline. The question is about changing based on market performance (or whatever) - when do you not blindly follow 4% adjusted for inflation, how do you change in those circumstances, etc.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

TN_Boy wrote: Wed Oct 30, 2024 10:17 am
goonie wrote: Wed Oct 30, 2024 10:04 am It's amusing the number of people who think they're going to live to 85 and beyond...and that working a sedentary job for many, many years is going to get them there.
I don't think it that amusing. For one thing, often the question is how long at least one of a couple lives, which is not uncommonly past 85.

I know fit healthy people that didn't make it anywhere near 85, while relatively sedentary people lived into their 80s (maybe early 90s!) with all their cognitive abilities basically intact. Unless/until you get a dire diagnosis, you really don't know how long you will live. Worrying about this, while it can be badly overdone, is reasonable.
Anecdotes like that are the exception, not the rule. Generally, the fitter and healthier you are, the longer you live. And the more sedentary you are, the less fit and healthy you are.
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watchnerd
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by watchnerd »

goonie wrote: Wed Oct 30, 2024 11:12 am
TN_Boy wrote: Wed Oct 30, 2024 10:17 am

I don't think it that amusing. For one thing, often the question is how long at least one of a couple lives, which is not uncommonly past 85.

I know fit healthy people that didn't make it anywhere near 85, while relatively sedentary people lived into their 80s (maybe early 90s!) with all their cognitive abilities basically intact. Unless/until you get a dire diagnosis, you really don't know how long you will live. Worrying about this, while it can be badly overdone, is reasonable.
Anecdotes like that are the exception, not the rule. Generally, the fitter and healthier you are, the longer you live. And the more sedentary you are, the less fit and healthy you are.
Also, increased physical activity correlates with reduced rate of dementia.
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TN_Boy
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by TN_Boy »

goonie wrote: Wed Oct 30, 2024 11:12 am
TN_Boy wrote: Wed Oct 30, 2024 10:17 am

I don't think it that amusing. For one thing, often the question is how long at least one of a couple lives, which is not uncommonly past 85.

I know fit healthy people that didn't make it anywhere near 85, while relatively sedentary people lived into their 80s (maybe early 90s!) with all their cognitive abilities basically intact. Unless/until you get a dire diagnosis, you really don't know how long you will live. Worrying about this, while it can be badly overdone, is reasonable.
Anecdotes like that are the exception, not the rule. Generally, the fitter and healthier you are, the longer you live. And the more sedentary you are, the less fit and healthy you are.
Being fit and healthy is a better idea than not being fit and healthy. It's why I exercise a lot.

But alas, population statistics are not very useful with a population of 1 or 2, a fact that is often overlooked. Which is why you have to plan upon a longer retirement, unless you know you will not make it due to some already known issue. Plenty of sedentary people live into their 80s. Plenty of fit active people die before making their 80s.

For any given individual, whether they be fit and active or coach potatoes you do not know how long they will live. That's part of the retirement planning problem. Nor do you know if an individual will develop dementia and need lots of LTC. Same problem; population stats don't predict YOUR future.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by TN_Boy »

watchnerd wrote: Wed Oct 30, 2024 11:21 am
goonie wrote: Wed Oct 30, 2024 11:12 am

Anecdotes like that are the exception, not the rule. Generally, the fitter and healthier you are, the longer you live. And the more sedentary you are, the less fit and healthy you are.
Also, increased physical activity correlates with reduced rate of dementia.
I exercise a lot. I eat okay. I am not under the delusion that this lifestyle means I will live to be 85+ and not have dementia. For planning purposes in your 60s (a common retirement age) a healthy lifestyle doesn't change anything. I'm often surprised how few people don't understand that.

Across 1,000 people, sure it you can make predictions based on lifestyle. But those stats don't predict YOUR fate.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

TN_Boy wrote: Wed Oct 30, 2024 11:31 am
watchnerd wrote: Wed Oct 30, 2024 11:21 am

Also, increased physical activity correlates with reduced rate of dementia.
I exercise a lot. I eat okay. I am not under the delusion that this lifestyle means I will live to be 85+ and not have dementia. For planning purposes in your 60s (a common retirement age) a healthy lifestyle doesn't change anything. I'm often surprised how few people don't understand that.

Across 1,000 people, sure it you can make predictions based on lifestyle. But those stats don't predict YOUR fate.
I couldn't disagree more. A healthy lifestyle absolutely changes things. For example, someone who reaches age 55 with a 3% withdrawal rate is better off retiring and spending more time being active than continuing to work their desk job for 5 or 10 more years so that they can get to a 2.5 or 2% withdrawal rate. Their healthcare expenses are probably going to be lower and they will probably live longer to enjoy all of their money.
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watchnerd
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by watchnerd »

goonie wrote: Wed Oct 30, 2024 11:53 am
TN_Boy wrote: Wed Oct 30, 2024 11:31 am

I exercise a lot. I eat okay. I am not under the delusion that this lifestyle means I will live to be 85+ and not have dementia. For planning purposes in your 60s (a common retirement age) a healthy lifestyle doesn't change anything. I'm often surprised how few people don't understand that.

Across 1,000 people, sure it you can make predictions based on lifestyle. But those stats don't predict YOUR fate.
I couldn't disagree more. A healthy lifestyle absolutely changes things. For example, someone who reaches age 55 with a 3% withdrawal rate is better off retiring and spending more time being active than continuing to work their desk job for 5 or 10 more years so that they can get to a 2.5 or 2% withdrawal rate. Their healthcare expenses are probably going to be lower and they will probably live longer to enjoy all of their money.
I'm noodling between retiring somewhere between 55 (end of 2025) and 57 (end of 2027) for exactly this reason. We're already at 3% withdrawal.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by TN_Boy »

goonie wrote: Wed Oct 30, 2024 11:53 am
snip

I couldn't disagree more. A healthy lifestyle absolutely changes things. For example, someone who reaches age 55 with a 3% withdrawal rate is better off retiring and spending more time being active than continuing to work their desk job for 5 or 10 more years so that they can get to a 2.5 or 2% withdrawal rate. Their healthcare expenses are probably going to be lower and they will probably live longer to enjoy all of their money.
I think you have it backwards. The person with the unhealthy lifestyle is the one who should retire at 55, since they won't live as long, right? Heck, go with 4% in that case!

The person who lives longer is the one who has to worry more about running out of money ..... and their healthcare expenses might or might not be lower.

Yep, we just disagree. For a group of size 1 or 2 I don't think the population stats tell you anything of planning value. Maybe someone with a true stats background can explain to me where I'm wrong.

Disclosure: I retired at about 55 with a "healthy lifestyle" so I definitely like that plan; but I'm realistic about the possible paths my health could take. This decision was based upon the money we had and where I was in my career enjoyment. A 3% draw would not have matched our lifestyle expectations, so if needed I would have worked longer.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by IDpilot »

TN_Boy wrote: Wed Oct 30, 2024 12:17 pm
goonie wrote: Wed Oct 30, 2024 11:53 am
snip

I couldn't disagree more. A healthy lifestyle absolutely changes things. For example, someone who reaches age 55 with a 3% withdrawal rate is better off retiring and spending more time being active than continuing to work their desk job for 5 or 10 more years so that they can get to a 2.5 or 2% withdrawal rate. Their healthcare expenses are probably going to be lower and they will probably live longer to enjoy all of their money.
I think you have it backwards. The person with the unhealthy lifestyle is the one who should retire at 55, since they won't live as long, right? Heck, go with 4% in that case!

The person who lives longer is the one who has to worry more about running out of money ..... and their healthcare expenses might or might not be lower.

Yep, we just disagree. For a group of size 1 or 2 I don't think the population stats tell you anything of planning value. Maybe someone with a true stats background can explain to me where I'm wrong.

Disclosure: I retired at about 55 with a "healthy lifestyle" so I definitely like that plan; but I'm realistic about the possible paths my health could take. This decision was based upon the money we had and where I was in my career enjoyment. A 3% draw would not have matched our lifestyle expectations, so if needed I would have worked longer.
All you can every know about longevity are the probabilities and the population stats will give you those. And those do have planning value. You can increase the accuracy of the probabilities by matching the population to your specific case i.e. use US population, smoking/nonsmoking, current health, male/female ..., but no matter how much you increase this match, it is still just a probability and not a deterministic answer.

And yet that has value. Knowing that a US, 65-year-old male/female, nonsmoking, couple in average health today have a 50% chance of one of them making it to 92 and 10% chance of one of them making it to age 99 is useful. (American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, www.longevityillustrator.org/, accessed October 30, 2024.)
Last edited by IDpilot on Wed Oct 30, 2024 1:26 pm, edited 2 times in total.
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Leesbro63
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Leesbro63 »

I’d hate for this thread to get shut down. Let’s return to retirement funding and move back from the health discussion.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by TN_Boy »

Leesbro63 wrote: Wed Oct 30, 2024 1:00 pm I’d hate for this thread to get shut down. Let’s return to retirement funding and move back from the health discussion.
Fair enough!

Tax consequences ignored (I know your case that's not an option) did we like see any sample portfolio options?

For example, using LMP to match say 80% of your expenses with the balance in a risk portfolio, what are the range of outcomes for that solution versus a standard portfolio at 2%. We didn't have TIPs in a lot of the historical scenarios, but people have simulated that.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by yankees60 »

Penelope8735 wrote: Tue Oct 29, 2024 10:23 pm This thread is really long in the tooth! Of course it is, for good reason. It's what is most of mind for any sensible person. How can " I, or we," be better protected from financial ruin someday in the future? 4%, 6%, 2% SWR ?! Ha! All ridiculous endeavors! Only you know you, what your have, what you want, and what you want to protect. If you can do better than you have so far, then do even better, no matter your age, or how you feel about your job. Don't be a sissy and bail out of work too early based upon a nifty equation that suits you're fancy! FIRE BH's really don't exist, IMHO. BH philosophies engender perseverance.

Case in point, to the extent it possibly relates to anyone here. My 96 year old mom fell and broke her hip 5 days ago. Surgery is done. She's in rehab now & in bad shape. Doesn't look good on a few levels. I had some success 10 and more years ago, convincing my siblings to get her financial affairs in order. I achieved about a 70% success rate on that. So without going into details, I can say that it's sometimes what you do to responsibly protect a family member, that ultimately protects your own more immediate family members, while your're in your in your 50's, 60's or 70's, i.e. to protect your own spouse & children. I am one of more than a few siblings worried sick about mom, right now. But, I am the only sibling able to underwrite the very substantial costs as we get things sorted. I'm glad to cover whatever cost is needed, but it's sobering to understand the reality of dealing with this stuff in later life. Retired people financing retired people? It's different nowadays. These new realities are affecting our own plans, our finances. and we are quietly "very aware" that equally situated family members are either unable to help for bad reasons, or just can't help even though they want to. Decide for yourselves where you think you could fit into this common situation. It certainly should affect what you may think is a sensible SWR, or NOT, in your own estimation.

My recommendation. Shoot past the 4% rule and realize it's just a way-mark that should be surpassed, if you are able. Pay attention to everything, and build a good barrier against needing money you may not be able to pull our of your pocket. For me, I know, that if the day ever comes that I need financial help, that I'd have little reason to expect I'll receive a nickel from anyone. Hope your situation is better, but don't count on it.
Best wishes for all that you are doing and you are an excellent person for doing so.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Wannaretireearly »

TimeTheMarket wrote: Wed Oct 30, 2024 7:47 am
Chili Powder wrote: Tue Oct 29, 2024 11:15 pm To be blunt, I think this is bad advise. The 4% rule has something like a 1% chance of running out of money after 30 years based on historical data. Your life expectancy is less than 30 years at 48 years old for a man and 53 years old for a woman. Financial risks aren't the only types of risks out there. To me this thread is basically people being excessively pessimistic about finances, while ignoring the fact that they are working too long and taking higher health/death risks than they need to. It's important to remember that people who died before 75 aren't going to post about what a big mistake it was working to save up for a 2% withdraw rate.
I agree with this. All of us are long term planners to a degree but some of us trust far too much in our health. I am exceptionally healthy now and work on it quite diligently, but I could be hit by a car later while riding my bike or get a terminal cancer diagnosis next month. Remember perfect is the enemy of good enough.

If you're looking for reasons to spend your working & retired life in perpetual fear of the future, pushing off retirement as far as possible, and having an almost 100% chance of dying with a ton of money this 2% idea seems like the right approach. Why not 1.8% or 1.5%? We can find scenarios justifying them.

Actually, the second post in the thread was a poignant one. In real life we're able to make adjustments. Maybe you put off the vacation or patio install if the market has gone to hell one year.

The difference between 4% and 2% could be another *decade* of working, so instead of retiring at 60 you retire at 70, then summarily die from congestive heart disease shortly thereafter.
Well said 🙌
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by watchnerd »

Wannaretireearly wrote: Thu Oct 31, 2024 12:52 pm
TimeTheMarket wrote: Wed Oct 30, 2024 7:47 am

I agree with this. All of us are long term planners to a degree but some of us trust far too much in our health. I am exceptionally healthy now and work on it quite diligently, but I could be hit by a car later while riding my bike or get a terminal cancer diagnosis next month. Remember perfect is the enemy of good enough.

If you're looking for reasons to spend your working & retired life in perpetual fear of the future, pushing off retirement as far as possible, and having an almost 100% chance of dying with a ton of money this 2% idea seems like the right approach. Why not 1.8% or 1.5%? We can find scenarios justifying them.

Actually, the second post in the thread was a poignant one. In real life we're able to make adjustments. Maybe you put off the vacation or patio install if the market has gone to hell one year.

The difference between 4% and 2% could be another *decade* of working, so instead of retiring at 60 you retire at 70, then summarily die from congestive heart disease shortly thereafter.
Well said 🙌
I thought the starting assumption of this thread was that one already had a big enough pile of assets to make 2% SWR work if one wished to do so.

And thus the question isn't about how much longer to work, but how much to spend in retirement if:

a) You want to preserve the majority of the wealth for heirs
b) You want that wealth to survive worst case scenarios as much as possible
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Trance »

Funny enough if you hold a globally diversified portfolio you're going to get the 2% from dividends. There'd be no need to sell your stock investments and you'd free yourself from the fluctuations of the market. If we go for a 60/40 portfolio with tips you'd be much closer to a 3% rate with those payments and you'd remove the risk of inflation.

I'm debating if I want to be investing 60/40 the entire time with long term tips or rebalance closer to retirement from a 100% stock investment
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by watchnerd »

Trance wrote: Thu Oct 31, 2024 2:38 pm Funny enough if you hold a globally diversified portfolio you're going to get the 2% from dividends. There'd be no need to sell your stock investments and you'd free yourself from the fluctuations of the market. If we go for a 60/40 portfolio with tips you'd be much closer to a 3% rate with those payments and you'd remove the risk of inflation.

I'm debating if I want to be investing 60/40 the entire time with long term tips or rebalance closer to retirement from a 100% stock investment
But living off the dividends doesn't prevent the portfolio wealth erosion due to inflation seen in the 1970s.

And stocks don't always keep up with inflation, even if TIPS will. In the Lost Decade, stocks had negative real return.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

I'll be 71 in April so I don't have to draw anything yet. If I really tightened my belt I could live on SS and bank interest but that's unnecessary so I've been drawing 1.5%/12 each month. (I also drew twice for larger than usual purchases.) The 1.50% is meaningless because my draw is based on needed/wanted dollars, the numbers at retirement just worked out that way.

I think the SWRs which come out of MCS and the like are unrealistic, not in the sense they're too high or too low but because rather than sitting down and running the numbers or even going to see a CFP investors aren't examining their personal situations and coming up with dollar amounts which are in line with their objectives.

Another reason I don't like arriving at SWRs from MCS is there's usually no understanding of why the historical returns were what they were, a sequence of returns is bootstrapped from the historical sample a gazillion times to give the impression of the results being reliable when the whole process is really just projecting the past into the future...which imo is a mistake.

We have tools like AA, diversification, etc. to help in taking the leap of faith into the unknowable future. We can also be conservative when we plan.

I think I only use 2 historical data points (maybe they're the same thing): The Efficient Frontier and my portfolio's risk-adjusted performance. I needed something to base my fund/portfolio choice on while not taking excessive risk/SD.
"I just got fluctuated out of $1,500.", Jerry
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by smitcat »

watchnerd wrote: Thu Oct 31, 2024 2:50 pm
Trance wrote: Thu Oct 31, 2024 2:38 pm Funny enough if you hold a globally diversified portfolio you're going to get the 2% from dividends. There'd be no need to sell your stock investments and you'd free yourself from the fluctuations of the market. If we go for a 60/40 portfolio with tips you'd be much closer to a 3% rate with those payments and you'd remove the risk of inflation.

I'm debating if I want to be investing 60/40 the entire time with long term tips or rebalance closer to retirement from a 100% stock investment
But living off the dividends doesn't prevent the portfolio wealth erosion due to inflation seen in the 1970s.

And stocks don't always keep up with inflation, even if TIPS will. In the Lost Decade, stocks had negative real return.
Living off of the divs does not prevent portfolio wealth erosion seen in the 1970's.
Living off of the divs does recover very well after that period as it is a 'perpetual' withdrawal rate even adjusted for inflation.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Leesbro63 »

KEotSK66 wrote: Thu Oct 31, 2024 3:58 pm I'll be 71 in April so I don't have to draw anything yet.
I think you are mixing Required Minimum Distribution from an IRA or other tax sheltered account with Safe Withdrawal Rate, generally meant to be the amount you spend from your overall investment assets, including, but not limited to, IRA RMDs. Just because the government requires us to take part of our IRA each year, after a certain age, and pay tax on that, doesn't mean you have to spend all or any of the remaining (after tax) money. RMD and SWR are two different concepts, although both do play into the whole retirement income situation.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

Leesbro63 wrote: Thu Oct 31, 2024 4:15 pm
KEotSK66 wrote: Thu Oct 31, 2024 3:58 pm I'll be 71 in April so I don't have to draw anything yet.
I think you are mixing Required Minimum Distribution from an IRA or other tax sheltered account with Safe Withdrawal Rate,...
No, just providing background info.
"I just got fluctuated out of $1,500.", Jerry
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

A 2% draw in 3% personal inflation (pi) requires a TR of 5.10% in order to grow the portfolio AND the next year's draw with pi.
A 3% draw in 3% personal inflation requires a TR of 6.19% in order to grow the portfolio AND the next year's draw with pi.

In 5% pi those TRs rise to 7.14% and 8.25% respectively to achieve the requisite growth of the portfolio and the next year's draw.

Realistically those TRs need to be annualized TRs (aTR) over short to intermediate periods to avoid excessive cannibalization of the portfolio.

IMO we'll soon know if growth or stagflation is the near-term environment but if it's the latter those aTRs may not be attainable, look at the last several years. In continued stagflation growth could/will be weak, with the usual consequences for NAVs, dividends, draws, portfolios, pi, etc.
"I just got fluctuated out of $1,500.", Jerry
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Leesbro63 »

KEotSK66 wrote: Fri Nov 01, 2024 8:58 am A 2% draw in 3% personal inflation (pi) requires a TR of 5.10% in order to grow the portfolio AND the next year's draw with pi.
A 3% draw in 3% personal inflation requires a TR of 6.19% in order to grow the portfolio AND the next year's draw with pi.

In 5% pi those TRs rise to 7.14% and 8.25% respectively to achieve the requisite growth of the portfolio and the next year's draw.

Realistically those TRs need to be annualized TRs (aTR) over short to intermediate periods to avoid excessive cannibalization of the portfolio.

IMO we'll soon know if growth or stagflation is the near-term environment but if it's the latter those aTRs may not be attainable, look at the last several years. In continued stagflation growth could/will be weak, with the usual consequences for NAVs, dividends, draws, portfolios, pi, etc.
Respectfully I honestly ask: Can you sum what that means in plain English?
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Trance »

For those using tips in your asset allocation: did you have a fixed portfolio like 60/40 or did you favor stocks and buy your bonds when you got closer to retirement and rebalanced your portfolio i.e. glide path?
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

KEotSK66 wrote: Fri Nov 01, 2024 8:58 am In continued stagflation growth could/will be weak, with the usual consequences for NAVs, dividends, draws, portfolios, pi, etc.
"I just got fluctuated out of $1,500.", Jerry
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Circle the Wagons »

Trance wrote: Fri Nov 01, 2024 12:33 pm For those using tips in your asset allocation: did you have a fixed portfolio like 60/40 or did you favor stocks and buy your bonds when you got closer to retirement and rebalanced your portfolio i.e. glide path?
Neither. I use a dynamic AA and enjoy the free inflation protection on the fixed income side.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Trance »

Circle the Wagons wrote: Fri Nov 01, 2024 12:38 pm
Trance wrote: Fri Nov 01, 2024 12:33 pm For those using tips in your asset allocation: did you have a fixed portfolio like 60/40 or did you favor stocks and buy your bonds when you got closer to retirement and rebalanced your portfolio i.e. glide path?
Neither. I use a dynamic AA and enjoy the free inflation protection on the fixed income side.
Maybe I need a second cup of coffee, but if you don't have a fixed rate for percentage in bonds or a glide path, how do you choose how much to allocate?
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

KEotSK66 wrote: Fri Nov 01, 2024 8:58 am A 2% draw in 3% personal inflation (pi) requires a TR of 5.10% in order to grow the portfolio AND the next year's draw with pi.
A 3% draw in 3% personal inflation requires a TR of 6.19% in order to grow the portfolio AND the next year's draw with pi.

In 5% pi those TRs rise to 7.14% and 8.25% respectively to achieve the requisite growth of the portfolio and the next year's draw.
Where did you come up with 5.1, 6.19, 7.14, and 8.25?

I understand that 5, 6, 7, and 8 would be needed to keep up with inflation...and greater than that would be needed to grow the portfolio. However, where did you come up with the additional 0.1, 0.19, 0.14, and 0.25?
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

Circle the Wagons wrote: Fri Nov 01, 2024 12:38 pm
Trance wrote: Fri Nov 01, 2024 12:33 pm For those using tips in your asset allocation: did you have a fixed portfolio like 60/40 or did you favor stocks and buy your bonds when you got closer to retirement and rebalanced your portfolio i.e. glide path?
Neither. I use a dynamic AA and enjoy the free inflation protection on the fixed income side.
What free inflation protection on the fixed income side are you referring to?
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

goonie wrote: Fri Nov 01, 2024 1:35 pm However, where did you come up with the additional 0.1, 0.19, 0.14, and 0.25?
Each is the additional return needed to account for drawing your money at the beginning of the period, ie the TR needed has to be calculated on the portfolio value AFTER the money is drawn.

The needed TR is given by...

TR = (draw% + inflation%)/(1.00 - draw%D), draw%D is the draw% expressed as a decimal

(This TR grows the portfolio with inflation which in turn grows the next year's draw with inflation.)
"I just got fluctuated out of $1,500.", Jerry
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

KEotSK66 wrote: Fri Nov 01, 2024 1:56 pm
goonie wrote: Fri Nov 01, 2024 1:35 pm However, where did you come up with the additional 0.1, 0.19, 0.14, and 0.25?
Each is the additional return needed to account for drawing your money at the beginning of the period, ie the TR needed has to be calculated on the portfolio value AFTER the money is drawn.

The needed TR is given by...

TR = (draw% + inflation%)/(1.00 - draw%D), draw%D is the draw% expressed as a decimal

(This TR grows the portfolio with inflation which in turn grows the next year's draw with inflation.)
I see, thanks. I wasn't thinking about withdrawing money at the beginning of the period.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

I see, thanks. I wasn't thinking about withdrawing money at the beginning of the period.

For a long time I wasn't either, that's why my spreadsheets were always off.
"I just got fluctuated out of $1,500.", Jerry
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Circle the Wagons »

Trance wrote: Fri Nov 01, 2024 12:42 pm
Circle the Wagons wrote: Fri Nov 01, 2024 12:38 pm

Neither. I use a dynamic AA and enjoy the free inflation protection on the fixed income side.
Maybe I need a second cup of coffee, but if you don't have a fixed rate for percentage in bonds or a glide path, how do you choose how much to allocate?
I use the Merton share within the context of an overall lifecycle plan.

In my opinion, AA should be an output of the planning process, not an input.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Circle the Wagons »

goonie wrote: Fri Nov 01, 2024 1:51 pm
Circle the Wagons wrote: Fri Nov 01, 2024 12:38 pm

Neither. I use a dynamic AA and enjoy the free inflation protection on the fixed income side.
What free inflation protection on the fixed income side are you referring to?
TIPS
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by GAAP »

Circle the Wagons wrote: Fri Nov 01, 2024 4:18 pm In my opinion, AA should be an output of the planning process, not an input.
+1

Too many here put the cart before the horse. An AA cannot be chosen rationally without knowing what you are attempting to achieve. That goal should be described with enough detail to be clear (i.e., it should be a SMART goal).

If you don't know where you're going, how will you know how to get there, or that you've arrived?
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

Circle the Wagons wrote: Fri Nov 01, 2024 4:18 pm In my opinion, AA should be an output of the planning process, not an input.
:thumbsup :thumbsup :thumbsup
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

Circle the Wagons wrote: Fri Nov 01, 2024 4:19 pm
goonie wrote: Fri Nov 01, 2024 1:51 pm
What free inflation protection on the fixed income side are you referring to?
TIPS
Why are you calling that free?
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Circle the Wagons »

goonie wrote: Fri Nov 01, 2024 5:17 pm
Circle the Wagons wrote: Fri Nov 01, 2024 4:19 pm

TIPS
Why are you calling that free?
Because there is no discernible premium paid vs. a comparable nominal treasury of same duration.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by goonie »

Circle the Wagons wrote: Fri Nov 01, 2024 5:24 pm
goonie wrote: Fri Nov 01, 2024 5:17 pm
Why are you calling that free?
Because there is no discernible premium paid vs. a comparable nominal treasury of same duration.
Using that logic, is the higher interest rate paid by the comparable nominal treasury bond of same duration also "free" (because there is no premium paid vs a comparable TIPS)?

I was initially confused by what you said because the original question was asking how people who use TIPS allocate stocks vs bonds (not how they allocate TIPS vs other bonds). And your response about taking the free inflation protection on the fixed income side made me think you were comparing that to the equity side.
Circle the Wagons wrote: Fri Nov 01, 2024 12:38 pm
Trance wrote: Fri Nov 01, 2024 12:33 pm For those using tips in your asset allocation: did you have a fixed portfolio like 60/40 or did you favor stocks and buy your bonds when you got closer to retirement and rebalanced your portfolio i.e. glide path?
Neither. I use a dynamic AA and enjoy the free inflation protection on the fixed income side.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by Circle the Wagons »

goonie wrote: Fri Nov 01, 2024 7:12 pm
Circle the Wagons wrote: Fri Nov 01, 2024 5:24 pm

Because there is no discernible premium paid vs. a comparable nominal treasury of same duration.
Using that logic, is the higher interest rate paid by the comparable nominal treasury bond of same duration also "free" (because there is no premium paid vs a comparable TIPS)?
No. Indeed, that difference is expected / breakeven inflation -- by definition.

There is no premium paid either way. Yet, one protects from unexpected inflation and the other is fully exposed.
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Re: My New Retirement Thinking: LMP or 2% SWR

Post by KEotSK66 »

what about disinflation?
"I just got fluctuated out of $1,500.", Jerry
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