Author Topic: 4% withdrawl questions  (Read 1094 times)

martind

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4% withdrawl questions
« on: February 11, 2019, 09:26:24 AM »
Hello from the UK!

I only joined this forum today, but I've have been reading the blog for over a year and started my own stock market portfolio about 7 years ago.

My question is how do you take the 4% from your portfolio and is this too conservative? For example the FTSE100 index in the UK is currently paying out close to 4% in dividends alone - which is great!

But I would also like to take additional income from the capital gains, does anyone have a strategy on how best to do this? For example, take 50% of the capital gain in a growth year and nothing when the market falls over the year.

Thank you

Martin

RWD

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Re: 4% withdrawl questions
« Reply #1 on: February 11, 2019, 10:03:15 AM »
You are aware that the 4% comes from the starting portfolio value (increasing with inflation) and is not 4% of current portfolio every year, right? Also, your dividend percentage doesn't really mean much for portfolio survivability.

There are a lot of people that are trying to be even more conservative than 4%. Though I think it is just fine. See the massive amounts of discussion here:
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

nereo

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Re: 4% withdrawl questions
« Reply #2 on: February 11, 2019, 12:54:21 PM »
Hello from the UK!

I only joined this forum today, but I've have been reading the blog for over a year and started my own stock market portfolio about 7 years ago.

My question is how do you take the 4% from your portfolio and is this too conservative? For example the FTSE100 index in the UK is currently paying out close to 4% in dividends alone - which is great!

But I would also like to take additional income from the capital gains, does anyone have a strategy on how best to do this? For example, take 50% of the capital gain in a growth year and nothing when the market falls over the year.

Thank you

Martin

RWD already linked the relevant sticky - I'd read through that and it may help inform many of your questions

re: dividends - beware of the siren's call of dividends. Dollar-for-dollar they reduce share value by an equal amount. All else being equal, a company could pay out a 4% dividend or no dividend and your investment would be worth exactly the same.

Regarding taking 'extra' from capitol gains - you can certainly do this, but be aware that the more you take, the more you risk porfolio failure. What you are describing sounds like one type of Variable Withdraw Rate (VWR).  It's not a bad strategy, but harder to calculate/model than a fixed WR, and many find it hard to adjust expenses year-to-year based on market conditions.

Car Jack

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Re: 4% withdrawl questions
« Reply #3 on: February 11, 2019, 01:04:50 PM »
4% came out of the Trinity study, which found that at 4%, you would most likely be able to fund a 30 year retirement.  I believe it's only US based and assumes a 60/40 asset allocation.

So if your time frame is longer than 30 years, you need to have a lower % than 4%.  I've seen others attach numbers to number of years, but don't know how they chose them.  I've also heard a new study has been done as an update with 3 1/2% being the new rule of thumb.

I'm a big supporter in building a year by year "life" spread sheet.  I include everything coming in and everything I expect to go out year by year.  So paying for college, selling my house, paying for health insurance off my company plan are all included.  I have an assumed rate of increase for my liquid assets that are set each year, so as we move forward, I can make changes.  Each year end, I replace any predicted numbers with actual numbers.

Where many people pshaw my numbers....my FI number will be 2%.  My current assets put me at 2.17%, so I'm getting close.

nereo

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Re: 4% withdrawl questions
« Reply #4 on: February 11, 2019, 01:29:24 PM »
4% came out of the Trinity study, which found that at 4%, you would most likely be able to fund a 30 year retirement.  I believe it's only US based and assumes a 60/40 asset allocation.

So if your time frame is longer than 30 years, you need to have a lower % than 4%.  I've seen others attach numbers to number of years, but don't know how they chose them.  I've also heard a new study has been done as an update with 3 1/2% being the new rule of thumb.


The original trinity study looked at stock/bond allocations ranging or 100/0,  75/25, 50/50, 25/75 and 0/100 and withdraws tied to inflation over rolling 30 year periods, with the investments being the SP500 and high-grade US investment bonds.   A portfolio was considered to have failed if it ran out of money before the 30 year period.  It was updated by the same authors in 2011.  You can read the original study here. (note: opens PDF)

Saying "if your time frame is longer than 30 years, you will need to have a lower % than 4%' is a bit harder to parse out.  It is true that longer periods result in higher failures at 4% under historical simulations, but at the same time a majority of these periods still accumulate (rather than depreciate) in value, and all of the failures have characteristically low returns in the first decade of retirement (i.e. are identifiable early).  Therefor the 'proper' WR is an individual decision as it includes risk tolerance, flexibility and outlook of the future.

A great deal of analysis has been done on safe withdraw rates, much of it documented here (https://www.bogleheads.org/wiki/Safe_withdrawal_rates).  By and large the findings of the original Trinity study have been upheld: the vast majority (but not all) of historically simulated portfolios survived a 30 year period with a WR of 4% and at least 50% equities. 

martind

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Re: 4% withdrawl questions
« Reply #5 on: February 11, 2019, 02:43:42 PM »
Thank you for the thought provoking answers. I will read up on the Trinity Study.

I can see how a bear market can hammer down the value of a portfolio. It would have been painful to retire on 31st Dec 1999... In the UK, the FT100 dropped 3 years in a row:
2000   -6.3%
2001   -12.3%
2002   -20.6%

I think after "retirement" from full time corporate work, it would be better for me to have some part-time & fun work to supplement income from my portfolio, so that I could operate a variable withdrawal rate with less risk (e.g. 2% in a bear market, 6% in a bull). Something like that anyway, I'll have to calculate the numbers...




Andy R

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Re: 4% withdrawl questions
« Reply #6 on: February 11, 2019, 07:49:18 PM »
You're setting yourself up for a risk by assuming that dividends are detached from total return and you can just take the dividends and all will be fine.

A company earns money and pays taxes and costs, that leaves net earnings.
They can then payout 20% or 80% or any other amount of their earnings as dividends.  The amount of dividends has nothing to do with your total return.

Just because companies in one location might pay out 50% of earnings and companies in another location payout 20% does not mean the higher dividends in the first one is somehow getting more money.

What is happening is that by getting a higher amount of dividends and not re-inveting the excess, there is less money directed towards growing the company and you assets are deteriorating the same as if you sold down assets.

Divdinds are not free seperate money.
https://www.cnbc.com/2016/12/08/dont-buy-in-to-the-dividend-fallacy-new-academic-paper-warns.html
https://www.bogleheads.org/wiki/Why_did_my_fund_unexpectedly_drop_in_value
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=258311
https://www.forbes.com/sites/jimdahle/2018/11/11/five-reasons-to-avoid-focusing-on-dividend-stocks/#5d07d3b07479


In response to your question, if you have decided on 4%, then use the dividends for as much as you can and sell down shares if there is a shortfall or re-invest if there is an excess.

If you have multiple funds, then take from the one that is highest above your asset allocation first. Eg if you wanted 70/30 and equities have done well and you now have 75/25, then take from the equities.
If you use an all-in one like a target date fund or a life strategy fund, just take out the shortfall from that fund.

Heckler

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Re: 4% withdrawl questions
« Reply #7 on: February 11, 2019, 08:51:54 PM »
In the UK, the FT100 dropped 3 years in a row:
2000   -6.3%
2001   -12.3%
2002   -20.6%


and that's why you need to diversify greater than 100 UK companies.

Tyler

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Re: 4% withdrawl questions
« Reply #8 on: February 11, 2019, 09:08:48 PM »
Regarding the Trinity Study, I personally wouldn't put too much stock into a set of research that does not account for the assets you personally invest in or the inflation of your own home country.  Every asset class, country, and portfolio is different so SWRs are a lot more complicated than most people realize from just reading US-centric research.

This article may help.  It not only looks at real-world withdrawal rates in the UK but it also offers a tool to help you find the SWR for your own personal portfolio. 

Your Home Country is Inseparable from Your Withdrawal Rate

MustacheAndaHalf

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Re: 4% withdrawl questions
« Reply #9 on: February 11, 2019, 09:21:03 PM »
In the UK, the FT100 dropped 3 years in a row:
2000   -6.3%
2001   -12.3%
2002   -20.6%

and that's why you need to diversify greater than 100 UK companies.
Be careful of blinding using that as proof for diversification.  Diversification did not help against the 2000-2002 losses:
U.S.: -44%
international developed: -47%
emerging markets: -44%

Those maximum drawdowns show that the UK probably did better than elsewhere (-35% using OP's numbers), not worse.  It's good to diversify, but it's not justified by performance from 2000-2002.

martind

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Re: 4% withdrawl questions
« Reply #10 on: February 12, 2019, 07:30:32 AM »

Once again - thank you for all your replies...

Another thing - stocks perform far better than bonds over time, so why bother with a stocks/bonds split and reduce portfolio performance?

I'm 100% in stocks. Yes, it's painfull during a bear market year, but over the long term stocks win (beat bonds) hands down...

Tyler

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Re: 4% withdrawl questions
« Reply #11 on: February 12, 2019, 08:49:05 AM »
Another thing - stocks perform far better than bonds over time, so why bother with a stocks/bonds split and reduce portfolio performance?

Two reasons: a better accumulation experience and superior withdrawal rates.

MrOnyx

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Re: 4% withdrawl questions
« Reply #12 on: February 12, 2019, 09:05:19 AM »

Once again - thank you for all your replies...

Another thing - stocks perform far better than bonds over time, so why bother with a stocks/bonds split and reduce portfolio performance?

The quick answer is that stocks offer a rocky ride, but consistently prevail long term, whereas bonds offer a smoother ride at a lower return. Read Tyler's linked article for a more detailed review, however.

Quote
I'm 100% in stocks. Yes, it's painfull during a bear market year, but over the long term stocks win (beat bonds) hands down...

As am I. Like you, I only discovered MMM and started my journey last year, and I plan to keep my 100% AA for at least until the last few years of saving. It's even simpler than that, because I'm using Vanguard's LifeStrategy funds (so I'm technically what, 97% stocks?), which are global with heavy emphasis on US and UK.

Good luck, and like the very first response told you, don't worry about the 4% rule, especially not right now. I'm assuming it'll be a little while before you have to make sure your t's are crossed and your i's dotted on your withdrawal plan, so definitely don't lose sleep over it :)

I also like the idea of taking up a small time gig once I hit my 4% FI number, then subsidising maybe half or more of my expenses that way (putting me at 2%) for just a few years to mitigate sequence of returns risk, and of course, overall risk of retiring just before a recession. You can dip your toes in slowly, keeping an eye on your portfolio and the market before deciding when - if at all - you'd like to fully pull out of working. Personally, I think a part-time job could be quite enjoyable...

tophdna

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Re: 4% withdrawl questions
« Reply #13 on: February 12, 2019, 11:18:33 AM »
So if you were to withdraw 4% from your portfolio (say your portfolio is 60/40 VTSAX for stocks and VBTLX for bonds) where would you withdraw the 4% from? VTSAX or VBTLX?

nereo

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Re: 4% withdrawl questions
« Reply #14 on: February 12, 2019, 11:24:18 AM »
So if you were to withdraw 4% from your portfolio (say your portfolio is 60/40 VTSAX for stocks and VBTLX for bonds) where would you withdraw the 4% from? VTSAX or VBTLX?
Both.    Otherwise your AA will get all out of balance.
You can periodically rebalance your portfolio, or you can use your withdraws to keep your AA in check.  From what I've seen the former method is far more common -  mostly likely because it's a bit easier to execute.

tophdna

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Re: 4% withdrawl questions
« Reply #15 on: February 12, 2019, 11:32:00 AM »
So if you were to withdraw 4% from your portfolio (say your portfolio is 60/40 VTSAX for stocks and VBTLX for bonds) where would you withdraw the 4% from? VTSAX or VBTLX?
Both.    Otherwise your AA will get all out of balance.
You can periodically rebalance your portfolio, or you can use your withdraws to keep your AA in check.  From what I've seen the former method is far more common -  mostly likely because it's a bit easier to execute.


So if 4% was $12,000....would I take $6,000 from each? I thought it was 4% of the whole portfolio and not 4% of each asset (VTSAX and VBTLX).

nereo

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Re: 4% withdrawl questions
« Reply #16 on: February 12, 2019, 11:36:18 AM »
So if you were to withdraw 4% from your portfolio (say your portfolio is 60/40 VTSAX for stocks and VBTLX for bonds) where would you withdraw the 4% from? VTSAX or VBTLX?
Both.    Otherwise your AA will get all out of balance.
You can periodically rebalance your portfolio, or you can use your withdraws to keep your AA in check.  From what I've seen the former method is far more common -  mostly likely because it's a bit easier to execute.


So if 4% was $12,000....would I take $6,000 from each? I thought it was 4% of the whole portfolio and not 4% of each asset (VTSAX and VBTLX).

4% of everything is the same as 4% from each asset. 
For example, if oyu have 500k in VTSAX and 500k in VBTLX and your AA has you split 50/50, you would take $20k our of each (4%), which is the same as $40k from your whole portfolio. 
Does that make sense?

EvenSteven

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Re: 4% withdrawl questions
« Reply #17 on: February 12, 2019, 11:40:28 AM »
So if you were to withdraw 4% from your portfolio (say your portfolio is 60/40 VTSAX for stocks and VBTLX for bonds) where would you withdraw the 4% from? VTSAX or VBTLX?
Both.    Otherwise your AA will get all out of balance.
You can periodically rebalance your portfolio, or you can use your withdraws to keep your AA in check.  From what I've seen the former method is far more common -  mostly likely because it's a bit easier to execute.


So if 4% was $12,000....would I take $6,000 from each? I thought it was 4% of the whole portfolio and not 4% of each asset (VTSAX and VBTLX).

If your asset allocation was 50/50, then you would take 6k from each to maintain your chosen AA. In your example you were at 60/40, so $7,200 from VTSAX and 4.8 from VBTLX.

4% from each asset added together is the same number as 4% from your total portfolio.

tophdna

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Re: 4% withdrawl questions
« Reply #18 on: February 12, 2019, 11:43:48 AM »
Gotcha, sorry, math illiterate apparently.

martind

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Re: 4% withdrawl questions
« Reply #19 on: February 12, 2019, 03:28:13 PM »
Two reasons: a better accumulation experience and superior withdrawal rates.
[/quote]

Thanks for the reading material & to the others who replied.

The 4% (or other) number is pretty important to me as I want to get the portfolio target value clear in my mind. I'm only 40 but I'm already sick of big company bullsh*t and politics, so want to quit asap... Latest thinking is move to 3 income streams:

Stock portfolio income / fun part-time gig / airbnb "rent a room" a few days a month.

There's some interesting other low effort ways of making side income here in the UK. Like renting driveway space to commuters or spare rooms as storage space...

JohnnyZ

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Re: 4% withdrawl questions
« Reply #20 on: February 14, 2019, 09:22:25 AM »
A great deal of analysis has been done on safe withdraw rates, much of it documented here (https://www.bogleheads.org/wiki/Safe_withdrawal_rates).  By and large the findings of the original Trinity study have been upheld: the vast majority (but not all) of historically simulated portfolios survived a 30 year period with a WR of 4% and at least 50% equities.

 Has any research been done that accounted for expense fees and taxes? It seems to me taxes especially would have a huge impact on success rates. Also, were portfolios with a stock portion more diversified than S&P500 ever studied?

JZinCO

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Re: 4% withdrawl questions
« Reply #21 on: February 14, 2019, 09:39:15 AM »
A great deal of analysis has been done on safe withdraw rates, much of it documented here (https://www.bogleheads.org/wiki/Safe_withdrawal_rates).  By and large the findings of the original Trinity study have been upheld: the vast majority (but not all) of historically simulated portfolios survived a 30 year period with a WR of 4% and at least 50% equities.

 Has any research been done that accounted for expense fees and taxes? It seems to me taxes especially would have a huge impact on success rates. Also, were portfolios with a stock portion more diversified than S&P500 ever studied?

Lots of variations of studies, some quite interesting (e.g. what if returns were lower but sequence return risk plummeted by using TIPS).
Google is your friend.. https://scholar.google.com/scholar?cites=921403757381636144&as_sdt=4005&sciodt=0,6&hl=enl.

edit: It's interesting to note that the 4% rule is highly inefficient. Because there are no conditional rules (i.e. it is 4% inflation-adj of initial value no matter what), it requires you to save ALOT. That's been the overarching criticism in academia.
« Last Edit: February 14, 2019, 10:03:53 AM by JZinCO »

secondcor521

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Re: 4% withdrawl questions
« Reply #22 on: February 14, 2019, 09:43:43 AM »
A great deal of analysis has been done on safe withdraw rates, much of it documented here (https://www.bogleheads.org/wiki/Safe_withdrawal_rates).  By and large the findings of the original Trinity study have been upheld: the vast majority (but not all) of historically simulated portfolios survived a 30 year period with a WR of 4% and at least 50% equities.

 Has any research been done that accounted for expense fees and taxes? It seems to me taxes especially would have a huge impact on success rates. Also, were portfolios with a stock portion more diversified than S&P500 ever studied?

Yes.  Generally the results show that you need to subtract whatever fees and expenses you are paying from 4% to get to a safe withdrawal rate.  So if 4% is safe and you're paying 1% annually, then your safe rate is 3%.

I handle taxes as an expense and include it in my total expenses for the numerator and use my portfolio values unadjusted in the denominator.  But in my case my taxes are negative and will likely remain so for the next several years, so it's not much of a concern.

There are backtests of all sorts of asset classes out there.  Personally I like TSM more than S&P500, but if you look at their long term performance charts they're essentially identical.