Author Topic: A SWR For Today  (Read 10280 times)

Mr. Green

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Re: A SWR For Today
« Reply #50 on: June 07, 2017, 04:07:39 PM »
But the idea that you'll be able to re-enter the workforce in a good paying, college-trained job after 10 or 20 years away is a bit suspect.  Even when oil went to $150 and my industry was pulling anyone with a heartbeat out of retirement, most of them only lasted a few months before getting the boot.
The risk there definitely depends on what your expenses are. The common trend for MMM-type people seems to be 30-60k per year.

I'll illustrate with my personal situation. Our expenses are about 30k at the moment but our FIRE plan is to spend up to 40k per year. We know how important the first 10 years of returns are, and we'll know roughly how that's going to turn out by year the end of year 7. In the unlikely event that we were looking at the short end of the stick on returns I could pick up any part-time job and make a serious impact on propping up our stash. It would be nothing to pull in 10k a year at a minimum-ish wage job. With little to no income, I'd be almost assured that I pay no tax so I'll see pretty much all of it. 10k is 25% of my expenses, and that's at the full 40k! If we can tighten our belt for a year or two if the market has crashed we could deal with 30k in expenses. With 10k of that coming from my job, I'm only withdrawing 2% of the original stash balance for the year. It wouldn't take more than 3-5 years of this in the worst circumstances (based on history) to get a portfolio back on track.

Of course the higher the base spending, the more difficult it is to ensure that any job would have the desired effect. Though after spending 7-10 years having complete control of my time, I'm not sure that I would want a full-time job. I'd likely prefer a part-time, low responsibility job because I've become accustomed to having my freedom.

The one thought I have regarding an extra couple years at a high paying job vs. the chance of needing to pick up a low paying job after ER is that it assumes a sequence of returns worse than we've ever had, the worst of which are based on some pretty awful events. I don't think an extra couple years will save someone if the future holds events significantly worse than our past. I expect something will have collapsed, economically, and we'll all be recovering from near financial ruin regardless of starting position. Just my opinion there.

All of this is part of that sliding scale I like to think of where people have to figure out what they're really comfortable with.
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steveo

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Re: A SWR For Today
« Reply #51 on: June 07, 2017, 04:09:34 PM »
I guess there are always service jobs, but that's not my idea of a good fallback plan.  I'd rather work an extra 2 or 3 years (making 6 figures) than have to work even one year in service (making low five figures).  And that's the irony when you look at the numbers, that I can easily make a decade of service industry income in 1-2 years in my current line of work.   

This is your choice and you may be extremely risk averse so this suits you but you have just guaranteed extra work for yourself.

One other point is that a lower income job is fine for the early retiree who is frugal. Instead of withdrawing 4% you can work in some job that doesn't pay well and withdraw 2%. You may only have to do this if things are looking a little bleak.

dividendman

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Re: A SWR For Today
« Reply #52 on: June 07, 2017, 04:39:01 PM »
Facts:

Chance of 4% WR failing > 0% < 100%
Chance of 4% WR failing with considerations (going back to work, variable withdrawal, rising equity glidepath) >> 0% < 100%

Chance of working another year if you don't quit: 100%
Chance of death increasing per year lived: 100%



EscapeVelocity2020

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Re: A SWR For Today
« Reply #53 on: June 07, 2017, 05:15:17 PM »
Not sure if I'm getting an interesting conversation going or just getting folks riled up (like I said, I'm not advocating that people abandon the historically sound 4% SWR), but one other thing I think about is that my ability to earn and save now might be better what the US workforce may see in 10-20 years, which includes my children's early career.  Technology is replacing jobs and a palpable chasm is widening between the rich and the poor.  Sure, if my kids make it into the remaining '1%-er' jobs they will be fine, but I'm also increasing their odds for success by being capable of giving them help (graduating with no student debt, providing health insurance until they are on their own, possibly even helping them with a downpayment on a home, etc.).  If you believe we are in a transformative period in terms of the future of work, I'm not sure how you can feel prepared for it by repeating what worked a generation ago.  Back then, people spent their whole career at one company and had a defined pension, buying stocks involved calling up a broker and checking the price in the newspaper, and healthcare and college were generally affordable for the rising middle class.     

Also, I'll reiterate, my situation is somewhat different than folks itching to ER.  I in no way feel that working extra years or having less time in retirement is a negative for me personally.  I love the lifestyle I get with my job (especially the variety of experiences) and will only head off into the sunset when I feel like it would be an improvement (like I'm burned out at work or feel too old to keep up), or when they fire me.  I'm only saying this so people understand my perspective, what works for me might be different than what works for you...     
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dividendman

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Re: A SWR For Today
« Reply #54 on: June 07, 2017, 06:22:58 PM »
Not sure if I'm getting an interesting conversation going or just getting folks riled up (like I said, I'm not advocating that people abandon the historically sound 4% SWR), but one other thing I think about is that my ability to earn and save now might be better what the US workforce may see in 10-20 years, which includes my children's early career.  Technology is replacing jobs and a palpable chasm is widening between the rich and the poor.  Sure, if my kids make it into the remaining '1%-er' jobs they will be fine, but I'm also increasing their odds for success by being capable of giving them help (graduating with no student debt, providing health insurance until they are on their own, possibly even helping them with a downpayment on a home, etc.).  If you believe we are in a transformative period in terms of the future of work, I'm not sure how you can feel prepared for it by repeating what worked a generation ago.  Back then, people spent their whole career at one company and had a defined pension, buying stocks involved calling up a broker and checking the price in the newspaper, and healthcare and college were generally affordable for the rising middle class.     

Don't you think that while there is a chance of your prediction of a widening chasm and vast extremes of wealth and poverty in the future could be true, there is an equal or perhaps much greater chance that advances in technology will allow for Universal Basic Income for everyone within the next twenty years so retirement savings may not be required at all?

Mr. Green

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Re: A SWR For Today
« Reply #55 on: June 07, 2017, 06:58:30 PM »
Not sure if I'm getting an interesting conversation going or just getting folks riled up (like I said, I'm not advocating that people abandon the historically sound 4% SWR), but one other thing I think about is that my ability to earn and save now might be better what the US workforce may see in 10-20 years, which includes my children's early career.  Technology is replacing jobs and a palpable chasm is widening between the rich and the poor.  Sure, if my kids make it into the remaining '1%-er' jobs they will be fine, but I'm also increasing their odds for success by being capable of giving them help (graduating with no student debt, providing health insurance until they are on their own, possibly even helping them with a downpayment on a home, etc.).  If you believe we are in a transformative period in terms of the future of work, I'm not sure how you can feel prepared for it by repeating what worked a generation ago.  Back then, people spent their whole career at one company and had a defined pension, buying stocks involved calling up a broker and checking the price in the newspaper, and healthcare and college were generally affordable for the rising middle class.     

Also, I'll reiterate, my situation is somewhat different than folks itching to ER.  I in no way feel that working extra years or having less time in retirement is a negative for me personally.  I love the lifestyle I get with my job (especially the variety of experiences) and will only head off into the sunset when I feel like it would be an improvement (like I'm burned out at work or feel too old to keep up), or when they fire me.  I'm only saying this so people understand my perspective, what works for me might be different than what works for you...   
This is why I like to emphasize that it's all what people are comfortable with. I see a whole lot of "inside the box thinking" when it comes to FIRE. Either folks feel like 4% isn't really safe, even though there are myriad safeties that can be built into it, or they feel like working past what you need to for FIRE is a waste of time. I say to each their own, but hopefully they fully understand all the aspects to be considered. If you love the job, awesome! Some folks love work to the point that it's not work. Nothing wrong with that. Others want to control all their time. That's cool too. Personally I think we're going to see increasing gains with the advancement of technology, but I totally see the stratifying of incomes as well. I believe some type of universal basic income will have to come into play at some point but now we're on another topic. I suppose I'm in the same boat as Warren Buffet. I believe that America's best days still lie ahead. We may not stay World #1 but that doesn't mean we can't still have economic prosperity.
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cerat0n1a

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Re: A SWR For Today
« Reply #56 on: June 08, 2017, 03:26:46 AM »

You need to factor inflation into your analysis.  Just because you can get treasuries at 2% return indefinitely, at a 2% WR you would eventually require a lower standard of living.

So, to re-state the earlier point. If you have an investment option that will match (but not beat) inflation, a 2% withdrawal rate implies that you have enough money to last 50 years. To assume that you can only only safely withdraw 2% is incredibly pessimistic - you are basically assuming that your return on capital will be less than inflation over multiple decades. It's certainly possible - see Weimar Germany in the 1920s or Zimbabwe & Argentina recently, but even there, owners of property and other "real" assets did OK.

I think what EscapeVelocity2020 is saying in recent posts makes a bit more sense; it's about having a lot of wealth to pass on to kids and liking a current well paid job rather than any rational view that a 2% withdrawal rate is actually necessary.

steveo

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Re: A SWR For Today
« Reply #57 on: June 08, 2017, 04:38:21 AM »
it's about having a lot of wealth to pass on to kids and liking a current well paid job rather than any rational view that a 2% withdrawal rate is actually necessary.

I have no issues with this however this should be stated as the goal/s and not that the 4% WR is somehow not safe. Anything below 6% with some flexibility is fairly safe. Once you get to that point I think you can do whatever you feel like doing. Stay in the higher paid job, work part time, work in a different job, take some time off and work at another point, don't work but be more frugal etc.

If you want to pass on a tonne of wealth to your kids that is fine. If you like your job that is fine. Neither has anything to do with amending the WR required to retire with a degree of comfort. I don't judge how people want to spend their time. We are all different. The math of withdrawing for retirement though isn't about different lifestyles.

EscapeVelocity2020

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Re: A SWR For Today
« Reply #58 on: June 08, 2017, 06:36:29 AM »
Another way to look at it is, let's say MMM retired in 2008 with 600k and 24k expenses.  By this year, with the compound growth of his 600k more than offsetting the withdrawal, he has a roughly 2 - 3% WR.  So is 4% still bulletproof for new retirees? 
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Mr. Green

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Re: A SWR For Today
« Reply #59 on: June 08, 2017, 07:24:57 AM »
Another way to look at it is, let's say MMM retired in 2008 with 600k and 24k expenses.  By this year, with the compound growth of his 600k more than offsetting the withdrawal, he has a roughly 2 - 3% WR.  So is 4% still bulletproof for new retirees?
Absolutely! If 2008 is the first year of ER, the market will have to end 2017 up 20% in order for MMM to have a 10-year average return that matches the historical average. If 2017 ended where the market is right now his 10-year average annual return will be under 6%, basically a full percentage point below the historical average. Despite the fact that we've had very nice returns over the last few years, this just goes to show you how much damage that one year of -37% returns (2008) had on a portfolio. So his first 10 years of retirement are falling well within the expected parameters of SWR scenarios.

At 4%, in a majority of scenarios you end up with more money than you started with. This means your withdrawal rate will naturally become less than 4% of your current stash balance as it grows. However, the WR isn't meant to be recalculated every year. It's based on the starting value of the stash in some capacity (maybe there's an adjustment for inflation or other drawdown scenarios people consider). You can certainly reset your WR rate to match the current value of your stash in any year after ER but you then change the parameters of a 30-year retirement scenario to the new numbers. If you're making that adjustment after a long bull run, where the expectation is a down cycle at some point, increasing the withdrawals to 4% of the now-larger stash may put you at greater risk of failure long term because you increase the risk of a bad sequence of returns during the first 10 years of the new 30-year period.
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Mr. Green

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Re: A SWR For Today
« Reply #60 on: June 08, 2017, 07:48:16 AM »
You might find this chart interesting. It shows the results of 30-year periods based on 750k invested in 100% stocks, 0.08% in expense fees, and withdrawing 30k per year (4%). The chart also shows averages for the first 10 years and first 20 years within a 30-year period.

In the first column (year), Red indicates a portfolio that ran out of money after 30 years or was drained to the point that it would be exhausted in the next couple years. Orange means a portfolio ended with less than it started but still has a fairly healthy balance. Green indicates a portfolio ended with more than it started with.

We know the historical average return is between 6.5-7%, adjusted for inflation. Take a look at the average returns in the years where a portfolio fails. All those numbers are adjusted for inflation and based on Compound Annual Growth Rate data on moneychimp.com. Just look at how awful the returns have to be before a 4% withdrawal rate fails. I like seeing data like this because it eliminates some of the mystery about how things would likely turn out based on future return scenarios. I think most people would be very comfortable with a 4% WR after looking at this data.

Note: Something I find very comforting is that no stash has ever failed to go the distance if the average return for the first 10 years is greater than 3%. While I certainly don't expect that we've seen all the combinations of ups and downs there are, 3% is a looooong way from the average return.
« Last Edit: June 08, 2017, 07:59:18 AM by Mr. Green »
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EscapeVelocity2020

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Re: A SWR For Today
« Reply #61 on: June 08, 2017, 08:03:53 AM »
Wow, you (probably intentionally) missed my point.  Let's actually use the numbers from 2008, shall we...

I took inflation rates from here and total S&P return from here.

In 2008, MMM retires with 600k and 24k withdrawl.  I assume his expenses came from the money he earned and he has 600k at the end of the year.  In 2009, there was actually 0.4% deflation and 24.5% total S&P return (including dividends).  So his expenses were 23904 and his portfolio grew to roughly 717k.  Do this though 2017 and I get that his current expenses are $27,415 and his portfolio is $1,462,200.  Hence, his WR is 0.187 or less than 2%....
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Mr. Green

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Re: A SWR For Today
« Reply #62 on: June 08, 2017, 08:16:54 AM »
In 2008, MMM retires with 600k and 24k withdrawl.  I assume his expenses came from the money he earned and he has 600k at the end of the year.  In 2009, there was actually 0.4% deflation and 24.5% total S&P return (including dividends).  So his expenses were 23904 and his portfolio grew to roughly 717k.  Do this though 2017 and I get that his current expenses are $27,415 and his portfolio is $1,462,200.  Hence, his WR is 0.187 or less than 2%....
I didn't miss your point. I guess I just wan't able to accurately convey what I was trying to. His withdrawal rate has dropped to less than 2% almost 10 years into his retirement. Assuming he continues to withdrawal similar amounts, his WR will go back up during the next recession, correction, etc. He's had a very good sequence of returns with the exception of the first year so I would expect him to be in one of the higher percentiles of historic 30-year periods. Looking at today as a snapshot in time of his stash might very well be like looking at the apex of a curve before it drops lower (or as WR goes, higher). Only the future can tell us that.
« Last Edit: June 08, 2017, 08:22:56 AM by Mr. Green »
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cerat0n1a

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Re: A SWR For Today
« Reply #63 on: June 08, 2017, 08:17:47 AM »
Wow, you (probably intentionally) missed my point.  Let's actually use the numbers from 2008, shall we...

I took inflation rates from here and total S&P return from here.

In 2008, MMM retires with 600k and 24k withdrawl.  I assume his expenses came from the money he earned and he has 600k at the end of the year.  In 2009, there was actually 0.4% deflation and 24.5% total S&P return (including dividends).  So his expenses were 23904 and his portfolio grew to roughly 717k.  Do this though 2017 and I get that his current expenses are $27,415 and his portfolio is $1,462,200.  Hence, his WR is 0.187 or less than 2%....

You are pointing out that his portfolio has done well (but still below market average for a 10 year period) and that he is now withdrawing 2% rather than 4%. So your question is, would it be OK for someone retiring today with a similar size portfolio be OK to withdraw twice as much per year (i.e. 4%) or (same question in effect) is it OK for MMM to now double his withdrawal rate? The answer you got is "yes" in both cases, but that it exposes you the sequence of returns risk that MMM has already apparently successfully overcome.

Mr. Green

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Re: A SWR For Today
« Reply #64 on: June 08, 2017, 08:27:31 AM »
I feel obliged to mention though that under no circumstances is any withdrawal rate bulletproof. Something crazy can always happen. That's part of the sliding scale of risk. Even 2% could fail in some unknown future scenario. If no (literally zero) risk is acceptable, the only solution is to work until death.
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EscapeVelocity2020

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Re: A SWR For Today
« Reply #65 on: June 08, 2017, 08:40:08 AM »
Thanks for the replies.  Just explaining how I got to 2% WR not being crazy for me (just kinda worked out that way).  I'm away from my computer most of today, but enjoyed the discussion and sharing my perspective. 

Working until death isn't a bad thing if you enjoy the work, even if you don't need the money for yourself...
« Last Edit: June 08, 2017, 08:42:20 AM by EscapeVelocity2020 »
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zz_marcello

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Re: A SWR For Today
« Reply #66 on: June 08, 2017, 11:08:08 AM »
...Working until death isn't a bad thing if you enjoy the work, even if you don't need the money for yourself...

Maybe for some but this is not the:"Be employed till your last day" forum ;-)

2% WR is unreasonable low because a 3% stock portfolio WR never ever failed even for an 100 year retirement but there is a world of difference between a 4% WR in times of high CAPE's and a ~3.25% WR.

I highly recommend to invest one hour of your life for the ultimate guide to safe withdrawal rates:
https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

It gives you a lot of confidence that a ~3-3.25% is very golden (and a 4% withdrawal rate with current CAPE is more risky than many in the MMM community think.

secondcor521

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Re: A SWR For Today
« Reply #67 on: June 08, 2017, 01:55:47 PM »
And the risk free 30 yr treasury rate is still below 2%...

No it isn't.  As of yesterday it was 2.84%, and it's been above 3% this year:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2017
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EscapeVelocity2020

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Re: A SWR For Today
« Reply #68 on: June 08, 2017, 06:43:19 PM »
And the risk free 30 yr treasury rate is still below 2%...

No it isn't.  As of yesterday it was 2.84%, and it's been above 3% this year:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2017

You're right, I should've used a CD or shorter term bond to represent the risk free rate.  30 year bonds could be quite risky if you need to sell them before maturity and newly issued 30 yrs have higher yield....
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sirdoug007

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Re: A SWR For Today
« Reply #69 on: June 08, 2017, 09:31:30 PM »
30 year bonds are not inflation protected.

A 100% 30 year bond portfolio would have a real return around 1%.

This is why sticks are so important for the long run.


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secondcor521

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Re: A SWR For Today
« Reply #70 on: June 08, 2017, 10:13:21 PM »
30 year bonds are not inflation protected.

A 100% 30 year bond portfolio would have a real return around 1%.

This is why sticks are so important for the long run.


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Agreed on the 1% real yield on a 30 year TIPS.  I was interpreting "risk free" in the traditional sense of the phrase as free from default risk (and I suppose, calling risk), the gold standard of which I thought were US Treasuries.  You're right that there is still inflation to consider.

This is why I only invest in twigs for the long run.
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EscapeVelocity2020

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Re: A SWR For Today
« Reply #71 on: June 09, 2017, 08:10:42 AM »
30 year bonds are not inflation protected.

A 100% 30 year bond portfolio would have a real return around 1%.

This is why sticks are so important for the long run.


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Agreed on the 1% real yield on a 30 year TIPS.  I was interpreting "risk free" in the traditional sense of the phrase as free from default risk (and I suppose, calling risk), the gold standard of which I thought were US Treasuries.  You're right that there is still inflation to consider.

This is why I only invest in twigs for the long run.

Yeah, I was sort of all over the place trying to get the point across that instruments that are 'risk free' hardly yield anything.  Hence my statement, USE are about the only game in town (and have been for about the past decade).  Real estate was a close second with good yield and rising demand / value coming out of the housing bust, but being a physical asset, it is pretty clear (at least in Houston and China) that we are in an oversupply and rising vacancies (although new apartments and office buildings are still coming to market).  To me, this is a sign of a market that is not healthy and does not bode well for what happens if USE begins a downturn, for whatever reason.  I've heard terms like 'bond bubble' and 'credit bubble' thrown around, but noone really knows what the heck is going on, since inflation is still well contained. 

Twigs sounds like an interesting financial product, anything like TIPS or Bitcoin?   
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