Author Topic: Anyone remember the 8% SWR?  (Read 7250 times)

Gone Fishing

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Anyone remember the 8% SWR?
« on: August 27, 2014, 11:56:48 AM »
I was just reflecting back to the early days of my FIRE journey and had to laugh at the fact that my early projections were based on a 8% SWR.  Now this was in the late 90's and the market had been booming for quite some time.  I did a google search to see if I could find out who spread such ideas and found that Dave Ramsey and Peter Lynch have both recommended high withdrawal rates at some time or another.  Everyone else seems to have scrubbed the records pretty well.  Anyone else remeber the 8% SWR recommendation?

nereo

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Re: Anyone remember the 8% SWR?
« Reply #1 on: August 27, 2014, 12:04:08 PM »
Facinating!
Nope, I guess I'm too young to ever remember anyone recommending an 8% SWR. From what I understand, most of the statistical basis for the modern 4% SWR comes from the Trinity Study which was released in 1998.

zataks

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Re: Anyone remember the 8% SWR?
« Reply #2 on: August 27, 2014, 12:21:01 PM »
8% hmmm?  Head math tells me that the rule of thumb on that would be multiplying annual spending by 12.5 to achieve my required retirement FI stash.  That sounds really nice!

I'll be sticking with numbers that are a little more conservative (not something I often say!).

FireDAD

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Re: Anyone remember the 8% SWR?
« Reply #3 on: August 27, 2014, 12:30:24 PM »
I listen to the DR show every day at work and he is still going on about the 8% withdraw rate and swears that if you can't average 12% a year then you are blind/dumb/not paying enough to advisors.

So there is still plenty of that toxic advice going around!

Gone Fishing

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Re: Anyone remember the 8% SWR?
« Reply #4 on: August 27, 2014, 12:50:07 PM »
I listen to the DR show every day at work and he is still going on about the 8% withdraw rate and swears that if you can't average 12% a year then you are blind/dumb/not paying enough to advisors.

So there is still plenty of that toxic advice going around!

As Zataks pointed out an 8% WR would cut the required size of the 'stache in half.  The only positive side effect of DR's advice I can imagine is that might encourage folks to save as shrinks the retirement number to something more attainable?

It's a shame DR's advice isn't a little more conservative, he really connects with a lot of people. 

Eric

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Re: Anyone remember the 8% SWR?
« Reply #5 on: August 27, 2014, 01:45:48 PM »
At 8% I'm FI!  Whoo hoo!

But really, we're missing some context here.  If you're on the verge of drawing Social Security and qualifying for Medicare, you probably can withdrawal 8% to start.  Depends on how long you need it to last or what your SS payments will be.

The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

RWD

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Re: Anyone remember the 8% SWR?
« Reply #6 on: August 27, 2014, 02:11:24 PM »
The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

I'm not sure I'd want to bet on the non-inflation adjusted success rate. Table 2 is inflation adjusted and gives a 43% success rate for the 20 years at 8% with 50/50 mix.

Eric

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Re: Anyone remember the 8% SWR?
« Reply #7 on: August 27, 2014, 02:50:48 PM »
The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

I'm not sure I'd want to bet on the non-inflation adjusted success rate. Table 2 is inflation adjusted and gives a 43% success rate for the 20 years at 8% with 50/50 mix.

I'm not sure I understand.  Why would you not bet on non-inflation adjusted success rates?  Do you think the authors somehow messed up the research when they didn't include inflation?  If you trust Table 2, you should trust Table 1.  Claiming that one is more accurate than the other doesn't make much sense to me.

marty998

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Re: Anyone remember the 8% SWR?
« Reply #8 on: August 27, 2014, 04:41:48 PM »
The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

I'm not sure I'd want to bet on the non-inflation adjusted success rate. Table 2 is inflation adjusted and gives a 43% success rate for the 20 years at 8% with 50/50 mix.

If you are 65 and had a life expectancy of 85, you've got a coin toss chance of falling of the perch before 20 years.

In those circumstances 8% could be a a reasonable argument.

solon

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Re: Anyone remember the 8% SWR?
« Reply #9 on: August 27, 2014, 04:48:28 PM »
"falling off the perch"? I just LOL'd!

Seņora Savings

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Re: Anyone remember the 8% SWR?
« Reply #10 on: August 27, 2014, 04:52:07 PM »
The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

I'm not sure I'd want to bet on the non-inflation adjusted success rate. Table 2 is inflation adjusted and gives a 43% success rate for the 20 years at 8% with 50/50 mix.

I'm not sure I understand.  Why would you not bet on non-inflation adjusted success rates?  Do you think the authors somehow messed up the research when they didn't include inflation?  If you trust Table 2, you should trust Table 1.  Claiming that one is more accurate than the other doesn't make much sense to me.

Using the non-inflation adjusted rate means that you won't increase spending with inflation.  Someone who retired in 1990 might find it hard to make it on the same dollar amount today since a 1990 dollar is worth about $0.55 today.  The math is good, it just doesn't reflect reality.

lakemom

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Re: Anyone remember the 8% SWR?
« Reply #11 on: August 27, 2014, 05:01:00 PM »
At 8% I'm FI!  Whoo hoo!

But really, we're missing some context here.  If you're on the verge of drawing Social Security and qualifying for Medicare, you probably can withdrawal 8% to start.  Depends on how long you need it to last or what your SS payments will be.

The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

+1  At least Dave Ramsey assumes everyone is working until at least 62, if not 67. I'd imagine that the 8% is much less risky if you start to draw at 67 as opposed to 37 or 47!

Eric

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Re: Anyone remember the 8% SWR?
« Reply #12 on: August 27, 2014, 05:17:16 PM »
The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

I'm not sure I'd want to bet on the non-inflation adjusted success rate. Table 2 is inflation adjusted and gives a 43% success rate for the 20 years at 8% with 50/50 mix.

I'm not sure I understand.  Why would you not bet on non-inflation adjusted success rates?  Do you think the authors somehow messed up the research when they didn't include inflation?  If you trust Table 2, you should trust Table 1.  Claiming that one is more accurate than the other doesn't make much sense to me.

Using the non-inflation adjusted rate means that you won't increase spending with inflation.  Someone who retired in 1990 might find it hard to make it on the same dollar amount today since a 1990 dollar is worth about $0.55 today.  The math is good, it just doesn't reflect reality.

I'm aware we're talking about non-inflation adjusted withdrawals, noted it in my original post, and fully understand what that means.  But the statement above by RWD seemed to question the success rate of non-inflation adjusted withdrawals, which is what I didn't understand.  Questioning whether one could live on non-inflation adjusted withdrawals is a wholly separate question from the success rate of the model for determining withdrawal rate for non-inflation adjusted withdrawals.

Setting that aside, I still think you could make a reasonable argument for non-inflation adjusted withdrawals over a couple decade time period.  While a 1990 $1 is only $.55 today, food prices are pretty steady and may have even declined.  Most of that inflation is driven by consumer goods, so if you buy those used, and use them sparingly, I think you wouldn't realize a decline of 45% in purchasing power.  My guess is closer to 20%.  Add to that the fact that most people spend less as they age, and I think it's fairly reasonable to for people with short time frames and full social security payments to give it a go at a high, non-inflation adjusted withdrawal rate. 

Plus it gives them a chance to complain that they're on a fixed income, and what senior citizen would give up the chance to complain about that?  j/k

I realize it's not relevant to those of us looking to FIRE in their 40s or 50s, as inflation would kill us over 50+ years without those adjustments, but for those that are older and have shorter periods to plan for, it's not a terrible idea.

Alex321

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Re: Anyone remember the 8% SWR?
« Reply #13 on: August 27, 2014, 06:30:00 PM »
Dave Ramsey has helped a lot of people, but be ALWAYS says 12% from "growth stock mutual funds."

RWD

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Re: Anyone remember the 8% SWR?
« Reply #14 on: August 27, 2014, 06:42:53 PM »
The Trinity Study (Table 1) had an 88% success rate for an 8% withdrawal over 20 years (non-inflation adjusted withdrawals at 50/50 stock/bond mix).  If you only need to cover 20 or so years, those are pretty good odds.

I'm not sure I'd want to bet on the non-inflation adjusted success rate. Table 2 is inflation adjusted and gives a 43% success rate for the 20 years at 8% with 50/50 mix.

I'm not sure I understand.  Why would you not bet on non-inflation adjusted success rates?  Do you think the authors somehow messed up the research when they didn't include inflation?  If you trust Table 2, you should trust Table 1.  Claiming that one is more accurate than the other doesn't make much sense to me.

Using the non-inflation adjusted rate means that you won't increase spending with inflation.  Someone who retired in 1990 might find it hard to make it on the same dollar amount today since a 1990 dollar is worth about $0.55 today.  The math is good, it just doesn't reflect reality.

I'm aware we're talking about non-inflation adjusted withdrawals, noted it in my original post, and fully understand what that means.  But the statement above by RWD seemed to question the success rate of non-inflation adjusted withdrawals, which is what I didn't understand.  Questioning whether one could live on non-inflation adjusted withdrawals is a wholly separate question from the success rate of the model for determining withdrawal rate for non-inflation adjusted withdrawals.

Thanks. Yes, that's what I meant. I was not at all questioning the accuracy of the data. I just would assume that my expenses would rise with inflation. Therefore the 88% success rate appears to be not applicable.

arebelspy

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Re: Anyone remember the 8% SWR?
« Reply #15 on: September 03, 2014, 10:50:21 PM »
Heh, thanks for the laugh OP.  Yeah, looking at old spreadsheets and the assumptions one put into them is amusing.

Looking at some house purchase spreadsheets I have from 2009 or so is quite different than reality.  :)

And I agree with those saying DR has some bad advice.  Aside from his 12% being way too high, he doesn't seem to be aware of sequence of return risk.

My FIRE income will come from rentals, but if you looked at it from a SWR type perspective, I'm planning on spending ~6% of my 'stache value annually, equivalent to a 6% SWR.  Could probably even up that by a decent amount, but I'm being conservative.
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Bateaux

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Re: Anyone remember the 8% SWR?
« Reply #16 on: September 03, 2014, 11:15:28 PM »
There were annuitys back then paying enough to support 8% withdrawl.   Those days are over.

UnleashHell

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Re: Anyone remember the 8% SWR?
« Reply #17 on: September 04, 2014, 03:32:24 AM »
my average rate of return on the stocks I manage is 22% - right back to 2007 so it does include a couple of bad years!

Therefore I know I sustain at 8%

see this financial advice stuff is easy.. Pay me to manage your stocks and everyone is a winner!!!




ok - I do have a 22% return - but on a small portfolio. 8% of what I have would sustain me and my family very nicely. Especially when you get all realistic and add in inheritances and SS in 16+ years time...

but there are no certainties. I know the 22% will revert towards the average at some point. the money from inheritance may go elsewhere or be used in nursing costs etc.


I'll stick to a 4% based on what I have available in investments.  Guess I'll head back to work today then....

chasesfish

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Re: Anyone remember the 8% SWR?
« Reply #18 on: September 04, 2014, 04:39:33 AM »
8% sounds great in theory, the market should average that amount.  Unfortunately volatility will can crush the average.

It still may work for people going for FIRE in their 40's with a nice pension fallback that'll kick in 10-15 years later.