Author Topic: SWR during extreme market volatility  (Read 679 times)

evanc

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SWR during extreme market volatility
« on: November 01, 2018, 05:39:48 PM »
A hypothetical (double checking my comprehension of the SWR):

Stache is $1M, 4% in yr 1 of retirement is obviously $40k, no problem there, but what happens if you retire and a week later the market drops 50%, formerly $1M stache is reduced to $500k.

My question is, still withdraw 40k that year?  What about the year after that, and the year after? Any adjustments necessary? Or will the inevitable market recovery eventually work itself out, meaning leave the withdrawals on auto pilot? I understand that there are some options, going back to work, reducing expenses, etc., but what I am more asking here is from a mathematical perspective, is it NECESSARY  to change the game plan in this type of scenario?  Or if I have a long enough retirement expectation (30+ years),  can I just keep on keeping on?

MDM

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Re: SWR during extreme market volatility
« Reply #1 on: November 01, 2018, 06:29:31 PM »
See Stop worrying about the 4% rule for >1600 posts on this.

But in short, if you believe the future will be no worse than the worst of the past, yes you still withdraw the $40K.

If you believe otherwise, then you should act otherwise.

evanc

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Re: SWR during extreme market volatility
« Reply #2 on: November 01, 2018, 06:34:25 PM »
See Stop worrying about the 4% rule for >1600 posts on this.

But in short, if you believe the future will be no worse than the worst of the past, yes you still withdraw the $40K.

If you believe otherwise, then you should act otherwise.

 That is exactly what I was looking for, thank you MDM!!!

FIRE 20/20

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Re: SWR during extreme market volatility
« Reply #3 on: November 01, 2018, 06:42:39 PM »
I recommend doing some reading on the 4% rule.  Here are some links to get you started.  Michael Kitces has done a good amount of research on the question I think you're asking, so I put his link first because I think they're most relevant.  But I think some basic reading from the links below would help also.
https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
https://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
https://www.madfientist.com/safe-withdrawal-rate/
https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/


To answer your specific questions briefly, the 4% rule is better thought of as a general guideline.  Depending on your circumstances, you may or may not want to increase or decrease that number.  There's nothing particularly magic about it, but it is an outstanding pessimistic rule of thumb to use. 

My question is, still withdraw 40k that year?  That depends.  The studies that have been done say that the 4% rule almost always works if you blindly withdraw 4%, have a particular ratio of stocks and bonds, and want your money to last 30 years.  But it does occasionally fail and a little more often you have so little after 30 years that it might as well have failed.  Therefore, if you want to blindly withdraw money without ever reducing expenses or ever working again and if you have dependents who will be relying on you long term then no, you probably should keep working and aim for a lower withdrawal rate.  However, if you can earn some money with a side gig, can cut expenses, or you're willing to take some risk then you can start withdrawing $40k and you'll probably be able to ride it out.  The important thing to note is that what you're asking about is known as the Sequence of Returns Risk.  Again, the Kitces post covers it, but you can google that phrase and 4% withdrawal rate and get a lot of reading.  Big ERN covers it pretty extensively too. 

What about the year after that, and the year after?
Adjust for inflation and keep going.

Any adjustments necessary?
Probably not, but in about 5% of the cases - yes.  More than 5% if you want your money to last more than 30 years. 

Or will the inevitable market recovery eventually work itself out, meaning leave the withdrawals on auto pilot?
Most of the time, but sometimes not.

is it NECESSARY  to change the game plan in this type of scenario?
You won't know until you're there.  Most of the time things will recover and you'll be fine.  But that scenario is one of the ones that is a bad sequence of returns, and it's more likely to result in running out of money (if you don't adjust) than if you have good returns the first few years. 

evanc

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Re: SWR during extreme market volatility
« Reply #4 on: November 05, 2018, 12:11:11 PM »
Very much appreciated, 20/20!