Author Topic: SWR retirement age dependent?  (Read 16929 times)

omni

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SWR retirement age dependent?
« on: May 28, 2013, 07:22:13 AM »
Do you guys think SWR should be dependent on when someone retires? In my case DW and I am planning on retiring in our mid 30's, which means the nest egg probably needs to last 50 odd years. I know MMM presumes a SWR of 4%, but my conservative nature would tend me towards a lower percentage.

The main reasons for me to tend it to a lower percentage are to do with how lengthy the ER time frame is, which leads to compounding in inflation rates (e.g. 3% a year of inflation makes $1 today worth $4.4, 4% makes $7.1, 5% makes $11.47, 10% makes $117.4). This is the case if I leave money in the bank earning no interest, which wouldn't be realistic, so the main risk would be the difference between inflation rate and my personal investment rate of return. If my personal investment rate of return is lower than inflation rate, then I stand to possibly run out of money before I die.

To mitigate this, potential solutions include:
  • Decrease my personal SWR - e.g. to 2%
  • Get better at improving my investment return - though I am of the opinion that in the long run, over decades, that I'd perform 'normal', and lose out only in fees/transaction costs.
  • Buy an asset that mirrors inflation rate - like a property
  • Work part time - possible, but kind of defeats the purpose of ER! :)
What do you guys think?

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Re: SWR retirement age dependent?
« Reply #1 on: May 28, 2013, 07:27:44 AM »
If you have no wiggle room in your budget (can you cut spending during bad market years?) and/or have no desire to ever pick up any sort of job ever again (as a contingency), then a lower SWR might be prudent. 2% is pretty extreme, from what I've learned. 

If you ever play with Firecalc, look into how much even $5000-10000 of income during the first few years of ER affects the overall outcome.  You really shouldn't totally dismiss the idea, it's very powerful.

matchewed

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Re: SWR retirement age dependent?
« Reply #2 on: May 28, 2013, 07:44:07 AM »
My take on it is if you want to be conservative in your estimates reducing your SWR is the way to go. You can't predict future returns so changing what you can control is the best bet.

Improving investment returns is very difficult IMO but then again I'm definitely not an expert in that area. Looking for further efficiencies would possibly be better - see madFIentist's post - http://www.madfientist.com/retire-even-earlier/

I personally predict low returns but I'm personally comfortable with a 4% SWR with a combination of part-time work. I don't think part-time work defeats the purpose of ER. This is probably one of the first generations that can fully realize a "career" of jumping in and out of the work force at will. We truly get to shape the working aspect of our life as we see fit.

*edit*

But I personally don't think that the SWR is age dependent, maybe inadvertently since the studies it is based off of involved 30 year time frames. One of the common pushbacks on the 4% SWR is the passing criteria. If you don't run out of money you pass. However looking at FIRECALC most scenarios are well over the 0 mark. In fact I'd contend with the ability for early retirees to manage their spending, take part time jobs if necessary, and have the extra time to invest efficiently and with greater knowledge that 4% will work out well for FIRE (barring hyper inflationary periods). But then again I'm irrationally optimistic for the far future.
« Last Edit: May 28, 2013, 07:52:38 AM by matchewed »

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Re: SWR retirement age dependent?
« Reply #3 on: May 28, 2013, 07:52:01 AM »
I personally predict low returns but I'm personally comfortable with a 4% SWR with a combination of part-time work. I don't think part-time work defeats the purpose of ER. This is probably one of the first generations that can fully realize a "career" of jumping in and out of the work force at will. We truly get to shape the working aspect of our life as we see fit.

+1

omni

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Re: SWR retirement age dependent?
« Reply #4 on: May 28, 2013, 08:01:09 AM »
Thanks for your ultra quick responses! I am located in Australia, so IR doesn't mean all too much to me without reading further about it :), but I appreciate that it is to efficiently structure your investments.

I did have a look at Firecalc, but the data points seemed limited. At 50 years there are 90 data points which seems limited to me. Aside from that being outside of USA, I wonder how applicable the data is. I did find a research on SWF across more countries, but that presumes a 30 year retirement period. http://www.fpanet.org/journal/CurrentIssue/TableofContents/AnInternationalPerspectiveonSafeWithdrawalRates/  . For Australia, it is 3.68%, reasonably close to USA's 4%, but again over a 30 year time frame.

---edit---
I take that back, 90 data points is quite a bit to work with. As is 110 at 30 years.
---edit---
I have a 30% wiggle room in my budget (e.g. there is up to 30% 'luxury' expenses that can be trimmed on down years), and am open to part time work, but though I'd get some view of a sensible SWF that is on the safer side but not ultra conservative.

At this stage I intend to not spend the 30% in the earlier years, and gradually ramp up spending as we get more comfortable.
« Last Edit: May 28, 2013, 08:10:04 AM by omni »

Mr Mark

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Re: SWR retirement age dependent?
« Reply #5 on: May 28, 2013, 08:02:33 AM »
With just a touch of flexibility and common sense even a 4% SWR  is conservative.

Take a 80% 30 year fixed mortgage as well, and that leverage boosts your effective swr on top. Add some rental income ( along with opportunities for forced income, by doing your own managing and maintenance) and that stash will last forever. Imho.

I guess if you get to age 90 and have a big stash, that swr could easily go to 10%+ !!


omni

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Re: SWR retirement age dependent?
« Reply #6 on: May 28, 2013, 08:18:04 AM »
But I personally don't think that the SWR is age dependent, maybe inadvertently since the studies it is based off of involved 30 year time frames. One of the common pushbacks on the 4% SWR is the passing criteria. If you don't run out of money you pass. However looking at FIRECALC most scenarios are well over the 0 mark. In fact I'd contend with the ability for early retirees to manage their spending, take part time jobs if necessary, and have the extra time to invest efficiently and with greater knowledge that 4% will work out well for FIRE (barring hyper inflationary periods). But then again I'm irrationally optimistic for the far future.
Makes sense. I guess if by the end of the 30 years, the stash amount is still significantly positive, presumably it will last quite a number more years.


omni

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Re: SWR retirement age dependent?
« Reply #7 on: May 28, 2013, 08:20:11 AM »
Take a 80% 30 year fixed mortgage as well, and that leverage boosts your effective swr on top. Add some rental income ( along with opportunities for forced income, by doing your own managing and maintenance) and that stash will last forever. Imho.
Could you elaborate what you mean here? How does a 30 year mortgage boost your effective SWR?

arebelspy

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Re: SWR retirement age dependent?
« Reply #8 on: May 28, 2013, 08:31:02 AM »
Take a 80% 30 year fixed mortgage as well, and that leverage boosts your effective swr on top. Add some rental income ( along with opportunities for forced income, by doing your own managing and maintenance) and that stash will last forever. Imho.
Could you elaborate what you mean here? How does a 30 year mortgage boost your effective SWR?

Doesn't apply to you in Australia.

For those of us that can lock in super cheap rates (i.e. below an expected SWR rate), the positive leverage is free cash, meaning you can have a higher SWR.

And it has the side benefit of being an inflation hedge.
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velocistar237

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Re: SWR retirement age dependent?
« Reply #9 on: May 28, 2013, 08:48:58 AM »
Many investment classes track inflation, one of which is stocks.

According to FIREcalc back-testing, any withdrawal rate below 3.3% would have had 100% success over any time horizon with normal, prudent investments (low-fee, diversify, rebalance, etc.). It only takes 1-3 years to get from a 4% withdrawal rate to a 3.3% withdrawal rate, so many people will think it worth the effort.

Keep this in mind though: if you are going for 100% success, then you are 100% guaranteed to work those extra years. If you go for 80% success and rely on the multiple margins of safety that MMM offers, then you will retire earlier and have some small chance of having to work during a downturn, if you don't already anyway. Whatever you do, don't do it out of fear.

pom

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Re: SWR retirement age dependent?
« Reply #10 on: May 28, 2013, 08:59:26 AM »
Be careful with Firecalc, it is based on a US perspective.

Look at this study: http://www.fpanet.org/journal/CurrentIssue/TableofContents/AnInternationalPerspectiveonSafeWithdrawalRates/

For Australia, the safe retirement rate that they suggest is 3.68%. Using 4.0% gives you a 2.5% failure rate, it is not high at all but it is interesting to note the difference.

I currently reside in France and the SWR is ... 1.25% and a 4.0% withdrawal rate failed 42% of the time in the last 79 years... ouch!

Thankfully I am also a Canadien citizen, SWR is 4.42% there!

Mr Mark

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Re: SWR retirement age dependent?
« Reply #11 on: May 28, 2013, 09:37:14 AM »
Take a 80% 30 year fixed mortgage as well, and that leverage boosts your effective swr on top. Add some rental income ( along with opportunities for forced income, by doing your own managing and maintenance) and that stash will last forever. Imho.
Could you elaborate what you mean here? How does a 30 year mortgage boost your effective SWR?

Doesn't apply to you in Australia.

For those of us that can lock in super cheap rates (i.e. below an expected SWR rate), the positive leverage is free cash, meaning you can have a higher SWR.

And it has the side benefit of being an inflation hedge.

Exactly. Say I have a 300k house. If I own it, that's 300k of my portfolio tied into real estate. If I borrow 80% @3.5% (nominal) and invest that money at an average expected return of 9% nominal, say by buying index funds, I boost my average portfolio return. 240k at about 5% delta gives 12k per year on top of my non mortgaged portfolio.

As long as the nominal interest rate is less than my nominal investment return I'm probably  better off, long term, but at the expense of more risk/volatility.

If iinterest rate on debt is less than my swr, I'm definitely better off borrowing and investing.

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Re: SWR retirement age dependent?
« Reply #12 on: May 28, 2013, 09:50:45 AM »
Quote
I personally don't think that the SWR is age dependent

Well, it's certainly life-expectancy dependent, provided of course that one knows one's life expectancy.  If you have a year to live, you should spend 100% of what you've got or as much as you want, whichever is smaller (though if you're not married, i.e., won't be committing another person to pay off your debts, go ahead and have fun with the credit cards, while you're at it, and spend away on those too.  Especially in month 12.). 

Barring that level of certainty, the longer you live, holding SWR and everything else constant, the more likely it is you will run out of money.  So, sure, but how high is too high?  I have no particular expertise in this topic (I'm told that at 2% you can safely afford to live forever, word is medical science isn't there yet), but there appear to be some useful recommendations above (note, too, that especially with a long time horizon, this isn't just about how returns will fluctuate, but living expenses also, and those may be a function of technologies not even invented yet -- for good (with respect to living expenses) or ill (ditto)). 

As others have pointed out, the ability/opportunity to re-enter the workforce is another sort of safeguard against uncertainty.

velocistar237

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Re: SWR retirement age dependent?
« Reply #13 on: May 28, 2013, 11:36:35 AM »
For large time horizons, the capital recovery problem approaches a steady state withdrawal.


So for constant rate of return R and initial value V0, the payment per period will be almost the same for depleting principal as it is for preserving principal, over the time horizon of n periods.

You can test this for variable returns in FIREcalc by changing the portfolio type to random performance and changing the time frame to various values. The withdrawal rate that gives you 99-100% success will be the same for various large time horizons.
« Last Edit: May 28, 2013, 11:39:13 AM by velocistar237 »

omni

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Re: SWR retirement age dependent?
« Reply #14 on: May 29, 2013, 08:11:55 AM »
Thanks for everyone's response. I think I will stick to a 3% SWR to be on the conservative side as it is a long retirement, to guard against outlier type events. The difference between a 4% and 3% SWR is about 2.5 years of work for me, which isn't an alarming difference.

At the mean time I'll focus a bit more on making the nest egg more resilient. Luckily the wife is willing to go for part time work, and is (likely) flexible around the budget during down years. I will do the same with part time work, and keep a closer eye on investments.

Mr Mark

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Re: SWR retirement age dependent?
« Reply #15 on: May 29, 2013, 09:04:24 PM »
So it's a small difference?

In financial terms, exactly. Fretting about 3% [wildly conservative]   or 4 % isn't the issue usually. Markets are going to be volatile. If you have a stash of a million or more, cry me a river. Be a fox. If you can't live on a stash like that, when the markets are down for a few years (bonds, anyone?) that's not a swr problem.

2.5 years. At, say, age 40. That's 2.5/40 years, 6.2% of remaining life, that's a huge difference.


arebelspy

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Re: SWR retirement age dependent?
« Reply #16 on: May 29, 2013, 09:09:48 PM »
Agree with Mark somewhat (though I wouldn't call 3% wildly conservative, it's what I'd recommend to someone wanting to FIRE in their 30s who doesn't want to be flexible on spending later or have to earn extra income).

But while Mark looked at the difference in amount of years, I'll look at it in dollars: Going from a 4% SWR to 3% is a stache 1/3 bigger.. that's not a "small difference" to me.

Either way, I wouldn't trivialize it, because it's important to reflect on, IMO.
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omni

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Re: SWR retirement age dependent?
« Reply #17 on: May 30, 2013, 04:49:07 AM »
I guess I am looking from perspective of spending about 6% of my retirement life to boost the retirement fund by 33% if all goes to plan, bringing SWR from 4 to 3%, as being a pretty good pay off. This can just be because I am more conservative though or want more flexibility when I ER. That'll leave me retired at 34-35, which is reasonable in my book. But I say this while I still enjoy my career, which may not be the case in a few years time! :)

happy

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Re: SWR retirement age dependent?
« Reply #18 on: May 30, 2013, 07:42:31 AM »
Another option (which is a personal fave of mine ) that was mentioned tangentially above, is that of working part-time to cover your expenses only, leaving your stash to compound untouched. The accumulation phase is hard work, but replacing expenses is much less so. This strategy could carry you from 4% to 3%.

arebelspy

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Re: SWR retirement age dependent?
« Reply #19 on: May 30, 2013, 08:08:59 AM »
I guess I am looking from perspective of spending about 6% of my retirement life to boost the retirement fund by 33% if all goes to plan, bringing SWR from 4 to 3%, as being a pretty good pay off. This can just be because I am more conservative though or want more flexibility when I ER. That'll leave me retired at 34-35, which is reasonable in my book. But I say this while I still enjoy my career, which may not be the case in a few years time! :)

Yes, if you can hit a 3% by mid-30s with plans for healthcare and other related big expense items (kid's college, for example, if you have them and are into the idea of paying for it) and your budget is overall reasonable (not just 10k/yr. because that's what you're able to get along on as a single person in their 20s), that would be the way to go, IMO.

Another option (which is a personal fave of mine ) that was mentioned tangentially above, is that of working part-time to cover your expenses only, leaving your stash to compound untouched. The accumulation phase is hard work, but replacing expenses is much less so. This strategy could carry you from 4% to 3%.

(Emphasis mine.)

Wouldn't that carry you from 4% to 0%?
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jexy103

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Re: SWR retirement age dependent?
« Reply #20 on: May 30, 2013, 03:16:18 PM »

Another option (which is a personal fave of mine ) that was mentioned tangentially above, is that of working part-time to cover your expenses only, leaving your stash to compound untouched. The accumulation phase is hard work, but replacing expenses is much less so. This strategy could carry you from 4% to 3%.

(Emphasis mine.)

Wouldn't that carry you from 4% to 0%?

I think happy meant that the OP can quit the FT job when he reaches a 4% SWR, and then work PT to cover expenses (0% WR) until the 'stache grows enough or life expectancy has decreased to the point where it would then be a 3% SWR. For instance, the OP could stop working FT at 34 at 4% SWR and cut back to PT- his 'stache would continue to grow through investment gains while he is working PT to cover his expenses (and he continues to age which decreases the length of time his 'stache must last). If he works PT for 10 years, at age 44, his 'stache is larger (and needs to last less time), so the OP may have a SWR of 3% due to investment gains, even while not contributing during his PT years.

At least, that's how I read it.

arebelspy

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Re: SWR retirement age dependent?
« Reply #21 on: May 30, 2013, 04:27:59 PM »
Interesting.  There would have to be quite a bit of gains to increase your stache amount by 1/3 without any contributions (and all in real dollars, above inflation).  I'd rather keep contributing or be flexible with the withdrawals.  But yes, that does make sense.  Thanks.
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meadow lark

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Re: SWR retirement age dependent?
« Reply #22 on: May 30, 2013, 08:19:49 PM »
  I just went to a compound interest calculator and 3% for 10 years  will give you 34%.   Add another 3% for inflation a year, so if you can make 6% you are golden.  This is similar to our current plan.  Accumulation stage for 5 more years, then part-time.  Until I don't want to work part-time.  Even going part-time, we would end up contributing enough (4%) to get our employer match (2%.).   And the yearly 3% they give instead of a pension.) 
  I am by comfortable with a SWR of 4%, because I am flexible and when the market goes down for a few years, We will either work a little, or spend less.  I think this is easy when you are a young retiree - not so much at 80.

happy

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Re: SWR retirement age dependent?
« Reply #23 on: May 31, 2013, 03:38:49 AM »

Another option (which is a personal fave of mine ) that was mentioned tangentially above, is that of working part-time to cover your expenses only, leaving your stash to compound untouched. The accumulation phase is hard work, but replacing expenses is much less so. This strategy could carry you from 4% to 3%.

(Emphasis mine.)

Wouldn't that carry you from 4% to 0%?

I think happy meant that the OP can quit the FT job when he reaches a 4% SWR, and then work PT to cover expenses (0% WR) until the 'stache grows enough or life expectancy has decreased to the point where it would then be a 3% SWR. For instance, the OP could stop working FT at 34 at 4% SWR and cut back to PT- his 'stache would continue to grow through investment gains while he is working PT to cover his expenses (and he continues to age which decreases the length of time his 'stache must last). If he works PT for 10 years, at age 44, his 'stache is larger (and needs to last less time), so the OP may have a SWR of 3% due to investment gains, even while not contributing during his PT years.

At least, that's how I read it.

Thanks Jexy, thats just what I meant.

The math is quite good IMO.

Say you want 40k a year expesnes in retirement, you will need 1mill for a 4%SWR or 1.32 mill for a 3% SWR.

If you work FT until you reach 1mill, and invest your money netting 5% after inflation (I think that is what MMM uses for his calculations), then it will take about 6 years to reach 1.32mill.  So for that 6 years you only need to earn your 40k expenses which you could do by just working part of the year, or working reduced hours.  Or working your dream job that you always wanted to do but doesn't make much money.

Of course I understand a lot of people will prefer to go flat out for a shorter period...as I say its just one alternative.

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Re: SWR retirement age dependent?
« Reply #24 on: May 31, 2013, 04:01:42 AM »
Say you want 40k a year expesnes in retirement, you will need 1mill for a 4%SWR or 1.32 mill for a 3% SWR.

If you work FT until you reach 1mill, and invest your money netting 5% after inflation (I think that is what MMM uses for his calculations), then it will take about 6 years to reach 1.32mill.  So for that 6 years you only need to earn your 40k expenses which you could do by just working part of the year, or working reduced hours.  Or working your dream job that you always wanted to do but doesn't make much money.

Of course I understand a lot of people will prefer to go flat out for a shorter period...as I say its just one alternative.

I think it's a fantastic alternative. Got me thinking now .....

happy

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Re: SWR retirement age dependent?
« Reply #25 on: May 31, 2013, 04:38:07 AM »
Yes it might be a gentle way of easing out if you are procrastinating a bit on retiring :)

omni

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Re: SWR retirement age dependent?
« Reply #26 on: May 31, 2013, 06:24:53 AM »
Yes it might be a gentle way of easing out if you are procrastinating a bit on retiring :)
Like a lot :)

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Re: SWR retirement age dependent?
« Reply #27 on: May 31, 2013, 09:19:31 AM »
I've advocated on this forum before that age can factor into SWR decisions, and that "stacking the deck" up front through part time work or other methods to reduce principal reduction in early years can go a long way towards providing a very safe (and lucrative) retirement later on. So I'd say target a low SWR (0 - 3%) during the early years of your retirement, then it could be 4%+ in later years.

By doing any kind of part time work in the early years (whether it's to cover all your expenses or just a portion) that reduces the amount you need to withdraw from your stash, you can greatly mitigate the gigantic risk of bad sequencing up front, and the longer term threat of inflation. I also argue that you can use it to invest in a safer AA, allowing your stash to grow, but without the stomach churning ups and downs of an 80%, 90%, or even 100% equities allocation in an attempt to "keep ahead of inflation".

As we age, the amount you can safely withdraw increases, plain and simple. As pointed out above, at 100 years old your SWR could be very, very high, and the rate would gradually decrease as you back up in age. I will feel very safe reducing principal if desired when I'm in my 70s, 80s, 90s. A lot of traditional retirement plans build principal depletion into the strategy, so that you're theoretically left with $0 when you reach your maximum life expectancy. I don't plan on going to $0, but would feel very confident starting to deplete principal at age 65 - 70 over whatever years remained, leaving a healthy margin of safety in the principal balance (say, targeting drawing it down by half until a target age of 100).

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Re: SWR retirement age dependent?
« Reply #28 on: May 31, 2013, 10:16:29 AM »
I've advocated on this forum before that age can factor into SWR decisions, and that "stacking the deck" up front through part time work or other methods to reduce principal reduction in early years can go a long way towards providing a very safe (and lucrative) retirement later on. So I'd say target a low SWR (0 - 3%) during the early years of your retirement, then it could be 4%+ in later years.

By doing any kind of part time work in the early years (whether it's to cover all your expenses or just a portion) that reduces the amount you need to withdraw from your stash, you can greatly mitigate the gigantic risk of bad sequencing up front, and the longer term threat of inflation. I also argue that you can use it to invest in a safer AA, allowing your stash to grow, but without the stomach churning ups and downs of an 80%, 90%, or even 100% equities allocation in an attempt to "keep ahead of inflation".

As we age, the amount you can safely withdraw increases, plain and simple. As pointed out above, at 100 years old your SWR could be very, very high, and the rate would gradually decrease as you back up in age. I will feel very safe reducing principal if desired when I'm in my 70s, 80s, 90s. A lot of traditional retirement plans build principal depletion into the strategy, so that you're theoretically left with $0 when you reach your maximum life expectancy. I don't plan on going to $0, but would feel very confident starting to deplete principal at age 65 - 70 over whatever years remained, leaving a healthy margin of safety in the principal balance (say, targeting drawing it down by half until a target age of 100).
+1

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Re: SWR retirement age dependent?
« Reply #29 on: June 07, 2013, 08:12:36 AM »


Exactly. Say I have a 300k house. If I own it, that's 300k of my portfolio tied into real estate. If I borrow 80% @3.5% (nominal) and invest that money at an average expected return of 9% nominal, say by buying index funds, I boost my average portfolio return. 240k at about 5% delta gives 12k per year on top of my non mortgaged portfolio.

As long as the nominal interest rate is less than my nominal investment return I'm probably  better off, long term, but at the expense of more risk/volatility.

If iinterest rate on debt is less than my swr, I'm definitely better off borrowing and investing.
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Suppose you retire today.  Using the above numbers, you get the mortgage and invest in a taxable account.  Annual mortgage payment is $13k; you sell $15k (15% capital gains rate) of the $240k invested to pay the mortgage (If you take dividend returns, the marginal tax rate will probably be higher.)  Each year the money is reduced by $15k (end of first year at $225+returns.  In the first year, you must make 6.25% to break even;second 6.7, third 7.2, and fourth 7.7.  If the initial investment gets hit by a down market early on, the bet may not work.  If you get the 9% right away, you are better off, but you have taken on the risk or volatility of the investment versus a paid for house.  Now if the market in the future offers only 8 or 7 for the next 30 years.

davisgang90

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Re: SWR retirement age dependent?
« Reply #30 on: June 07, 2013, 08:47:50 AM »
With just a touch of flexibility and common sense even a 4% SWR  is conservative.

Take a 80% 30 year fixed mortgage as well, and that leverage boosts your effective swr on top. Add some rental income ( along with opportunities for forced income, by doing your own managing and maintenance) and that stash will last forever. Imho.

I guess if you get to age 90 and have a big stash, that swr could easily go to 10%+ !!
This reminds me of a conversation my Mom and Grandmother had when she was 92.  She had spent $10,000 of her $110,000 in savings in one year and was worried she would run out of money.  My Mom's response "How many more years do you think you are going to live?"  She ended up dying 2 years later.

Siamond

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Re: SWR retirement age dependent?
« Reply #31 on: October 27, 2013, 07:07:13 AM »
Just to add my 2 cents here (yeah, I know, six months too late!)...

There are various public statements out there which say that using an SWR of X% that would apply for the usual 30 years period is more or less equivalent to planning for eternity. Well, I don't believe this is quite true. I want to early-retire, I don't want to bet on a premature death (who knows where medicine will bring us 20/30/40 years from now), so my projections are usually 45 years - and I am 51, and I suspect many of you guys are younger. In other words, a 50 years time period isn't that crazy.

Then I did a ton of backtesting with my own Excel sheet, using various asset allocations, various withdrawal methods, various assumptions on returns, etc. And I ended up noticing that a 40 or 50 years time period is actually significantly harder to satisfy, as there are more sequences of stock crisis which end up destroying your portfolio, the effect of the first few crisis being tolerable over 30 years, but one more crisis later on can be the final killer.

In the US (I insist, since the OP is in Australia), backtesting over 40+ years with a 4% WR can turn out to be problematic. And then you can indeed speculate that the rosy picture of US returns in the past 100 years may not repeated in the next century, notably with 50 years ahead of you. And then you have to customize per country (yes, Australia also had a fantastic run in the past century, but well, same thing, will that last?).

The probability of 'black swan' events (something really big, really damaging, and hard to predict) also gets significantly higher.

So, I don't know, but I wouldn't want to bet on a 4% number (in the US or Australia) for such long time period. But hey, as the other folks pointed out, all is not lost, if you have such long time period, well, you'll find plenty of opportunities to make some additional income through activities that you truly enjoy. So maybe a rule of thumb could be to use a 3% rule on your accumulated portfolio, use a proper variable withdrawal method (e.g. Guyton-Klinger or Hebeler) to make it better navigate the vagaries of the market, AND plan for some reasonable side-income to fill the gaps.

It is amazing to see how side-income in the early years, plus some form of pension/SS in the later years can make the overall equation look much better... That was my big discovery a few months ago when I was at the height of playing with such number crunching...
« Last Edit: October 27, 2013, 07:10:14 AM by Siamond »

chasesfish

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Re: SWR retirement age dependent?
« Reply #32 on: October 27, 2013, 08:34:59 AM »
I just think it depends.  If you have no pension and haven't worked long enough or are a rugged survivalist believing that SS will not be around at all, then go with a lower rate.  If you also think there's nothing working or entrepreneurial that you'll ever do, a lower rate will be okay.

I'm personally planning on a 5-6% rate, but am staring at a nice, well funded private pension 20 years after I stop working, plus I figure there will be plenty of opportunities to make side money that I'll never need.

aj_yooper

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Re: SWR retirement age dependent?
« Reply #33 on: October 27, 2013, 10:10:11 AM »
This is what William Bernstein writes about SWR:

“Even the most sophisticated retirement projections contain so much uncertainty that the entire process can be summarized as follows: Below the age of 65, a 2% spending rate is bulletproof, 3% is probably safe, and 4% is taking chances. Above 5%, you’re taking an increasingly serious risk of dying poor. (For each five years above 65, add perhaps half of a percentage point to those numbers.) “

Bernstein, William J,  The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) (Kindle Locations 560-563). Efficient Frontier Publications. Kindle Edition.

MMM followed the 4% rule for his ER timing, but he seems to be funding his retirement principally by his rental property and a paid for house.

arebelspy

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Re: SWR retirement age dependent?
« Reply #34 on: October 27, 2013, 11:57:51 AM »
And this is what William Bernstein (same author) wrote in the Retirement Calculator from Hell, Part III:
Quote
So, think about what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years. (A 97% success rate means a 3% failure rate; those 40 years divided by 0.03 is 1,200 years.) Ignore for a minute the uncertainties of the less-developed world and think only about the winners: Germany—in this century alone, three episodes of military and/or economic disaster, the first two associated with mass starvation. Japan—wartime devastation even worse than Germany’s. England—near brushes with disaster in 1812-1814 and in both world wars. And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.

History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).

A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.

(Emphasis original.)

So take his earlier quote of "bulletproof" and such with a grain of salt, as he's also said that (paraphrasing) black swans make it all meaningless anyways.

;)

Disclaimer: I support and agree with just about anything Bernstein's ever written, and am a big fan.
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frugaldrummer

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Re: SWR retirement age dependent?
« Reply #35 on: October 28, 2013, 11:47:50 PM »
Interesting discussion:

One the one hand, an older retiree has fewer years to cover.  BUT - an older retiree also is less likely to be able to make money in a downturn at a side gig due to health and other issues.  And a 60 year old retiree might have 45 years to cover - not exactly a short timeline.  A younger retiree has a better chance at being able to work a side gig or even return to full time employment if things go south.  So the idea that a younger retiree needs a more conservative SWR than an older retiree may not be entirely true.

As I see it, there are a few different ways that people might hedge that bet:

 - working longer to fund a lower SWR
 - planning to reduce expenses and/or take a side gig if bad years occur early on
 - working part-time in the early years of retirement to allow nest egg to grow to a safer SWR
 - have a paid off house on a few acres that could support a large truck garden and chicken coop and orchard; this might be the very BEST hedge against so-called "black swan" events.  If your home is paid for and you can raise your own food by canning vegetables and fruit and keeping chickens, you only need enough cash for property taxes and utilities to get by in a major depression.   


happy

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Re: SWR retirement age dependent?
« Reply #36 on: October 29, 2013, 01:02:28 AM »
Especially if you add water tanks and solar power to the house.

One advantage for the older retiree is that they are closer to their old man money/pensions/govt benefits, so some of the guesswork about what will happen in 2 or  3 decades by the time they hit 65 is taken out of the equation.

Edit :typo
« Last Edit: October 29, 2013, 01:32:05 AM by happy »

Tyler

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Re: SWR retirement age dependent?
« Reply #37 on: October 29, 2013, 01:19:34 AM »
One the one hand, an older retiree has fewer years to cover.  BUT - an older retiree also is less likely to be able to make money in a downturn at a side gig due to health and other issues.  And a 60 year old retiree might have 45 years to cover - not exactly a short timeline.  A younger retiree has a better chance at being able to work a side gig or even return to full time employment if things go south.  So the idea that a younger retiree needs a more conservative SWR than an older retiree may not be entirely true.

Interesting point.  Rigid SWR calculations might as well assume that a retiree can't work or reduce expenses further.  An active early retiree has many options on the table to attack those assumptions directly, and even the time to perfect them. 

I think it just boils down to confidence.  Both in the measurable sense and also in the emotional sense. 

Exflyboy

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Re: SWR retirement age dependent?
« Reply #38 on: October 30, 2013, 04:29:58 PM »
I got a plan,

My Wife is going to continue to work ($30 income plus bennies), while I retire with the current $1.25M at age 52 plus rent of about $16k.

The neat thing is here that her 30k plus my 16 makes close to what 4% of $1.25M is... so we can test if we can scrape by on so little money without touching the stash..:).. Wife is bought into NOT dipping into the stash.

Currently have most of that stash invested in stock ETFs... Giving up my well paying job is still scary though.
« Last Edit: October 30, 2013, 04:36:49 PM by frankh »

Ozstache

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Re: SWR retirement age dependent?
« Reply #39 on: November 01, 2013, 01:52:27 PM »
Giving up my well paying job is still scary though.

However, be able to do what you want, when you want, in ER also pays you well - in happiness. Here's how I enjoyed myself this week at my ER "job", out on the open winding roads and top campsites without the usual weekend/holiday traffic and crowds - it was magnificent!
 




omni

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Re: SWR retirement age dependent?
« Reply #40 on: November 02, 2013, 06:32:17 AM »
Giving up my well paying job is still scary though.

However, be able to do what you want, when you want, in ER also pays you well - in happiness. Here's how I enjoyed myself this week at my ER "job", out on the open winding roads and top campsites without the usual weekend/holiday traffic and crowds - it was magnificent!
 


Show off ;)

All good points. From a practical point of view, 3% SWR and willingness to work part time and adjust spending should keep us quite safe - probably the best bet for black swan events.

Aside from that I am tending more towards thinking that SWR for a retiree who intends not to work at all depend on expected returns of his/her investments. If expected return from a certain stock + bond combination is 7%, but (for argument sake) from a certain great property buy is 10%, surely you could withdraw 3% more from the latter?