Author Topic: Safe withdrawal rate  (Read 4525 times)

frugledoc

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Safe withdrawal rate
« on: June 25, 2014, 10:16:57 AM »
When we talk about chances of success with 4% , 3% safe withdrawal rates I'm not sure exactly what we are talking about.

Does it mean chances that you will not run out of all your money before you die or does it mean chances of maintaining your spending power for the rest of your life by living off income/drawdown from your investments?

For example,  if I have a property that pays 10k rent a year and I run out of money I'm still getting 10k per year or I can sell the thing and live off the money for several more years.

shotgunwilly

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Re: Safe withdrawal rate
« Reply #1 on: June 25, 2014, 10:20:37 AM »
When we talk about chances of success with 4% , 3% safe withdrawal rates I'm not sure exactly what we are talking about.

Does it mean chances that you will not run out of all your money before you die or does it mean chances of maintaining your spending power for the rest of your life by living off income/drawdown from your investments?

For example,  if I have a property that pays 10k rent a year and I run out of money I'm still getting 10k per year or I can sell the thing and live off the money for several more years.

Both. The 4% rule assumes you have your money in fairly safe investments returning close to 4% a year after inflation.  So you can withdraw 4% possibly forever, or atleast till you croak.

To add: The "chances of success" studies you see are taking into consideration past market history and how the 4% rule would hold up in different times.
« Last Edit: June 25, 2014, 10:23:04 AM by shotgunwilly »

frugledoc

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Re: Safe withdrawal rate
« Reply #2 on: June 25, 2014, 10:23:17 AM »
But then you will be left with the same amount of assets taking inflation into account when you die?
 
So is it only important if you want to leave assets to kids etc?

Can you explain what might happen in an equity based portfolio where 5% a year is withdrawn? 

bo_knows

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Re: Safe withdrawal rate
« Reply #3 on: June 25, 2014, 10:26:56 AM »
But then you will be left with the same amount of assets taking inflation into account when you die?
 
So is it only important if you want to leave assets to kids etc?

Can you explain what might happen in an equity based portfolio where 5% a year is withdrawn?

No, the 4% rule only assumes that you don't run out of money... it doesn't assume that you're retaining all of your principle investment. a 5% initial withdrawal, adjusted-for inflation every year, has a lower "success rate".

Also, I suppose I would be a poor shill if I didn't recommend www.cfiresim.com to show you these success rates.  You plug in a portfolio amount, a withdrawal amount, a number of years and submit the form.  It'll show you the success rate of that particular scneario.

Try it with 4%, 5%, 6%
« Last Edit: June 25, 2014, 10:30:24 AM by bo_knows »

Eric

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Re: Safe withdrawal rate
« Reply #4 on: June 25, 2014, 10:34:07 AM »
This post has a pretty good explaination, and includes a link to the updated Trinity Study, which is where the "4% rule" initially came from.

http://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/

nereo

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Re: Safe withdrawal rate
« Reply #5 on: June 25, 2014, 10:52:14 AM »
But then you will be left with the same amount of assets taking inflation into account when you die?
 
So is it only important if you want to leave assets to kids etc?
well... the 'problem' that most people face when planning their retirement is that it's very hard to predict when you will die.  So it's recommended that you plan for the longest conceivable length of time that you could live for.  For the majority of people on these boards, that will be 30+ years, even if they are already in their 60s.
What's interesting is that if a portfolio has a >90% chance of lasting for 30+ years, it will last 50 or 60 years more often than not (using historical scenarios as guidelines).  So in a sense anyone using a "constant %SWR" strategy will most likely die with a large chunk of money to pass on to whomever they want - usually as large if not larger than they started with.

frugledoc

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Re: Safe withdrawal rate
« Reply #6 on: June 25, 2014, 11:24:23 AM »
Okay. Lets take a 1 million dollar retirement portfolio that is in a mixture of bonds/equities/property.

The retiree retires at 30 years old and lives to 90, withdrawing 4% / $40000 per year

In what scenario would they run out of money?

hexdexorex

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Re: Safe withdrawal rate
« Reply #7 on: June 25, 2014, 11:27:12 AM »
Okay. Lets take a 1 million dollar retirement portfolio that is in a mixture of bonds/equities/property.

The retiree retires at 30 years old and lives to 90, withdrawing 4% / $40000 per year

In what scenario would they run out of money?

All depends on how well their portfolio does. Never if it does well enough...and up to historical standards.

matchewed

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Re: Safe withdrawal rate
« Reply #8 on: June 25, 2014, 11:28:04 AM »
Okay. Lets take a 1 million dollar retirement portfolio that is in a mixture of bonds/equities/property.

The retiree retires at 30 years old and lives to 90, withdrawing 4% / $40000 per year

In what scenario would they run out of money?

Depends on what you mean by property. You'd have to anticipate returns for that category.

Also depends on your ratio of those things. I'd recommend running it yourself. There isn't much data for 60 year retirements - see this discussion.

nereo

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Re: Safe withdrawal rate
« Reply #9 on: June 25, 2014, 11:33:44 AM »
Okay. Lets take a 1 million dollar retirement portfolio that is in a mixture of bonds/equities/property.

The retiree retires at 30 years old and lives to 90, withdrawing 4% / $40000 per year

In what scenario would they run out of money?
well... too many unknowns to give you a clear answer, but if you take fireCalc's defaults, over a 60 year period the portfolio will run out of money in 18% of the historical periods.  That's assuming 75% equities, 25% bonds.
The results will change if you change what % you have in bonds/equities, and if you include property and include money from SS when the retiree hits 62 or 65 or 70 (all 30+ years into retirement).

It's worth noting that at the 30 year mark, about 2/3 of the simulations have a much higher balance than the original $1M.
Also, as smart, thinking adults, we have the power to change things if we retire and then suddenly there is the worst economic conditions in a century.  We can cut our spending, or find temporary part time work - all of which will greatly add to our chances of success.
« Last Edit: June 25, 2014, 11:35:28 AM by nereo »

ak907

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Re: Safe withdrawal rate
« Reply #10 on: June 25, 2014, 11:47:44 AM »
This is a question I worry about constantly. If I am truly honest about the amount of money roughly foresee being needed in the future and what is a more comfortable withral rate (3-3.5%), the amount of time to retirement increases dramatically.
Question: When I try to do a variable withdrawal rate in cfiresim, it always says:

"Your Variable Spending Z-value must be numeric. Please return to the input page and input only numbers and decimal points.

Your Variable Spending Z-value must be between 0 and 1. Please return to the input page and correct the value."

even with defaults. Anyone know how to fix that?

matchewed

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Re: Safe withdrawal rate
« Reply #11 on: June 25, 2014, 11:52:25 AM »
/snip

Beetlejuice Beetlejuice Beetlejuice
« Last Edit: June 25, 2014, 12:07:46 PM by matchewed »

bo_knows

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Re: Safe withdrawal rate
« Reply #12 on: June 25, 2014, 12:06:15 PM »
This is a question I worry about constantly. If I am truly honest about the amount of money roughly foresee being needed in the future and what is a more comfortable withral rate (3-3.5%), the amount of time to retirement increases dramatically.
Question: When I try to do a variable withdrawal rate in cfiresim, it always says:

"Your Variable Spending Z-value must be numeric. Please return to the input page and input only numbers and decimal points.

Your Variable Spending Z-value must be between 0 and 1. Please return to the input page and correct the value."

even with defaults. Anyone know how to fix that?

Ahh, you know, I didn't realize I broke the old variable spending system when I added the new one.

Try www.cfiresim.com/dev/input.php for now.  I'm moving a bunch of changes to the main site tonight, but that one should tide you over.

Edit: I changed it on the main page. The new "Variable Spending" should work.  See the FAQ for a description of it.  I suggest using the Spending Floor/Ceiling values with it.
« Last Edit: June 25, 2014, 12:18:29 PM by bo_knows »