Author Topic: 4% SWR (or 3.x) has never been modeled with current interest rates  (Read 13176 times)

myfirenow

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All of the modeling for withdrawal rates has been done by taking into account higher interest rates. If this is wrong, can you point me to any research or articles?

Now we're at all-time lows in yields after a 38-year bond bull market. Global negative rates 16T+

For the 10 year treasury, let's call normal/average around 4-5%. Right now it's nearly 1.5% and could be headed below 50 basis points.

All returns price from this risk free rate.

This is not a thread on valuations or asset allocation. However, with this in mind, what does it mean for withdrawal rates? Especially if we have a Japan-like scenario where rates stay here 10+ years.

Side node: I'm planning to FIRE next year. I've got enough capital for a 3.5% SWR with an 80/20 Asset Allocation.

Any thoughts?

freedomfightergal

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #1 on: August 24, 2019, 12:43:25 PM »
I've wondered this myself, as I check my bond distributions & dividends ping my account in teeny tiny numbers..... 

Tyler

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #2 on: August 24, 2019, 01:03:31 PM »
Yes interest rates are low, but one could argue they're back to something closer to the historical norm after an insane bubble in the 1970's. 



Long-term SWRs are often calculated since the beginning of that chart, so they already account not only for very low rates through WW2 but also for massive rate hikes up to over 15%(!) that were absolutely brutal for bondholders.  The past was way more painful than most younger investors have any context for.  And while there's no guarantee the future won't be even more difficult, SWRs are pretty good guides because they already account for some very rough times to invest.  Worry less about interest rates and more about maximizing personal flexibility to adapt at whatever life throws at you, and I think you'll be fine. 

BTW, low interest rates also don't necessarily harm withdrawal rates because bond returns are not solely from interest.  In fact, because of bond convexity the additional volatility at low or even negative rates can be highly profitable depending on how you build and rebalance your portfolio.

PDXTabs

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #3 on: August 24, 2019, 01:45:15 PM »
All of the modeling for withdrawal rates has been done by taking into account higher interest rates. If this is wrong, can you point me to any research or articles?
...
Any thoughts?

  • You are right. All of the long term data for retirements had the 30 year treasury yielding more than 2%.
  • I wouldn't put too much money in bonds (80/20 seems fine). AFAICT these historically low interest rates are pushing up equity (and real estate) prices.
  • I personally wouldn't worry about retiring. Central banks across the world seem intent of pumping more money into the financial system and so far there hasn't been any appreciable inflation. So far, people with capital have done quite well under this regime.

Padonak

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #4 on: August 24, 2019, 02:18:00 PM »
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AdrianC

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #5 on: August 24, 2019, 07:49:24 PM »
So here is what I do. I keep a relatively small amount in index funds. Not enough to worry about. And For fun, I check out individual stocks and buy a few. I keep it to the value end. No FANGs for me. Just  DOGS. If I’m right, I’ll make a bit. If I’m wrong, it won’t kill me. Everybody needs a hobby.

Have you laid out your strategy in detail on these boards? I’d like to see it. Graham or Buffett or ??

It’s been tough being a value investor the last few years. You doing alright?

As for the OP question, well obviously a bond heavy portfolio isn’t going to do it long term. I don’t see why stocks won’t do a real 4% or so, which is what we need. Just have to have a way to deal with the volatility.


Bateaux

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #6 on: August 25, 2019, 12:11:46 AM »
Probably should be planning a 2 to 3 percent withdrawal rate the next few years. A recession is looming, best be prepared.

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #7 on: August 26, 2019, 09:21:17 AM »
Probably should be planning a 2 to 3 percent withdrawal rate the next few years. A recession is looming, best be prepared.

You are suggesting we should be prepared for a recession worse than the Great Depression or any other period in the history of the stock market?

ChpBstrd

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #8 on: August 26, 2019, 10:56:20 AM »
Risk-free investments still offer zero real returns just like they did throughout modern history. My worries that “rates can only go up from here, causing a bond bubble to burst” are offset by my worries that “the US is entering a Japan scenario as an aging population, declining productivity growth, a crippling debt overhang, and an overemphasis on investments creates a state of permanent deflationary pressure”. There’s no telling which way things will go.

My reaction to the “everything bubble” has been:

1) Learn to use options to efficiently reduce downside risks to my equity, e.g. through collars. Put hedging in my brokerage accounts to offset my vulnerable work 401k.
2) Lock in a cheap mortgage rate on a cheaper house in a LCOL area.
3) Adjust my AA so that a 40% drop in equities or bonds would not set back my FIRE date by more than 2-3 years.
4) Throw out “stink bids” for protected put or deep ITM covered call positions on high yield stocks that could be limited-risk alternatives to junk bonds. If my broker can find a pair of trading partners, perhaps during a volatility spike or short squeeze, I could lock in a high yield at minimal risk. This is a lotto ticket, not a core strategy.
5) Hold some cash in case of crash! Online savings accounts now yield more than treasuries. Duration risk is replaced by the risk of even lower rates in the future, which is not a bad trade off in my opinion.
6) Continue to invest in job skills, energy efficiency, and other high-yielding small-scale projects that are only available to individual investors.
7) Avoid highly vulnerable positions like online lending platforms, junk bonds, B and BB bonds, consumer credit, cyclical industries, high-beta/high-leverage stocks, financials, etc.

bacchi

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #9 on: August 26, 2019, 11:17:33 AM »
Risk-free investments still offer zero real returns just like they did throughout modern history. My worries that “rates can only go up from here, causing a bond bubble to burst” are offset by my worries that “the US is entering a Japan scenario as an aging population, declining productivity growth, a crippling debt overhang, and an overemphasis on investments creates a state of permanent deflationary pressure”. There’s no telling which way things will go.

Aging population? The over-65 population in the US will rise from 16% to 23% by 2060. Compare that to Japan, which is currently 27% and increases by ~.7% each and every year.

Quote
creates a state of permanent deflationary pressure

I see the opposite problem -- hidden  and eventual inflation. The everything bubble is affecting housing prices and rents and will continue to do so. Climate change will affect food prices. Rising standard-of-living in China will impact goods made there, which will cause Walmart immense problems as their cheap plastic products will get harder to source.

BeanCounter

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #10 on: August 26, 2019, 11:23:31 AM »
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ChpBstrd

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #11 on: August 26, 2019, 11:40:48 AM »
Aging population? The over-65 population in the US will rise from 16% to 23% by 2060. Compare that to Japan, which is currently 27% and increases by ~.7% each and every year.

Yes, and in 1994, shortly after their deflationary crisis began, the percentage of Japanese over age 65 was 14%. Source: https://en.m.wikipedia.org/wiki/Aging_of_Japan

The baby boomers’ hyper-spending habits will be a historical memory five years from now when they are almost all without paychecks. Maybe sooner if a recession knocks a large cohort out of work for good. Less spending and more money hoarding is deflationary.

bacchi

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #12 on: August 26, 2019, 11:48:53 AM »
Aging population? The over-65 population in the US will rise from 16% to 23% by 2060. Compare that to Japan, which is currently 27% and increases by ~.7% each and every year.

Yes, and in 1994, shortly after their deflationary crisis began, the percentage of Japanese over age 65 was 14%. Source: https://en.m.wikipedia.org/wiki/Aging_of_Japan


7%/40yr << 13%/25yr


Quote
The baby boomers’ hyper-spending habits will be a historical memory five years from now when they are almost all without paychecks. Maybe sooner if a recession knocks a large cohort out of work for good. Less spending and more money hoarding is deflationary.

https://www.pewresearch.org/fact-tank/2018/03/01/millennials-overtake-baby-boomers/

Millennials will or already outnumber boomers. Millennials love tech and coffee and experiences. The spending goes on.

nereo

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #13 on: August 26, 2019, 11:58:03 AM »
Probably should be planning a 2 to 3 percent withdrawal rate the next few years. A recession is looming, best be prepared.

Serious question - if you are indeed worried about a looming recession and SORR, why not hold 2-3 years of expenses in cash equivalents, rather than use a 2 or 3% WR? 

If you held 3 years worth of cash that would equate to 28x expenses = 3.6%, and from what I've seen 3 years can abate even a nasty recession.  3 years after the 'great recession' the SP500 had returned all that value to those who didn't sell...

Yes, there would be some cash drag on your portfolio, but to me that seems less extreme and easier to achieve than a 2.x% WR.
« Last Edit: August 26, 2019, 12:18:04 PM by nereo »

ChpBstrd

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #14 on: August 26, 2019, 12:06:37 PM »
I think the moral of the story is if any large chunk of the population suddenly has to switch their lifestyle from big houses, new SUVs, restaurant food 3x per week, and a steady income to living off of Social Security then you will likely get deflationary pressures regardless of whatever the younger generation is doing.

The US’s demographic graying might have happened as fast as Japan’s but it has been slowed by the arrival of young immigrants. If immigration is reduced (a top government priority now) we will have faster demographic aging. Otherwise we will just take longer to reach the tipping point.

I simultaneously entertain the inflationary / stagflation scenario. There are some narratives that lead in that direction instead of the deflationary scenario. But I was not asked to defend that hypothesis.
« Last Edit: August 27, 2019, 09:24:46 AM by ChpBstrd »

NorCal

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #15 on: August 26, 2019, 09:38:37 PM »
You're right that the current interest rate environment has never been modeled.  This is one of the weaknesses of backtesting.

Don't forget that the biggest hedge fund failure in history (LTCM) was built entirely by backtesting developed by the brightest finance phd's of the day.

I recently read an interesting article from a high-frequency trader.  They still succesfully use backtesting in their trading strategies.  Yet the models using backtesting now only work for a matter of weeks before the methodology goes stale.

This isn't to say that you shouldn't invest.  It's just to caution about overconfidence in what can be reliably forecast.

Just as important as the change in interest rates is the change in dividend yields.  In 1970, the S&P 500 yielded about 4%.  If you pulled the trigger on retirement in 1970, you could live off 4% of the investment without ever drawing down your principal.  Imagine the portfolio survival rates of the stagflation of the 70's/80's if your investment yielded less than 2% at the time.  Backtesting won't tell you that.

Maybe the "market will always return 7%+" crowd is right.  I hope they are.  But this doesn't mean I'm going to be my retirement on it. 

Bloop Bloop

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #16 on: August 26, 2019, 11:39:49 PM »
I'm pretty conservative which is why I am basing FIRE on never dipping into principal - living off only rent/dividends. Which I guess would be around a 3% withdrawal rate.

kenmoremmm

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #17 on: August 26, 2019, 11:40:11 PM »
PTF

nereo

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #18 on: August 27, 2019, 04:30:50 AM »
I'm pretty conservative which is why I am basing FIRE on never dipping into principal - living off only rent/dividends. Which I guess would be around a 3% withdrawal rate.

There is no 'magic' in dividends.  Money companies pay out in dividends limits the share price increasing.  The additional safety of living "off dividends" has nothing to do with the dividends themselves, but with the lower WR you would be using.

norajean

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #19 on: August 27, 2019, 04:58:03 AM »
One year performance comparison as of today -

VTSAX - Vanguard total stock fund: -2%
VBLTX - Vangard long term bond fund: +17%

vand

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #20 on: August 27, 2019, 05:16:13 AM »
There are many parameters which you can adjust for which will give you a different SWR beyond the typically quoted 4%.

I would highly recommend listening to this podcast from financial mentor (Todd Tressider interviewing Wafe Pfau) for a much more nuanced discussion of managing the distribution side of portfolio management:

https://financialmentor.com/podcast/automatic-income/10653

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #21 on: August 27, 2019, 06:28:58 AM »
One year performance comparison as of today -

VTSAX - Vanguard total stock fund: -2%
VBLTX - Vangard long term bond fund: +17%

You're forgetting dividends. Performance with dividends:
VTSAX - 0%
VBLTX - 20%
VBTLX - 10%

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #22 on: August 27, 2019, 06:31:41 AM »
One year performance comparison as of today -

VTSAX - Vanguard total stock fund: -2%
VBLTX - Vangard long term bond fund: +17%

You're forgetting dividends. Performance with dividends:
VTSAX - 0%
VBLTX - 20%
VBTLX - 10%

I should also note that VBLTX is closed to new investors.

NorCal

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #23 on: August 27, 2019, 07:39:03 PM »
I'm pretty conservative which is why I am basing FIRE on never dipping into principal - living off only rent/dividends. Which I guess would be around a 3% withdrawal rate.

There is no 'magic' in dividends.  Money companies pay out in dividends limits the share price increasing.  The additional safety of living "off dividends" has nothing to do with the dividends themselves, but with the lower WR you would be using.

I would say that is EXACTLY the magic of dividends.  As long as the dividend payout is reasonable to cash flows (usually, but not always a good assumption) it reduces the amount of principal assets you have to sell annually.  If you have two portfolios with expected returns of 7%, the higher yielding one would perform better over time, as there is less principal draw-down during the down years.

This is part of why I plan to have some assets invested directly in real-estate before retiring.  Cash-flow is a higher percentage of your total returns.

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #24 on: August 27, 2019, 08:18:25 PM »
I'm pretty conservative which is why I am basing FIRE on never dipping into principal - living off only rent/dividends. Which I guess would be around a 3% withdrawal rate.

There is no 'magic' in dividends.  Money companies pay out in dividends limits the share price increasing.  The additional safety of living "off dividends" has nothing to do with the dividends themselves, but with the lower WR you would be using.

I would say that is EXACTLY the magic of dividends.  As long as the dividend payout is reasonable to cash flows (usually, but not always a good assumption) it reduces the amount of principal assets you have to sell annually.  If you have two portfolios with expected returns of 7%, the higher yielding one would perform better over time, as there is less principal draw-down during the down years.

This is part of why I plan to have some assets invested directly in real-estate before retiring.  Cash-flow is a higher percentage of your total returns.

Ummm, what? 5% gain plus 2% dividend is the same total return as 7% gain and no dividend. In the dividend yielding case you keep more shares but they will decrease in value over time relative to the no-dividend fund such that they will be equivalent.

If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.

BeanCounter

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #25 on: August 27, 2019, 09:18:30 PM »
I'm pretty conservative which is why I am basing FIRE on never dipping into principal - living off only rent/dividends. Which I guess would be around a 3% withdrawal rate.

There is no 'magic' in dividends.  Money companies pay out in dividends limits the share price increasing.  The additional safety of living "off dividends" has nothing to do with the dividends themselves, but with the lower WR you would be using.

I would say that is EXACTLY the magic of dividends.  As long as the dividend payout is reasonable to cash flows (usually, but not always a good assumption) it reduces the amount of principal assets you have to sell annually.  If you have two portfolios with expected returns of 7%, the higher yielding one would perform better over time, as there is less principal draw-down during the down years.

This is part of why I plan to have some assets invested directly in real-estate before retiring.  Cash-flow is a higher percentage of your total returns.

Ummm, what? 5% gain plus 2% dividend is the same total return as 7% gain and no dividend. In the dividend yielding case you keep more shares but they will decrease in value over time relative to the no-dividend fund such that they will be equivalent.

If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.
Correction- you ALWAYS need to consider the tax implications of dividends, which unless they are qualified are taxed as ordinary income instead of capital gains. This is one reason why dividends may not be as good of a deal as just selling some shares.

AdrianC

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #26 on: August 28, 2019, 06:48:19 AM »
Yes interest rates are low, but one could argue they're back to something closer to the historical norm after an insane bubble in the 1970's. 



Long-term SWRs are often calculated since the beginning of that chart, so they already account not only for very low rates through WW2 but also for massive rate hikes up to over 15%(!) that were absolutely brutal for bondholders.  The past was way more painful than most younger investors have any context for.  And while there's no guarantee the future won't be even more difficult, SWRs are pretty good guides because they already account for some very rough times to invest.  Worry less about interest rates and more about maximizing personal flexibility to adapt at whatever life throws at you, and I think you'll be fine. 

Tyler, I agree with your sentiment.

For anyone not keeping up with bond yields, the 10-year is not currently at 2.85%. It's more like 1.5%. We live in interesting times...

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #27 on: August 28, 2019, 07:03:26 AM »
If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.
Correction- you ALWAYS need to consider the tax implications of dividends, which unless they are qualified are taxed as ordinary income instead of capital gains. This is one reason why dividends may not be as good of a deal as just selling some shares.
Why would you need to consider the tax implications of dividends in a tax-sheltered account?

nereo

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #28 on: August 28, 2019, 07:26:08 AM »
If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.
Correction- you ALWAYS need to consider the tax implications of dividends, which unless they are qualified are taxed as ordinary income instead of capital gains. This is one reason why dividends may not be as good of a deal as just selling some shares.
Why would you need to consider the tax implications of dividends in a tax-sheltered account?

You wouldn't for a Roth- though people in retirement typically have both tax-sheltered and tax advantaged accounts.  For most of us that have modest spend rates there will be minimal (often $0) taxes to be paid on either LTCG or dividend income after we stop working

My broader point was to address this misperception that by not selling off any shares a person "living off dividends" is somehow better off than someone who sells shares but has a similar WR (all else being equal).  The notion that you will eventually 'run out of shares' is false so long as your WR is reasonable (i.e. long-term market gains are above your WR, adjusting for SORR etc etc).

BeanCounter

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #29 on: August 28, 2019, 07:35:58 AM »
If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.
Correction- you ALWAYS need to consider the tax implications of dividends, which unless they are qualified are taxed as ordinary income instead of capital gains. This is one reason why dividends may not be as good of a deal as just selling some shares.
Why would you need to consider the tax implications of dividends in a tax-sheltered account?
oh, well I just assumed that you were speaking of a taxable account.
I'm not sure I understand why anyone would want to try to live off dividends in their Roth or T-IRA? You're just going to be subject to RMD's at age 70.5 anyway, which may or may not exceed your dividends earned.

I don't know that this is correct- but for many years, in the accumulation phase, I didn't think about dividends, they were just a way to buy more shares but I didn't pick my funds based on their dividends. Now that I'm going to FIRE in 9 months, we've switched to having any dividends paid go directly to cash. I figure I'm going to have to pay tax on them anyway I might as well be able to have access to the money as part of my draw down strategy. But even on a $2.4M portfolio, I can't just live off the dividends.

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #30 on: August 28, 2019, 07:55:55 AM »
If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.
Correction- you ALWAYS need to consider the tax implications of dividends, which unless they are qualified are taxed as ordinary income instead of capital gains. This is one reason why dividends may not be as good of a deal as just selling some shares.
Why would you need to consider the tax implications of dividends in a tax-sheltered account?
oh, well I just assumed that you were speaking of a taxable account.
I'm not sure I understand why anyone would want to try to live off dividends in their Roth or T-IRA? You're just going to be subject to RMD's at age 70.5 anyway, which may or may not exceed your dividends earned.

I don't know that this is correct- but for many years, in the accumulation phase, I didn't think about dividends, they were just a way to buy more shares but I didn't pick my funds based on their dividends. Now that I'm going to FIRE in 9 months, we've switched to having any dividends paid go directly to cash. I figure I'm going to have to pay tax on them anyway I might as well be able to have access to the money as part of my draw down strategy. But even on a $2.4M portfolio, I can't just live off the dividends.

Yes, I was speaking about a taxable account. I specifically stated such and that tax consequences need to be considered. That is why I was confused that you started your post with "Correction".

BeanCounter

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #31 on: August 28, 2019, 08:07:25 AM »
If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.
Correction- you ALWAYS need to consider the tax implications of dividends, which unless they are qualified are taxed as ordinary income instead of capital gains. This is one reason why dividends may not be as good of a deal as just selling some shares.
Why would you need to consider the tax implications of dividends in a tax-sheltered account?
oh, well I just assumed that you were speaking of a taxable account.
I'm not sure I understand why anyone would want to try to live off dividends in their Roth or T-IRA? You're just going to be subject to RMD's at age 70.5 anyway, which may or may not exceed your dividends earned.

I don't know that this is correct- but for many years, in the accumulation phase, I didn't think about dividends, they were just a way to buy more shares but I didn't pick my funds based on their dividends. Now that I'm going to FIRE in 9 months, we've switched to having any dividends paid go directly to cash. I figure I'm going to have to pay tax on them anyway I might as well be able to have access to the money as part of my draw down strategy. But even on a $2.4M portfolio, I can't just live off the dividends.

Yes, I was speaking about a taxable account. I specifically stated such and that tax consequences need to be considered. That is why I was confused that you started your post with "Correction".
Well, the statement you made "when you are retired and selling anyway this probably won't have an effect" is incorrect because the tax treatment between the dividends earned or capital gains from selling is different. So for me, I have RMD and dividends which are both taxed higher than any capital gains I incur from selling funds.

Boofinator

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #32 on: August 28, 2019, 08:14:51 AM »
Well, the statement you made "when you are retired and selling anyway this probably won't have an effect" is incorrect because the tax treatment between the dividends earned or capital gains from selling is different. So for me, I have RMD and dividends which are both taxed higher than any capital gains I incur from selling funds.

I think you are confused. With a tax-advantaged account (such as an IRA or 401k), your dividends and capital gains are untaxed but your RMDs are taxed similar to earned income. In a taxable account, qualified dividends and long-term capital gains are taxed at a (generally) lower rate than income (such as from RMDs). (Applicable to U.S.)

BlueHouse

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #33 on: August 28, 2019, 08:17:03 AM »

https://www.pewresearch.org/fact-tank/2018/03/01/millennials-overtake-baby-boomers/

Millennials will or already outnumber boomers. Millennials love tech and coffee and experiences. The spending goes on.

I think your observation about Millennials is based on those who have grown up in the US, but the article referenced says that much of the growth comes from immigrants.  Do you think their buying patterns will be the same? 

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #34 on: August 28, 2019, 08:19:18 AM »
If you are holding funds in a taxable account then you also need to consider the tax consequences of dividends. When you are retired and selling anyway this probably won't have an effect but during the accumulation phase dividends are a forced sell that results in a drag on total fund performance because of the tax hit.
Correction- you ALWAYS need to consider the tax implications of dividends, which unless they are qualified are taxed as ordinary income instead of capital gains. This is one reason why dividends may not be as good of a deal as just selling some shares.
Why would you need to consider the tax implications of dividends in a tax-sheltered account?
oh, well I just assumed that you were speaking of a taxable account.
I'm not sure I understand why anyone would want to try to live off dividends in their Roth or T-IRA? You're just going to be subject to RMD's at age 70.5 anyway, which may or may not exceed your dividends earned.

I don't know that this is correct- but for many years, in the accumulation phase, I didn't think about dividends, they were just a way to buy more shares but I didn't pick my funds based on their dividends. Now that I'm going to FIRE in 9 months, we've switched to having any dividends paid go directly to cash. I figure I'm going to have to pay tax on them anyway I might as well be able to have access to the money as part of my draw down strategy. But even on a $2.4M portfolio, I can't just live off the dividends.

Yes, I was speaking about a taxable account. I specifically stated such and that tax consequences need to be considered. That is why I was confused that you started your post with "Correction".
Well, the statement you made "when you are retired and selling anyway this probably won't have an effect" is incorrect because the tax treatment between the dividends earned or capital gains from selling is different. So for me, I have RMD and dividends which are both taxed higher than any capital gains I incur from selling funds.
Ah, I guess there is some nuance there. I figured with buy and hold strategies you'd be dealing with only long term capital gains and qualified dividends which should be equivalent. But that's why I said "probably". Meaning it may turn out to be equivalent but you should still be thinking about it. But as I don't have a whole lot of experience first hand with this I might be completely wrong in my assumptions.

Malkynn

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #35 on: August 28, 2019, 08:46:46 AM »
It's like every week someone is shocked to discover that the 4% rule isn't infallible.

I'm absolutely fascinated by this.
No WR is safe no matter what mathematical model you use.
You can't Boglehead your way to total financial security.

The models are a best guess at how to make decisions today to anticipate the financial needs of tomorrow and to assess the possible risk mitigating effects of different options.

It's all just probabilities and not dissimilar to the weather forecast. The calculations behind it are solid and the best we've got for deciding whether or not to bring an umbrella.
Though, that decision will depend far more on the individual's willingness to risk getting wet.

Is it wise to retire on exactly 25X your base expenses and  to spend every single cent of your budget every single year, plus inflation, while blindly ignoring what the markets and global economy are doing, while keeping no doors open for future earnings if necessary???
Lol, probably not.

What these models do is allow us to decide today what mitigating strategies we think best fit our particular risk tolerances for what might happen tomorrow.

For one person, ageism might be a huge factor in their industry, so banking on going back to their career is a bad mitigating strategy. They may choose to be more conservative, or they may choose to build skills that aren't subject to ageism, or both.

For another, they might have citizenship and family in an extremely low cost geographic region and can easily geo-arbitrage their way to a much lower spend rate.

For yet another, they might not have a lot of flexibility and may have a lot of high fixed costs, say, for a medically complex child whose specialists are only in HCOL areas of a country with expensive healthcare. Their best bet may be an extremely low WR and a large cash reserve.

For someone whose stache is primarily in index funds, AA based strategies might be best for mitigating risks like SORR. For someone with a rock solid defined benefit pension that covers their entire bare bones spend, a bond tent or cash reserves might be overkill.

For someone whose stache is primarily in real estate...well, I have no idea what they might do since I don't read much about primarily RE strategies. But you get the point.

All plans can fail.
The best thing you can do is try to understand your possible and probable failures, know your particular risk factors, and modulate accordingly.

The 4% rule is a starting point, not an end goal.
If you just got a perm and wear a lot of silk, grab an umbrella. Me? I don't mind getting rained on and I don't worry about the 4% rule. YMMV

nereo

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #36 on: August 28, 2019, 08:50:06 AM »
You can't Boglehead your way to total financial security.

For the record I've just added this quote from Malkynn to my signature line.  Absolute Gold.

bacchi

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #37 on: August 28, 2019, 09:06:14 AM »

https://www.pewresearch.org/fact-tank/2018/03/01/millennials-overtake-baby-boomers/

Millennials will or already outnumber boomers. Millennials love tech and coffee and experiences. The spending goes on.

I think your observation about Millennials is based on those who have grown up in the US, but the article referenced says that much of the growth comes from immigrants.  Do you think their buying patterns will be the same?

No. Generally, they won't have as much money so the $500k houses won't be bought by them. Those immigrants will continue to contribute to SS, though, and buy phones and shoes and TVs.

Malkynn

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #38 on: August 28, 2019, 09:06:41 AM »
You can't Boglehead your way to total financial security.

For the record I've just added this quote from Malkynn to my signature line.  Absolute Gold.

;)

reeshau

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #39 on: August 28, 2019, 09:15:14 AM »
"all models are wrong, but some are useful." - George Box

My first thought about any discussion of the 4% rule, or any other model.

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #40 on: August 28, 2019, 09:16:21 AM »
All of the modeling for withdrawal rates has been done by taking into account higher interest rates. If this is wrong, can you point me to any research or articles?

Now we're at all-time lows in yields after a 38-year bond bull market. Global negative rates 16T+

For the 10 year treasury, let's call normal/average around 4-5%. Right now it's nearly 1.5% and could be headed below 50 basis points.

You are quoting nominal numbers, If you look at real rates (as measured by trailing three year CPI), we are not in unprecedented territory (but still "rare"):

https://www.aqr.com/Insights/Perspectives/Bonds-Are-Frickin-Expensive
https://www.mymoneyblog.com/inflation-adjusted-real-treasury-bond-yield.html

YMMV as to how much CPI matches your personal inflation rate and all that

Tyler

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #41 on: August 28, 2019, 09:22:13 AM »
Tyler, I agree with your sentiment.

For anyone not keeping up with bond yields, the 10-year is not currently at 2.85%. It's more like 1.5%. We live in interesting times...

True.  And I appreciate your attention to detail.  ;)  For the record, I found that image on Google and chose it for the historical context rather than the up-to-the-day accuracy of the final number. 

And CanuckExpat also makes a good point about real yields.  Withdrawal rates are all about purchasing power, and it's important to always keep things in context of inflation. 

ChpBstrd

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #42 on: August 29, 2019, 10:24:44 AM »
I doubt that early retirees in any era relied too heavily on US treasuries. The real squeeze is the reduced spread between treasuries and corporate bonds. One heard a lot more about 60/40 or even 50/50 allocations in the era when investment grade corporates offered 3-4% real yields. Now we’re talking about leaving 5-10% of our portfolios in cash and putting the remainder in the stock market at PE=25 or so while hoping for the best in the long term!

It’s not that the historical analyses of the 4% WR were done badly or anything, it’s that the economy has changed to the point that the bond-heavy AAs people used in the past seem unlikely to succeed and are becoming unpopular. If you think about all the stars that would have to align for a portfolio of IG corporate bonds yielding 2-3% to return 4% real per year for a decade it just seems like a one-scenario wager: A decline in interest rates to near zero perhaps with some deflation, an end to the trend of increasing corporate leverage but in a way that does not impair profitability and drive down bond prices, no recession with the accompanying downgrades and bankruptcies, no supply shocks such as rising prices for oil or for manufactured products from China, no bubbles in historically overpriced housing, bonds, stocks, derivatives, etc...

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #43 on: August 29, 2019, 10:52:41 AM »
It's like every week someone is shocked to discover that the 4% rule isn't infallible.

I'm absolutely fascinated by this.
No WR is safe no matter what mathematical model you use.
You can't Boglehead your way to total financial security.

The models are a best guess at how to make decisions today to anticipate the financial needs of tomorrow and to assess the possible risk mitigating effects of different options.

It's all just probabilities and not dissimilar to the weather forecast. The calculations behind it are solid and the best we've got for deciding whether or not to bring an umbrella.
Though, that decision will depend far more on the individual's willingness to risk getting wet.

Is it wise to retire on exactly 25X your base expenses and  to spend every single cent of your budget every single year, plus inflation, while blindly ignoring what the markets and global economy are doing, while keeping no doors open for future earnings if necessary???
Lol, probably not.

What these models do is allow us to decide today what mitigating strategies we think best fit our particular risk tolerances for what might happen tomorrow.

For one person, ageism might be a huge factor in their industry, so banking on going back to their career is a bad mitigating strategy. They may choose to be more conservative, or they may choose to build skills that aren't subject to ageism, or both.

For another, they might have citizenship and family in an extremely low cost geographic region and can easily geo-arbitrage their way to a much lower spend rate.

For yet another, they might not have a lot of flexibility and may have a lot of high fixed costs, say, for a medically complex child whose specialists are only in HCOL areas of a country with expensive healthcare. Their best bet may be an extremely low WR and a large cash reserve.

For someone whose stache is primarily in index funds, AA based strategies might be best for mitigating risks like SORR. For someone with a rock solid defined benefit pension that covers their entire bare bones spend, a bond tent or cash reserves might be overkill.

For someone whose stache is primarily in real estate...well, I have no idea what they might do since I don't read much about primarily RE strategies. But you get the point.

All plans can fail.
The best thing you can do is try to understand your possible and probable failures, know your particular risk factors, and modulate accordingly.

The 4% rule is a starting point, not an end goal.
If you just got a perm and wear a lot of silk, grab an umbrella. Me? I don't mind getting rained on and I don't worry about the 4% rule. YMMV

So...I get sequence of return risks, but what are AA based strategies?

PathtoFIRE

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #44 on: August 29, 2019, 10:53:33 AM »
...A decline in interest rates to near zero perhaps with some deflation, an end to the trend of increasing corporate leverage but in a way that does not impair profitability and drive down bond prices, no recession with the accompanying downgrades and bankruptcies, no supply shocks such as rising prices for oil or for manufactured products from China, no bubbles in historically overpriced housing, bonds, stocks, derivatives, etc...

So...you're saying there's a chance.

Malkynn

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #45 on: August 29, 2019, 11:02:04 AM »
So...I get sequence of return risks, but what are AA based strategies?

Like the bond tent I mentioned.
Honestly, I'm so not the person to ask though. This is not my area of expertise and not my particular area of risk either.

nereo

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #46 on: August 29, 2019, 11:39:24 AM »
AA = Asset Allocation.  An AA-based strategy (often referred to as a Strategic Asset Allocation) is any financial plan designed to reduce your financial risk for your particular circumstances.  Generally speaking it outlines what you shuold hold, and what you should sell, and in what order.

A very common Strategic Asset Allocation is for an earlier retiree to have a portion of his/her investments in equities, a portion in bonds/cash, and down the line some income from things like social security or the sale of a home.  The plan might be for the person to live off the bonds during the first five years (mitigating sequence of returns risk, or SORR) and replenishing the bonds with the sale of equities whenever the market is in positive territory (i.e. a 'bull market').

Such a strategy might make sense for one individual that has most of their NW in a brokerage account, but may not be the best strategy for someone who is heavily invested in real estate, or for a retired military officer who meets their basic expenses with a pension but wants long-term growth of their portfolio for whatever reason.  In other words (and like Malkynn said) - a 4% WR is just a starting point, and you need to decide what will work best for you for mitigating risk.

Wolfpack Mustachian

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #47 on: August 30, 2019, 10:12:15 AM »
Thanks Malkynn and nereo!

Indexer

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #48 on: August 31, 2019, 08:20:34 AM »
One year performance comparison as of today -

VTSAX - Vanguard total stock fund: -2%
VBLTX - Vangard long term bond fund: +17%

You're forgetting dividends. Performance with dividends:
VTSAX - 0%
VBLTX - 20%
VBTLX - 10%

I should also note that VBLTX is closed to new investors.

To clarify, the fund isn't closed, the investor share class of the fund was closed when Vanguard lowered the minimum of the admiral share class. This is a positive since the admiral share class has lower expenses. The other share classes are still open.

Admiral share: VBLAX
ETF: BLV

RWD

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Re: 4% SWR (or 3.x) has never been modeled with current interest rates
« Reply #49 on: August 31, 2019, 08:41:53 AM »
One year performance comparison as of today -

VTSAX - Vanguard total stock fund: -2%
VBLTX - Vangard long term bond fund: +17%

You're forgetting dividends. Performance with dividends:
VTSAX - 0%
VBLTX - 20%
VBTLX - 10%

I should also note that VBLTX is closed to new investors.

To clarify, the fund isn't closed, the investor share class of the fund was closed when Vanguard lowered the minimum of the admiral share class. This is a positive since the admiral share class has lower expenses. The other share classes are still open.

Admiral share: VBLAX
ETF: BLV

Ah, I should have looked closer. I didn't realize it was the investor share class since norajean was comparing it to VTSAX which is admiral share class. Thanks for the clarification.