Author Topic: Anybody else ok using an aggressive 7% withdraw rate?  (Read 14528 times)

George_PA

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Anybody else ok using an aggressive 7% withdraw rate?
« on: January 17, 2014, 09:02:29 AM »
This post was inspired by a portion of the JLCollins stocking investing series. 

Let me explain where I got 7% from:

I am 33 years old, and the basic plan to be in the stash building stage for another 6-7 years.  Thus, I plan to reach FIRE at age 40 with a stash of a minimum of at least 400k (I make about 120k/year right now and saving).  A conservative estimate is that I would need $2184/month in passive income (about 27k per year) during early retirement.

I have a separate, entirely different 401k savings as well. 

Thus, the plan is to build a stash to bridge the gap from age 40 to 60, at which point, I could then tap into the 401k penalty free (also I am not interested in a Roth conversion ladder scheme nor the 72t rule).

Anyway, below are two highlighted charts from the updated 2009 version of the Trinity study taking into account different withdraw rates (adjusted for inflation):


 
If I am reading this correctly, according to historical data:

*As long as you keep your asset allocation in stocks very high (75% to 100%), you have an average 72% success rate using 7%.  Anything above 25% in bonds is too risky using a 7% withdraw rate.   

*Also, it appears that 7% is much riskier for some reaching FIRE at 30 age rather than at age 40.  It really matters whether you are looking for 20 years or 30 years or longer. 

Thus, my own plan is do 75% allocating into the Vanguard Total Stock Market Index Fund and 25% allocating into the Vanguard Total Bond Market Index Fund.  In fact according to the other chart below from the trinity study, with this allocation, on average, after 20 years you will have more money left in the stash than you started with even taking 7% withdraws: 
 


Personally I am comfortable with a 72% success rate (others my not be).  I feel that if one does fall into the 28% failure rate, you could always take on part-time work or even have a side business, if need be, to make up short falls.  The key difference in early retirement is you are still be young and presumably healthy, and capable with plenty of energy and spirit.  In contrast, a 7% withdraw would not make sense for anyone over 65 doing conventional old-age retirement.

Further, for background info, me and wife just recently paid off our mortgage and have no debt whatsoever.  This may be why I feel less risk with this withdraw rate than other people with high monthly payments on their mortgages.  So the money in FIRE is to mainly to pay for groceries, health care, utilities, and property tax.   

Anyone have any thoughts or comments on this idea (i.e. it is smart, stupid, complete BS, etc.)?

Watchmaker

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #1 on: January 17, 2014, 09:22:29 AM »
If you include your 401(k) in the calcuation, what would your withdrawal rate be?

While I understand that thinking about the resources in different baskets helps one think about it, I do believe you should include the whole picture in your analysis.

George_PA

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #2 on: January 17, 2014, 09:39:14 AM »
Yeah the 7% withdraw is only for between age 40 to 60.

Well once you turn age 60 or older, you could access the 401k which will be much larger that your regular stash due to the power of compounding over time. 

Thus, at this age, the reasonable thing to do is dial it down to 4% or 5% withdraws.  Of course this is possible because at that later age, you have a large pool of money to draw from.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #3 on: January 17, 2014, 10:20:49 AM »
I think 7% is too aggressive.

Firstly you are very young, as you say you have 72% chance of being right. Now lets say you retire in your early 40's pulling 7%.. If after a couple of years you realise you are over doing it on your $400k, you can go back to work.. Well maybe. Times will have moved on and you have been out of work for 2 years. A lot of employers are going to view that dimly and you may not be making anything like what you were before.

Lets say your now 80 years old.. for a few years now inflation has been running high and your stash is declining and you decide if you live to 95 your simply not going to make it?.. Now what. You can't go and work construction, your physical abilities will be a fraction of what they are now, think you'll be able to tolerate the BS of the corporate workplace after doing what you wanted for 40 years?

I just retired at 52 and have somewhere north of $1.2M and about $15k of rental income.. My Wife is still working but she could quit if she wanted to... I think I have enough, but I don't think I have money to burn either. We have do kids and live frugally.

The other factor is your investments may do much better than the 400k you are planning to retire on, i.e your 7 years away, thats a long time in the investment world.

Bottom line is when you get to the point where you think your maybe a year out, reevaulate at that point but I think you need a NW worth bigger than 400k.. The good thing is when you have $400k your NW will be growing at a much faster rate too.

I would advise not getting into the trap of "all you can think about is retirement".. I did that for a year and its hell to be quite honest. Learn to enjoy life WITH work, change jobs if you have to because your probably about 10 years plus away from walking out the door.

Your doing great, don't take your eye off the ball in the meantime..:)

Good lucj

Frank

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #4 on: January 17, 2014, 10:29:33 AM »

I would advise not getting into the trap of "all you can think about is retirement".. I did that for a year and its hell to be quite honest. Learn to enjoy life WITH work, change jobs if you have to because your probably about 10 years plus away from walking out the door.

Your doing great, don't take your eye off the ball in the meantime..:)

+1

@George_PA: Your calculations are unusually precise ($2184 expenses, for example) so you're obviously studying this subject quite closely.  I've been there.  But you have plenty of time to fine tune your plan as you go, so perhaps you can refocus your gaze from 100 steps down the road to the ones right in front of you for a while.

IMHO, spending that mental energy on things like how to be happier with your job now, how to creatively reduce expenses even further, and what things you look forward to in retirement that you can start implementing in your life today will make you happier and more productive towards your end goals without driving yourself a little crazy in the meantime.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #5 on: January 17, 2014, 10:35:56 AM »
If you include your 401(k) in the calcuation, what would your withdrawal rate be?

While I understand that thinking about the resources in different baskets helps one think about it, I do believe you should include the whole picture in your analysis.

I wholeheartedly agree with Watchmaker's suggestion.  I am right at 40 and hit FI, as long as I measure my net worth as all of my retirement assets.  I'm not sure if I'd consider myself FI with only assets outside the tax sheltered retirement plans (since these are my most aggressive, longest time horizon investments with the highest potential for growth over the coming decades).  It's an interesting exercise, that my SWR would be higher than I like if I looked at it as you do, but this is also a stable, short horizon 3% nominal type return, so I am not going to shift all of my money to it.  But withdrawl strategy at any age is a complex balance between tax optimization and not having so much in a 401k that you get slammed by RMDs in your 70s, so I expect to spend 401k money before 60y.o.

arebelspy

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #6 on: January 17, 2014, 10:42:02 AM »
Running cfiresim.com - standard scenario on everything, but spending 70k (change #1) on 1MM portfolio over 40 years (change #2) has a success rate of 19%.  And if your retirement is longer, the chance of failure obviously increases.

I plan on having a SWR around that, but it's actually not an SWR, but a return based on my assets (rents).  In other words, I'll be living on around 7+% of my total portfolio amount, but I won't have to withdraw anything to do so.  Other asset classes may allow this.

I would not be comfortable with more than about a 3-3.5% SWR using a standard stock/bond mix (probably 90/10, personally) over a long retirement (50 years or more).

I also don't want to have to earn money when retired.

YMMV, naturally.  :)
« Last Edit: January 17, 2014, 10:43:52 AM by arebelspy »
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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #7 on: January 17, 2014, 11:10:59 AM »
I would say the 7% is too aggressive.  Bear markets can decimate portfolios and your projections.

Even if you build a portfolio based on factor investing.  See this post - https://forum.mrmoneymustache.com/investor-alley/dimensional-fund-advisors/.  You will want to scale back your risk tolerance as you approach early retirement.  Risk tolerance should be based on how much risk you can live with and how much risk you need to hit your goals.

Stocks have huge variability in returns so averages can be very deceptive. For example:  Data is 1932 to 2012 calculated at 2 standard deviations.  S&P 500 average return is 12.28% per year.  Sounds great but the portfolio loses money 27% of the years!  95% of the time the yearly returns will be between negative 21.7% and positive 46%.  When you tilt stocks  toward value and small cap, your average return increases to 13.84%, lose money 27% of the time and 95% of the returns are between negative 22.7% and positive 50%.

When you go out to 10 year rolling periods, the story gets better.  There are 908 rolling 10 year periods in this sample.  S&P average return for each 10 year period is 10.72% per year.  The portfolio loses money 5.8% of the time (each year for the 10 years!).  95% of the returns are between .2% per year and 21.3% per year.  When you tilt toward value and small cap, your average return for each 10 year period is 12.36% per year.  The portfolio loses money 3.7% of the time (each year for the 10 years).  95% of the returns are between 3.1% and 21.6%.

The other caution is that stocks are at valuation metrics are currently at least average (or above).  This would suggest that "expected returns" from high levels are less than historical averages.  Simple math, future expected returns were higher at S&P 800 vs. S&P 1800.

Here is a link to Vanguards updated data regarding withdrawal rates https://personal.vanguard.com/pdf/s325.pdf.  To live in retirement for 40 years+, your SWR might need to be 2.5% to 3.5%.  Maybe you flex your withdrawal rate based on a portfolio return hurdle rate of 5%.  If your portfolio makes less than 5%, you withdrawal less.

Good luck,
Todd Moerman

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #8 on: January 17, 2014, 11:15:57 AM »

Also, remember: the amount you take out in the early years matters the most.  The more that is there to compound, the longer you'll last.

Personally, this seems too risky for me.  Hell, I'm probably waaaaay over the other side.  firecalc gives me results in the high 90s going with a 4% SWR (varying depending on how much historical data I use for my expenses) -- and even then I keep wondering when to pull the trigger or if I need to save up for 3.5% or less.

mpbaker22

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #9 on: January 17, 2014, 11:28:58 AM »

I would not be comfortable with more than about a 3-3.5% SWR using a standard stock/bond mix (probably 90/10, personally) over a long retirement (50 years or more).

I might be mis-reading the post, but it sounds like it's a 7% withdrawal rate but only for 20 years.  At that point the 401K kicks in and lowers the 7% to something else.  I think as long as the total withdrawal rate is less than 3.5% the OP should be good.  Even if the non-401K runs out, he/she can always withdraw a small amount from the 401k with penalty or SEPP.



Stocks have huge variability in returns so averages can be very deceptive. For example:  Data is 1932 to 2012 calculated at 2 standard deviations.  S&P 500 average return is 12.28% per year.  Sounds great but the portfolio loses money 27% of the years!  95% of the time the yearly returns will be between negative 21.7% and positive 46%.  When you tilt stocks  toward value and small cap, your average return increases to 13.84%, lose money 27% of the time and 95% of the returns are between negative 22.7% and positive 50%.

When you go out to 10 year rolling periods, the story gets better.  There are 908 rolling 10 year periods in this sample.  S&P average return for each 10 year period is 10.72% per year.  The portfolio loses money 5.8% of the time (each year for the 10 years!).  95% of the returns are between .2% per year and 21.3% per year.  When you tilt toward value and small cap, your average return for each 10 year period is 12.36% per year.  The portfolio loses money 3.7% of the time (each year for the 10 years).  95% of the returns are between 3.1% and 21.6%.


Sure, but the OPs charts aren't averages.  They're probabilities based on the Monte Carlo simulations which take into account all the things that are mildly likely to happen.  There's roughly a 28% chance the OP could run out of money in the taxable accounts.  If that happens OP will have to draw on 401K.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #10 on: January 17, 2014, 11:36:54 AM »

I would not be comfortable with more than about a 3-3.5% SWR using a standard stock/bond mix (probably 90/10, personally) over a long retirement (50 years or more).

I might be mis-reading the post, but it sounds like it's a 7% withdrawal rate but only for 20 years.  At that point the 401K kicks in and lowers the 7% to something else.  I think as long as the total withdrawal rate is less than 3.5% the OP should be good.  Even if the non-401K runs out, he/she can always withdraw a small amount from the 401k with penalty or SEPP.

You're right, I skimmed that part.

So it's not a 7% SWR, it's a temporary raised SWR, but the overall SWR is what matters.

I always think it's weird when people set it up separately like that.

If that's the scenario though, sure, a 7% SWR could be fine.  Hell, a 100% SWR could be fine, if you only need to bridge a 1-year gap to pension/SS/whatever.  ;)
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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #11 on: January 17, 2014, 11:40:19 AM »
Running cfiresim.com - standard scenario on everything, but spending 70k (change #1) on 1MM portfolio over 40 years (change #2) has a success rate of 19%.  And if your retirement is longer, the chance of failure obviously increases.

I plan on having a SWR around that, but it's actually not an SWR, but a return based on my assets (rents).  In other words, I'll be living on around 7+% of my total portfolio amount, but I won't have to withdraw anything to do so.  Other asset classes may allow this.

I would not be comfortable with more than about a 3-3.5% SWR using a standard stock/bond mix (probably 90/10, personally) over a long retirement (50 years or more).

I also don't want to have to earn money when retired.

YMMV, naturally.  :)

Too bad there's not a FIREcalc for rental vacancies, major repairs, etc. :-)

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #12 on: January 17, 2014, 11:40:50 AM »
Too bad there's not a FIREcalc for rental vacancies, major repairs, etc. :-)

I know, right!?
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Eric

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #13 on: January 17, 2014, 11:47:29 AM »
Yeah the 7% withdraw is only for between age 40 to 60.

Well once you turn age 60 or older, you could access the 401k which will be much larger that your regular stash due to the power of compounding over time. 

Thus, at this age, the reasonable thing to do is dial it down to 4% or 5% withdraws.  Of course this is possible because at that later age, you have a large pool of money to draw from.

That's not a 7% withdraw rate though.  That's 7% of X bucket, while you still have Y bucket over here.  If they're roughly equal, it's actually a 3.5% withdrawal rate.  It doesn't really matter if they're in separate buckets or not.  Your total investments portfolio will still be growing at the same rate. (assuming similar allocation, obviously)

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #14 on: January 17, 2014, 11:56:22 AM »

I would not be comfortable with more than about a 3-3.5% SWR using a standard stock/bond mix (probably 90/10, personally) over a long retirement (50 years or more).

I might be mis-reading the post, but it sounds like it's a 7% withdrawal rate but only for 20 years.  At that point the 401K kicks in and lowers the 7% to something else.  I think as long as the total withdrawal rate is less than 3.5% the OP should be good.  Even if the non-401K runs out, he/she can always withdraw a small amount from the 401k with penalty or SEPP.

You're right, I skimmed that part.

So it's not a 7% SWR, it's a temporary raised SWR, but the overall SWR is what matters.

I always think it's weird when people set it up separately like that.

If that's the scenario though, sure, a 7% SWR could be fine.  Hell, a 100% SWR could be fine, if you only need to bridge a 1-year gap to pension/SS/whatever.  ;)

I think it makes perfect sense in this scenario.  The OP now knows he has a 72% chance of not tapping that 401K early and a 28% chance of taking a 10% penalty for at least 1 year.  That may be a simplification, and I might not call it a 7% SWR, but it does make sense to consider the two separately.  Maybe that's not what you were saying though.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #15 on: January 17, 2014, 12:18:14 PM »
If your total retirement savings can produce about a 3+% yield, your plan makes sense.  Just a thought.  I remember Nords talking about having 2 years of liquid money available when you retire as a cushion so you don't have to draw when the market pickles.  Rick Ferri says the same thing.

Stash A must have taxable accounts or Roths to draw on.  You said you were not interested in a Roth conversion ladder.  However, you may or may not know, you could gradually convert your 401k money to Roths while you are retired and not have to pay any taxes on the 401k money.

George_PA

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #16 on: January 17, 2014, 02:01:18 PM »
Thanks for the quick replies.  I think the scenario my have come off a bit confusing; sorry if I did not explain it very clear (that was my fault).

mpbaker22 hit it exactly right (and Abs later too), it is really a theory of two separate stashes. 

The idea was to draw a 7% SWR only on the $400k taxable non-401k money from age 40-60; the second stash (401k money) is not touched, and left to compound until age 60 at which point it should grow to about $2 million (in my own personal case);

Thus, the 7% SWR is a temporary one only for ages 40-60 only on the 400k regular taxable investments.  After that point, the idea is to go back down to 4% SWR once you are 60 years or older, because then you would have access to the additional $2 million (plus any residual money left over from the original non-401k stash if there is any left).

Also, Eric, yeah that is true, I only used the words "withdraw rate" because I do not know what else to call a temporarily raised withdraw rate on only the taxable non-401k portion of the stash.

frankh you make a good point out that if you are out of work for 2 years, employers definitely would not like that (no argument there).  If the first taxable stash did run out before age 60, I would enter a different field of work or become self employed, I definitely would not go back to my original career.  Also I would not need to make nearly as much money as previously, just enough for things like property tax, utilities and groceries.  MMM often says on the blog that in early retirement you pick up different skills and hobbies anyway and that opportunities to earn cash on the side part-time pop-up whether you are really looking for them or not.  You bring up good points as well about making sure you have enough money, anyway I (like many other aspiring mustachians on this forum) have several years to think about it before reaching FI like where you are already.



 


« Last Edit: January 17, 2014, 02:34:16 PM by George_PA »

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #17 on: January 17, 2014, 02:29:44 PM »
Thinking about it, I like it quite a bit, actually, figuring it out backwards like this.

Figure out what percent success rate you're comfortable with (via introspection), then seeing what SWR hits that success rate over the time period you have as your "gap," then building a stache based on what's required of that.

E.g. a 10% SWR may be 90% safe (with you may call good enough) over the short timeframe you have (say, 8-10 years or something), so you only need to build up 10x your yearly expenditures to bridge that gap.
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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #18 on: January 17, 2014, 05:21:07 PM »
Thinking about it, I like it quite a bit, actually, figuring it out backwards like this.

Figure out what percent success rate you're comfortable with (via introspection), then seeing what SWR hits that success rate over the time period you have as your "gap," then building a stache based on what's required of that.

E.g. a 10% SWR may be 90% safe (with you may call good enough) over the short timeframe you have (say, 8-10 years or something), so you only need to build up 10x your yearly expenditures to bridge that gap.

Yes, and you can play around with it for the "what's one more year get me" scenarios. E.g., with the FIRECalc defaults, a 7% withdrawal has better than a 60% chance of making it 20 years. If you think "could I work a few more years and save a bit more in that time?" you might be interested to see that a 5.5% withdrawal has nearly a 93% chance of making it 17 years.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #19 on: January 17, 2014, 09:09:45 PM »
Abs and Undecided, I came to the same conclusion when looking at the historical data and trying different scenarios.

It is interesting that someone reaching FIRE at age 30 (like MMM) pretty much has to use something close to 4% SWR to bring the gap to about age 60 because he has a whole 30 years to cover with passive income.

Reaching FIRE at age 30 still appears to a rare scenario (these people definitely get my respect if you can pull it off). 

A lot of people from this forum are in a different boat, i.e. reaching FIRE at 40 or 50 years of age.   It appears that according to the Trinity Study data, if you only need 10 or 20 years to bridge the gap until you can tap your 401k money, a temporary, higher SWR will often work for 10 or 20 years but fail for scenarios such as 25 or 30 years (assuming if they are not doing the Roth laddering).

Another fun and interesting conclusion, is that if you happen to get to FIRE at an early age and do have extra income (i.e. from a side job, over-estimating your passive income needs, or new-found interests), you can actually contribute this additional money into your 401k (old man/one woman money) even after reaching FI just to get more compounding by the time you reach 65 (this was the subject of MMM's article titled "First Retire, then Get Rich": http://www.mrmoneymustache.com/2012/05/14/first-retire-then-get-rich/). 
« Last Edit: January 17, 2014, 09:11:23 PM by George_PA »

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #20 on: January 17, 2014, 09:17:47 PM »
I misunderstood you at first George.  I do think you're on the right track with this.  It's an interesting way to think about it, so thank you for bringing it up.


Abs and Undecided

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #21 on: January 17, 2014, 09:44:55 PM »
I misunderstood you at first George.  I do think you're on the right track with this.  It's an interesting way to think about it, so thank you for bringing it up.


Abs and Undecided

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I'm sure it was the infamous pronouncing my name Are Bel Spy.  ;)
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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #22 on: January 17, 2014, 10:13:43 PM »
Thanks for the quick replies.  I think the scenario my have come off a bit confusing; sorry if I did not explain it very clear (that was my fault).
mpbaker22 hit it exactly right (and Abs later too), it is really a theory of two separate stashes. 
The idea was to draw a 7% SWR only on the $400k taxable non-401k money from age 40-60; the second stash (401k money) is not touched, and left to compound until age 60 at which point it should grow to about $2 million (in my own personal case);
Thus, the 7% SWR is a temporary one only for ages 40-60 only on the 400k regular taxable investments.  After that point, the idea is to go back down to 4% SWR once you are 60 years or older, because then you would have access to the additional $2 million (plus any residual money left over from the original non-401k stash if there is any left).
George, I think you're making this awfully hard on yourself.

Instead of looking at separate buckets of money, try it the way that the Trinity Study does it.  No matter what buckets your assets are invested in or when you can tap them, start by calculating your initial annual spending as a percentage of the total portfolio (not just as a percentage of the accounts you can spend first).  If it's less than 4% then you're probably good no matter which bucket you spend first.  If you're spending 5% at first and then planning to cut back when you're 60 well... you might want to think about annuitizing part of your portfolio (for guaranteed worst-case income) for that first 20 years and then investing the rest in equities. 

The Trinity Study did not (and can't) simulate variable spending.  I don't think that any historical-returns or Monte Carlo calculator does a good job with variable spending.  You could try FIRECalc and cFIRESim with your numbers to see how it works, or spend a few bucks for Financial Engines' simulations of your portfolio and your spending plans.  If you're not happy with those simulators then try Bob Clyatt's 4%/95% spending plan.  That lets you spend a little more during recessions and adopt a higher starting withdrawal rate. 

The more complicated your retirement spending plan becomes, the less likely you are to stick with it during a recession.

I remember Nords talking about having 2 years of liquid money available when you retire as a cushion so you don't have to draw when the market pickles.
Let me point out that the majority of my retirement expenses are covered by my military pension (which includes a cost-of-living adjustment just like Social Security).  This the equivalent of the income from a portfolio of I bonds, so the rest of our retirement portfolio can be aggressively invested in equities.  The reason we keep two years' expenses in cash ("expenses" not already covered by my pension) is so that we can ride out a bear market. 

steveo

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #23 on: January 17, 2014, 10:16:45 PM »
I intend to follow exactly the same approach.

I will have 2 broad asset pools. I will use one pool up until a certain age and then have access to another pool. I do not intend to utilise all of pool 1 though prior to being able to access pool 2.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #24 on: January 18, 2014, 04:25:42 AM »
Thanks for the quick replies.  I think the scenario my have come off a bit confusing; sorry if I did not explain it very clear (that was my fault).
mpbaker22 hit it exactly right (and Abs later too), it is really a theory of two separate stashes. 
The idea was to draw a 7% SWR only on the $400k taxable non-401k money from age 40-60; the second stash (401k money) is not touched, and left to compound until age 60 at which point it should grow to about $2 million (in my own personal case);
Thus, the 7% SWR is a temporary one only for ages 40-60 only on the 400k regular taxable investments.  After that point, the idea is to go back down to 4% SWR once you are 60 years or older, because then you would have access to the additional $2 million (plus any residual money left over from the original non-401k stash if there is any left).
George, I think you're making this awfully hard on yourself.


Agree.  However, if he's talking about retiring at 40 and living for potentially 50 or more years after, he wants to make sure his initial withdrawal rate is less than 4.  For these purposes lets just assume 4 is a SWR for 50 years.  I personally would factor the taxes and 10% penalty in as well.  I.E. even if you have to pay a 10% penalty for a few years because the taxable stache didn't last, you'd be able to take the 10% penalty hit without going over 4%.  I'd plan for 3.63% withdrawal rate for a couple years under the assumption that a 4% withdrawal rate is 'safe'.

Sidenote - I don't like using the SWR acronym when talking about individual withdrawal rates.  Market studies show that 4% is the safe withdrawal rate for 30 years.  7% is apparently safe for 20 years, 72% of the time.  But if I am physically withdrawing x% per year, that does not make it my SWR, it makes it my withdrawal rate.  The SWR is determined by monte carlo simulations, not the number I'm drawing down.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #25 on: January 18, 2014, 08:54:17 AM »
I don't think your success rate is actually 72%. It WAS 72% over the periods studied, but that doesn't mean it will be 72% going forward. It probably will not be. Additionally, I don't believe the Trinity study takes expenses or taxes into account (somebody correct me if I'm wrong) so that would decrease your success rates across the board. In this situation, I suppose you always have the opportunity to go back to work part-time if you need to, so it's not a huge deal. But I don't think 72% is a number you should count on. Your real success rate is probably much lower.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #26 on: January 18, 2014, 11:10:30 AM »
What is magic about 72% other than you saw it in the table? Would 50% work?

Lots of us have 401ks but do not do two-step modeling. I consider it all one chunk for the initial withdrawal rate and write a few formulas in Excel to optimize taxes on which accounts from which to draw when including SS.

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #27 on: January 18, 2014, 11:43:39 AM »
Nords and mpbaker22 yeah what you say makes sense and is right, it really comes out to 4% SWR or lower when combining the two pools of money.  This probably made the whole post confusing; to me it is just more intuitive to think of it terms of two pools of money drawing upon at different stages in life rather than combining them as one single pool of money (it appears that steveo prefers this way as well); 

Sorry ARS, I get my letters mixed up sometimes and it has been a while since I have been on this forum posting. 

kyleaaa taxes and fees are a good point to bring up and do play a factor but it is not a big one in this case.  First from my understand of tax law, the investment money 401k or non-401k, it is not actually taxed until you sell the actual investments, i.e. taking withdraws during retirement.  In the US you are taxed on your yearly income not your total net worth. 

Thus, an early retiree who is married drawing on 27k per year would actually fall into a lower income category and probably not pay much of anything in income taxes (you would be in some of the lowest tax brackets).  If you did work part-time, obviously you are going to pay more in taxes; MMM has already covered this subject pretty well in the blog in various articles.

The 27k yearly income is coming from long term capital gains, taxed usually at 15%.  Plus you also get to take the standard deduction, for married people this was $12,200 in 2013 in addition to any other deductions or credits you might have.  State tax usually gives breaks for low income people as well (this varies depending on the state).  The local level usually only taxes income from jobs rather than from investments (although again this may vary depending on where you live). 

Vanguard has some of the lowest fees in the industry, thus, they may play a factor, but this is about as close as you can get to eliminating them.  I already checked and my 401k has low fees as well. JLCollins also mentioned a Frontline episode on the dangers of fees in investing, it is really an eye opening and interesting video to watch, I highly recommend it if you have not seen it yet.
 
Snackdog, there is nothing magic about 72%, the success rate is based upon your own personal preference; for example, if you want more safety, save up longer and use a lower withdraw rate so that you can get to 95+% percentage success rate if you.  50% is too low for me personally.


« Last Edit: January 18, 2014, 11:53:25 AM by George_PA »

Nords

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #28 on: January 18, 2014, 12:29:23 PM »
Nords and mpbaker22 yeah what you say makes sense and is right, it really comes out to 4% SWR or lower when combining the two pools of money. 
Then you're probably good.

The key to boosting the success ratio from 72% or 80% or 90% or 93.4836% to "as close to 100% as you can get" is longevity insurance.  For some that may only be Social Security, for others it could be an asset allocation high in equities, and for still others it could be a SPIA.

mpbaker22

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #29 on: January 18, 2014, 02:26:37 PM »
I don't think your success rate is actually 72%. It WAS 72% over the periods studied, but that doesn't mean it will be 72% going forward. It probably will not be. Additionally, I don't believe the Trinity study takes expenses or taxes into account (somebody correct me if I'm wrong) so that would decrease your success rates across the board. In this situation, I suppose you always have the opportunity to go back to work part-time if you need to, so it's not a huge deal. But I don't think 72% is a number you should count on. Your real success rate is probably much lower.

Can you give one good reason why it won't be 72% going forward?  Also, taxes should be taken into account, but they should be considered part of expenses.  I.E. 4% withdrawal should cover expenses + taxes.

kyleaaa

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #30 on: January 18, 2014, 04:24:25 PM »

kyleaaa taxes and fees are a good point to bring up and do play a factor but it is not a big one in this case.  First from my understand of tax law, the investment money 401k or non-401k, it is not actually taxed until you sell the actual investments, i.e. taking withdraws during retirement.  In the US you are taxed on your yearly income not your total net worth. 

In a 401k or other tax-deferred plan (IRA, etc) you don't pay tax until you withdraw it, but you pay the full marginal tax rate. It is a SIGNIFICANT drag on returns. For regular taxable accounts, which is probably mostly what you'll be tapping for the purposes of this plan, it is NOT true that you don't pay tax until you sell the actual investments. You must pay taxes every year on capital gains distributions and dividends. Cap gains tend to be relatively small for index funds and the dividend rate probably won't break 2% or so anytime soon, but they are not insignificant. And even the long-term capital gains rate of 15% is a enough to throw you off course. You really need to rerun these numbers taking taxes and fees into account. I think you'll be shocked how much difference they make over long periods of time. Vanguard's fees are low, but they will still make a large impact over long periods of time.
« Last Edit: January 18, 2014, 04:39:39 PM by kyleaaa »

Eric

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #31 on: January 18, 2014, 04:28:33 PM »
I agree that you'll probably pay little to no taxes in retirement at a $27K income level but...

The 27k yearly income is coming from long term capital gains, taxed usually at 15%.

If you're talking about 401k or traditional IRA withdrawals, since this money was pre-tax money, those are taxed as ordinary income, not as capital gains.

kyleaaa

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #32 on: January 18, 2014, 04:35:46 PM »
Can you give one good reason why it won't be 72% going forward?  Also, taxes should be taken into account, but they should be considered part of expenses.  I.E. 4% withdrawal should cover expenses + taxes.

Because 72% is an artifact of the exact data set used in the updated Trinity study, and it's not a particularly large data set. I forget how many unique 30 year periods there are, but it isn't a lot. A better question would be, why would anybody assume the success rate of a given strategy going forward would be exactly the same as the success rate of the same strategy in the past? In the LOOOOOOONG term your success rate might average out to something like 72%, but you aren't investing nearly long enough to count on that.

arebelspy

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #33 on: January 18, 2014, 09:52:30 PM »
Because 72% is an artifact of the exact data set used in the updated Trinity study, and it's not a particularly large data set. I forget how many unique 30 year periods there are, but it isn't a lot. A better question would be, why would anybody assume the success rate of a given strategy going forward would be exactly the same as the success rate of the same strategy in the past? In the LOOOOOOONG term your success rate might average out to something like 72%, but you aren't investing nearly long enough to count on that.

There's (current year - beginning year for when you have data - 30) time periods.  So roughly 65 data periods, depending on when you feel comfortable starting your data?

Sure, in the long run it may average to 72.  Or it may average to 80, because the future is better than the past (which have been 72).  Or it may be lower.

So maybe the success rate won't be the (exact) same as the past, but I think what MPB was asking is why do you think it will be worse, rather than better or (roughly) the same?
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mpbaker22

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #34 on: January 18, 2014, 10:18:31 PM »
Can you give one good reason why it won't be 72% going forward?  Also, taxes should be taken into account, but they should be considered part of expenses.  I.E. 4% withdrawal should cover expenses + taxes.

Because 72% is an artifact of the exact data set used in the updated Trinity study, and it's not a particularly large data set. I forget how many unique 30 year periods there are, but it isn't a lot. A better question would be, why would anybody assume the success rate of a given strategy going forward would be exactly the same as the success rate of the same strategy in the past? In the LOOOOOOONG term your success rate might average out to something like 72%, but you aren't investing nearly long enough to count on that.

I can't tell if you don't understand what a Monte Carlo simulation is or if you're just trolling.  I'm not sure that the Trinity data is a Monte Carlo situation, but there's just as much reason to believe the true success rate is 80% as there is to believe it's 64%.

We could use something like firecalc to estimate viability for 20 years though.

arebelspy

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #35 on: January 19, 2014, 01:30:36 AM »
I believe Trinity study was historical data, not Monte Carlo sim.
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kyleaaa

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #36 on: January 19, 2014, 07:58:20 AM »
I can't tell if you don't understand what a Monte Carlo simulation is or if you're just trolling.  I'm not sure that the Trinity data is a Monte Carlo situation, but there's just as much reason to believe the true success rate is 80% as there is to believe it's 64%.

We could use something like firecalc to estimate viability for 20 years though.

I do understand Monte Carlo simulations, the Trinity study doesn't use it, and of course we don't know what the success rate will be going forward. It could be higher or lower, and that's the point: the 72% number is meaningless. Yet it's being bandied about as if it's some sort of relatively accurate estimate. That's a mistake. Garbage in, garbage out.

Nords

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #37 on: January 19, 2014, 08:29:02 AM »
I do understand Monte Carlo simulations, the Trinity study doesn't use it, and of course we don't know what the success rate will be going forward. It could be higher or lower, and that's the point: the 72% number is meaningless. Yet it's being bandied about as if it's some sort of relatively accurate estimate. That's a mistake. Garbage in, garbage out.
Here, this might help cheer things up:
http://www.efficientfrontier.com/ef/901/hell3.htm

Especially the quote "Thus, any estimate of long-term financial success greater than about 80% is meaningless."

arebelspy

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #38 on: January 19, 2014, 08:30:30 AM »
I do understand Monte Carlo simulations, the Trinity study doesn't use it, and of course we don't know what the success rate will be going forward. It could be higher or lower, and that's the point: the 72% number is meaningless. Yet it's being bandied about as if it's some sort of relatively accurate estimate. That's a mistake. Garbage in, garbage out.
Here, this might help cheer things up:
http://www.efficientfrontier.com/ef/901/hell3.htm

Especially the quote "Thus, any estimate of long-term financial success greater than about 80% is meaningless."

72% < 80%, so clearly it's valid Nords!

;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Nords

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #39 on: January 19, 2014, 08:35:56 AM »
I do understand Monte Carlo simulations, the Trinity study doesn't use it, and of course we don't know what the success rate will be going forward. It could be higher or lower, and that's the point: the 72% number is meaningless. Yet it's being bandied about as if it's some sort of relatively accurate estimate. That's a mistake. Garbage in, garbage out.
Here, this might help cheer things up:
http://www.efficientfrontier.com/ef/901/hell3.htm

Especially the quote "Thus, any estimate of long-term financial success greater than about 80% is meaningless."

72% < 80%, so clearly it's valid Nords!

;)
Or at least it's precise!

dragoncar

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #40 on: January 19, 2014, 01:44:18 PM »
I do understand Monte Carlo simulations, the Trinity study doesn't use it, and of course we don't know what the success rate will be going forward. It could be higher or lower, and that's the point: the 72% number is meaningless. Yet it's being bandied about as if it's some sort of relatively accurate estimate. That's a mistake. Garbage in, garbage out.
Here, this might help cheer things up:
http://www.efficientfrontier.com/ef/901/hell3.htm

Especially the quote "Thus, any estimate of long-term financial success greater than about 80% is meaningless."

Any estimate of the threshold for meaninglessness, with respect to a long-term financial success analysis, above 50% is meaningless.*




*my ass

mpbaker22

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #41 on: January 20, 2014, 08:09:31 AM »
I can't tell if you don't understand what a Monte Carlo simulation is or if you're just trolling.  I'm not sure that the Trinity data is a Monte Carlo situation, but there's just as much reason to believe the true success rate is 80% as there is to believe it's 64%.

We could use something like firecalc to estimate viability for 20 years though.

I do understand Monte Carlo simulations, the Trinity study doesn't use it, and of course we don't know what the success rate will be going forward. It could be higher or lower, and that's the point: the 72% number is meaningless. Yet it's being bandied about as if it's some sort of relatively accurate estimate. That's a mistake. Garbage in, garbage out.

Ok, so the trinity study wasn't exactly a Monte Carlo simulation.  However, it back-tested 70 years of data at various time frames.  Even going one year at a time, that's 50+ scenarios.  Now, 50 scenarios isn't all that many, but Monte Carlo simulations are based on the historical data, so they're only as good as the historical data we have.

I'd just say that you have just as much reason to think your odds are higher than 72% than to think they're lower.  Yes, we could face nuclear attacks next year, but I don't see any rational reason to live in such fear.

EscapeVelocity2020

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #42 on: January 20, 2014, 07:17:56 PM »
One last thing that sticks out to me is that you stated that 2 million dollars in your 401k will start to be withdrawn at age 60.  The IRS currently requires minimum distributions linked to your expected longevity at age 70.5, so you could get stuck withdrawing ~73k (given an estimate of 27.4 years longevity at age 70.  Who knows what tax law will be when you are 60, but will probably be the same or less favorable, IMHO).  'Having to' withdraw 73k sounds like a nice problem to have until you see the tax on it, since you'll be up in an ugly marginal bracket and might not be needing the money, so basically paying to reinvest it outside the 401k. 

My 70 y.o. Dad has this problem in a small way, our Gen X will have it in spades if we are really supposed to fund our long retirements with 401k's and prudently wait as long as possible to tap them.  Just saying that you should think about if this situation will be optimal.  You probably won't go broke with your plan, but you'll have to fork over more money to the IRS than if you drew down the fully taxed 401k earlier over a period that gets your RMD closer to the amount you expect to live on in retirement (given that you should also have Social Security, or as a worst case about 70% of what you are currently projected to receive)...

I'm not a tax expert, but see the value in retiring early if it helps optimize my taxable income AND allow me to spend more of my time doing what I  want to do.  Hope I've given folks enough information to start to think about this issue.
« Last Edit: January 20, 2014, 07:29:42 PM by EscapeVelocity2020 »

ShavinItForLater

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #43 on: January 24, 2014, 11:23:26 AM »
I expect to be in a similar position, following a similar strategy.  About 2/3 of our stash is in taxable accounts, the other 1/3 in 401k, IRA, pension, etc.  This is largely not by deliberate intention--our long term investments have pretty much all gone into retirement accounts, but I worked at a startup that went public and the proceeds are what makes up that taxable amount.

We're in our early 40s.  We'll likely spend more than 4% per year of the taxable part (especially to fund college for the kids and eventually pay off the mortgage, although at 3.25% fixed for 30 years it's tempting to let it ride).  We'll let the retirement accounts grow (and keep contributing to them to the extent possible for reduced tax exposure) until age 59.5.  If you assume a 7%-ish compound annual return, the retirement accounts would double and then double again by around that time, if so it would be roughly 4 times what it is today.

I'd generally look to stay under 4% looking at the combined stash, and also of course make sure we wouldn't run out of non-retirement assets early.  What "retirement" means to us is still TBD--I expect we may still have income of one kind or another through much of that time, so we may be putting a lot more emphasis on the FI (and the work-life flexibility and choice it offers) than the RE.

aj_yooper

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Re: Anybody else ok using an aggressive 7% withdraw rate?
« Reply #44 on: January 24, 2014, 01:40:09 PM »
One last thing that sticks out to me is that you stated that 2 million dollars in your 401k will start to be withdrawn at age 60.  The IRS currently requires minimum distributions linked to your expected longevity at age 70.5, so you could get stuck withdrawing ~73k (given an estimate of 27.4 years longevity at age 70.  Who knows what tax law will be when you are 60, but will probably be the same or less favorable, IMHO).  'Having to' withdraw 73k sounds like a nice problem to have until you see the tax on it, since you'll be up in an ugly marginal bracket and might not be needing the money, so basically paying to reinvest it outside the 401k. 

My 70 y.o. Dad has this problem in a small way, our Gen X will have it in spades if we are really supposed to fund our long retirements with 401k's and prudently wait as long as possible to tap them.  Just saying that you should think about if this situation will be optimal.  You probably won't go broke with your plan, but you'll have to fork over more money to the IRS than if you drew down the fully taxed 401k earlier over a period that gets your RMD closer to the amount you expect to live on in retirement (given that you should also have Social Security, or as a worst case about 70% of what you are currently projected to receive)...

I'm not a tax expert, but see the value in retiring early if it helps optimize my taxable income AND allow me to spend more of my time doing what I  want to do.  Hope I've given folks enough information to start to think about this issue.

If you add in Social Security at age 70, that means SS would be fully taxed too. 

Converting the tax favored accounts to Roths makes sense then as you reduce the amount of the required distribution at age 70, especially if you can stay in the 15% bracket or lower when doing the Roth conversions.  Personally, I would conserve the taxable accounts in early retirement and begin drawing from Roths when they are available.