6% Flexible Withdrawal Rate

[brad3184]

I was hoping to discuss/get linked to resources around this idea.  I've read so much on this forum and other places about the 4% rule.  And one of the keys to maybe being able to ratchet up your withdrawal rate a bit is your willingness, in down years, to scale back (live on less, take a part time job, draw just from cash during those years) - anything that ultimately puts less withdrawal strain on your portfolio and thus extending its life.

OK - so what about the idea of a 6% flexible rate of withdrawal as a default withdrawal strategy.  You take out 0.5% of your portfolio value at the end of every single month.  The merits should be obvious, good month take more, bad month take less.  The thought here is if you've saved 25x your annual spending, and have planned all along to live on 4% SWR - what if you instead implemented this completely flexible 6%.  Would this allow you to spend more, have a higher standard of living throughout your FIRE period (is it flexible enough to withstand the dreaded "sequence of return risk" while providing you more income).

The merits to me immediately seem powerful because on the standard $1mil portfolio, live on $40k scenario I'd be able to live on $60k/yr.  My portfolio would have to go down to $666,666 before my flexible 6% (0.5% per month) rate of w/d would actually be at the $40k annualized level. Any resources anyone has on this?  Other threads?  Thoughts?

Edit to add example:

Month 1 - $1,000,000 value at months end x 0.5%= $5000 monthly draw
Month 2 = $994,000 value at months end x 0.5% = $4970 monthly draw
Month 3 = $1,005,000 Value at months end x 0.5% = $5025 monthly draw

[MustacheAndaHalf]

https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
Running $1M at 6% using a 60% US stock/40% bond ("60/40") portfolio gives 100% success using historical returns.  But you need to react to 2008 type events by dramatically lowering your spending to match your portfolio, as you noted.

[brad3184]

To be clear - when I say Flexible what I mean is a Fixed Plan that is open to the flexibility that your monthly income is going to change.  The Fixed part is every month, lets say at the end of the month, you take out exactly 0.5% of your portfolio.

Month 1 - $1,000,000 value at months end x 0.5%= $5000 monthly draw
Month 2 = $994,000 value at months end x 0.5% = $4970 monthly draw
Month 3 = $1,005,000 Value at months end x 0.5% = $5025 monthly draw

So I guess that's what I'm asking, I can't really find a scenario where this has been modeled but it seems like it can have some merit.  By nature of the plan you can never not have some income, you're always just taking 0.5% of your account each month (as long as there is a balance, there is 0.5% of that).  The question is, is it too high?  Do we run our principal low and thus end up having to take a much lower income (and would have been better off doing 4% and being safe)?  Or by having a flexible system like this, is it flexible enough, to still work out with a high degree of Success.

Going to copy my example into the original post for clarification.

[brad3184]

https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
Running $1M at 6% using a 60% US stock/40% bond ("60/40") portfolio gives 100% success using historical returns.  But you need to react to 2008 type events by dramatically lowering your spending to match your portfolio, as you noted.

This is a neat Tool you've linked too here - the problem is that any "Fixed %" option you put in is going to produce a 100% probability of success because it just keeps paying out a % of what's left of the balance (even if you're down to $1000, 6% would pay $60.

I'm trying to figure out - in the real world - in the scenarios where the 4% w/d rate maybe has you spending your last dollar after a 30 year retirement - what would a 6% w/d that is flexible monthly do in those scenarios.  Curios if this has every been examined

[maizefolk]

With cFiresim and a 75/25 stocks/bonds split, a 30 year time frame, and spending 6% of the portfolio each year, you end up having less money to spend each year at the end of 30 years than you did at the start. (If you start out spending $60k year out of a $1M portfolio the median outcome is that after 30 years you only have $50k year to spend). The worst outcome would mean having to cut spending to $16k/year. Going to 100% stocks brings the median yearly spending at the end of 30 years back up to around $60k. But that still means a close to 50% chance you'll end up with less income after 30 years than you spent your first year of retirement. And the worst case year requires caping annual spending at only $18k.

So for my blood 6% carries a bit too much risk.

[FIPurpose]

To be clear - when I say Flexible what I mean is a Fixed Plan that is open to the flexibility that your monthly income is going to change.  The Fixed part is every month, lets say at the end of the month, you take out exactly 0.5% of your portfolio.

Month 1 - $1,000,000 value at months end x 0.5%= $500 monthly draw
Month 2 = $994,000 value at months end x 0.5% = $497 monthly draw
Month 3 = $1,005,000 Value at months end x 0.5% = $502.50 monthly draw

So I guess that's what I'm asking, I can't really find a scenario where this has been modeled but it seems like it can have some merit.  By nature of the plan you can never not have some income, you're always just taking 0.5% of your account each month (as long as there is a balance, there is 0.5% of that).  The question is, is it too high?  Do we run our principal low and thus end up having to take a much lower income (and would have been better off doing 4% and being safe)?  Or by having a flexible system like this, is it flexible enough, to still work out with a high degree of Success.

Going to copy my example into the original post for clarification.

.5% of 1000000 is $5000 not $500

[FIPurpose]

You might be interested in this method as well:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

It is a calculated withdrawal strategy that takes your current wealth and timeline, and adjusts each year.

[Telecaster]

Thoughts?

Two thoughts for you to consider.

1)  The 4% rule assumes an inflation adjusted withdrawal from the initial portfolio balance.  You're doing a fixed withdrawal from the current balance.  One thing that might happen is that inflation rises faster than the portfolio and you wind up eating Alpo (the opposite could happen too, of course).

2)  The 2008 scenario as others have mentioned.  Suddenly, you are living on half of what you were living on.  That might be tough. 

[SwordGuy]

6% once per year does not = .5% twelve times per year.

[MustacheAndaHalf]

https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
Running $1M at 6% using a 60% US stock/40% bond ("60/40") portfolio gives 100% success using historical returns.  But you need to react to 2008 type events by dramatically lowering your spending to match your portfolio, as you noted.

This is a neat Tool you've linked too here - the problem is that any "Fixed %" option you put in is going to produce a 100% probability of success because it just keeps paying out a % of what's left of the balance (even if you're down to $1000, 6% would pay $60.

I didn't introduce a fixed percentage in this thread - you did.  To quote you, "You take out 0.5% of your portfolio value at the end of every single month".  Explain how my example is a fixed percentage and yours is not?

[Interest Compound]

Lots of discussion and analysis on VPW here, which is very similar to your proposal:

Revisiting the asset allocation question - The case for 100% stocks

I think you'll find this post helpful, it assumes a starting 5.1% withdrawal rate for a 30 year old, which gets higher each year:

--------------------------

To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):

• In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
• The median withdrawal for these 65% of people was between $120k-$150k.
• ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
• ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
• The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
• The median withdrawal for these 35% of people, was between $50k-$70k.

This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.

If you aren't comfortable with that, VPW isn't for you.

[Scandium]

It always seemed to me that mustachians have less flexibility in their spending in bad years. Joe consumer who buy new cars, TVs, Disney vacations etc all the time can easily just stop that for a while, as they indeed did in 2008. But if you're already living on rice and beans, biking everywhere, have your heater set to 58 degrees, and vacation on free public land, then what are you going to cut? Any reduction would be extremely painful. Living efficiently makes it hard to cut waste.

Just thought that's something to keep in mind with these discussions. Of course both persons could (try) to get a job to get through it. But low pay/skill jobs weren't exactly plentiful in 2008 from what I recall..

[Retire-Canada]

It always seemed to me that mustachians have less flexibility in their spending in bad years. Joe consumer who buy new cars, TVs, Disney vacations etc all the time can easily just stop that for a while, as they indeed did in 2008. But if you're already living on rice and beans, biking everywhere, have your heater set to 58 degrees, and vacation on free public land, then what are you going to cut? Any reduction would be extremely painful. Living efficiently makes it hard to cut waste.

Reading the MMM blog and this forum I see relatively few examples of uber frugal types vs. say the ERE model. In fact I'm surprised the opposite way in that there are quite a few spendy FIRE plans getting discussed. I've got 25% of non-essentials in my budget without getting down to rice and beans.

I'm in Canada, but there were no issues with getting retail jobs through the 2008 crisis. I'm of the mind that if you are an above average person you'll cut through the chaff and get work. Especially if you are only looking for part-time stuff.

That said if someone really has very limited flexibility in their budgets and cannot lose much $$ of spending than they better have some other mechanisms in their FIRE plans to address investment return issues.

[zz_marcello]

Lots of discussion and analysis on VPW here, which is very similar to your proposal:

Revisiting the asset allocation question - The case for 100% stocks

I think you'll find this post helpful, it assumes a starting 5.1% withdrawal rate for a 30 year old, which gets higher each year:
...

• ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
• ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
• The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.

Hi!

From my perspective one has to look into existing and past stock market fundamentals for SWR's / FIRE calculations.

- What where the common characteristics when the 4% SWR was nearly failing/performing poorly?  --> Shiller CAPE was above 20!
- Where is Shiller CAPE now? --> Its is far above 20!

To get a good probability for SWR's when the investments is mostly stocks, one has to ask: What was the SWR when CAPE was at 24 or above.
The answer is not more than 4%!

From my perspective it is self delusional to compare the current market environment with years like 1921 or 1982 where CAPE was around ~7 and had stock market dividend yields north of 6%.
SWR calculations without CAPE considerations are currently painting a much too positive picture.

The US stock market is currently like having a rental property that only nets 2.3% per year from rental payments. To get a 4% yield the landlord has to take an additional 1,7% of house value mortgage out of the house every year and he is betting that house value will rise as fast/faster than his increasing mortgage.

Have a nice week!
:-)

[Manguy888]

With cFiresim and a 75/25 stocks/bonds split, a 30 year time frame, and spending 6% of the portfolio each year, you end up having less money to spend each year at the end of 30 years than you did at the start.

Maybe this is okay - as you age, you increase the chance of something like social security, medicare, and/or a pension kicking in. At the same time, you're spending less money as you age. I've seen this anecdotally with my parents and grandparents - the vacations and renovations, and life in general slows down. Rather than be a problem, a wind-down of withdrawal might be a good design principle, and more realistic to how life is actually lived. Spend a little more up front when you have the energy for, a little less later.

[2Birds1Stone]

It always seemed to me that mustachians have less flexibility in their spending in bad years. Joe consumer who buy new cars, TVs, Disney vacations etc all the time can easily just stop that for a while, as they indeed did in 2008. But if you're already living on rice and beans, biking everywhere, have your heater set to 58 degrees, and vacation on free public land, then what are you going to cut? Any reduction would be extremely painful. Living efficiently makes it hard to cut waste.

Just thought that's something to keep in mind with these discussions. Of course both persons could (try) to get a job to get through it. But low pay/skill jobs weren't exactly plentiful in 2008 from what I recall..

I agree with Retire-Canada, my FIRE budget is 50% necessary and 50% discretionary

[Retire-Canada]

I agree with Retire-Canada, my FIRE budget is 50% necessary and 50% discretionary

If I go full survival mode I am probably the same.

[Shane]

It always seemed to me that mustachians have less flexibility in their spending in bad years. Joe consumer who buy new cars, TVs, Disney vacations etc all the time can easily just stop that for a while, as they indeed did in 2008. But if you're already living on rice and beans, biking everywhere, have your heater set to 58 degrees, and vacation on free public land, then what are you going to cut? Any reduction would be extremely painful. Living efficiently makes it hard to cut waste.

Reading the MMM blog and this forum I see relatively few examples of uber frugal types vs. say the ERE model. In fact I'm surprised the opposite way in that there are quite a few spendy FIRE plans getting discussed. I've got 25% of non-essentials in my budget without getting down to rice and beans.

I'm in Canada, but there were no issues with getting retail jobs through the 2008 crisis. I'm of the mind that if you are an above average person you'll cut through the chaff and get work. Especially if you are only looking for part-time stuff.

That said if someone really has very limited flexibility in their budgets and cannot lose much $$ of spending than they better have some other mechanisms in their FIRE plans to address investment return issues.

For ERE-type retirees, what @Scandium said about their inability to become more frugal makes total sense, but I agree with @RC that most of us don't fall into that extremely frugal category.

My family and I can live comfortably on ~2% of our NW/year, i.e., just the dividends from VTSAX, but during years that the stock market is making profits, we plan to indulge ourselves by spending more on fun stuff like travel and eating out more often.

Also, as mentioned above in the thread, CAPE is high right now, and historically that has correlated with lower than average SWRs. If OP is looking at a long ER, it might be prudent to be a little more conservative in the beginning years, i.e., </=4%/year, and then maybe ratchet up spending later on when it becomes clear that the market is moving upwards and you've got fewer future years of life left. I also agree with what someone else mentioned upthread, that as we age we tend to spend less money, so if OP is already "older," then spending more in the beginning and planning on decreasing spending in later years might also make sense.

[FrugalZony]

In my initial FIRE plan I had about 25% in my budget that I could cut if need be (travel, fun, cleaning service, donations etc.) plus other options that I had foreseen (renting out a room etc.) to offset cost.
Now I am going with another plan for the first couple of years that does not even foresee a fixed place to live, so my budget for Y1 and Y2 is even lower. Then we shall see.

It is true that ERE type folks (I am NOT one of them) have less to cut, but their costs are so low that even the smallest income can make a HUGE difference.

[Eric]

Lots of discussion and analysis on VPW here, which is very similar to your proposal:

Revisiting the asset allocation question - The case for 100% stocks

I think you'll find this post helpful, it assumes a starting 5.1% withdrawal rate for a 30 year old, which gets higher each year:
...

• ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
• ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
• The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.

Hi!

From my perspective one has to look into existing and past stock market fundamentals for SWR's / FIRE calculations.

- What where the common characteristics when the 4% SWR was nearly failing/performing poorly?  --> Shiller CAPE was above 20!
- Where is Shiller CAPE now? --> Its is far above 20!

To get a good probability for SWR's when the investments is mostly stocks, one has to ask: What was the SWR when CAPE was at 24 or above.
The answer is not more than 4%!

From my perspective it is self delusional to compare the current market environment with years like 1921 or 1982 where CAPE was around ~7 and had stock market dividend yields north of 6%.
SWR calculations without CAPE considerations are currently painting a much too positive picture.

The US stock market is currently like having a rental property that only nets 2.3% per year from rental payments. To get a 4% yield the landlord has to take an additional 1,7% of house value mortgage out of the house every year and he is betting that house value will rise as fast/faster than his increasing mortgage.

Have a nice week!
:-)

Comparing today's CAPE number to 1982 or 1921 doesn't really make much sense.  It's truly an apples to oranges comparison.  How earnings are calculated today are not how they were calculated in 1921 due to accounting standard improvements.  Same with 1982, although the difference is less pronounced.  There are a few other issues too, but that one is the biggest to me.

http://www.aaii.com/journal/article/a-cautionary-note-about-robert-shillers-cape.touch

[Eric]

https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
Running $1M at 6% using a 60% US stock/40% bond ("60/40") portfolio gives 100% success using historical returns.  But you need to react to 2008 type events by dramatically lowering your spending to match your portfolio, as you noted.

This is a neat Tool you've linked too here - the problem is that any "Fixed %" option you put in is going to produce a 100% probability of success because it just keeps paying out a % of what's left of the balance (even if you're down to $1000, 6% would pay $60.

I didn't introduce a fixed percentage in this thread - you did.  To quote you, "You take out 0.5% of your portfolio value at the end of every single month".  Explain how my example is a fixed percentage and yours is not?

No matter what you call it, his point was that all fixed percentage withdrawals are going to have a 100% chance of success.  So framing it like that doesn't really help.  You could withdrawal 50% per year and have a 100% chance of never running out of money, but it'd most certainly be a failure.

[aperture]

posting to follow. -ap

[Fire2025]

I'm interested in a, possible, higher SWR also.  I'm retiring at 55, so my retirement timeline is shorter.  Thanks for starting this thread.

[Telecaster]

I'm also a little skeptical of CAPE:

Between 1981 and 2015, the CAPE ratio signaled that equities were overvalued in no fewer than 416 of 422 months.

http://www.fa-mag.com/news/jeremy-siegel--shiller-p-e-ratios--fatal-flaw--the-bullish-case-24815.html?section=5

[MustacheAndaHalf]

https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults
Running $1M at 6% using a 60% US stock/40% bond ("60/40") portfolio gives 100% success using historical returns.  But you need to react to 2008 type events by dramatically lowering your spending to match your portfolio, as you noted.

This is a neat Tool you've linked too here - the problem is that any "Fixed %" option you put in is going to produce a 100% probability of success because it just keeps paying out a % of what's left of the balance (even if you're down to $1000, 6% would pay $60.

I didn't introduce a fixed percentage in this thread - you did.  To quote you, "You take out 0.5% of your portfolio value at the end of every single month".  Explain how my example is a fixed percentage and yours is not?

No matter what you call it, his point was that all fixed percentage withdrawals are going to have a 100% chance of success.  So framing it like that doesn't really help.  You could withdrawal 50% per year and have a 100% chance of never running out of money, but it'd most certainly be a failure.

The thread title is "6% Flexible Withdrawal Rate", and he mentions withdrawing 0.5% per month in his first post.  I did not introduce a fixed 6% percentage withdrawal - OP did.

[brad3184]

Lots of discussion and analysis on VPW here, which is very similar to your proposal:

Revisiting the asset allocation question - The case for 100% stocks

I think you'll find this post helpful, it assumes a starting 5.1% withdrawal rate for a 30 year old, which gets higher each year:

--------------------------

To put some numbers to my statements on VPW, I've looked at all the available years, tested the standard 30 year retirement and a longer 70 year retirement, both with $1,000,000 in 100% stocks, and these factors remained consistent (all dollars inflation-adjusted):

• In total, there was a 65% chance that VPW never lowered your withdrawal amount below the 4% rule.
• The median withdrawal for these 65% of people was between $120k-$150k.
• ---> If you were part of the unlucky 35%, 92% of your retirement years remained above the 4% rule.
• ------> In the worst case scenario 8% of years where you fell short, you were typically about $5,000 short for the year. About $400-$500 a month.
• The times this happened were clustered around 1966 and 1929, where the 4% rule left you unable to feed yourself.
• The median withdrawal for these 35% of people, was between $50k-$70k.

This assumes Person #1's path, where they take the full possible withdrawal each year, and throw away 100% of withdrawn cash that's above and beyond their living expenses. No cash buffer, no keeping the unused portion invested (Person #2's path), none of that. The numbers above represent a subset of a subset of a worst case scenario (35%), on top of another worst case scenario (8%), on top of another worst case scenario (withdrawing the total amount each year, even if you don't need it, throwing away the excess cash each year so there's no buffer), and the result is $400-$500 a month.

If you aren't comfortable with that, VPW isn't for you.

Interest Compound thank you for posting this.  I've not responded because I've been in such a rabbit hole reading all the linked links & information about this.  This is exactly the type of solution I've been seeking.  I'm 31 and likely targeting FIRE at 40.  I'm actually focusing on a withdrawal rate that not only covers my essentials each month (probably 3%) but allows me to continue investing / getting into other business ventures if need be - I have built in flexibility which should work out in my favor if the variable withdrawal calls for a lower withdrawal, but on the aggregate doesn't subject me to sequence of return risk as much and allows a greater median income throughout my early retirement.

Again thank you for posting this.  I'm probably going to be spending weeks combing through this information.

[soccerluvof4]

With cFiresim and a 75/25 stocks/bonds split, a 30 year time frame, and spending 6% of the portfolio each year, you end up having less money to spend each year at the end of 30 years than you did at the start.

Maybe this is okay - as you age, you increase the chance of something like social security, medicare, and/or a pension kicking in. At the same time, you're spending less money as you age. I've seen this anecdotally with my parents and grandparents - the vacations and renovations, and life in general slows down. Rather than be a problem, a wind-down of withdrawal might be a good design principle, and more realistic to how life is actually lived. Spend a little more up front when you have the energy for, a little less later.

^+1- This is the path I am basically hoping to stay on