The Dangerously Miasmic Myth Of A 4% Safe Withdrawal Rate

[wtjbatman]

Updated note: The Seeking Alpha website requires registration to read the entire article. Personally I think it's worth it to register at SA (and it's free), but just a heads up for everyone to save you some time if you're not interested in reading it.

Source: http://seekingalpha.com/article/2258403-the-dangerously-miasmic-myth-of-a-4-percent-safe-withdrawal-rate

I'll admit, his click bait article title worked on me (who am I kidding, I was going to read it anyway).

The section on how international diversification can impact your SWR was interesting. Specifically the research done by Wade Pfau.

Personally I intend to rely on passive income instead of a set SWR, but I also think the article points out something that most people here know. A true "safe" withdrawal rate may be much harder to attain (1-2%?) for some people, but by having the flexibility to adjust your withdrawal rate year to year you can at least have a reasonable expectation of not burning through your stash.

[TomTX]

Eh, I'm not gonna create a login or give some random site my G+ credentials just to read Page 2.

[hodedofome]

Agreed, I plan on varying my withdrawal rate as well. I'll probably do something like 3-5 percent each year. Take out up to 5 percent in good years, and drop down to 3 percent in bad years. Perhaps even lower.

[wtjbatman]

Eh, I'm not gonna create a login or give some random site my G+ credentials just to read Page 2.

Oops, I actually completely forgot about that. I've been reading SA for so long that I'm logged into the site on every computer I use, lol. I'll put a note in the original post.

[Mississippi Mudstache]

Didn't read the article, but a 4% withdrawal inherently assumes that the investor will be robotically increasing spending with each passing year and never earning a shred of additional income. In other words, regardless of what the article says, I'm not concerned.

[skunkfunk]

Why would you need to go to 1-2% to be safe? At 1%, you could withdraw for 100 years only matching inflation. To say 1-2% is the maximum "safe" level is to say you're going to live forever and only invest in stuff with a horrible return.

[arebelspy]

Why would you need to go to 1-2% to be safe? At 1%, you could withdraw for 100 years only matching inflation. To say 1-2% is the maximum "safe" level is to say you're going to live forever and only invest in stuff with a horrible return.

Sequence of returns risk.

[skunkfunk]

Why would you need to go to 1-2% to be safe? At 1%, you could withdraw for 100 years only matching inflation. To say 1-2% is the maximum "safe" level is to say you're going to live forever and only invest in stuff with a horrible return.

Sequence of returns risk.

Please correct me if I'm wrong (I'd hate to jump the gun and screw myself) but I think I'm more likely to wind up working years longer than I should have than years too short at a 3% withdrawal.

[arebelspy]

Why would you need to go to 1-2% to be safe? At 1%, you could withdraw for 100 years only matching inflation. To say 1-2% is the maximum "safe" level is to say you're going to live forever and only invest in stuff with a horrible return.

Sequence of returns risk.

Please correct me if I'm wrong (I'd hate to jump the gun and screw myself) but I think I'm more likely to wind up working years longer than I should have than years too short at a 3% withdrawal.

Correct.  Some would rather risk working a bit longer than risk running out of money.  They view the latter risk as a lot more catastrophic.

[warfreak2]

Please correct me if I'm wrong (I'd hate to jump the gun and screw myself) but I think I'm more likely to wind up working years longer than I should have than years too short at a 3% withdrawal.

Correct.  Some would rather risk working a bit longer than risk running out of money.  They view the latter risk as a lot more catastrophic.

If a withdrawal strategy fails, it's usually because the portfolio starts going south early on. One thing I'd like to see is a "go back to work if the portfolio gets X% below its starting point in real terms [and you are young enough]" strategy. This could increase the SWR (i.e., probably having to do less work) at a cost of possibly having to do more. It would tie the length of the accumulation period more closely to the stock market, reducing the expected length but increasing the standard deviation, probably in inverse proportion to X.

[Ottawa]

If a withdrawal strategy fails, it's usually because the portfolio starts going south early on.

This does appear to be true based on firecalc or cfiresim. 

One thing I'd like to see is a "go back to work if the portfolio gets X% below its starting point in real terms [and you are young enough]" strategy. This could increase the SWR (i.e., probably having to do less work) at a cost of possibly having to do more. It would tie the length of the accumulation period more closely to the stock market, reducing the expected length but increasing the standard deviation, probably in inverse proportion to X.

Interesting idea.   

[hodedofome]

I think it's a great idea for almost everyone to have SOME kind of side income in early retirement. Find something that you love to do and find a way to make a little money from it. Heck be a marshal at a golf course if you must. Part time jobs in retirement keep us active and enjoying life without too much stress. In the good years you can use the money for fun things like trips or eating out or whatever. In the bad years you don't have to freak out as much about the market.

[SnackDog]

More realistically, there is no way we will increase our spending by the inflation factor.  We are "sticky upward" on spending and I have the historic figures to prove it. Although the official inflation figures used in these studies are real, real people don't see their cost of living increase that much.  If prices for food, petrol, rent, travel etc increase, we hold firm and spend less.  By just holding to 1 point under inflation on the increases, 4% becomes quite safe and closer to 5% reasonable.

[dragoncar]

Eh, I'm not gonna create a login or give some random site my G+ credentials just to read Page 2.

Oops, I actually completely forgot about that. I've been reading SA for so long that I'm logged into the site on every computer I use, lol. I'll put a note in the original post.

You can also disable javascript.  My "quick javascript switcher" Chrome plugin seemed to remember my preference to disable JS on seekinalpha (presumably for this annoying reason)

[Alex239]

Eh, I'm not gonna create a login or give some random site my G+ credentials just to read Page 2.

Just as an aside, I've been a free member at their site for more than a year now. They seem to have decent information and an active group of writers and decent community comments. No click bait or sold mailing lists that I can tell.

[butchmonkey]

Eh, I'm not gonna create a login or give some random site my G+ credentials just to read Page 2.

Just as an aside, I've been a free member at their site for more than a year now. They seem to have decent information and an active group of writers and decent community comments. No click bait or sold mailing lists that I can tell.

Ditto.


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[lv211]

Don't use your credentials to log in to SA.

Use a un/pw from bugmenot.

http://bugmenot.com/view/seekingalpha.com