Author Topic: The 4% vs 5% withdrawal rate?  (Read 6243 times)

CoffeeR

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Re: The 4% vs 5% withdrawal rate?
« Reply #50 on: February 06, 2020, 01:59:57 PM »
It's my understanding that the 4% withdrawal rate rule of thumb in retirement applies if you wish to preserve your capital, for example for those who want to leave an inheritance. But what if you're okay with your capital being reduced in retirement and not concerned with leaving an inheritance? Would the 5% rule be acceptable?
The larger the withdrawal rate the more flexibility you need. The paradox is that the longer you need the money  the more likely the failure at a fixed % withdrawal. Yet, the longer you need the money, the younger you (likely) are and thus have opportunity to earn additional income and so the higher a withdrawal rate you can risk.

I think the 4% is overly conservative since it assumes no adjustment in spending when markets are down. Almost every does adjusts unless you are extremely leanFI.
« Last Edit: February 07, 2020, 07:41:50 AM by CoffeeR »

vand

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Re: The 4% vs 5% withdrawal rate?
« Reply #51 on: February 07, 2020, 02:33:03 AM »
We're currently operating a 7.6% withdrawal rate.

In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.

In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.

Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.

There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>

except you're not really, for the other assets you then go on to list.

Davnasty

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Re: The 4% vs 5% withdrawal rate?
« Reply #52 on: February 07, 2020, 06:08:24 AM »
We're currently operating a 7.6% withdrawal rate.

In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.

In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.

Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.

There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>

except you're not really, for the other assets you then go on to list.

I think it's correct to call this a withdrawal rate of 7.6%, but not to say it's their safe withdrawal rate.

ender

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Re: The 4% vs 5% withdrawal rate?
« Reply #53 on: February 07, 2020, 06:15:59 AM »
except you're not really, for the other assets you then go on to list.

Realistically very few people will be in a situation that they start off with a portfolio and spend exactly 4% inflation adjusted every year and never have other income or assets at any point in their life too.

Also, I also think people don't realize the success rate that a 4% withdrawal has historically - it's 95% of periods you end up with above $0 at the end. Most of the time, a lot more.

That's a really dang high success rate even if someone blindly starts withdrawing.

Chuck Ditallin

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Re: The 4% vs 5% withdrawal rate?
« Reply #54 on: February 07, 2020, 08:40:35 AM »
We're currently operating a 7.6% withdrawal rate.

In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.

In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.

Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.

There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>

except you're not really, for the other assets you then go on to list.

I think it's correct to call this a withdrawal rate of 7.6%, but not to say it's their safe withdrawal rate.

Oddly, I too think it's correct.

I'm not sure you can award the title 'safe withdrawal rate' with anything other than hindsight. The 4% figure came from an historical study.

Remember that your heart has been beating all your life so far... (and I won't entertain tricksy quibbles...)

vand

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Re: The 4% vs 5% withdrawal rate?
« Reply #55 on: February 11, 2020, 09:14:36 AM »
We're currently operating a 7.6% withdrawal rate.

In under 6 years, I get my first index-linked DB pension, which will cover 64% of our expenses.

In an additional 7 years, further index-linked pensions will cover another 34% of our expenses.

Our FIRE budget is 150% of our pre-FIRE spend; we're blowing the rest on travel and house projects.

There's so much redundancy built in that it's ridiculous, but there really is nothing else we want to spend the money on. We've done our sums and think we've thought of everything <famous last words>

except you're not really, for the other assets you then go on to list.

I think it's correct to call this a withdrawal rate of 7.6%, but not to say it's their safe withdrawal rate.

Oddly, I too think it's correct.

I'm not sure you can award the title 'safe withdrawal rate' with anything other than hindsight. The 4% figure came from an historical study.

Remember that your heart has been beating all your life so far... (and I won't entertain tricksy quibbles...)

Fine, whatever. In that case it's entire accurate to say there are also FIers out there currently operating on a 20-100% withdrawal rate.

Michael in ABQ

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Re: The 4% vs 5% withdrawal rate?
« Reply #56 on: February 12, 2020, 10:30:56 AM »
Not that I expect to get 100% of what Social Security projects, but even if its 50-75% that's probably $20,000 a year. If your post-FIRE expenses are $50,000 a year, then you only need to withdraw $30,000 a year.

In my case I should get a military pension at age 60 as well so I will probably be looking at a more aggressive 5-6% rate, i.e. saving 17-20x annual savings instead of 25x.

DeniseNJ

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Re: The 4% vs 5% withdrawal rate?
« Reply #57 on: February 12, 2020, 12:50:07 PM »
You have to define success.  The 4% rule is successful if at the end of 30 yrs you have even ONE dollar left.

I don't define "success" as having a buck to my name.

At 5%, the chances of having zero dollars increase.  But remember that these are odds.  If you fail, you fail BIG.  You run out of money.  These rules don't really have anything to do with maintaing capital.

Simply put, the study showed that for each of the prior 25 years, if you started withdrawing 4% and maintained that same dollar amount, you would have at least a buck after 30 yrs in all but 2 of those start years.  This says nothing about the future or preserving capital.  Unfortunately if you are a person who started in any of those 2 start years, you were SOL, with NOTHING left.

Villanelle

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Re: The 4% vs 5% withdrawal rate?
« Reply #58 on: February 12, 2020, 06:29:45 PM »
You have to define success.  The 4% rule is successful if at the end of 30 yrs you have even ONE dollar left.

I don't define "success" as having a buck to my name.

At 5%, the chances of having zero dollars increase.  But remember that these are odds.  If you fail, you fail BIG.  You run out of money.  These rules don't really have anything to do with maintaing capital.

Simply put, the study showed that for each of the prior 25 years, if you started withdrawing 4% and maintained that same dollar amount, you would have at least a buck after 30 yrs in all but 2 of those start years.  This says nothing about the future or preserving capital.  Unfortunately if you are a person who started in any of those 2 start years, you were SOL, with NOTHING left.

Of course this fails to take into account any common sense reduction of spending in a down market.  If we end up at a 4% withdraw rate, if the market is down by 10% or more, we will spend less.  Since we aren't planning a super lean FIRE, that will be easy to do.  Cut a vacation for one year (or do a weekend driving trip vs. international travel), go meatless one dinner a week, and lower the thermostat another degree or two in winter. 

Heck, maybe if the market is really shit, we walk some dogs for pay.

Suddenly there's $4000 of our 4% that stays in the account.

But I'd still define us as 4%ers, but 4% with common sense adaptations. 

chevy1956

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Re: The 4% vs 5% withdrawal rate?
« Reply #59 on: February 12, 2020, 08:14:47 PM »
That's a really dang high success rate even if someone blindly starts withdrawing.

This to me is something that I don't think many people realize when they do the figures. Would anyone who could get to that level really spend 4% blindly without any adjustments in all situations. I don't think so.

One thing I always state though is that you have to estimate your expenses with some buffer. If you state that you are at a 4% WR but there is no buffer at all and things are really tight then it's going to be hard/maybe even impossible to adjust.

Malcat

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Re: The 4% vs 5% withdrawal rate?
« Reply #60 on: February 13, 2020, 05:34:43 AM »
That's a really dang high success rate even if someone blindly starts withdrawing.

This to me is something that I don't think many people realize when they do the figures. Would anyone who could get to that level really spend 4% blindly without any adjustments in all situations. I don't think so.

One thing I always state though is that you have to estimate your expenses with some buffer. If you state that you are at a 4% WR but there is no buffer at all and things are really tight then it's going to be hard/maybe even impossible to adjust.

That's why the simulations are all really rough guidelines.

It's simply not even close to reality that anyone would spend exactly 4%+estimated inflation every single year, down to the penny with no exception.

That's why the 4% rule is a very good starting point, but all simulations are heavily compromised by input variability factors.

A person with a significant buffer in their budget and capacity to lower spending in down years and a cash reserve may never in reality withdraw a full 4%.

nereo

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Re: The 4% vs 5% withdrawal rate?
« Reply #61 on: February 13, 2020, 07:33:11 AM »
There’s lots of follow-up data on how people tend to spend their money in retirement. 
For starters, retirees tend to spend less each decade of retirement, and they also tend to reduce their spending in response to bear markets even when they have enough and don’t really need to.. I’ve yet to meet an early retiree who never received any compensation for activities (“work”) in their “retirement”.  Excluding the ‘extreme retirement’ sorts, even those with seemingly frugal retirement budgets find there are a myriad of ways to cut spending - if necessary - as they have more time to devote towards financial efficiency.

Like Malkynn and others have said - simulations running a ‘blind’ WR of x% are just starting points.  No one actually operates that way - setting up periodic distributions on their retirement day and then never checking their portfolio or noticing the broader economy again.. These are broad guidelines, starting points, ballpark figures. The more flexibility and ‘layers of safety’ you build into your lives the greater your chances of success. 

moof

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Re: The 4% vs 5% withdrawal rate?
« Reply #62 on: February 13, 2020, 03:08:31 PM »
<snip>
I can't believe I've never seen this simulator before.  Very simple.  Except for one thing:  the "How much do you spend each year" doesn't take taxes into account.  I'll be drawing down at least 20-30% more than this calculator shows in order to "spend" what I need .
I would advise you find a tax calculator (use an your tax prep software for example) and put in your expected retirement scenario.  In my case I expect to pay under 5% net Federal taxes until I pay off my mortgage, and 0% after that.  Keep in mind things like Roth withdrawals being being tax-free, only having to paying taxes on your actual capital gains for brokerage withdrawals, and a sizeable standard deduction.If you stay in a lower tax bracket the capital gains will be at 0%.

See these links:
https://www.marketwatch.com/story/heres-the-formula-for-paying-no-federal-income-taxes-on-100000-a-year-2019-11-22
https://mymoneywizard.com/earn-100000-zero-taxes/
http://www.moneychimp.com/features/tax_calculator.htm

There are more write-ups out there, but in short there are low taxes on modest retirement earnings.

By way of example, lets say you have $1M in 401k/IRA's, $200k in Roth, and $200k in taxable with a $100k basis.  You can withdraw 5% from everything and have $50k in earned income, $10k from taxable ($5k of realized long term capital gains, or LTCG), and $10k of previously taxed Roth to get to $70k of withdrawals.  But how much is left?  The moneychimp llink says you pay only $2684 in taxed, just 3.8% lost to taxes of what you cashed in.  Not zero, but not that painful either.

But wait, it gets better.  You can now withdraw and immediately buy back $90k MORE from your taxable account to realize a grand total of $50k in LTCG for the year and pay $0 in additional taxes while doing it.  You have now reset the basis for half of your taxable account in a single year.  Within 2-3 years of doing this your taxable account will have a basis that nearly matches the account, making the account much more flexible for lumpy expenses in future years.
« Last Edit: February 13, 2020, 05:23:23 PM by moof »

GreatLaker

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Re: The 4% vs 5% withdrawal rate?
« Reply #63 on: February 13, 2020, 07:33:41 PM »
There is a difference between withdrawal rate and sustainable withdrawal rate.

Most studies of a fixed constant dollar withdrawal rate (i.e. start year 1 by withdrawing x% of your portfolio then increase that amount annually by the rate of inflation), based on historical data, have shown that somewhere close to 4% starting withdrawal will sustain a 30 year retirement with a very low probability of running out of money.

Sustainable withdrawal rate strategies are for retirees that need to live off their portfolio, i.e. they do not have enough guaranteed income from sources like government pensions, workplace pensions and annuities. Such people need a withdrawal strategy that minimizes the chance of outliving their money.

OP has stated he / she has enough other sources of income to live on, so using up their portfolio is not a problem. So a SWR strategy is irrelevant. They can withdraw 5%, 6% or higher as a withdrawal rate, but it should not be considered a sustainable withdrawal rate.

TomTX

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Re: The 4% vs 5% withdrawal rate?
« Reply #64 on: February 15, 2020, 01:57:00 PM »

Wade Pfau's Forbes article with the latest expansion: 


Ugh. Wade always sneaks in some unreasonable handicap on the "4% rule" for his analysis. Add in a 1% management fee removed from the account beyond the 4% withdrawal? Sure! Handicap all returns in your Monte Carlo by 25% below actual historical returns for "reasons"? Sure!

TomTX

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Re: The 4% vs 5% withdrawal rate?
« Reply #65 on: February 15, 2020, 02:00:44 PM »
5%?  Are you kidding me?  Forward returns are widely predicted to underperform compared to past history.

Ah, a follower of the great thorstach!

I direct you to: The Top Is In, an object lesson in why market timing is bad developed in realtime starting April 11, 2017.

https://forum.mrmoneymustache.com/investor-alley/top-is-in/

Spoiler: The Top wasn't in. Nor the next dozen times he called it.

pecunia

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Re: The 4% vs 5% withdrawal rate?
« Reply #66 on: February 15, 2020, 02:19:54 PM »
What if you are a doddering old drooling fool in your sixties?  The money doesn't have to last as long.

AND

I don't think I saw anybody say anything about Social Security.  If you are not retiring too young and Trump is not able to implement his "reforms," and you've put enough into the system,........then you should get the check implemented by FDR and his cohorts years ago.  You have something to fall back on if the money runs thin.

Telecaster

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Re: The 4% vs 5% withdrawal rate?
« Reply #67 on: February 15, 2020, 03:38:21 PM »
5%?  Are you kidding me?  Forward returns are widely predicted to underperform compared to past history.

Ah, a follower of the great thorstach!

I direct you to: The Top Is In, an object lesson in why market timing is bad developed in realtime starting April 11, 2017.

https://forum.mrmoneymustache.com/investor-alley/top-is-in/

Spoiler: The Top wasn't in. Nor the next dozen times he called it.

Still, it isn't a crazy thought.  I mean, predicting the top is, but lately stocks have been outstripping the historical average.  That means at some point we should seen returns below the historical average, right? 

I'm cool with it.  The 4% SWR looked at lots of periods when returns were below average.  Still worked. 

chevy1956

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Re: The 4% vs 5% withdrawal rate?
« Reply #68 on: February 15, 2020, 03:43:21 PM »
That's why the simulations are all really rough guidelines.

I was thinking about this. You are correct in that the 4% level is a great guideline but to me it's a little bit beside the point when it comes to each of us as individuals coming up with our own plans. At the end of the day I think you should dig into your specific situation and your specific plan. The simulators are great to help you with coming up with a plan but there will be stuff that you don't model into those simulators. You might spend more the first 5 years or you might have some buffer for overseas travel that is outside of your model. You might be able to downsize your house.

Maybe it's better to look at a range of potential WR's. This post on the stop worrying thread describes this to me. It's more like anywhere from 3%-6% should be good dependent on other factors.

https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843
« Last Edit: February 15, 2020, 03:46:06 PM by chevy1956 »

TomTX

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Re: The 4% vs 5% withdrawal rate?
« Reply #69 on: February 15, 2020, 06:21:42 PM »
5%?  Are you kidding me?  Forward returns are widely predicted to underperform compared to past history.

Ah, a follower of the great thorstach!

I direct you to: The Top Is In, an object lesson in why market timing is bad developed in realtime starting April 11, 2017.

https://forum.mrmoneymustache.com/investor-alley/top-is-in/

Spoiler: The Top wasn't in. Nor the next dozen times he called it.

Still, it isn't a crazy thought.  I mean, predicting the top is, but lately stocks have been outstripping the historical average.  That means at some point we should seen returns below the historical average, right? 

I'm cool with it.  The 4% SWR looked at lots of periods when returns were below average.  Still worked.

You may enjoy this Bill Bengen article on SWR.

https://www.fa-mag.com/news/small-cap-withdrawal-magic-28553.html?section=47

At the end he comments on the likely impending market crash. Then go note the date. VTI is up more than 50% since then.

Malcat

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Re: The 4% vs 5% withdrawal rate?
« Reply #70 on: February 15, 2020, 06:22:05 PM »
That's why the simulations are all really rough guidelines.

I was thinking about this. You are correct in that the 4% level is a great guideline but to me it's a little bit beside the point when it comes to each of us as individuals coming up with our own plans. At the end of the day I think you should dig into your specific situation and your specific plan. The simulators are great to help you with coming up with a plan but there will be stuff that you don't model into those simulators. You might spend more the first 5 years or you might have some buffer for overseas travel that is outside of your model. You might be able to downsize your house.

Maybe it's better to look at a range of potential WR's. This post on the stop worrying thread describes this to me. It's more like anywhere from 3%-6% should be good dependent on other factors.

https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732843/#msg732843

The simulators may be kind of useless in terms of actual values, but they have a huge utility in terms of relative values. Meaning, they're amazing for showing the relative impact of variable inputs, which is really helping for guiding decisions in the present.