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General Discussion => Post-FIRE => Topic started by: RetirementInvestingToday on May 13, 2017, 05:42:31 AM

Title: A SWR For Today
Post by: RetirementInvestingToday on May 13, 2017, 05:42:31 AM
I am currently FI and intend to FIRE in the next few months at age 44.  Before I hand in my resignation I therefore thought it prudent to run all my numbers again just to make sure I haven't missed anything.  As part of that I had some thoughts that I thought I'd share with the MMM collective.

It seems that on MMM 4% is considered a safe WR for many.  In recent months I've seen some excellent analysis here for various ages that shows the not running out of money vs running out of money vs being dead comparisons as the FIRE years pass by.  It showed that the running out of money risk was small in comparison to the others.  Thinking about this a little more forced me to run some analysis of my own.  Instead of showing historic averages of what happens I tried to think about it more along the lines of given where we are today what could my sequence of returns look like going forwards if I FIRE'd now.  So I'm trying to narrow all those averages to a smaller more representative dataset.  I freely admit I'm using historic data rather than a crystal ball but stay with me.

My hypothesis was that if I retired at the end of a boom/economic cycle my sequence of returns would likely be lower than if I retired at the start of a boom/economic cycle.  On top of that my WR's would ramp quickly as the downturn played out meaning I'm also eating into my capital faster on top of lower returns.  So now all I need to do is understand if we're closer to the start or end of a boom cycle.  The only measure I could think of is CAPE.  So what I did is used cFIREsim to get the historic sequence of returns for each historic retirement year which gives me ending real wealth and plotted that against the CAPE that was present at the start of  each retirement cycle.  Plotting that gives me the following chart:
(https://4.bp.blogspot.com/-BqnGjyrDUSQ/WRbUw3TMW-I/AAAAAAAADgI/kAk-StMxB4QuP_M9fKjCLZHidGuCcfDJQCK4B/s400/170512-3.PNG)
Source: http://www.retirementinvestingtoday.com/2017/05/predicting-retirement-financial-success.html (http://www.retirementinvestingtoday.com/2017/05/predicting-retirement-financial-success.html)

The coefficient of determination for that is 65% so it's not perfect but it is interesting.  With the CAPE currently at 29.3 it suggests that the risk of running out of money for anyone retiring today might just be far greater than we think.

Thoughts?
Title: Re: A SWR For Today
Post by: BTDretire on May 13, 2017, 07:21:45 AM
That does not look good for retiring now, we are at the 2008 level.
On the other hand lots of evidence the economy is starting to turn around,
earnings of many companies have increased. And with the Cape at 29 it is
far from the 44 we had in 2002.
 Are you right at the 4% WR? ($40k and $1,000,000)
 Add a little cushion (OMY, oh my) and live on a little less than 4% WR for a few years.
Another year could easily add 10% to your Nestegg, (savings plus growth).
If it doesn't, you should be glad you are still working.
 I know that's contrary to what others would say.
I'd rather have feathers in MY mattress than pine straw.
Title: Re: A SWR For Today
Post by: RetirementInvestingToday on May 13, 2017, 07:37:50 AM
That does not look good for retiring now, we are at the 2008 level.
On the other hand lots of evidence the economy is starting to turn around,
earnings of many companies have increased. And with the Cape at 29 it is
far from the 44 we had in 2002.
 Are you right at the 4% WR? ($40k and $1,000,000)
 Add a little cushion (OMY, oh my) and live on a little less than 4% WR for a few years.
Another year could easily add 10% to your Nestegg, (savings plus growth).
If it doesn't, you should be glad you are still working.
 I know that's contrary to what others would say.
I'd rather have feathers in MY mattress than pine straw.

I still think I'm ok as I was always far more cautious in my approach as a result of my previous research.  When I FIRE I never want to be forced to go back to work.  I therefore planned on a WR of 2.5% (after FIRE home purchase) and it actually looks like I'll be closer to 2.0% (Mr Market permitting).  Right now I have 1.2M in wealth and plan to spend about EUR23k in FIRE.
Title: Re: A SWR For Today
Post by: maizefolk on May 13, 2017, 08:42:28 AM
What is your view on the impact those changes in accounting rules in 1990 had on the corporate earnings data that feeds into the CAPE ratio?

"In 1990, Standard & Poor's, following the Financial Accounting Standards Board, changed the definition of GAAP (generally accepted accounting principles) earnings to require mark-to-market accounting. But the change in criteria only required that companies mark down their assets when they have a loss. When an asset increased in value, it could only be marked up when it was sold."

Since then, the CAPE hasn't been below 15, even at the bottom of the 2001 and 2009 crashes.
Title: Re: A SWR For Today
Post by: BrokenBiscuits on May 15, 2017, 12:34:10 PM
If you don't have time to read the whole thing, skip to page 10.  A chart showing returns at different levels of CAPE.

http://www.starcapital.de/files/publikationen/Research_2016-01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling.pdf

In short, retiring when markets are high is likely to reduce your long-term returns. Pretty obvious, but nice to see the stats to back it up.

Title: Re: A SWR For Today
Post by: ysette9 on May 15, 2017, 04:18:54 PM
Leaving aside whether CAPE and all of that is even that reasonable a predictor (see Warren Buffet's recent discussion at his shareholder meeting where he said that you can't boil economic indicators down to a neat little number for simple analysis), this stuck out to me:
Quote
  I therefore planned on a WR of 2.5% (after FIRE home purchase) and it actually looks like I'll be closer to 2.0% (Mr Market permitting).

At anything less than 3-3.5% WR you are so utterly, absurdly bullet-proof that the discussion should end right now. I don't have the numbers immediately at my fingertips, but I believe I've read more than one time that a 60-year retirement has never failed historically at a 3% WR.

My advice is to stop worrying about this nonsense and go out and live life. Congratulations on winning the game!
Title: Re: A SWR For Today
Post by: Eric on May 15, 2017, 04:28:05 PM
I've been struggling with this a bit myself.  My answer is a 3 prong approach.  Although due to this approach, I'm about 18 months out.

1) Over save.  I'm planning to over save so that I can take a 20% hit without making a single spending adjustment.  While this sounds like it could be a lot of extra working time, most of the over saving is driven by recent market gains.  I'm only working the same amount of time that I would otherwise be with 0 returns over my last 2 years of work.  If the market has losses in the next 18 months, then I'll adjust this 20% number lower.

2) Overweight bonds for the first 5 years.  Assuming markets are still high when I've reached 20% over my total, I plan to start my retirement with a 60/40 stock/bond allocation.  I will then move back to my desired AA of 80/20 over the 5 years by spending from the bond portion for these 5 years and rebalancing to higher stock allocations each year.  (60/40, 65/35, 70/30, 75/25, 80/20)  This is to help mitigate the sequence of returns risk of facing a large drop.  (Larger than 20% of course)  More info here (https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/) and here (https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/).

3) Have a flexible withdrawal plan.  I'm not actually planning to use a 4% WR or 3% WR or any static percent.  I plan to adjust my spending based on market performance and portfolio balance, with a built in ceiling and floor.  The ceiling is 4% of my original number, or what turns out to be 3.2% of the +20% over-saved number.  The floor is 3% 2.7% of my original number, or 2% 2.3% of the +20% over-saved number.  In addition, I don't plan to take any inflation adjustments for the first 5 years.

Is this too conservative?  I don't know, but these current valuations have me nervous.  If it turns out that there is no crash and the valuations resolve themselves by trending sideways for a while, then all the better.

(edited percentages in step 3, off initially due to bad spreadsheeting (rounding))
Title: Re: A SWR For Today
Post by: steveo on May 15, 2017, 05:11:23 PM
I honestly don't believe these gloom and doom theories regarding why now we have a WR lower than 4%. I intend to retire with a 5% WR. I might go a little lower but I can't see myself getting to 4%.

I will have some flexibility in relation to selling my house and moving to a lower COL location.

Are we going to have a great depression or another world war ? Will there be any social security available for anyone ever again ? Can you spend less and live off beans and rice for a year or two ? Could you cut back on travel or restaurants or whatever for a year or two ?

I view all these lower than 4% WR arguments as typically being completely off-base. The only time it might be true is if you are in your 20's, are completely stingy in your spending now and have no room to move if some unexpected expense comes up.
Title: Re: A SWR For Today
Post by: Etihwdivadnai on May 15, 2017, 06:47:56 PM
I originally aimed for the conventional SWR of 4%.
But then discovered MM and started reading various other blogs and forums too
and therefore decided to aim for a slightly safer SWR of 3%.
Hence OMY (actually 3 more years) such that I FIRE'd with a SWR of 3% as targetted.
I'm now 2 years into FIRE and it has so far turned outh that my actual annual spend is currently 1.45%.
I think I might "let my hair down" / "go wild" and let year 3's spend creep up to 2%.
Title: Re: A SWR For Today
Post by: Mr. Green on May 16, 2017, 10:34:42 AM
There is a recent article where Warren Buffet was quoted as saying if interest rates were to remain low for 10, 20, 30 years then the stock market looks cheap right now. Maybe things are shifting a little. Maybe the economics of our time has changed enough that interest rates will stay lower than we have had historically, and a "high" CAPE doesn't indicate a frothy market as much as it used to. That's crystal ball stuff to me.

I think most everyone advocates for having flexibility in both the withdrawal rate and ability to make adjustments in other areas of your life. Retiring with exactly a million and taking 4% no matter what and never earning another dollar might find you in a spot of trouble 30 years from now. But if you have the ability to scale back to 3-3.5% in bad times or earn some bucks for a few years, you already have cushion built into that 4% WR.

This is all part of figuring how what risk you're willing to accept. A 100% success rate is literally an impossible scenario because stuff happens in life. You just have to figure out where you fall on that sliding scale of risk and what is acceptable to you.
Title: Re: A SWR For Today
Post by: dude on May 16, 2017, 11:45:10 AM
My biggest concern is U.S. stock returns going forward.  There have been a lot of very smart people pointing out how overvalued the U.S. stock market is currently relative to its historical average (yes, I know about the accounting change), and conversely, how undervalued European and other foreign stocks are. I do think it's only a matter of time before international markets overtake the U.S., and that U.S. dominance is on the wane. I recently acted on that belief by increasing my exposure to the MSCI (14% of my portfolio) and plan to stay that way long-term (despite its dogshit relative performance vis--vis U.S. Total Stock Market over the past 25 years). Otherwise, I'm still pretty confident in the 4% rule.
Title: Re: A SWR For Today
Post by: FLBiker on May 16, 2017, 11:52:39 AM
Personally, I've based my FIRE estimates on 4%, but I don't worry too much about it.  If the market tanks and I need more money, I'm not above getting a part-time job and earning $10K a year or whatever.  Truthfully, I'm a pretty productive guy, so it's hard for me to imagine not earning any money in retirement, but we'll see.  Regardless, it will be nice not to have to.

Also, I don't include social security in my projections, so I view that as a safety net as well.
Title: Re: A SWR For Today
Post by: BTDretire on May 16, 2017, 11:57:08 AM
That does not look good for retiring now, we are at the 2008 level.
On the other hand lots of evidence the economy is starting to turn around,
earnings of many companies have increased. And with the Cape at 29 it is
far from the 44 we had in 2002.
 Are you right at the 4% WR? ($40k and $1,000,000)
 Add a little cushion (OMY, oh my) and live on a little less than 4% WR for a few years.
Another year could easily add 10% to your Nestegg, (savings plus growth).
If it doesn't, you should be glad you are still working.
 I know that's contrary to what others would say.
I'd rather have feathers in MY mattress than pine straw.

I still think I'm ok as I was always far more cautious in my approach as a result of my previous research.  When I FIRE I never want to be forced to go back to work.  I therefore planned on a WR of 2.5% (after FIRE home purchase) and it actually looks like I'll be closer to 2.0% (Mr Market permitting).  Right now I have 1.2M in wealth and plan to spend about EUR23k in FIRE.
Good, you took my advice before I said it. How did you do that? :-)
Title: Re: A SWR For Today
Post by: respond2u on May 27, 2017, 10:59:41 PM
earlyretirementnow did some analysis of safe withdrawal rates in a high CAPE era and made a calculator to help

Using CAPE to guide withdrawal rate: https://earlyretirementnow.com/2017/03/15/the-ultimate-guide-to-safe-withdrawal-rates-part-11-criteria/

Calculator: https://earlyretirementnow.com/2017/01/25/the-ultimate-guide-to-safe-withdrawal-rates-part-7-toolbox/

BTW, the 4% rule is safe for a 20 year retirement. It starts to fail for longer horizons. Bengen's original paper is here if you want to know where it came from: http://www.retailinvestor.org/pdf/Bengen1.pdf

And you can do your own backtesting with www.cfiresim.com, though it doesn't really address the high CAPE problem (low future returns for both stocks and bonds)
Title: Re: A SWR For Today
Post by: spokey doke on May 28, 2017, 08:45:27 AM

3) Have a flexible withdrawal plan.  I'm not actually planning to use a 4% WR or 3% WR or any static percent.  I plan to adjust my spending based on market performance and portfolio balance, with a built in ceiling and floor.

This^^^^

While a fixed percentage gets you variation by portfolio performance/size, this seems like a better way to adjust for ups and downs...playing with both on cfiresim gives a nice comparison (again, not radically different results for me, but it makes way more sense to me, and the numbers are better in my simulations)
Title: Re: A SWR For Today
Post by: JohnGalt on May 29, 2017, 12:47:51 AM

3) Have a flexible withdrawal plan.  I'm not actually planning to use a 4% WR or 3% WR or any static percent.  I plan to adjust my spending based on market performance and portfolio balance, with a built in ceiling and floor.

This + I would take it a step further to have a flexible lifestyle plan. 

I'm 32 and plan on calling it quits on my full time career in the next 12 months at probably a 6% WR.  However, I don't really think about that.  A much lower WR would cover my baseline expenses if needed and I fully expect to be doing activities that will earn some sort of income sometime over the next 30 years.  I want to FIRE to keep life interesting and, to me at least, that means change is baked in. 
Title: Re: A SWR For Today
Post by: spokey doke on May 31, 2017, 09:29:38 AM

3) Have a flexible withdrawal plan.  I'm not actually planning to use a 4% WR or 3% WR or any static percent.  I plan to adjust my spending based on market performance and portfolio balance, with a built in ceiling and floor.

This + I would take it a step further to have a flexible lifestyle plan. 

That pretty much goes along with the variable spending model...esp. if you look at the entire range of outcomes in the cfiresim simulations...I could end up with around 100K or 30M with my current numbers plugged in...pretty dramatic difference
Title: Re: A SWR For Today
Post by: homestead neohio on May 31, 2017, 10:00:26 AM
It seems that on MMM 4% is considered a safe WR for many. 
...
I freely admit I'm using historic data rather than a crystal ball but stay with me.
...
With the CAPE currently at 29.3 it suggests that the risk of running out of money for anyone retiring today might just be far greater than we think.

Risk of running out at 6% SWR sure, 5% maybe, but zero risk at 4% if using a historic dataset.  We'd have to have something worse than US historical to fail at 4%.

You are at 2% or 2.5%?   Congratulations!  You can give significant amounts of money away every year to causes you believe in and still be totally fine.  Fear of running out of money is not a valid excuse for you.  Is there something else you are afraid of?  Or do you just enjoy your job and it is the best thing you can imagine to do with your time understanding you no longer need money?  Serious questions.
Title: Re: A SWR For Today
Post by: maizefolk on May 31, 2017, 12:12:56 PM
Risk of running out at 6% SWR sure, 5% maybe, but zero risk at 4% if using a historic dataset.  We'd have to have something worse than US historical to fail at 4%.

Um... which historical data? cFireSim shows ~5% failure for 4% WR with historical data and a range of different bond/stock ratios.

We can argue back and forth about how much risk there is, but there is indeed some nonzero risk if you have zero spending flexibility.

Title: Re: A SWR For Today
Post by: steveo on May 31, 2017, 04:40:53 PM
Risk of running out at 6% SWR sure, 5% maybe, but zero risk at 4% if using a historic dataset.  We'd have to have something worse than US historical to fail at 4%.

Um... which historical data? cFireSim shows ~5% failure for 4% WR with historical data and a range of different bond/stock ratios.

We can argue back and forth about how much risk there is, but there is indeed some nonzero risk if you have zero spending flexibility.

We should quantify the risk and the assumptions underpinning it.

1. There is a 5% failure rate at a 4% withdrawal rate based on the best data that we have.
2. This is assuming no fees on your portfolio and I believe a 50/50 stock/bond allocation.
3. This is assuming no flexibility at all in spending patterns,
4. This is assuming no additional income or assets at any point within your period of retirement.
5, This is assuming a 30 year retirement.

My personal opinion is that these assumptions are really conservative in relation to the chance of success. So for me personally I will be eligible for a government pension. I may choose to work part time in a crappy job. I may downsize my house. I will probably inherit a lot of money. I also have 3 kids so I assume my expenses may even go down.

If you have unrealistic expenses - i.e. you are living on a bare bones budget with no ability to spend less, you will never be able to receive a pension, your retirement period is significantly greater than 30 years, you will never inherit any money or work at all going forward well then you are subject to a 5% chance of failure on a 4% WR.

So is 4% really too high a WR for the majority of people or is it too low ? For me personally I think it's too low. I think most people are in the same situation as myself.

Then there is the question if now is somehow one of those failure times to retire in assuming you have no flexibility at all. I think that is impossible to predict so worse case you are 95% likely to be successful if you retire today on a 4% WR.
Title: Re: A SWR For Today
Post by: Fishingmn on June 01, 2017, 07:12:36 AM
This article was very insightful in analyzing different withdrawal rates, portfolio mixes and time horizons.  https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

The chart about 1/2 way down shows a lot of the variability.
Title: Re: A SWR For Today
Post by: ysette9 on June 01, 2017, 09:02:00 AM
Great article and I love how in-depth their simulations are. Thank you for sharing!

I find it interesting that the language they use to describe safe withdrawal rates is fairly pessimistic (
Quote
Success probabilities deteriorate quite a bit when the retirement horizon goes from 30 to 60 years.
) and yet their own table shows 89% chance of success at a 4% withdrawal rate for a 60-year retirement with 100% stocks. In my mind that is a pretty damn high chance of success for such a long retirement period. Hell, even at a 5% withdrawal rate there is still a 70% chance of success, which is a lot higher than I would have expected.

The thing I really like about the data in the table of results is how clearly it illustrates the importance of having a high equities percentage for those of us shooting for a long retirement. I think people around here sometimes (and in the Bogleheads forum especially) treat the question of asset allocation as primarily what will keep you sleeping well at night and treat the longevity of your portfolio as secondary, even unimportant provided you have at least a good 50% equities. This work shows me that if you really shooting for a long retirement that you have to either get comfortable with a higher equity percentage (at least 75%) or resign yourself to a lower withdrawal rate. i.e. having too few equities is a RISK that needs to be treated as such. This is opposite to how most people conventionally view asset allocation with stocks being "risky" and bonds being "safe". In the early retirement world this is reversed.
Title: Re: A SWR For Today
Post by: maizefolk on June 01, 2017, 11:58:26 AM
The thing I really like about the data in the table of results is how clearly it illustrates the importance of having a high equities percentage for those of us shooting for a long retirement. I think people around here sometimes (and in the Bogleheads forum especially) treat the question of asset allocation as primarily what will keep you sleeping well at night and treat the longevity of your portfolio as secondary, even unimportant provided you have at least a good 50% equities. This work shows me that if you really shooting for a long retirement that you have to either get comfortable with a higher equity percentage (at least 75%) or resign yourself to a lower withdrawal rate. i.e. having too few equities is a RISK that needs to be treated as such. This is opposite to how most people conventionally view asset allocation with stocks being "risky" and bonds being "safe". In the early retirement world this is reversed.

+1

We really need several different words for risk (like the who knows if true but oft repeated idea that the inuit have 100 words for different types of snow). I think a lot of the arguments on this topic come from people using the word risk to describe different things.

Risk of getting lower than expected returns (independent of the risk of not having enough money to spend to support your expenses).
Sequence of returns risk (you run out of money early in retirement).
Longevity risk (you run out of money late in retirement (especially with conservative asset allocations)).
OMY risk  (you lose years you could have been enjoying FIRE by working too long).

I'm sure there are others.
Title: Re: A SWR For Today
Post by: ysette9 on June 01, 2017, 12:11:03 PM
Yep, you bring up a good point about talking about risk. Overall I think we in the community could do a better job of foot stomping the longevity risk and the importance of equities for long-term portfolio performance.
Title: Re: A SWR For Today
Post by: brooklynguy on June 01, 2017, 12:17:07 PM
We really need several different words for risk

I think the simpler solution is to just be more precise about the specific risk or set of risks being referred to, an approach for which lots of us (including me) repeatedly advocate (especially in the leveraged-investing-via-mortgage threads).  Most recent example (https://forum.mrmoneymustache.com/welcome-to-the-forum/mr-math-and-paying-off-your-mortgage/msg1519884/#msg1519884):

It depends on how you define "risk."  We tend to use that word loosely, without precisely defining what it means, which is the reason everyone always ends up talking past each other in these debates.  If "risk" means "exposure to an adverse possibility," we should be clear about which specific adverse possibility or possibilities we are referring to, or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities.

We should start using the word "risk" in the same way we would use the word "likelihood."  No one would describe something as having "[high]/[low] likelihood" without being clear about what likelihood they are referring to, and, if they did, everyone would immediately follow up with the obvious question "likelihood of what?"
Title: Re: A SWR For Today
Post by: ysette9 on June 01, 2017, 01:43:21 PM
I like that. I'll try to keep that in mind and ask people to clarify what they mean by "risk" when they use it unqualified.
Title: Re: A SWR For Today
Post by: maizefolk on June 01, 2017, 02:19:57 PM
We should start using the word "risk" in the same way we would use the word "likelihood."  No one would describe something as having "[high]/[low] likelihood" without being clear about what likelihood they are referring to, and, if they did, everyone would immediately follow up with the obvious question "likelihood of what?"

The analogy to likelihood is also a very clear approach. I like it.

From a language perspective, one downside is that if people often say "X is more likely than Y" and it is very clear what they mean, while if people say "X is riskier than Y" it sounds like a meaningful statement but it doesn't actually mean much without defining what type of risk is being discussed.

Anyway, I'm getting down into the weeds. The important point, which I think we're all in agreement about, is that using the word risk, without specifying what kind of risk, is a recipe for both poor communication and poor decision making.

Yep, you bring up a good point about talking about risk. Overall I think we in the community could do a better job of foot stomping the longevity risk and the importance of equities for long-term portfolio performance.

Agreed. For a 30 year retirement you don't actually need a lot of growth to avoid portfolio failure. After all it is only 5 years longer than a 25 year portfolio where 0% real returns (just keeping up with inflation) is enough to make a 4% withdrawal rate work. 60 year retirements are a different animal. Harder to get precisely estimated probabilities because of the smaller number of 60 year time frames in our historical record, but there is still more than enough information to make it clear low returns from high bond allocations become a much bigger source of portfolio failures on those time frames.
Title: Re: A SWR For Today
Post by: steveo on June 02, 2017, 10:34:37 PM
Great article and I love how in-depth their simulations are. Thank you for sharing!

I find it interesting that the language they use to describe safe withdrawal rates is fairly pessimistic (
Quote
Success probabilities deteriorate quite a bit when the retirement horizon goes from 30 to 60 years.
) and yet their own table shows 89% chance of success at a 4% withdrawal rate for a 60-year retirement with 100% stocks. In my mind that is a pretty damn high chance of success for such a long retirement period. Hell, even at a 5% withdrawal rate there is still a 70% chance of success, which is a lot higher than I would have expected.

The thing I really like about the data in the table of results is how clearly it illustrates the importance of having a high equities percentage for those of us shooting for a long retirement. I think people around here sometimes (and in the Bogleheads forum especially) treat the question of asset allocation as primarily what will keep you sleeping well at night and treat the longevity of your portfolio as secondary, even unimportant provided you have at least a good 50% equities. This work shows me that if you really shooting for a long retirement that you have to either get comfortable with a higher equity percentage (at least 75%) or resign yourself to a lower withdrawal rate. i.e. having too few equities is a RISK that needs to be treated as such. This is opposite to how most people conventionally view asset allocation with stocks being "risky" and bonds being "safe". In the early retirement world this is reversed.

I think that article is way too pessimistic (again) and way too formulaic. I don't believe that hard and fast withdrawal rules are going to work. There isn't going to be a perfect withdrawl method. It's good to see these analysis though and draw out the important points for you. The key point to me is that a high equity portfolio appears to be much safer over the longer term. I'm inclined to think the safest way to think about ER is to have a high equity portfolio and flexibility in your spending. That flexibility could be returning to work.

Title: Re: A SWR For Today
Post by: Padonak on June 04, 2017, 07:08:29 PM
This is an excellent topic, thanks for all the links as well.

I am aiming for a 4% WR and being able to cut it down to 3.5% if need be.
Title: Re: A SWR For Today
Post by: soccerluvof4 on June 06, 2017, 11:21:57 AM
I am at a 4-5% withdrawl right now because I have 4 kids home but 2 leaving over the next 12 months on scholarships so that will reduce my costs quite a bit. Also once the market got over 20 I stopped adding to it and have 3 years of living in cash account to either buy a 25% correction or live on so I dont need to withdraw more. To some they worry about cash drag and all that but I still have more than 25xs saved and this helps me sleep at night. Also if I ever see a deal I have the "cash in an account" to buy . Otherwise I am currently in a 60/40 invested portfolio.
Title: Re: A SWR For Today
Post by: BTDretire on June 06, 2017, 06:29:55 PM
One thing I haven't seen addressed is actual income.
If your 4% is $28,000, it is different than if your 4% is $50,000.
 You have a lot more room for adjustment at $50,000.
Title: Re: A SWR For Today
Post by: maizefolk on June 06, 2017, 06:36:48 PM
One thing I haven't seen addressed is actual income.
If your 4% is $28,000, it is different than if your 4% is $50,000.
 You have a lot more room for adjustment at $50,000.

Well to some extent this is addressed by talking about the difference between people's bare-bones budgets and their target budgets in FIRE. The advantage to talking about it that way is that it could well be that for a young single person, withdrawing $28k/year leaves a lot more room for adjustment than for an older married couple (with the higher healthcare costs that come with age) withdrawing $50k/year.
Title: Re: A SWR For Today
Post by: dividendman on June 06, 2017, 06:50:09 PM
I also think people don't consider the rising equity glide-path as a way to help portfolio survival and guard against sequence of returns risk.

If your portfolio is in decent shape after the first 10 years of ER it's going to go the whole way.

I'm personally using 75/25 stock/bond split and reducing by bond exposure by 2% per year for the first 10 years. This way I'm pretty much just using bond liquidation (unless the stock market does really well) and dividends/interests for the first 10 years until by portfolio comes to 95/5 stock/bond.

This both allows an aggressive approach (as up-thread someone correctly stated that not having enough stocks isn't good in the long term) in the long term and fights off that scary first decade.

The proof will be in the pudding for me, I RE this August with this plan!
Title: Re: A SWR For Today
Post by: SwordGuy on June 06, 2017, 07:07:53 PM
We chose to diversify our income streams rather than trust the market completely. 


Renting housing : 33% to 40% of target income.
Renting farmland: 33% of target income.
Stocks          : 50% of target income.
Social Security : 50% of target income.  (We started later than a lot of you, and Mrs. Swordguy is 10 years older than I am.)
Pleasure work   : 0% to 50% of target income.



We rent houses and farmland, plus have social security, and stock income.   category brings in 25% to 50% of our target income.   
Title: Re: A SWR For Today
Post by: steveo on June 06, 2017, 11:18:22 PM
One thing I haven't seen addressed is actual income.
If your 4% is $28,000, it is different than if your 4% is $50,000.
 You have a lot more room for adjustment at $50,000.

I totally agree with this. If you are really tight to get to 4% compared to having some flexibility in your budget and getting to 5% I think the 5% level is safer.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 06, 2017, 11:57:35 PM
I typed up a brilliant defense of why the 2% SWR was a better estimation of where we are now - but my crap PC swallowed it while doing something in another window.  TLDR - Nominal gains will be 2%, real gains will be lower. 
Title: Re: A SWR For Today
Post by: respond2u on June 07, 2017, 12:07:26 AM
I typed up a brilliant defense of why the 2% SWR was a better estimation of where we are now - but my crap PC swallowed it while doing something in another window.  TLDR - Nominal gains will be 2%, real gains will be lower.

Is a longer summary "CAPE at 29.76 as of June 6" ?

Title: Re: A SWR For Today
Post by: steveo on June 07, 2017, 02:27:59 AM
I typed up a brilliant defense of why the 2% SWR was a better estimation of where we are now - but my crap PC swallowed it while doing something in another window.  TLDR - Nominal gains will be 2%, real gains will be lower.

This means that the standard 30 year retirement will require 50 years expenses to be saved up for. That sounds reasonable.
Title: Re: A SWR For Today
Post by: BTDretire on June 07, 2017, 06:49:50 AM
To much sarcasm steveo,
Either you have a big stache or you don't mind living near the poverty line.
 Many of us here would prefer a somewhat normal but frugal life, without every decision
being based on what our stache did today.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 07, 2017, 07:05:42 AM
I typed up a brilliant defense of why the 2% SWR was a better estimation of where we are now - but my crap PC swallowed it while doing something in another window.  TLDR - Nominal gains will be 2%, real gains will be lower.

Is a longer summary "CAPE at 29.76 as of June 6" ?

And the risk free 30 yr treasury rate is still below 2%...  The entire financial system, including international, has been responding to this bubble and could take a lifetime to unwind (if we were expecting​ higher rents that the 4% swr was based on).  The unknown is how much longer the  bull market continues / when the bear market begins.
Title: Re: A SWR For Today
Post by: dividendman on June 07, 2017, 08:27:16 AM
I typed up a brilliant defense of why the 2% SWR was a better estimation of where we are now - but my crap PC swallowed it while doing something in another window.  TLDR - Nominal gains will be 2%, real gains will be lower.

This means that the standard 30 year retirement will require 50 years expenses to be saved up for. That sounds reasonable.

I LOL'd.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 07, 2017, 09:39:31 AM
U.S. Equities are the only game in town, which is what worries me.  Back in the Trinity study days, bonds were competing for investors dollars and, as you pointed out, served a purpose in a retirees asset allocation.  So once equity P/E's begin to contract back to historical levels, where are investors going to go for their 7% nominal?

I think 2% nominal is a reasonable assumption because equity yields (dividends) and long bonds need to show something just above inflation.

Also, I'm just throwing ideas out there to get a conversation going about what folks are planning for if 2% SWR happens.  I know 4% SWR is the mainstream plan, and that's fine if that's what you believe.  Stevo's comment was interesting in the reality that, at 2%, a lot of strange things do start to happen, like a traditional retiree unavoidably spending down their savings (since pensions and retiree healthcare no longer exist).

We're definitely not in the sweet spot that our parents were in when it comes to a dependable 4% (or 5, 6, even 7% SWR)...  just my humble opinion tho.  The other interesting, positive aspect of 2% SWR is that it makes income extremly valuable - building up a side hustle to continue investing into a downturn will be golden.
Title: Re: A SWR For Today
Post by: Mr. Green on June 07, 2017, 10:22:30 AM
U.S. Equities are the only game in town, which is what worries me.  Back in the Trinity study days, bonds were competing for investors dollars and, as you pointed out, served a purpose in a retirees asset allocation.  So once equity P/E's begin to contract back to historical levels, where are investors going to go for their 7% nominal?

I think 2% nominal is a reasonable assumption because equity yields (dividends) and long bonds need to show something just above inflation.

Also, I'm just throwing ideas out there to get a conversation going about what folks are planning for if 2% SWR happens.  I know 4% SWR is the mainstream plan, and that's fine if that's what you believe.  Stevo's comment was interesting in the reality that, at 2%, a lot of strange things do start to happen, like a traditional retiree unavoidably spending down their savings (since pensions and retiree healthcare no longer exist).

We're definitely not in the sweet spot that our parents were in when it comes to a dependable 4% (or 5, 6, even 7% SWR)...  just my humble opinion tho.  The other interesting, positive aspect of 2% SWR is that it makes income extremly valuable - building up a side hustle to continue investing into a downturn will be golden.
At some point you just have to have a plan, work that plan, and then adjust if you get down the road and the plan isn't going quite right. I think automatically planning for 2% SWR is major overkill. Unless your saving rate is extremely high (80%+) you're talking about adding serious years to a job. If someone is really looking to get away from their job I don't see potential lower returns as more of a risk than working longer, but I also think that safety margins are necessary. Social Security? Going back to work? Cutting back expenses? It also helps to truly understand what you need to live. Food, water, clothes, and shelter. That's it. Maybe that's nothing great if you have a family but our perception of what we really need to survive is grossly distorted by decades of abundance. Every person will have to answer for themselves where the point is that they're willing to walk away and live off a stash. There will never be a 100% safe choice.

Interestingly enough, for all the "lower future returns" predictions the market has been averaging a 13%+ return for the last 5 years and some folks think the market has room to run. I surely don't envy active fund managers!
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 07, 2017, 10:51:29 AM
Interestingly enough, for all the "lower future returns" predictions the market has been averaging a 13%+ return for the last 5 years and some folks think the market has room to run. I surely don't envy active fund managers!

The whole comment was good and well written, but did want to highlight this last bit.  Just because I'm predicting 2% SWR doesn't mean I have any changes to AA or silver bullets.  Like you point out, compound equity returns have been phenomenal lately, so we should all continue to execute on our target AA and savings.  It's a little funny to me that ER'd 30 y.o.'s worry about spending extra years at work, but I wholly understand not wasting years of life being at a job you did not want to be at.  The upside of 4% SWR is that you can get to FI in your 30's and then figure out how much more you are willing to do to pad the stache.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 07, 2017, 11:03:14 AM
US equities/bonds aren't the only game in town.  There are plenty of funds with good enough returns that are uncorrelated with US equities.  Look to international funds, commodities, sector funds (e.g. energy/healthcare).  My plan is to diversify widely and buy low / sell high as I go along, while minimizing taxes.

International funds have just recently started to perform, but have mostly been a bust since 2009.  Emerging markets are generally a mess, EAFE will be struggling with Brexit, low oil price, and nationalism...  commodities are a bust (inflation hedge, we don't need no stinkin inflation hedge)...  Real estate was good, but has become too correlated to equities (low mortgage rates coincide with low 30-yr yield)...  So I'm not so sure diversificiation is what it used to be.  If you do believe in it, one of the best performing portfolios historically is 25% cash, 25% stock, 25% gold, 25% bond (Harry Browne's Permanent Portfolio).
Title: Re: A SWR For Today
Post by: Mr. Green on June 07, 2017, 12:56:22 PM
It's a little funny to me that ER'd 30 y.o.'s worry about spending extra years at work, but I wholly understand not wasting years of life being at a job you did not want to be at.  The upside of 4% SWR is that you can get to FI in your 30's and then figure out how much more you are willing to do to pad the stache.
This is the bit where I think everyone has to figure out what's most important to them. A 2% SWR means twice the stash, assuming the expenses are the same. That could easily mean another 10 years or more, even for someone who was considering ER in their 30's.

A related fun fact: As a 33 year old, I have a 20% chance of being dead before I turn 65. That's based on Social Security's actuarial data.

Maybe the person who somewhat likes their job thinks it's worth working a little longer for some extra security. If you detest your job it might be a no-brainer to ER. I like to think of it as a sliding scale. Everyone will have a different spot where they identify the reward of ER being worth more than the cost of continuing to work.

It seems worth reiterating that a 4% SWR wil already leave you with tons of extra money in the majority of historical scenarios, hence why it's been considered "safe," as much as something can be safe. We also know that the sequence of returns in the first 10 years of ER are by far the most important in determining whether a stash will go the distance. So I'd be less worried about padding my stash than I would be about having a plan for an underperforming first 10 years in ER. For those that say younger people with longer retirements are the most at risk because of longevity, understanding this benefits those same young people the most because they will be able to re-enter the workforce in some capacity the easiest.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 07, 2017, 02:55:43 PM
For those that say younger people with longer retirements are the most at risk because of longevity, understanding this benefits those same young people the most because they will be able to re-enter the workforce in some capacity the easiest.

I mostly agree with everything you said and persoanlly expect my 2% SWR means I'll have way too much money throughout retirement (even if I somehow start to spend down principal).  But the idea that you'll be able to re-enter the workforce in a good paying, college-trained job after 10 or 20 years away is a bit suspect.  Even when oil went to $150 and my industry was pulling anyone with a heartbeat out of retirement, most of them only lasted a few months before getting the boot.  If your skills are rusty or non-existent (especially with software) then the working world will have left you behind.  These guys were baffled by simulations, instant messaging, and even basic Excel tools.  They were great with calculators, but that only gets you so far...

I guess there are always service jobs, but that's not my idea of a good fallback plan.  I'd rather work an extra 2 or 3 years (making 6 figures) than have to work even one year in service (making low five figures).  And that's the irony when you look at the numbers, that I can easily make a decade of service industry income in 1-2 years in my current line of work.   
Title: Re: A SWR For Today
Post by: Eric on June 07, 2017, 03:33:19 PM
International funds have just recently started to perform, but have mostly been a bust since 2009.

I don't think you can complain that US stocks are expensive and at the same time that international hasn't had a great return lately.  You can have your cake, or you can eat it, but not both.  Not to mention that a lot of that underperformance has been due to the relative strength of the USD, so if the US economy starts slowing down, so with the strength of the dollar, making international look even better.
Title: Re: A SWR For Today
Post by: steveo on June 07, 2017, 03:51:25 PM
To much sarcasm steveo,
Either you have a big stache or you don't mind living near the poverty line.
 Many of us here would prefer a somewhat normal but frugal life, without every decision
being based on what our stache did today.

I don't believe this at all. This is what gets me about these discussions. Too many people are unreasonable about what they are stating in relation to being way too pessimistic.

I honestly think the people that are pessimistic have no idea what the 4% rule entails. No flexibility at all in your spending and no additional assets or income coming to you at any point in your life. That has a 95% success rate over 30 years and the median size of your stash at the end of that 30 years is 1.5 times what you started with.

Assuming that you have a reasonably estimate of your expenses you should be good. This is the only reasonable flaw that I can see in the SWR analysis. You aren't living near the poverty line. It really doesn't judge your expenses. You can be mr spendy pants and the maths is exactly the same.

Maybe a better way to phrase this is to state that anything over a 50% success rate means on average you are going to be working too long.  The 50% rate is more like a 6% WR. Anyone who gets to a 6% WR should be fine with some flexibility. That is logical. It's illogical to state anything below 6%.
Title: Re: A SWR For Today
Post by: steveo on June 07, 2017, 03:57:39 PM
I typed up a brilliant defense of why the 2% SWR was a better estimation of where we are now - but my crap PC swallowed it while doing something in another window.  TLDR - Nominal gains will be 2%, real gains will be lower.

Is a longer summary "CAPE at 29.76 as of June 6" ?

And the risk free 30 yr treasury rate is still below 2%...  The entire financial system, including international, has been responding to this bubble and could take a lifetime to unwind (if we were expecting​ higher rents that the 4% swr was based on).  The unknown is how much longer the  bull market continues / when the bear market begins.

You are predicting the future based on utilising your completely subjective opinion which cannot be backed up via historical data. It might take a lifetime to unwind or it might never unwind. You are not a seer who can predict this and the consistency of people predicting the future is consistently wrong.

The best information that we have is the data that is currently available which entails lots of bad periods - world wars, hyperinflation, depressions etc.

You are stating that the next 100 years will be significantly worse than the last 100 years. The odds are a million to one that you are going to have guessed this correctly.
Title: Re: A SWR For Today
Post by: Mr. Green on June 07, 2017, 04:07:39 PM
But the idea that you'll be able to re-enter the workforce in a good paying, college-trained job after 10 or 20 years away is a bit suspect.  Even when oil went to $150 and my industry was pulling anyone with a heartbeat out of retirement, most of them only lasted a few months before getting the boot.
The risk there definitely depends on what your expenses are. The common trend for MMM-type people seems to be 30-60k per year.

I'll illustrate with my personal situation. Our expenses are about 30k at the moment but our FIRE plan is to spend up to 40k per year. We know how important the first 10 years of returns are, and we'll know roughly how that's going to turn out by year the end of year 7. In the unlikely event that we were looking at the short end of the stick on returns I could pick up any part-time job and make a serious impact on propping up our stash. It would be nothing to pull in 10k a year at a minimum-ish wage job. With little to no income, I'd be almost assured that I pay no tax so I'll see pretty much all of it. 10k is 25% of my expenses, and that's at the full 40k! If we can tighten our belt for a year or two if the market has crashed we could deal with 30k in expenses. With 10k of that coming from my job, I'm only withdrawing 2% of the original stash balance for the year. It wouldn't take more than 3-5 years of this in the worst circumstances (based on history) to get a portfolio back on track.

Of course the higher the base spending, the more difficult it is to ensure that any job would have the desired effect. Though after spending 7-10 years having complete control of my time, I'm not sure that I would want a full-time job. I'd likely prefer a part-time, low responsibility job because I've become accustomed to having my freedom.

The one thought I have regarding an extra couple years at a high paying job vs. the chance of needing to pick up a low paying job after ER is that it assumes a sequence of returns worse than we've ever had, the worst of which are based on some pretty awful events. I don't think an extra couple years will save someone if the future holds events significantly worse than our past. I expect something will have collapsed, economically, and we'll all be recovering from near financial ruin regardless of starting position. Just my opinion there.

All of this is part of that sliding scale I like to think of where people have to figure out what they're really comfortable with.
Title: Re: A SWR For Today
Post by: steveo on June 07, 2017, 04:09:34 PM
I guess there are always service jobs, but that's not my idea of a good fallback plan.  I'd rather work an extra 2 or 3 years (making 6 figures) than have to work even one year in service (making low five figures).  And that's the irony when you look at the numbers, that I can easily make a decade of service industry income in 1-2 years in my current line of work.   

This is your choice and you may be extremely risk averse so this suits you but you have just guaranteed extra work for yourself.

One other point is that a lower income job is fine for the early retiree who is frugal. Instead of withdrawing 4% you can work in some job that doesn't pay well and withdraw 2%. You may only have to do this if things are looking a little bleak.
Title: Re: A SWR For Today
Post by: dividendman on June 07, 2017, 04:39:01 PM
Facts:

Chance of 4% WR failing > 0% < 100%
Chance of 4% WR failing with considerations (going back to work, variable withdrawal, rising equity glidepath) >> 0% < 100%

Chance of working another year if you don't quit: 100%
Chance of death increasing per year lived: 100%


Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 07, 2017, 05:15:17 PM
Not sure if I'm getting an interesting conversation going or just getting folks riled up (like I said, I'm not advocating that people abandon the historically sound 4% SWR), but one other thing I think about is that my ability to earn and save now might be better what the US workforce may see in 10-20 years, which includes my children's early career.  Technology is replacing jobs and a palpable chasm is widening between the rich and the poor.  Sure, if my kids make it into the remaining '1%-er' jobs they will be fine, but I'm also increasing their odds for success by being capable of giving them help (graduating with no student debt, providing health insurance until they are on their own, possibly even helping them with a downpayment on a home, etc.).  If you believe we are in a transformative period in terms of the future of work, I'm not sure how you can feel prepared for it by repeating what worked a generation ago.  Back then, people spent their whole career at one company and had a defined pension, buying stocks involved calling up a broker and checking the price in the newspaper, and healthcare and college were generally affordable for the rising middle class.     

Also, I'll reiterate, my situation is somewhat different than folks itching to ER.  I in no way feel that working extra years or having less time in retirement is a negative for me personally.  I love the lifestyle I get with my job (especially the variety of experiences) and will only head off into the sunset when I feel like it would be an improvement (like I'm burned out at work or feel too old to keep up), or when they fire me.  I'm only saying this so people understand my perspective, what works for me might be different than what works for you...     
Title: Re: A SWR For Today
Post by: dividendman on June 07, 2017, 06:22:58 PM
Not sure if I'm getting an interesting conversation going or just getting folks riled up (like I said, I'm not advocating that people abandon the historically sound 4% SWR), but one other thing I think about is that my ability to earn and save now might be better what the US workforce may see in 10-20 years, which includes my children's early career.  Technology is replacing jobs and a palpable chasm is widening between the rich and the poor.  Sure, if my kids make it into the remaining '1%-er' jobs they will be fine, but I'm also increasing their odds for success by being capable of giving them help (graduating with no student debt, providing health insurance until they are on their own, possibly even helping them with a downpayment on a home, etc.).  If you believe we are in a transformative period in terms of the future of work, I'm not sure how you can feel prepared for it by repeating what worked a generation ago.  Back then, people spent their whole career at one company and had a defined pension, buying stocks involved calling up a broker and checking the price in the newspaper, and healthcare and college were generally affordable for the rising middle class.     

Don't you think that while there is a chance of your prediction of a widening chasm and vast extremes of wealth and poverty in the future could be true, there is an equal or perhaps much greater chance that advances in technology will allow for Universal Basic Income for everyone within the next twenty years so retirement savings may not be required at all?
Title: Re: A SWR For Today
Post by: Mr. Green on June 07, 2017, 06:58:30 PM
Not sure if I'm getting an interesting conversation going or just getting folks riled up (like I said, I'm not advocating that people abandon the historically sound 4% SWR), but one other thing I think about is that my ability to earn and save now might be better what the US workforce may see in 10-20 years, which includes my children's early career.  Technology is replacing jobs and a palpable chasm is widening between the rich and the poor.  Sure, if my kids make it into the remaining '1%-er' jobs they will be fine, but I'm also increasing their odds for success by being capable of giving them help (graduating with no student debt, providing health insurance until they are on their own, possibly even helping them with a downpayment on a home, etc.).  If you believe we are in a transformative period in terms of the future of work, I'm not sure how you can feel prepared for it by repeating what worked a generation ago.  Back then, people spent their whole career at one company and had a defined pension, buying stocks involved calling up a broker and checking the price in the newspaper, and healthcare and college were generally affordable for the rising middle class.     

Also, I'll reiterate, my situation is somewhat different than folks itching to ER.  I in no way feel that working extra years or having less time in retirement is a negative for me personally.  I love the lifestyle I get with my job (especially the variety of experiences) and will only head off into the sunset when I feel like it would be an improvement (like I'm burned out at work or feel too old to keep up), or when they fire me.  I'm only saying this so people understand my perspective, what works for me might be different than what works for you...   
This is why I like to emphasize that it's all what people are comfortable with. I see a whole lot of "inside the box thinking" when it comes to FIRE. Either folks feel like 4% isn't really safe, even though there are myriad safeties that can be built into it, or they feel like working past what you need to for FIRE is a waste of time. I say to each their own, but hopefully they fully understand all the aspects to be considered. If you love the job, awesome! Some folks love work to the point that it's not work. Nothing wrong with that. Others want to control all their time. That's cool too. Personally I think we're going to see increasing gains with the advancement of technology, but I totally see the stratifying of incomes as well. I believe some type of universal basic income will have to come into play at some point but now we're on another topic. I suppose I'm in the same boat as Warren Buffet. I believe that America's best days still lie ahead. We may not stay World #1 but that doesn't mean we can't still have economic prosperity.
Title: Re: A SWR For Today
Post by: cerat0n1a on June 08, 2017, 03:26:46 AM

You need to factor inflation into your analysis.  Just because you can get treasuries at 2% return indefinitely, at a 2% WR you would eventually require a lower standard of living.

So, to re-state the earlier point. If you have an investment option that will match (but not beat) inflation, a 2% withdrawal rate implies that you have enough money to last 50 years. To assume that you can only only safely withdraw 2% is incredibly pessimistic - you are basically assuming that your return on capital will be less than inflation over multiple decades. It's certainly possible - see Weimar Germany in the 1920s or Zimbabwe & Argentina recently, but even there, owners of property and other "real" assets did OK.

I think what EscapeVelocity2020 is saying in recent posts makes a bit more sense; it's about having a lot of wealth to pass on to kids and liking a current well paid job rather than any rational view that a 2% withdrawal rate is actually necessary.
Title: Re: A SWR For Today
Post by: steveo on June 08, 2017, 04:38:21 AM
it's about having a lot of wealth to pass on to kids and liking a current well paid job rather than any rational view that a 2% withdrawal rate is actually necessary.

I have no issues with this however this should be stated as the goal/s and not that the 4% WR is somehow not safe. Anything below 6% with some flexibility is fairly safe. Once you get to that point I think you can do whatever you feel like doing. Stay in the higher paid job, work part time, work in a different job, take some time off and work at another point, don't work but be more frugal etc.

If you want to pass on a tonne of wealth to your kids that is fine. If you like your job that is fine. Neither has anything to do with amending the WR required to retire with a degree of comfort. I don't judge how people want to spend their time. We are all different. The math of withdrawing for retirement though isn't about different lifestyles.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 08, 2017, 06:36:29 AM
Another way to look at it is, let's say MMM retired in 2008 with 600k and 24k expenses.  By this year, with the compound growth of his 600k more than offsetting the withdrawal, he has a roughly 2 - 3% WR.  So is 4% still bulletproof for new retirees? 
Title: Re: A SWR For Today
Post by: Mr. Green on June 08, 2017, 07:24:57 AM
Another way to look at it is, let's say MMM retired in 2008 with 600k and 24k expenses.  By this year, with the compound growth of his 600k more than offsetting the withdrawal, he has a roughly 2 - 3% WR.  So is 4% still bulletproof for new retirees?
Absolutely! If 2008 is the first year of ER, the market will have to end 2017 up 20% in order for MMM to have a 10-year average return that matches the historical average. If 2017 ended where the market is right now his 10-year average annual return will be under 6%, basically a full percentage point below the historical average. Despite the fact that we've had very nice returns over the last few years, this just goes to show you how much damage that one year of -37% returns (2008) had on a portfolio. So his first 10 years of retirement are falling well within the expected parameters of SWR scenarios.

At 4%, in a majority of scenarios you end up with more money than you started with. This means your withdrawal rate will naturally become less than 4% of your current stash balance as it grows. However, the WR isn't meant to be recalculated every year. It's based on the starting value of the stash in some capacity (maybe there's an adjustment for inflation or other drawdown scenarios people consider). You can certainly reset your WR rate to match the current value of your stash in any year after ER but you then change the parameters of a 30-year retirement scenario to the new numbers. If you're making that adjustment after a long bull run, where the expectation is a down cycle at some point, increasing the withdrawals to 4% of the now-larger stash may put you at greater risk of failure long term because you increase the risk of a bad sequence of returns during the first 10 years of the new 30-year period.
Title: Re: A SWR For Today
Post by: Mr. Green on June 08, 2017, 07:48:16 AM
You might find this chart interesting. It shows the results of 30-year periods based on 750k invested in 100% stocks, 0.08% in expense fees, and withdrawing 30k per year (4%). The chart also shows averages for the first 10 years and first 20 years within a 30-year period.

In the first column (year), Red indicates a portfolio that ran out of money after 30 years or was drained to the point that it would be exhausted in the next couple years. Orange means a portfolio ended with less than it started but still has a fairly healthy balance. Green indicates a portfolio ended with more than it started with.

We know the historical average return is between 6.5-7%, adjusted for inflation. Take a look at the average returns in the years where a portfolio fails. All those numbers are adjusted for inflation and based on Compound Annual Growth Rate data on moneychimp.com. Just look at how awful the returns have to be before a 4% withdrawal rate fails. I like seeing data like this because it eliminates some of the mystery about how things would likely turn out based on future return scenarios. I think most people would be very comfortable with a 4% WR after looking at this data.

Note: Something I find very comforting is that no stash has ever failed to go the distance if the average return for the first 10 years is greater than 3%. While I certainly don't expect that we've seen all the combinations of ups and downs there are, 3% is a looooong way from the average return.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 08, 2017, 08:03:53 AM
Wow, you (probably intentionally) missed my point.  Let's actually use the numbers from 2008, shall we...

I took inflation rates from here (http://www.usinflationcalculator.com/inflation/current-inflation-rates/) and total S&P return from here (https://ycharts.com/indicators/sandp_500_total_return_annual).

In 2008, MMM retires with 600k and 24k withdrawl.  I assume his expenses came from the money he earned and he has 600k at the end of the year.  In 2009, there was actually 0.4% deflation and 24.5% total S&P return (including dividends).  So his expenses were 23904 and his portfolio grew to roughly 717k.  Do this though 2017 and I get that his current expenses are $27,415 and his portfolio is $1,462,200.  Hence, his WR is 0.187 or less than 2%....
Title: Re: A SWR For Today
Post by: Mr. Green on June 08, 2017, 08:16:54 AM
In 2008, MMM retires with 600k and 24k withdrawl.  I assume his expenses came from the money he earned and he has 600k at the end of the year.  In 2009, there was actually 0.4% deflation and 24.5% total S&P return (including dividends).  So his expenses were 23904 and his portfolio grew to roughly 717k.  Do this though 2017 and I get that his current expenses are $27,415 and his portfolio is $1,462,200.  Hence, his WR is 0.187 or less than 2%....
I didn't miss your point. I guess I just wan't able to accurately convey what I was trying to. His withdrawal rate has dropped to less than 2% almost 10 years into his retirement. Assuming he continues to withdrawal similar amounts, his WR will go back up during the next recession, correction, etc. He's had a very good sequence of returns with the exception of the first year so I would expect him to be in one of the higher percentiles of historic 30-year periods. Looking at today as a snapshot in time of his stash might very well be like looking at the apex of a curve before it drops lower (or as WR goes, higher). Only the future can tell us that.
Title: Re: A SWR For Today
Post by: cerat0n1a on June 08, 2017, 08:17:47 AM
Wow, you (probably intentionally) missed my point.  Let's actually use the numbers from 2008, shall we...

I took inflation rates from here (http://www.usinflationcalculator.com/inflation/current-inflation-rates/) and total S&P return from here (https://ycharts.com/indicators/sandp_500_total_return_annual).

In 2008, MMM retires with 600k and 24k withdrawl.  I assume his expenses came from the money he earned and he has 600k at the end of the year.  In 2009, there was actually 0.4% deflation and 24.5% total S&P return (including dividends).  So his expenses were 23904 and his portfolio grew to roughly 717k.  Do this though 2017 and I get that his current expenses are $27,415 and his portfolio is $1,462,200.  Hence, his WR is 0.187 or less than 2%....

You are pointing out that his portfolio has done well (but still below market average for a 10 year period) and that he is now withdrawing 2% rather than 4%. So your question is, would it be OK for someone retiring today with a similar size portfolio be OK to withdraw twice as much per year (i.e. 4%) or (same question in effect) is it OK for MMM to now double his withdrawal rate? The answer you got is "yes" in both cases, but that it exposes you the sequence of returns risk that MMM has already apparently successfully overcome.
Title: Re: A SWR For Today
Post by: Mr. Green on June 08, 2017, 08:27:31 AM
I feel obliged to mention though that under no circumstances is any withdrawal rate bulletproof. Something crazy can always happen. That's part of the sliding scale of risk. Even 2% could fail in some unknown future scenario. If no (literally zero) risk is acceptable, the only solution is to work until death.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 08, 2017, 08:40:08 AM
Thanks for the replies.  Just explaining how I got to 2% WR not being crazy for me (just kinda worked out that way).  I'm away from my computer most of today, but enjoyed the discussion and sharing my perspective. 

Working until death isn't a bad thing if you enjoy the work, even if you don't need the money for yourself...
Title: Re: A SWR For Today
Post by: zz_marcello on June 08, 2017, 11:08:08 AM
...Working until death isn't a bad thing if you enjoy the work, even if you don't need the money for yourself...

Maybe for some but this is not the:"Be employed till your last day" forum ;-)

2% WR is unreasonable low because a 3% stock portfolio WR never ever failed even for an 100 year retirement but there is a world of difference between a 4% WR in times of high CAPE's and a ~3.25% WR.

I highly recommend to invest one hour of your life for the ultimate guide to safe withdrawal rates:
https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

It gives you a lot of confidence that a ~3-3.25% is very golden (and a 4% withdrawal rate with current CAPE is more risky than many in the MMM community think.
Title: Re: A SWR For Today
Post by: secondcor521 on June 08, 2017, 01:55:47 PM
And the risk free 30 yr treasury rate is still below 2%...

No it isn't.  As of yesterday it was 2.84%, and it's been above 3% this year:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2017
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 08, 2017, 06:43:19 PM
And the risk free 30 yr treasury rate is still below 2%...

No it isn't.  As of yesterday it was 2.84%, and it's been above 3% this year:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2017

You're right, I should've used a CD or shorter term bond to represent the risk free rate.  30 year bonds could be quite risky if you need to sell them before maturity and newly issued 30 yrs have higher yield....
Title: Re: A SWR For Today
Post by: sirdoug007 on June 08, 2017, 09:31:30 PM
30 year bonds are not inflation protected.

A 100% 30 year bond portfolio would have a real return around 1%.

This is why sticks are so important for the long run.


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Title: Re: A SWR For Today
Post by: secondcor521 on June 08, 2017, 10:13:21 PM
30 year bonds are not inflation protected.

A 100% 30 year bond portfolio would have a real return around 1%.

This is why sticks are so important for the long run.


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Agreed on the 1% real yield on a 30 year TIPS.  I was interpreting "risk free" in the traditional sense of the phrase as free from default risk (and I suppose, calling risk), the gold standard of which I thought were US Treasuries.  You're right that there is still inflation to consider.

This is why I only invest in twigs for the long run.
Title: Re: A SWR For Today
Post by: EscapeVelocity2020 on June 09, 2017, 08:10:42 AM
30 year bonds are not inflation protected.

A 100% 30 year bond portfolio would have a real return around 1%.

This is why sticks are so important for the long run.


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Agreed on the 1% real yield on a 30 year TIPS.  I was interpreting "risk free" in the traditional sense of the phrase as free from default risk (and I suppose, calling risk), the gold standard of which I thought were US Treasuries.  You're right that there is still inflation to consider.

This is why I only invest in twigs for the long run.

Yeah, I was sort of all over the place trying to get the point across that instruments that are 'risk free' hardly yield anything.  Hence my statement, USE are about the only game in town (and have been for about the past decade).  Real estate was a close second with good yield and rising demand / value coming out of the housing bust, but being a physical asset, it is pretty clear (at least in Houston and China) that we are in an oversupply and rising vacancies (although new apartments and office buildings are still coming to market).  To me, this is a sign of a market that is not healthy and does not bode well for what happens if USE begins a downturn, for whatever reason.  I've heard terms like 'bond bubble' and 'credit bubble' thrown around, but noone really knows what the heck is going on, since inflation is still well contained. 

Twigs sounds like an interesting financial product, anything like TIPS or Bitcoin?