A SWR For Today

[RetirementInvestingToday]

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:

Source: 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?

[BTDretire]

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.

[RetirementInvestingToday]

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.

[maizefolk]

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.

[BrokenBiscuits]

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.

[ysette9]

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:

  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!

[Eric]

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 and here.

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))

[steveo]

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.

[Etihwdivadnai]

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%.

[MrGreen]

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.

[dude]

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-à-vis U.S. Total Stock Market over the past 25 years). Otherwise, I'm still pretty confident in the 4% rule.

[FLBiker]

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.

[BTDretire]

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? :-)

[respond2u]

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)

[spokey doke]

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)

[JohnGalt]

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. 

[spokey doke]

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

[homestead neohio]

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.

[maizefolk]

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.

[steveo]

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.

[Fishingmn]

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.

[ysette9]

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 (

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.

[maizefolk]

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.

[ysette9]

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.

[brooklynguy]

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:

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?"

[ysette9]

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.

[maizefolk]

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.

[steveo]

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 (

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.

[Padonak]

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.

[soccerluvof4]

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.

[BTDretire]

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.

[maizefolk]

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.

[dividendman]

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!

[SwordGuy]

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.   

[steveo]

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.

[EscapeVelocity2020]

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. 

[respond2u]

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" ?

[steveo]

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.

[BTDretire]

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.

[EscapeVelocity2020]

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.

[dividendman]

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.

[EscapeVelocity2020]

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.

[MrGreen]

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!

[EscapeVelocity2020]

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.

[EscapeVelocity2020]

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).

[MrGreen]

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.

[EscapeVelocity2020]

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.   

[Eric]

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.

[steveo]

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%.

[steveo]

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.