The Money Mustache Community
General Discussion => Post-FIRE => Topic started by: pa2016 on March 14, 2017, 08:25:32 PM
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Some posts here seem to indicate the 4% SWR is too conservative. I am curious as to if anyone here is actually doing a 5% withdrawal rate or even higher, especially during the early years of FIRE ? I am thinking that this is actually OK especially if current expenses include mortgage and that chunk of expenses will be gone after the mortgage is paid off. Plus SS will also then kick in...
Would like to hear from you if you are doing a >4% WR !
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I started out close to 10% and am now at 5.38%. I posted about my 8% concept here: http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/ (http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/)
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We haven't retired yet, but our target retirement WR is 4.4%. The way we got here was to assume the regular 4% rule, but then figure in the amount we have for projected social security. Given that our target retirement date has me at age 47 and my wife at 56, social security can actually play a meaningful part. So, while we aren't aiming for over 5%, we are aiming higher than 4.
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I started out close to 10% and am now at 5.38%. I posted about my 8% concept here: http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/ (http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/)
I'm game but 10% is really pushing it. Did you retain that spending level. To be clear did you spend less when you retired and therefore your WR declined easily or did you retain the same spending. I don't think that I can decrease my spending much when I retire as I have 3 kids. I read your article and with all due respect I'm not a fan of trying to beat the market to lower your WR.
For me personally my lowest figure is about a 5.7% WR. I'm not sure if we will retire on that figure because I have two tranches of money - one prior to 60 and one post 60. I think we will have more than that but I don't think we will retire on much less than 5%.
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Not yet retired, so take this with a grain of salt. We plan on starting around 10% until my wife's pension kicks in (2-3 years after we retire). Then it'll drop to about 8%. Then SS benefits kick in for her dropping it to about 5%. Then they kick in for me, dropping it to below 3%.
We also know we're up for some kind of inheritance from her parents but have no idea how much (most likely north of $100k) which would change our plans if/when it happened. For obvious reasons, the later the better on that one.
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I started out close to 10% and am now at 5.38%. I posted about my 8% concept here: http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/ (http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/)
I'm game but 10% is really pushing it. Did you retain that spending level. To be clear did you spend less when you retired and therefore your WR declined easily or did you retain the same spending. I don't think that I can decrease my spending much when I retire as I have 3 kids. I read your article and with all due respect I'm not a fan of trying to beat the market to lower your WR.
For me personally my lowest figure is about a 5.7% WR. I'm not sure if we will retire on that figure because I have two tranches of money - one prior to 60 and one post 60. I think we will have more than that but I don't think we will retire on much less than 5%.
Spending came down about 25% or so (ballpark). Most of the change in WR comes from growth of stache.
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Some posts here seem to indicate the 4% SWR is too conservative.
I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40. Many of these comments contradict experts who have studied SWR rates longer than some commentors have been alive. Many people also assume SS and pensions will still be around when they retire and yet I live among friends who have had their pensions cut to fractions of what they were and depending on who you believe, there is a chance SS may be bankrupt with a decade.
Your SWR in an individual calculation depending on how much you have saved up and how many years you are expecting to live. I may have millions saved up and don't expect to live but 20 more years so 10% is a SWR for me however there is a good chance it might not be for you.
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Some posts here seem to indicate the 4% SWR is too conservative.
I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40. Many of these comments contradict experts who have studied SWR rates longer than some commentors have been alive. Many people also assume SS and pensions will still be around when they retire and yet I live among friends who have had their pensions cut to fractions of what they were and depending on who you believe, there is a chance SS may be bankrupt with a decade.
Your SWR in an individual calculation depending on how much you have saved up and how many years you are expecting to live. I may have millions saved up and don't expect to live but 20 more years so 10% is a SWR for me however there is a good chance it might not be for you.
Anyone looking at real data will know that SS in the 2030s will pay out 75% of benefits assuming no changes.
75% of ss benefits is such an extreme windfall for the early retiree's portfolio it's frankly amazing. Let alone 100%
That being said, for people like myself looking to fire in their early 30s, SS is so far out it's hard to use it in any meaningful way.
There is, admittedly, a high aversion to work here. So, I see the want to have a higher than 4% WR.
I personally want to hit 4% but that's another 4 to 5 years out. It just seems to drag on.... if I had a way to get some side income passively I would cut the cord a lot faster. Though, I have not come up with one yet.
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If you retired at the end of 2012 with a 5% WR of your initial balance, you'd be down to 3.5% WR of your current balance. Doesn't seem so risky all of a sudden, huh?
(note, rough numbers based on S&P 500 return only, not inflation adjusted)
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Yea, it certainly has an element of timing involved...
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Some posts here seem to indicate the 4% SWR is too conservative.
I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40. Many of these comments contradict experts who have studied SWR rates longer than some commentors have been alive. Many people also assume SS and pensions will still be around when they retire and yet I live among friends who have had their pensions cut to fractions of what they were and depending on who you believe, there is a chance SS may be bankrupt with a decade.
Your SWR in an individual calculation depending on how much you have saved up and how many years you are expecting to live. I may have millions saved up and don't expect to live but 20 more years so 10% is a SWR for me however there is a good chance it might not be for you.
The only way for SS to go bankrupt is if the whole US gov't goes bankrupt. Surely you should expect some changes, but there's no reason for the fearmongering.
Also note that the SWRs are worst case scenarios. Median WRs are 50% higher. So you have to ask yourself:
(http://s2.quickmeme.com/img/28/28ef42680e4363e428684f5c703d5cda9f1d4958a37af18a2f466fb128f6f139.jpg)
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The flip side of being too conservative is over-saving and/or working/earning longer than you need. Its a nicer scenario than running out of money, but it would still chafe.
Besides, 'retirement' isn't a one way street unless you choose it to be. If shit really hits the fan, than you can un-retire.
What is your personal risk tolerance?
My situation is not unlike deskjockey's (minus inheritance). Multiple income streams hitting at different times does adds to complication.
If I stick to an overall 4%, I will likely retire and have a >>4% WR for the first stage (first 5 years?), ~4% WR for the second (years 5 - 10), and likely <4% WR after all income sources are flowing.
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Anyone looking at real data will know that SS in the 2030s will pay out 75% of benefits assuming no changes.
75% of ss benefits is such an extreme windfall for the early retiree's portfolio it's frankly amazing. Let alone 100%
That being said, for people like myself looking to fire in their early 30s, SS is so far out it's hard to use it in any meaningful way.
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This is such an important point that often gets overlooked when people are projecting for retirement income. Someone retiring in their 30's needs to have a 4% withdrawal rate to have the level of retirement safety generally associated with an SWR, since they have 30+ years before most social security or pensions would kick in (plenty of time for portfolio failure). On the other hand, someone retiring at 50 or even 40 has many fewer years before safety nets kick in, which in addition to a shorter timeline before payments, also means they are looking at a shorter timeline for any sort of legislation which would significantly reduce their SS benefits (or shorter timeline for their company or State to bankrupt, if looking at a pension).
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
People also use the 4% rule******** here..
*I can cut spending if markets are down
**HELOC
***Side income
****Owns a rental or highly appreciated property
*****ect
******ect2
So people jumping at 4% here are, in reality, not only not withdrawing 4%, they also sometimes are adding to savings.
If we want to be sticklers about it, once you retire you get 4% a year + inflation and ABSOLUTELY NO adjustments to spending, extra income, geographic arbitrage, or other tactics.
This is why 4% actually works BETTER than the trinity study shows because people have the above options.
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
In that example I think you'd find that people's spending will creep as their portfolios get bigger. For those that encounter problems due to sequence of returns risk, they have to make adjustments (withdraw less, work, etc.). For those that retire in their 30's on, say, a million dollars and find their stash to have doubled or more by the time their 50, I believe the majority of them would adjust their spending upward. This is certainly what I plan to do. I would never lock myself into a higher spending rate via fixed expenses but I would definitely take advantage of my good fortune by spending more. Maybe it would be different kinds of travel or donating more money while I'm younger but it will definitely go over the initial 4% target.
I also know that unless my stash is in absolute dire straits (imminent exhaustion), the boost that SS will give my spending, provided it hasn't increased, will be enough to stave off all but the worst scenarios. Suddenly having 50% of your spending come from a source outside of your portfolio will more or less save anyone, provided failure isn't already imminent. It might not recover a stash completely but it will extend the longevity by decades.
Edit: clarity
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
There is a lot more to it than just looking at the 4% SWR. Is that a forum where they really minimise their spending/budget ? If so they probably have less buffer than someone who optimises their budget but has some leeway. Do they increase their spending in retirement ? Are they really young ? Do they honestly expect never to get a cent from anywhere ever again ? These anecdotal examples can work against you when it comes to a 4% WR.
For me personally I think that I have a lot of buffer and can go higher than a 4% WR if I choose to because the assumptions of the 4% SWR are fairly rigid and on the conservative side. No social security, no inheritance, no decrease in spending, no money from downsizing your house, no extra income from going back to work simply because you may like too.
I'd look at the data and come to your own conclusion. I think the 4% SWR is relatively too safe based on my personal situation. You might be different.
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I'm pretty sure most of us are going to feel like idiots for having any stache at all, so it's all going to feel like overkill. Why?
Universal Basic Income is coming sooner than we think.
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
In that example I think you'd find that people's spending will creep as their portfolios get bigger. For those that encounter problems due to sequence of returns risk, they have to make adjustments (withdraw less, work, etc.). For those that retire in their 30's on, say, a million dollars and find their stash to have doubled or more by the time their 50, I believe the majority of them would adjust their spending upward. This is certainly what I plan to do. I would never lock myself into a higher spending rate via fixed expenses but I would definitely take advantage of my good fortune by spending more. Maybe it would be different kinds of travel or donating more money while I'm younger but it will definitely go over the initial 4% target.
I also know that unless my stash is in absolute dire straits (imminent exhaustion), the boost that SS will give my spending, provided it hasn't increased, will be enough to stave off all but the worst scenarios. Suddenly having 50% of your spending come from a source outside of your portfolio will more or less save anyone, provided failure isn't already imminent. It might not recover a stash completely but it will extend the longevity by decades.
Edit: clarity
Wrong: http://blogs.wsj.com/experts/2016/02/02/why-the-conventional-wisdom-about-retirement-spending-is-wrong/ (http://blogs.wsj.com/experts/2016/02/02/why-the-conventional-wisdom-about-retirement-spending-is-wrong/)
- " For every $1 people spent at age 65, they were only spending about $0.80 at age 85 (adjusted for inflation) if the initial target retirement income level was $50,000."
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I'm pretty sure most of us are going to feel like idiots for having any stache at all, so it's all going to feel like overkill. Why?
Universal Basic Income is coming sooner than we think.
Very Wrong
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
In that example I think you'd find that people's spending will creep as their portfolios get bigger. For those that encounter problems due to sequence of returns risk, they have to make adjustments (withdraw less, work, etc.). For those that retire in their 30's on, say, a million dollars and find their stash to have doubled or more by the time their 50, I believe the majority of them would adjust their spending upward. This is certainly what I plan to do. I would never lock myself into a higher spending rate via fixed expenses but I would definitely take advantage of my good fortune by spending more. Maybe it would be different kinds of travel or donating more money while I'm younger but it will definitely go over the initial 4% target.
I also know that unless my stash is in absolute dire straits (imminent exhaustion), the boost that SS will give my spending, provided it hasn't increased, will be enough to stave off all but the worst scenarios. Suddenly having 50% of your spending come from a source outside of your portfolio will more or less save anyone, provided failure isn't already imminent. It might not recover a stash completely but it will extend the longevity by decades.
Edit: clarity
Wrong: http://blogs.wsj.com/experts/2016/02/02/why-the-conventional-wisdom-about-retirement-spending-is-wrong/ (http://blogs.wsj.com/experts/2016/02/02/why-the-conventional-wisdom-about-retirement-spending-is-wrong/)
- " For every $1 people spent at age 65, they were only spending about $0.80 at age 85 (adjusted for inflation) if the initial target retirement income level was $50,000."
eh? That article has nothing to do with my comment? I'm confused.
Perhaps you were referring to my comments about spending creep? If so, I was referring to intentional spending, prior to old age, like travel or charity giving in your 50's and early 60's before SS kicks in and people start hitting that age limit where they don't want to travel as much.
That article actually helps my case by showing people statistically spend less in old age. So couple SS as a new income source with a downward trend in spending and you have a serious prop for any portfolio that is in trouble but not yet in imminent danger of exhaustion.
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
People also use the 4% rule******** here..
*I can cut spending if markets are down
**HELOC
***Side income
****Owns a rental or highly appreciated property
*****ect
******ect2
I think these sorts of things makes it hard to get an answer about a SWR on this forum. Many people on here say they are "retired" yet they are willing to take loans (add risk) in times when their spending exceeds their WR, they are willing to go back to work part time for another income, deal with rental property for an income, etc. While others such as myself want to know the SWR for retiring and not having to work or earn another cent for the rest of my days and never having to worry about cutting my spending during market downturns. Both ways are entirely acceptable but unless the poster inquiring about the SWR specifies their idea of retirement, it is hard for them to get a reliable answer.
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I'm always amazed at the faith people put in SWR comments in a anonymous forum where the average age of the participants is probably between ages 20 to 40.
I guess this was my main point. I belong to another forum where the large majority of people are currently retired and their the general consensus is that 4% as a SWR is the maximum one should take and many aim for less. They've been there and done that so I'm inclined to believe those personal experiences versus what is said about the subject on this forum with a much much younger crowd and longer projected retirement time frames with little end point data. I would very much like to see some Mustachians who are 40+ years into retirement that had a WR of more than 4%. How many of wish they had saved more earlier so they didn't have to go back to work to supplement the shortfall?
People also use the 4% rule******** here..
*I can cut spending if markets are down
**HELOC
***Side income
****Owns a rental or highly appreciated property
*****ect
******ect2
I think these sorts of things makes it hard to get an answer about a SWR on this forum. Many people on here say they are "retired" yet they are willing to take loans (add risk) in times when their spending exceeds their WR, they are willing to go back to work part time for another income, deal with rental property for an income, etc. While others such as myself want to know the SWR for retiring and not having to work or earn another cent for the rest of my days and never having to worry about cutting my spending during market downturns. Both ways are entirely acceptable but unless the poster inquiring about the SWR specifies their idea of retirement, it is hard for them to get a reliable answer.
The younger you are the more flexible you need to be. If someone is 50, SS is "right around the corner" and counts as "a job" as far as income is concerned.
If you're FIRE @ 30 with a 0 tolerance plan for work or earning income, yea, you might have issues in certain circumstances.
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Some posts here seem to indicate the 4% SWR is too conservative. I am curious as to if anyone here is actually doing a 5% withdrawal rate or even higher, especially during the early years of FIRE ? I am thinking that this is actually OK especially if current expenses include mortgage and that chunk of expenses will be gone after the mortgage is paid off. Plus SS will also then kick in...
Would like to hear from you if you are doing a >4% WR !
We will start out at 6-7% WR for a few years when I retire later this year at 57. I expect our expenses to go down as three of our adult children move out, now that they're finished with college. It may take a few years for them to move out, but we can manage with a higher WR even with a poor market since SS will kick in for me in 13 years. Also, we're carrying a mortgage which will be paid off in 15 years unless we choose to accelerate it. Since our mortgage rate is 3.75% and we can still get the mortgage interest deduction after I retire due to this and other deductions, it makes sense to not accelerate the payments.
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I'll likely scale back to part-time once I'm between an 8 to 10% WR in the next 5 years (mid thirties). This is mainly because I can still make more than double my annual spend and my wife makes enough to cover expenses. Truth be told, I'll probably keep working for a while as the work is easy for me and the pay is high. I think this is the case for a lot of us on here. Many of us are highly paid professionals that spend relatively little so, barring a major recession, it's pretty easy for us to get jobs that cover expenses if the market doesn't do as well as we all hope. I'm aware that I am very lucky in this regard.
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People also use the 4% rule******** here..
*I can cut spending if markets are down
**HELOC
***Side income
****Owns a rental or highly appreciated property
*****ect
******ect2
I think these sorts of things makes it hard to get an answer about a SWR on this forum. Many people on here say they are "retired" yet they are willing to take loans (add risk) in times when their spending exceeds their WR, they are willing to go back to work part time for another income, deal with rental property for an income, etc. While others such as myself want to know the SWR for retiring and not having to work or earn another cent for the rest of my days and never having to worry about cutting my spending during market downturns. Both ways are entirely acceptable but unless the poster inquiring about the SWR specifies their idea of retirement, it is hard for them to get a reliable answer.
I think you're looking for certainty where there is none. The safe withdrawal rates are NOT guaranteed. They are just what has worked in the past. There's no way to truly know what will happen in the future. Which is why we talk as much about flexibility as we do actual withdrawals.
I'll also add that basically no one actually follows a strict withdrawal scenario, such as Trinity Study methodology. So while many people use 4% as a nice guideline, even those that think it's rock solid don't end up withdrawing exactly 4% every year. There's a number of posts here where people talk about in it actuality:
https://forum.mrmoneymustache.com/post-fire/fire-on-4/
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^^^^+1
If you want certainty you need to take an indexed annuity, but even then the issuer could go bankrupt, so no real guarantee there either
The 4% rule is just a probability based approach to retirement that says based on the past it would seem that your chances of spending in line with the strict rules implied by the 4% rule,and having your stash last 30 years, should be ok.
It's impossible to predict the future, and at some point if you want to stop work you are going to just have to say enough is enough and deal with the hand you are dealt from that day on.
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I think these sorts of things makes it hard to get an answer about a SWR on this forum. Many people on here say they are "retired" yet they are willing to take loans (add risk) in times when their spending exceeds their WR, they are willing to go back to work part time for another income, deal with rental property for an income, etc. While others such as myself want to know the SWR for retiring and not having to work or earn another cent for the rest of my days and never having to worry about cutting my spending during market downturns. Both ways are entirely acceptable but unless the poster inquiring about the SWR specifies their idea of retirement, it is hard for them to get a reliable answer.
I think you're looking for certainty where there is none. The safe withdrawal rates are NOT guaranteed. They are just what has worked in the past. There's no way to truly know what will happen in the future. Which is why we talk as much about flexibility as we do actual withdrawals.
I'll also add that basically no one actually follows a strict withdrawal scenario, such as Trinity Study methodology. So while many people use 4% as a nice guideline, even those that think it's rock solid don't end up withdrawing exactly 4% every year. There's a number of posts here where people talk about in it actuality:
https://forum.mrmoneymustache.com/post-fire/fire-on-4/
+2
Someone could elect to work until he had a 2% withdrawal rate and there could still be some future scenario where it's not enough. It is literally impossible. No matter what solution we came up with it could be defeated by economics somewhere. Stuff $2 million under your mattress? Inflation could still potentially cause a failure.
One of the things I notice about the makeup of this forum is that a high percentage of members are analytical, engineer-types that are used to the idea of working a problem for a certain solution. I'm in that boat. The only way to be certain on this would be to know the future, and even then I think most of us would prefer to not know the ending to their story decades (or maybe not) in advance.
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Someone could elect to work until he had a 2% withdrawal rate and there could still be some future scenario where it's not enough. It is literally impossible. No matter what solution we came up with it could be defeated by economics somewhere. Stuff $2 million under your mattress? Inflation could still potentially cause a failure.
One of the things I notice about the makeup of this forum is that a high percentage of members are analytical, engineer-types that are used to the idea of working a problem for a certain solution. I'm in that boat. The only way to be certain on this would be to know the future, and even then I think most of us would prefer to not know the ending to their story decades (or maybe not) in advance.
Thoughtful post. I'm FI, at current valuations will be just under 2% WR when I FIRE in just a few short months and agree with everything you say. I want the option of never having to work again (am heading to the Mediterranean to decompress and we'll go from there) but at the same time realise that a black swan event/s could turn that on it's head. The 2% WR just means it has to be a larger black swan/s than the 4% WR punter.
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We aren't retired from full-time work yet, but I suppose you could say that our plans include a WR higher than 4% -- but it's hard to pinpoint an exact %, due to several factors.
1) Anticipated stash at "retirement" (defined as quit the full-time work for spouse + me): about $1.35MM
2) Anticipated initial WR: $60-65K/ year. This is approx. 4.5-5%.
3) Both spouse and I have worked enough to receive SS. We are guesstimating SS annual payouts at age 70 at 20K + 24K apiece (guesstimating a reduced % payout for each of us -- I think it is likely underestimating).
Items 1-3 alone get us to around a 95% success rate.
4) Additional influx of $: spouse doesn't want to fully retire, plans on working part time (roughly 1/2 time) for another year or two. I need a little time off from the grind, but may return to a part time gig too. (Cue Internet Retirement Police.) We don't need this $, but this has been one of those items that helps get spouse into the FIRE mindset. She's not entirely convinced that we can really retire this early...
5) Additional influx of $: will sell facepunchy house in another 12-14 years, downsize, invest the excess. Expect around $500K in today's dollars from that. (It's facepunchy, but it's paid off.)
6) Additional influx of $: will likely receive some inheritance from my parents. Not sure how much exactly, as I don't like thinking about this and am not counting on it in any way, but it's probably $200-300K.
When I play with the calculators, items 1-3 + 5 suggest that we could push the initial WR up to 70-80K and have a high probability of success. However, due to the less-certain nature of #5 (amount + timing), I don't want to push it that much. So it's kind of hard to calculate what our real WR % is going to be, as we may not really know the initial WR until many years in the future, when we can look back at the beginning.
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Some posts here seem to indicate the 4% SWR is too conservative. I am curious as to if anyone here is actually doing a 5% withdrawal rate or even higher, especially during the early years of FIRE ? I am thinking that this is actually OK especially if current expenses include mortgage and that chunk of expenses will be gone after the mortgage is paid off. Plus SS will also then kick in...
Would like to hear from you if you are doing a >4% WR !
I'm FIRE and choosing not to pay off my mortgage because I have a sweet 2.9% rate with 6 years left to payoff and don't want to deplete my small pot of after-tax investments as most of my stache is in retirement accounts.
My plan is to live on a 4.5% SWR that is calculated based on my net liquid assets (investment portfolio assets minus mortgage debt balance). But if I look at it as an overall WR using my current annual withdrawals divided by my investment portfolio assets, it currently comes out to 5.7%.
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I started out close to 10% and am now at 5.38%. I posted about my 8% concept here: http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/ (http://velociraptor.cc/blog/2017/02/13/the-8-percent-safe-withdrawal-rate/)
This. 'Stache growth is real and can change things considerably as time goes on.
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Social Security does not have to go bankrupt and that's not what the 2034 depletion of the SS trust fund means. Presently, the SS trust fund (big pile of extra money over what's paid out) is dwindling because those paying in are lower in number and those taking out are getting bigger in number. On top of this, SS is broken. Why do I say this? When SS was first created, a man could retire on his full retirement age and his life expectancy at that point was 1 year. Now, if you retire at 67, your life expectancy is what? 20 years? So you see the problem. What happens in 2034? At that point, the trust fund (big pile of extra money) goes to zero and people taking money out are now paid only what's coming in. What's coming in? 75% of current benefits. Will that go on forever? Likely not, but it will probably not be quite as bad because someone in Congress with balls is going to put forward a bill to do something reasonable like start raising the retirement age and/or eliminating early retirement (most people start taking ss at 62) and/or removing or raising the cap on SS income.
On to the 4%. This came from the Trinity study that found that with a conservative portfolio, a sustainable withdrawal rate of 4% will keep payments coming for 30 years. Nobody remembers the 30 years and thinks "wooo hoooo, I'm 24 and can take 4% forever". Well, no. You can take 4% till you're 54 and then you got nothing.
How do you figure things out, then? A simple excel spreadsheet with everything coming in, everything going out and settable % increases in investments is how I do it. I set my % increase for every year as a prediction. I have my SS numbers in there with the 75% drop in 2034. Every year, I replace predicted numbers with real numbers. My travel number is my ace in the hole. If things start going downhill, I don't spend $15k a year on travel and bam....I'll do fine. I'm not a big believer in some simple %. That depends on market returns which currently are lower than they were when the Trinity study was done. Heck....when the study was started, I was getting 10% on a 6 month CD while I was in grad school.
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On top of this, SS is broken. Why do I say this? When SS was first created, a man could retire on his full retirement age and his life expectancy at that point was 1 year. Now, if you retire at 67, your life expectancy is what? 20 years? So you see the problem.
That sounds good, except for the fact that it's not really even close to reality. You're looking at TOTAL life expectancy, which is irrelevant because many people died in childhood. The difference in life expectancy after reaching SS payout age is only about 5 years longer now than it was back then.
https://www.ssa.gov/history/lifeexpect.html
On to the 4%. This came from the Trinity study that found that with a conservative portfolio, a sustainable withdrawal rate of 4% will keep payments coming for 30 years. Nobody remembers the 30 years and thinks "wooo hoooo, I'm 24 and can take 4% forever". Well, no. You can take 4% till you're 54 and then you got nothing.
That's true, as long as you ignore the 95% of outcomes that were more than zero. Did you know that the average amount left after 30 years is 2x the starting amount (real dollars), and the median is 1.5x the starting amount? Outcomes vary, which is why 4% is a worst case scenario number. Most of the time, 4% leaves you ridiculously wealthy and nowhere close to broke.
I'm not a big believer in some simple %. That depends on market returns which currently are lower than they were when the Trinity study was done. Heck....when the study was started, I was getting 10% on a 6 month CD while I was in grad school.
The Trinity Study looked at market returns over 130+ years. Are you claiming that current returns are worse than at anytime over the last 130+ years? If so, your calculator may be broken.
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Hey OP -
Darn those 30 year old millionaires and their flexible plans.
Especially darn them for not having withdrawal rate data since they were 10.
Here's an idea - let's ask some 50 year olds who took 20 years longer to accumulate the same amount of money the same question. Since they just retired, they also can't give you any withdrawal rate data but at least they are your own age - so you can trust them.
If you want decades of retirement data, ask an 80 year old. You could also ask "Math" and see what he says. Math can be a cold comfort though, he has no heart.
Your problem is not related to data and withdrawal rates. It is psychological. You don't "feel" like the 4% rule is enough certainty and don't trust the flexibility of all the variables. It's cool, you aren't the only one.
I'm being a little cheeky on purpose. Don't be offended, have a laugh :)
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I am actually in between 30 and 50 -- 42 to be exact. Planning to FIRE in May, with a 6.5% WR. I am actually OK with this as this includes mortgage. Excluding mortgage, the expenses are closer to 2.5%.
I can choose to pay off mortgage but at 3.75% interest rate, I rather keep it for tax deduction purpose. DH will still be working, with no plans to stop anytime soon. So, I guess the difference is that I do have a backup ....
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Withdrawal rates are actually a lot more complicated and interesting than the old 4% rule implies. Yes, a WR higher than 4% may be perfectly fine based on your specific portfolio and personal situation. Here are a few articles to explain how the math works and how you might approach retirement investing a bit differently. https://portfoliocharts.com/portfolio/retirement-income/
For very early retirees, pay particular attention to perpetual withdrawal rates (https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/).
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In the couple years before my retirement (it's been 10.5 months now) I shifted from being incredibly detailed about my spending/saving to not tracking or caring at all. Pretty sure I've been in the 5% ballpark this year, but other than checking once a month or so to make sure I have money in the appropriate accounts I haven't looked at all. Probably at the end of retirement year 1 I'll sit down some morning and see what I've spent.
My personal opinion is that the "4% rule" is about 95% B.S. There's reasons it's way to high, there's reasons it's way too low. It's a reasonable thing to keep in mind for planning, but for actual retirement living flexibility is king. I'm 33 years old and live a life where I could easily cut my expense by ~70% tomorrow. I can also be pretty sure that I could make 3 phone calls and get a job starting next week. If the stock market drops by 60% next week, I'll likely do some combination of those two things. My strong guess is that anyone dutifully following a 4% withdrawal rate is going panic and do something similar.
I don't think a 4% withdrawal rate gives me a 99% chance of not having to work again. If I had to guess I'd put it at closer to 80%. (That number is completely made up, but on the other hand, I have never read any study that I though took into account enough to honestly say that their numbers aren't also mostly made up)
I think there's a reasonable enough chance that I can go 60 more years without working that I quit my job. But I also think the only way I can be confident that I'll be fine is too have the flexibility to do whatever it takes to be fine.
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The difference in life expectancy after reaching SS payout age is only about 5 years longer now than it was back then.
I'm glad to see someone else pointing out the huge difference between life expectancy at birth and life expectancy at adulthood. While I came across a detailed CDC chart on various ages, your linked social security article covers the issue well. Infant mortality and maternal death during labor are both way down, but otherwise adults live about as long now as they did a century ago.
https://www.cdc.gov/nchs/data/hus/2010/022.pdf
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I think there's a reasonable enough chance that I can go 60 more years without working that I quit my job. But I also think the only way I can be confident that I'll be fine is too have the flexibility to do whatever it takes to be fine.
I think this is key whether ones uses 3% or 7%. The only thing that is certain is that if you never retire for fear of not being able to sustain a long comfortable retirement you will not have a long comfortable retirement.
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I am actually in between 30 and 50 -- 42 to be exact. Planning to FIRE in May, with a 6.5% WR. I am actually OK with this as this includes mortgage. Excluding mortgage, the expenses are closer to 2.5%.
I can choose to pay off mortgage but at 3.75% interest rate, I rather keep it for tax deduction purpose. DH will still be working, with no plans to stop anytime soon. So, I guess the difference is that I do have a backup ....
Wait, what.....your mortgage is 62% of your spending? If you have a short time left on your mortgage it makes sense I guess, but if you have 10+ years left then I would think the mortgage amount represents a sizable piece of your stash and the net stash after payoff wouldn't be 2.5%?
Curious about this, can you walk through the math/time?
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(https://c1.staticflickr.com/3/2555/32137492394_f092c80db8_c.jpg)
Maizeman put together these charts in another thread to put the %WR risk of going broke in perspective with the risk of dying. I believe the death stats are for a US male. These numbers don't include Gov't retirement benefits or any flexibility in spending - both of which would reduce the red "go broke" zone.
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Very cool graphics!
Tyler - if you are reading this, I would love for you to add this kind of a graphic to your toolbox for any desired portfolio asset allocation !
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Cool! I'll look into it.
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Let me know if there's anything I can do to help out!
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selfishly, I'd ask what it looks like if you retire at 45 yrs old
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selfishly, I'd ask what it looks like if you retire at 45 yrs old
(https://c1.staticflickr.com/4/3712/32600486490_6e61a470fb_b.jpg)
You selfish bastard! Ha! ;)
I asked a similar question and Maizeman kindly obliged with this graph ^^^. It's for a FIRE at 50yrs old with 4%WR. Note there is a silver of red "go broke" zone, but it's freaking tiny and this without factoring in SS/CPP/OAS, etc...
I'll be firing somewhere between 4% - 5% WR and I'll be downshifting at ~5.7%WR, but I'll let my 'stach keep growing without any WR until it's a bit lower. Missing out on free time at the prime of my life seems like more of a concern than going broke!
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selfishly, I'd ask what it looks like if you retire at 45 yrs old
(https://c1.staticflickr.com/4/3712/32600486490_6e61a470fb_b.jpg)
You selfish bastard! Ha! ;)
I asked a similar question and Maizeman kindly obliged with this graph ^^^. It's for a FIRE at 50yrs old with 4%WR. Note there is a silver of red "go broke" zone, but it's freaking tiny and this without factoring in SS/CPP/OAS, etc...
I'll be firing somewhere between 4% - 5% WR and I'll be downshifting at ~5.7%WR, but I'll let my 'stach keep growing without any WR until it's a bit lower. Missing out on free time at the prime of my life seems like more of a concern than going broke!
Amen.
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Sure can do 45. I'm afraid it looks an awful lot like the 50 though. ;-)
(https://i.imgpile.com/i/prH0N.png) (https://imgpile.com/i/prH0N)
Chances of going broke before dying are ~3.3% at a 4% withdrawal rate, ~9.4% at 4.5% WR and ~15.6% at 5% WR.
Things to know that mean my projections may not line up with the standard ones you might get out of a website like cfiresim: 1) I use monthly data on stock returns (shiller data) to calculate a lot more total scenarios. 2) that means I also calculate withdrawals on a monthly basis, not one lump sum per year 3) to calculate failure rates I use portfolio life expectancy, which I think provides a more accurate estimate of failure rates over extremely long retirements than looking at the number of failures out of all the time intervals that are as long as your estimate retirement in historical data (traditional Trinity approach).
(https://i1.imgpile.com/i/prywk.png) (https://imgpile.com/i/prywk)
My approach is the green line, the traditional approach is the blue line. Intuitively, failure rates shouldn't decrease as we go to longer retirement lengths, but the problem is that really bad years (like the mid 60s) start dropping out of your dataset once your retirement window gets long enough.
(Tyler, I think you recommend the perpetual withdrawal rate, which also does a much better job than the conventional Trinity method for extremely long retirements, right?)
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So, you guys are nerding out with your graphs and various data sets - and it is great. Are those available somewhere or do I have to ask you to make on for a 35 year old? :)
What I am understanding is that a 4% withdrawal rate (or even 5% or higher) is actually very conservative because it has failure rates that are very low and does not account for any external variables that can be avoided through proactive management by the owner of such a portfolio. For example, the owner of the portfolio can register for social security (full or diminished), modify withdrawals, earn income or diagnose a portfolio failure based on known risks (like sequencing of return risks). Assuming the manager of the portfolio is aware of these risks, they should have years (decades?) to react (with really easy fixes they might do anyway) and, hopefully, avoid the small group of scenarios leading to portfolio failure. Not to mention the "chances" are that you will end up rich compared to ending up broke even without taking any of those steps.
In summary, these withdrawal rates and their data are extremely conservative because they don't (and can not) account for active intervention. Is that the conclusion you all are making?
Really cool to have death quantified as a risk and presented on a graph, btw. It seems we all (or at least I) focus on the small sliver of red "failure rate" part of the graph rather than the big "death" section.
These kind of conversations make me see the actual power of saved and invested money. I never "feel" like I'm "rich." Math reminds me my "feelings" are stupid and that I am in fact "rich."
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So, you guys are nerding out with your graphs and various data sets - and it is great. Are those available somewhere or do I have to ask you to make on for a 35 year old? :)
Maizeman would have to generate that for you, but it's going to look nearly identical to the one we have already posted for a 30yr old FIREr.
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Intuitively, failure rates shouldn't decrease as we go to longer retirement lengths, but the problem is that really bad years (like the mid 60s) start dropping out of your dataset once your retirement window gets long enough.
(Tyler, I think you recommend the perpetual withdrawal rate, which also does a much better job than the conventional Trinity method for extremely long retirements, right?)
You'll probably find my most recent post (https://portfoliocharts.com/2017/03/21/how-to-predict-withdrawal-rates-without-a-crystal-ball/) interesting WRT the problem you note with the traditional failure rate calculation methodology.
I personally like the perpetual rate for very early retirees because it focuses on maintaining your inflation-adjusted principal rather than spending it down. Think of it as the point where the red completely disappears from your chart even over long timeframes. For reference, the long-term PWR for a 100% US stock portfolio is right around 3.5% which matches your charts pretty well.
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So, you guys are nerding out with your graphs and various data sets - and it is great. Are those available somewhere or do I have to ask you to make on for a 35 year old? :)
Maizeman would have to generate that for you, but it's going to look nearly identical to the one we have already posted for a 30yr old FIREr.
You are correct, request withdrawn. Don't know how I missed that!
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Intuitively, failure rates shouldn't decrease as we go to longer retirement lengths, but the problem is that really bad years (like the mid 60s) start dropping out of your dataset once your retirement window gets long enough.
(Tyler, I think you recommend the perpetual withdrawal rate, which also does a much better job than the conventional Trinity method for extremely long retirements, right?)
You'll probably find my most recent post (https://portfoliocharts.com/2017/03/21/how-to-predict-withdrawal-rates-without-a-crystal-ball/) interesting WRT the problem you note with the traditional failure rate calculation methodology.
I personally like the perpetual rate for very early retirees because it focuses on maintaining your inflation-adjusted principal rather than spending it down. Think of it as the point where the red completely disappears from your chart even over long timeframes. For reference, the long-term PWR for a 100% US stock portfolio is right around 3.5% which matches your charts pretty well.
Very cool. Yes, I think the solution you're describing and the one I'm describing are both attempting to address the same problem: there's an awful lot of useful information about how portfolios return in the time series return information from start dates that don't already have 30 years of history (or 50, or 75, or whatever length of time people are trying to calculate a SWR for). I'm not quite clear on the math being used for projecting SWR out past where historical data stops, but I can envision how it would be done.
Do you know if anyone has done any cross validation of the technique? (In other words if you train the mode with just historical data through 1990 or something, how well do the predictions match the observed changes in SWR for portfolios which didn't have 30 years of data by 1990).
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Do you know if anyone has done any cross validation of the technique? (In other words if you train the mode with just historical data through 1990 or something, how well do the predictions match the observed changes in SWR for portfolios which didn't have 30 years of data by 1990).
The simple 3-frame animation in the post offers snapshots of the trajectories from different historical reference points even while crossing a large market drop. Try eyeing the projections for various lines for yourself and watch as they unfold. The ultimate endpoint is certainly not set in stone, but IMHO it's reasonably predictable and a lot more realistic than just ignoring the issue. In any case, exploring that in more in depth to fine-tune the projection method is a good idea -- I'll add it to the to-do list.
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Intuitively, failure rates shouldn't decrease as we go to longer retirement lengths, but the problem is that really bad years (like the mid 60s) start dropping out of your dataset once your retirement window gets long enough.
(Tyler, I think you recommend the perpetual withdrawal rate, which also does a much better job than the conventional Trinity method for extremely long retirements, right?)
You'll probably find my most recent post (https://portfoliocharts.com/2017/03/21/how-to-predict-withdrawal-rates-without-a-crystal-ball/) interesting WRT the problem you note with the traditional failure rate calculation methodology.
I personally like the perpetual rate for very early retirees because it focuses on maintaining your inflation-adjusted principal rather than spending it down. Think of it as the point where the red completely disappears from your chart even over long timeframes. For reference, the long-term PWR for a 100% US stock portfolio is right around 3.5% which matches your charts pretty well.
The intuitive presentation of quite a lot of data in that new chart really is very nicely done. Thank you.
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I would probably do 5% once I am at a point where I receive public pension. It would basically just be discretionary income so I wouldn't have much to lose. Basically just fewer vacations and less fun money if my withdrawal rate got reduced. I would still eat and be comfortable off the pension. Worst case I drop it down to 2 or 3% if there is a big crash.
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Very cool. Yes, I think the solution you're describing and the one I'm describing are both attempting to address the same problem: there's an awful lot of useful information about how portfolios return in the time series return information from start dates that don't already have 30 years of history (or 50, or 75, or whatever length of time people are trying to calculate a SWR for). I'm not quite clear on the math being used for projecting SWR out past where historical data stops, but I can envision how it would be done.
This has always bothered me too. Put another way, if you have the 100 years of data from 1917-2016 and are looking at 30-year horizons, 1932 gets used only 16 times and 2008 gets used only nine times. Of course this applies to some of good years too.
I'd be interested in seeing Monte Carlo type analyses where you have the actual performance of stock/bond/whatever markets for each year, but the years are randomized. Now if you have 1932 followed by 1974 followed by 2001 followed by 2008 you probably end up with the next sequel in the Mad Max franchise. But now you've got a sample size on the order of 10^57 (100!/70!) 30-year sequences.
Alternatively, keep decades intact and randomize the decades. You can make a good argument that periods this long exhibit a consistent sentiment regarding valuations and political/economic/cultural landscape, so the market returns should be kept together. So 1930s-1970s-2000s gives you Mad Max and 1950s-1980s-1990s gives everyone a pile of $100 bills to roll around in in a sample size of 720 (10*9*8).
Then there's the childishly simple idea of just wrapping the years around with 1917 following 2016. Or run the years in reverse... boy do I got ideas.
Anyway, back to the original question. Started at 5-plus a few years back figuring I'd find a job after a few months off and the worst of the 2008-09 crash was over. I was right about the second thing but not the first thing, so I'm down to the low 4's and can get it below 4 with a few hacks. It's hard to send out resumes when the stock market pays you better than a job would.
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The problem I have with monte carlo sequences is that they remove the human element and humans inevitably drive the market. The possibility of having years like 1932 and 2008 is an extreme example of that but really I think the "averages" become skewed because a random simulation will end up with scenarios that simply wouldn't happen in real life. If anything, I view a monte carlo simulation as even safer than historical simulations because of this. If the monte carlo sim says you're alright then you're really alright.
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The problem I have with monte carlo sequences is that they remove the human element and humans inevitably drive the market. The possibility of having years like 1932 and 2008 is an extreme example of that but really I think the "averages" become skewed because a random simulation will end up with scenarios that simply wouldn't happen in real life. If anything, I view a monte carlo simulation as even safer than historical simulations because of this. If the monte carlo sim says you're alright then you're really alright.
I actually tested this once way back in the day. (https://forum.mrmoneymustache.com/journals/dances-with-error-bars-the-journal-of-mm/msg909186/#msg909186)
Essentially what I saw was that you get more extreme returns (lower worst case scenarios and higher best case scenarios) by using market data in the actual sequence they occurred rather than randomly shuffling the order of your datapoints.
(http://i.imgur.com/Z94Wc53.png)
Now that was on a "per month" basis, so maybe the effect wouldn't be as strong if you only shuffled data on a per year or per decade basis. But ever since, my view was been that monte carlo data tends to be a less stringent test than straight historical data.
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I actually tested this once way back in the day. (https://forum.mrmoneymustache.com/journals/dances-with-error-bars-the-journal-of-mm/msg909186/#msg909186)
Essentially what I saw was that you get more extreme returns (lower worst case scenarios and higher best case scenarios) by using market data in the actual sequence they occurred rather than randomly shuffling the order of your datapoints.
Interesting; thanks. Sounds like more evidence of the herd mentality in financial markets.
I was trying to say saying you'd be able to run billions of trials and shooting for two or three 9's success rate. If the ones that don't work are the ones that chain together 32-74-01-08, there's probably other stuff going on in the equivalent real world that makes 4% SWR failing the least of my problems. And in which case I'll be grateful to have spent the few years FIREing that I did. Or put more directly: In another Great Depression, who doesn't get screwed anyway?
Also that's why I suggested grouping decades together (they don't have to be strict 0-9 periods, of course). There's a reason we had three straight down years in 2000-01-02 when straight probability gives it a chance of 1/250 or so.
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I actually tested this once way back in the day. (https://forum.mrmoneymustache.com/journals/dances-with-error-bars-the-journal-of-mm/msg909186/#msg909186)
Essentially what I saw was that you get more extreme returns (lower worst case scenarios and higher best case scenarios) by using market data in the actual sequence they occurred rather than randomly shuffling the order of your datapoints.
(http://i.imgur.com/Z94Wc53.png)
Now that was on a "per month" basis, so maybe the effect wouldn't be as strong if you only shuffled data on a per year or per decade basis. But ever since, my view was been that monte carlo data tends to be a less stringent test than straight historical data.
You should read "The Misbehavior of Markets" by Benoit Mandelbrot (the fractal guy). He explains this exact phenomenon in detail. TL;DR -- you're absolutely right, and your example is not isolated.
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Thanks! Looks interesting from the amazon blurb. I'm putting that one on my reading list.
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What I am understanding is that a 4% withdrawal rate (or even 5% or higher) is actually very conservative because it has failure rates that are very low and does not account for any external variables that can be avoided through proactive management by the owner of such a portfolio. For example, the owner of the portfolio can register for social security (full or diminished), modify withdrawals, earn income or diagnose a portfolio failure based on known risks (like sequencing of return risks). Assuming the manager of the portfolio is aware of these risks, they should have years (decades?) to react (with really easy fixes they might do anyway) and, hopefully, avoid the small group of scenarios leading to portfolio failure. Not to mention the "chances" are that you will end up rich compared to ending up broke even without taking any of those steps.
In summary, these withdrawal rates and their data are extremely conservative because they don't (and can not) account for active intervention. Is that the conclusion you all are making?
Yeah, I think the 4% rule is useful as a ballpark estimate, but flexibility (i.e. your withdrawing algorithm) is probably a bigger factor.
Retiring on 4% barely covering living expenses and not wating to work EVER again... risky.
But if your barebones expenses are 3% and you have energy for a potential unFIRE, you can absolutely indulge in luxury experiences at 6% for a few years, which still has 50% success but in case of imminent failure you have plenty of room to adjust.
So 4% can be risky and 6% can be safe depending on your flexibility.
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What I am understanding is that a 4% withdrawal rate (or even 5% or higher) is actually very conservative because it has failure rates that are very low and does not account for any external variables that can be avoided through proactive management by the owner of such a portfolio. For example, the owner of the portfolio can register for social security (full or diminished), modify withdrawals, earn income or diagnose a portfolio failure based on known risks (like sequencing of return risks). Assuming the manager of the portfolio is aware of these risks, they should have years (decades?) to react (with really easy fixes they might do anyway) and, hopefully, avoid the small group of scenarios leading to portfolio failure. Not to mention the "chances" are that you will end up rich compared to ending up broke even without taking any of those steps.
In summary, these withdrawal rates and their data are extremely conservative because they don't (and can not) account for active intervention. Is that the conclusion you all are making?
Yeah, I think the 4% rule is useful as a ballpark estimate, but flexibility (i.e. your withdrawing algorithm) is probably a bigger factor.
Retiring on 4% barely covering living expenses and not wating to work EVER again... risky.
But if your barebones expenses are 3% and you have energy for a potential unFIRE, you can absolutely indulge in luxury experiences at 6% for a few years, which still has 50% success but in case of imminent failure you have plenty of room to adjust.
So 4% can be risky and 6% can be safe depending on your flexibility.
I think people retiring at 4% that are barely covering living expenses are doing mental gymnastics to say "4%". People in this situation are going to actually withdraw more than 4% (meaning they were never 4% in the first place)
Sent from my SM-G935T using Tapatalk
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I think people retiring at 4% that are barely covering living expenses are doing mental gymnastics to say "4%". People in this situation are going to actually withdraw more than 4% (meaning they were never 4% in the first place)
One way to look at it is this:
- say $40K/yr is your basic living expenses
- say an extra $5K/yr is your luxuries
- FIRE at $1M at 4%WR on basic living expenses
- most FIRE start years your portfolio will grow while you take $$ out
- so when you hit $1.125M reset the FIRE clock and start WR 4% of the new amount at $45K/yr
You take on a small risk that a bad sequence of returns outcome means your portfolio doesn't grow on it's own, but you can mitigate that a number of ways. If you are tired of working I don't think this is a crazy approach to take.
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I think people retiring at 4% that are barely covering living expenses are doing mental gymnastics to say "4%". People in this situation are going to actually withdraw more than 4% (meaning they were never 4% in the first place)
Exactly. This to me is the biggest flaw in the 4% rule. The real question is related to having a budget that is realistic. I state that we spend about $40k per year but we have 3 kids that we support right now and we've spent this amount for years. It's unlikely that we will go over this amount. I think we could cut costs if we had too and the kids were a little older.
This is one of the reasons why I have no problems with a 5% or even a touch higher WR.
You have to look at the whole picture rather than trying to play games with the 4% rule.
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These models assume that you can stomach the market drops and not panic sell. There's a lot riding on this money and a $200k drop in value from a $1m portfolio isnt easy for most people.
We've all been spoiled from this bull market, and if you sell on the way down and miss the recovery you'll never make that money back.
The higher your withdrawal rate the more important this is.
Sent from my iPhone using Tapatalk
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Withdrawal rates are actually a lot more complicated and interesting than the old 4% rule implies. Yes, a WR higher than 4% may be perfectly fine based on your specific portfolio and personal situation. Here are a few articles to explain how the math works and how you might approach retirement investing a bit differently. https://portfoliocharts.com/portfolio/retirement-income/
For very early retirees, pay particular attention to perpetual withdrawal rates (https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/).
I read a few of this guys articles, including this one https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/ (https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/). He is proposing that an allocation of 100% stocks, as well as 60% stocks 40% bonds are two of the worst allocations when trying to maximize SWR. Im not an expert on this, and it seems to contradict a lot of what I have gathered from this forum and others. Anybody care to help explain?
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I am a coward I plan on going 3-3.5% WR
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Withdrawal rates are actually a lot more complicated and interesting than the old 4% rule implies. Yes, a WR higher than 4% may be perfectly fine based on your specific portfolio and personal situation. Here are a few articles to explain how the math works and how you might approach retirement investing a bit differently. https://portfoliocharts.com/portfolio/retirement-income/
For very early retirees, pay particular attention to perpetual withdrawal rates (https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/).
I read a few of this guys articles, including this one https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/ (https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/). He is proposing that an allocation of 100% stocks, as well as 60% stocks 40% bonds are two of the worst allocations when trying to maximize SWR. Im not an expert on this, and it seems to contradict a lot of what I have gathered from this forum and others. Anybody care to help explain?
You don't have to talk like he isn't here. Tyler is that guy.
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Withdrawal rates are actually a lot more complicated and interesting than the old 4% rule implies. Yes, a WR higher than 4% may be perfectly fine based on your specific portfolio and personal situation. Here are a few articles to explain how the math works and how you might approach retirement investing a bit differently. https://portfoliocharts.com/portfolio/retirement-income/
For very early retirees, pay particular attention to perpetual withdrawal rates (https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/).
I read a few of this guys articles, including this one https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/ (https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/). He is proposing that an allocation of 100% stocks, as well as 60% stocks 40% bonds are two of the worst allocations when trying to maximize SWR. Im not an expert on this, and it seems to contradict a lot of what I have gathered from this forum and others. Anybody care to help explain?
You don't have to talk like he isn't here. Tyler is that guy.
Did not realize he was the author. Any help for a newbie @Tyler?
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You're looking at the "Safe WRs for a Variety of Lazy Portfolios" right? Essentially it looks like this is comparing just domestic US stock/bond portfolio to portfolios that also contain other asset classes. Because some of these asset classes are not correlated with the performance of stocks OR bonds in the dataset, that means these portfolios didn't drop nearly as much in bad years. Since the worst years define what the safe withdrawal rate of a given portfolio is, that means these portfolios have higher SWRs.
Some of the most common additional asset classes used in alternative portfolios are international/developing world stocks or bonds, and gold. Just to give you both sides, below is my attempt to summarize why these asset classes don't get used in a lot of "conventional" simulations.
I really wish we had better historical data on international stocks or bonds going back as far as the USA dataset (1870s-present). Unfortunately a lot of the international stock/bond data (whether country specific or global index) in the public sector doesn't go back far at all.*
Adding gold to backtested portfolios tends to increase the SWR substantially. However, a big driver of this is that in the middle of "stagflation" in the mid 1970s, when inflation was destroying the value of fixed rate bonds, and the stock market dropped like a rock and then stayed down for more than a decade, the USA also went off the Bretton Woods system (end of the gold standard, read up on the "Nixon shock"), and the price of an oz of gold shot from a fixed rate of $35/oz to $450/oz by the early 80s (not adjusting for inflation, which was admittedly substantial). Since we're not back on the gold standard, we cannot go off the gold standard again in a future economic crisis, so the question is whether gold prices would respond in a similar fashion to economic conditions like the 1970s in the future.**
So basically the amount of historical data for these asset classes is shorter and, arguably, may not be representative. Of course excluding things because they make our models messy runs the risk of turning into a spherical cow in a frictionless vacuum (https://en.wikipedia.org/wiki/Spherical_cow#Details). Either way, no easy answer.
*Typically not even to world war II, although I know there are much better datasets that go back further for the folks who do this for a living and subscribe to various financial databases.
**Reasonable people can disagree on this point.
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Did not realize he was the author. Any help for a newbie @Tyler?
Sure! :)
The short story is that the famous SWR studies that the 4% rule is based on assume there are only two investment options -- an S&P500 fund and an intermediate bond fund. I believe they generally do this because 1) there's lots of data to study, and 2) it's much easier to compute and analyze when you concentrate on only two options. But not all stocks and bonds are created equal, and I like computation challenges. The Portfolio Charts tools simply apply the same SWR calculation methodologies (https://portfoliocharts.com/withdrawal-rates-methodology/) that the old studies used to modern portfolio options.
More diverse portfolios that think beyond the S&P500 and intermediate bonds often have higher SWRs because they have similar returns with lower volatility. And volatility is more important in the drawdown phase (https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/) than people realize.
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One thing to think about for those of us that have a large % of funds in 401k or IRA and retiring later -
We are in our mid 50's. Most of our non-retirement funds went into real estate which is providing a big chunk of our retirement needs but this means we will be tapping our IRA's at 59 or 60.
Our withdrawal rate is less than 3% right now but once we start taking withdrawals we will be hit with much higher expenses since we will have significant taxes due. That's going to push us right up to the 4% range. At some point I will also hire a Property Manager for our rentals which will also add significant expenses affecting our withdrawal rate.
Our situation is probably different than many as we aren't really that mustachian but the point is that withdrawal rates aren't static.
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Sure can do 45. I'm afraid it looks an awful lot like the 50 though. ;-)
(https://i.imgpile.com/i/prH0N.png) (https://imgpile.com/i/prH0N)
Chances of going broke before dying are ~3.3% at a 4% withdrawal rate, ~9.4% at 4.5% WR and ~15.6% at 5% WR.
Things to know that mean my projections may not line up with the standard ones you might get out of a website like cfiresim: 1) I use monthly data on stock returns (shiller data) to calculate a lot more total scenarios. 2) that means I also calculate withdrawals on a monthly basis, not one lump sum per year 3) to calculate failure rates I use portfolio life expectancy, which I think provides a more accurate estimate of failure rates over extremely long retirements than looking at the number of failures out of all the time intervals that are as long as your estimate retirement in historical data (traditional Trinity approach).
(https://i1.imgpile.com/i/prywk.png) (https://imgpile.com/i/prywk)
My approach is the green line, the traditional approach is the blue line. Intuitively, failure rates shouldn't decrease as we go to longer retirement lengths, but the problem is that really bad years (like the mid 60s) start dropping out of your dataset once your retirement window gets long enough.
(Tyler, I think you recommend the perpetual withdrawal rate, which also does a much better job than the conventional Trinity method for extremely long retirements, right?)
So I mainly am just replying to this to see these cool graphs come up again....
Given I myself am around 45, considering a 5% SWR and don't really factor in SS often when thinking SWR of stache, I do immediately notice that the little red "broke" part is appearing and growing during the range of ages I could start taking SS, and getting big (though never very large percentage-wise) around the age of 70 when one can start taking the largest SS benefit. Like most mustachians who keep their expenses very low compared to income, SS benefits for me starting at 70 would (assuming no huge changes) cover a significant portion of my expenses. So even "broke" might not be that bad...
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5% WR is more than fine, especially if you choose a variable WR. Just lower the WR to 3.5%-4% if the market dips.
Nothin is guaranteed in life - I would consider jumping in at 5% withdrawal. For me the challenge is not the money, more of mental challenge adjusting to the new way of lifestyle, be it, better.
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I'm pretty sure most of us are going to feel like idiots for having any stache at all, so it's all going to feel like overkill. Why?
Universal Basic Income is coming sooner than we think.
I'd rather not live on $15,000 with a world of lazy fucks in a more/less communist society.
But hey, that's just me.
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Yay graphs! This thread was one of the best I've read in these forums. Thanks for all the extra effort you all put into making it awesome!
I am currently looking at pulling the plug when we're at a 5-6% WR so this thread has been really illuminating, but I'm 100% sure either my wife or I will end up working some part time jobs for fun (both of our hobbies are really easy to get paid a little to do). So we'll probably only end up withdrawing around 3-4% per year. Just means we'll have no problem whatsoever doing big travel plans when the market is up.
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Thanks nawhite! It's really nice to get to hear when these types up discussions end up being useful.
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This might sound crazy but we retired at just over a 9% SWR.
It has improved since though (mostly because of ~20% increase in our stash - enabled by a 6-month long campervan trip around Northern Australia where we bought the van for $17,750, and sold it at the exact same price at the end of the trip - making our 'accomodation expenses' for those 6 months go down to less than $2,000).
However, we didn't FIRE based on SWR's or Net Worth figures - we FIRE'd solely based on rental and investment income exceeding our expenses - so the second this happened we were ready to go, it never really mattered to us what our net worth was at the time.
Edit: Sorry forgot to add an important point - while we have US citizenship, we also have 3 other citizenships - all in first-world countries (including the EU) that give access to Universal Healthcare - this means that our rough 'budget' for healthcare is like under $1,000 a year. This is a huge benefit and pure luck basically.
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That being said, for people like myself looking to fire in their early 30s, SS is so far out it's hard to use it in any meaningful way.
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This is such an important point that often gets overlooked when people are projecting for retirement income.
Given we finished up in our late 20's, social security has always been so far out that we have never included it in our calculations. Honestly I would take my retirement savings out now at 10 cents on the dollar just to be able to have control over them rather than leave them locked up with the state for the next 50+ years before I can access them (Australia - forced retirement contributions ~9% and basically no way to access them before retirement age - it would be great if Aussie's had their own version of the 'back-door roth').
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I'm pretty sure most of us are going to feel like idiots for having any stache at all, so it's all going to feel like overkill. Why?
Universal Basic Income is coming sooner than we think.
Very Wrong
I think it depends where we're talking about - the U.S. is probably a long way off politically/socially.
Parts of Europe, Australia, NZ, Canada etc. - could be within a couple decades and they all basically have some form of it now with vast swathes of the population already receiving and entitled to various family/welfare payments.
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I'm pretty sure most of us are going to feel like idiots for having any stache at all, so it's all going to feel like overkill. Why?
Universal Basic Income is coming sooner than we think.
I'd rather not live on $15,000 with a world of lazy fucks in a more/less communist society.
But hey, that's just me.
Couldn't you just save/invest - like you already have - and live on more than $15,000?
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This might sound crazy but we retired at just over a 9% SWR.
It has improved since though (mostly because of ~20% increase in our stash - enabled by a 6-month long campervan trip around Northern Australia where we bought the van for $17,750, and sold it at the exact same price at the end of the trip - making our 'accomodation expenses' for those 6 months go down to less than $2,000).
However, we didn't FIRE based on SWR's or Net Worth figures - we FIRE'd solely based on rental and investment income exceeding our expenses - so the second this happened we were ready to go, it never really mattered to us what our net worth was at the time.
Edit: Sorry forgot to add an important point - while we have US citizenship, we also have 3 other citizenships - all in first-world countries (including the EU) that give access to Universal Healthcare - this means that our rough 'budget' for healthcare is like under $1,000 a year. This is a huge benefit and pure luck basically.
Just read your blog post , can you elaborate more on how you got to $700 passive income per month after only 72k net worth ? We are in Australia too and gearing up to travel full time hopefully in 2020.
I'm 42 and my DH is 50 so I'd want to leave tomorrow so any ideas on how to speed things up would be appreciated :)
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Just read your blog post , can you elaborate more on how you got to $700 passive income per month after only 72k net worth ? We are in Australia too and gearing up to travel full time hopefully in 2020.
I'm 42 and my DH is 50 so I'd want to leave tomorrow so any ideas on how to speed things up would be appreciated :)
Sure - though I think you meant to write $500 passive income rather than $700 - although that's beside the issue.
If you're not interested in property, or don't yet have enough of a deposit together to secure a loan, you can look into other high-yielding investments like P2P lending, dividend focused ETFs (YMAX, HVST etc.) or even just build as much as you can up in a high-interest savings account which in Australia can still yield around 3% which isn't terrible given the fact that they're (essentially) zero risk and fully liquid.
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We had properties that we bought at peak in 2007 that dropped in value by 50-60% AND required monthly top up , expensive repairs , tenant damage , etc . We finally sold them this year , the minute the values rose enough . We also had a business in 2008 that tanked due to GFC so we lost 150k there so yeah all that put us 10 years behind but it's all in the past .
Now we still travel ( some say too much) and plan to aggressively save by 2020.
We bought a house where we lived to do up and resell , but with lots of personal things going on , we decided to rent it out and just bought a smaller unit for ourselves . However with 100k tied up in equity it's still cash flow negative .
For our travels we plan just to save in 3% account and use that money up while super grows , ect
Was curios where you bought your property and other details to get such a good return .
You can PM me if you like .
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Was curios where you bought your property and other details to get such a good return .
You can PM me if you like .
We walked blindly into a niche without realising it - we had our properties on AirBnB early on while we were travelling, and when we wanted to stop with AirBnB (after the 2nd kid came through) we leased them out long term, but because they were already full-furnished from being on AirBnB we had all these people moving from interstate and overseas applying - and they're willing to pay a premium to walk into a place that is ready to go with everything from beds and linen to cutlery and pots and pans.
The other part of the niche is pets - we're animal lovers and my wife is a dog trainer, so we would never disqualify a potential tenant just for having pets - so we actively advertise that we welcome pets. This is another thing that a lot of people are willing to pay a premium for.
Most of our tenants so far have been either interstate/international or with pets - or both.
By the way, these are all 2 bedroom apartments with a car space in St Kilda, Melbourne.
You're right, considering we only put 20% down on each, the cash-on-cash returns are great.
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I'm pretty sure most of us are going to feel like idiots for having any stache at all, so it's all going to feel like overkill. Why?
Universal Basic Income is coming sooner than we think.
Very Wrong
I think it depends where we're talking about - the U.S. is probably a long way off politically/socially.
Parts of Europe, Australia, NZ, Canada etc. - could be within a couple decades and they all basically have some form of it now with vast swathes of the population already receiving and entitled to various family/welfare payments.
See Greece. Plus various pension implosions globally. And I bet it could only be financed through ASSET taxation.
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How about the Nordic countries, Germany etc.?
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Was curios where you bought your property and other details to get such a good return .
You can PM me if you like .
We walked blindly into a niche without realising it - we had our properties on AirBnB early on while we were travelling, and when we wanted to stop with AirBnB (after the 2nd kid came through) we leased them out long term, but because they were already full-furnished from being on AirBnB we had all these people moving from interstate and overseas applying - and they're willing to pay a premium to walk into a place that is ready to go with everything from beds and linen to cutlery and pots and pans.
The other part of the niche is pets - we're animal lovers and my wife is a dog trainer, so we would never disqualify a potential tenant just for having pets - so we actively advertise that we welcome pets. This is another thing that a lot of people are willing to pay a premium for.
Most of our tenants so far have been either interstate/international or with pets - or both.
By the way, these are all 2 bedroom apartments with a car space in St Kilda, Melbourne.
You're right, considering we only put 20% down on each, the cash-on-cash returns are great.
You are lucky ( to stumble to profitable niche), I realise you still saved money so I'm not saying it's all luck and not hard work :) thanks for clarifying . I talked to my husband and said if we want to be done by 2020 ( our plan) or latest 2021 we now have to be strategic of what we do.
How many properties do you own ? Do you also have shares or is it all rental income ?
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How many properties do you own ? Do you also have shares or is it all rental income ?
We've made use of high-yielding ETFs before several times, but right now it's mostly the 3 apartments and P2P lending, with a sprinkling of freelance, side-hustle etc income in there.
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I don't get the obsession with high dividends / yields / cash flow, since you can get similar or better total returns with growth stocks in the long term. Is it because you like the convenience of having regular cash deposits in your account? Or don't like selling stocks regularly? Diversification? Or you like paying more taxes? I don't get it.
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Was curios where you bought your property and other details to get such a good return .
You can PM me if you like .
We walked blindly into a niche without realising it - we had our properties on AirBnB early on while we were travelling, and when we wanted to stop with AirBnB (after the 2nd kid came through) we leased them out long term, but because they were already full-furnished from being on AirBnB we had all these people moving from interstate and overseas applying - and they're willing to pay a premium to walk into a place that is ready to go with everything from beds and linen to cutlery and pots and pans.
The other part of the niche is pets - we're animal lovers and my wife is a dog trainer, so we would never disqualify a potential tenant just for having pets - so we actively advertise that we welcome pets. This is another thing that a lot of people are willing to pay a premium for.
Most of our tenants so far have been either interstate/international or with pets - or both.
By the way, these are all 2 bedroom apartments with a car space in St Kilda, Melbourne.
You're right, considering we only put 20% down on each, the cash-on-cash returns are great.
No offence but something sounds off here to me. The yield on property in Australia is ridiculously low. I think it would be 2%-3% at best. The return comes from capital gains.
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No offence but something sounds off here to me. The yield on property in Australia is ridiculously low. I think it would be 2%-3% at best. The return comes from capital gains.
If you invest for capital growth, then yes, the gains might come from capital gains.
We don't do that however, we invest for income. All 3 of our properties were purchased for between $400-500,000 - with 20% deposits. They are currently renting for: $550, $550 and $675 per week.
Like I said apparently we walked blindly and luckily into a niche of people prepared to pay a significant premium for fully-furnished places that allow pets. We've had returns around this level for 4 years now.
Happy to answer any further questions you have steveo.
Edit: sorry the most expensive of the 3 was actually $475,000, not $500,000.
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It's still not making sense to me. A realistic yield would be something like 2% once you take into account additional costs of maintaining a unit. There would be strata fees and upkeep.
Then with 20% down you are paying 5% on your loan on the remaining 80%. It might be possible if you bought years ago and the property increased in value significantly.
With your proposed yield your properties would have to be worth close to $5 million. Assuming that you are being honest you'd be better off selling your properties, paying off your loans and investing the remaining money into index funds.
Anyway - I'm pretty confident that you aren't retired and doing a 5% or higher WR that is in any way shape or form sustainable. You just aren't working at the moment.
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It's still not making sense to me. A realistic yield would be something like 2% once you take into account additional costs of maintaining a unit. There would be strata fees and upkeep.
Then with 20% down you are paying 5% on your loan on the remaining 80%. It might be possible if you bought years ago and the property increased in value significantly.
We
With your proposed yield your properties would have to be worth close to $5 million. Assuming that you are being honest you'd be better off selling your properties, paying off your loans and investing the remaining money into index funds.
Anyway - I'm pretty confident that you aren't retired and doing a 5% or higher WR that is in any way shape or form sustainable. You just aren't working at the moment.
Steveo, not all rental markets in Oz are the same. We bought a 4 bed house in Brissy with a gross rental yield of 5.4% and net yield of more than 3.5%, even setting aside a little for long term, major
Repairs. We have had the place for about 4 years.
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It's still not making sense to me. A realistic yield would be something like 2% once you take into account additional costs of maintaining a unit. There would be strata fees and upkeep.
Then with 20% down you are paying 5% on your loan on the remaining 80%. It might be possible if you bought years ago and the property increased in value significantly.
We
With your proposed yield your properties would have to be worth close to $5 million. Assuming that you are being honest you'd be better off selling your properties, paying off your loans and investing the remaining money into index funds.
Anyway - I'm pretty confident that you aren't retired and doing a 5% or higher WR that is in any way shape or form sustainable. You just aren't working at the moment.
Steveo, not all rental markets in Oz are the same. We bought a 4 bed house in Brissy with a gross rental yield of 5.4% and net yield of more than 3.5%, even setting aside a little for long term, major
Repairs. We have had the place for about 4 years.
Maybe but you'd be extremely hard pressed to get a net yield that is anywhere near the mortgage rate anywhere in Australia. If you are borrowing 80% I don't see how you can get that to work out when it comes to somehow funding your retirement off the rental yield. You'd be extremely lucky not to be out of pocket. Rent - mortgage payment - repairs - holding costs would tend to be negative.
Something smells real funny in that story. Add to that selling a blog and you get the picture.
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Something smells real funny in that story. Add to that selling a blog and you get the picture.
All the apartments were purchased after the recent wave or price rises (unfortunately).
You can see by the purchase prices and rental returns that I posted above what the returns are - they're yeilding far higher than 2%...
Cheers and best of luck mate!
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Then with 20% down you are paying 5% on your loan on the remaining 80%. It might be possible if you bought years ago and the property increased in value significantly.
Also sorry forgot to add - the loans are currently at 3.66%, 3.67% and 3.84% - so averaging around 25% cheaper than the rate you mention there.
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Tremendously useful thread. Loving the graphs! Thanks.
I see they are based on 100% stocks and understand that a fixed asset allocation is required for comparison of SWRs. But is 100% stocks common within this forum? I have recently moved into DIY investing and have set up our $1M in investable assets in 80% stocks / 20% bonds, which is unfortunately a source of contention as my husband would like to see a higher % in bonds. He is 53 and I am 45, 2 youngsters and a paid off house. Goal is to FIRE in 7 years with $1.8M CDN.
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There are arguments that 100% stocks will give you the highest return over very long periods, but it will be more volatile than a split portfolio.
Most will say the safer bet is to slowly transfer a higher percentage into bonds as you and your husband age, to lower the volatility.
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There are arguments that 100% stocks will give you the highest return over very long periods, but it will be more volatile than a split portfolio.
Most will say the safer bet is to slowly transfer a higher percentage into bonds as you and your husband age, to lower the volatility.
You need the bonds at the start to mitigate a poor sequence of returns risk. Once your are through that phase of retirement you need more stocks to mitigate the risk of high inflation. So I would do the exact opposite of what you are suggesting.
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Yup. Really one of these days I need to redo the death and bankruptcy chart with a reverse glide path asset allocation strategy. (FIRE with a significant percentage in bonds and then move towards a higher and higher stock market allocation over time).
@Blissful, I don't think 100% stocks is uncommon on this forum, but certainly lots of folks also have a small to moderate proportion of their assets in bonds. I just picked one asset allocation strategy that seems reasonable and kept using it so that at least all the different charts would be based on the same underlying assumptions.
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You need the bonds at the start to mitigate a poor sequence of returns risk. Once your are through that phase of retirement you need more stocks to mitigate the risk of high inflation. So I would do the exact opposite of what you are suggesting.
Good point - you're seeing my lack of experience with stocks given we're mostly real-estate and alternative investors :-)
Does this apply though also before FIRE? The OP is not FIRE'd yet from what I can tell.
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Does this apply though also before FIRE? The OP is not FIRE'd yet from what I can tell.
Before FIRE you are trying to grow your portfolio quickly so I would be heavy stocks. I plan to only buy my bonds as I am getting ready to FIRE since they serve me no purpose until I am going to pull my money out to live on. I don't need to tame the volatility in my investments when I am just buying and holding.
You can make the argument what happens if there is a big market crash just before I buy those bonds and FIRE? Well whether the crash happens the day before or the day after I buy the bonds I personally don't see myself stopping work into a serious financial crisis. I'd keep working through the crisis and the FIRE when markets recover even if I had the bonds sitting in my investment account.
If you were more worried about such an occurrence you could start buying your bonds earlier.
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Does this apply though also before FIRE? The OP is not FIRE'd yet from what I can tell.
Before FIRE you are trying to grow your portfolio quickly so I would be heavy stocks. I plan to only buy my bonds as I am getting ready to FIRE since they serve me no purpose until I am going to pull my money out to live on. I don't need to tame the volatility in my investments when I am just buying and holding.
You can make the argument what happens if there is a big market crash just before I buy those bonds and FIRE? Well whether the crash happens the day before or the day after I buy the bonds I personally don't see myself stopping work into a serious financial crisis. I'd keep working through the crisis and the FIRE when markets recover even if I had the bonds sitting in my investment account.
If you were more worried about such an occurrence you could start buying your bonds earlier.
There is a good argument for the apex of your bond weightage in your portfolio should be the day you FIRE.
So... if you're 10 years from FIRE, have no bonds, maybe increase it by 2% per year until the year your FIRE, then reduce it 2% per year for the first 10 years of FIRE.
This allows you to mitigate sequence of returns risk and somewhat mitigate a big shit the day before you FIRE.
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This allows you to mitigate sequence of returns risk and somewhat mitigate a big shit the day before you FIRE.
If you have to FIRE on a very specific day then I agree get your bonds in place so that a market crash is not an issue when that day rolls around. Personally I'm not constrained by FIREing on an exact date and even if I had my bonds in place I would not FIRE into the teeth of a severe market crash. I'd keep working and investing until the market recovered coming out in a better position financially and with my mental health intact! ;)
I wouldn't start buying bonds 10yrs out if your purpose is to mitigate a sequence of returns risk on the day you want to FIRE though. That's way too early if that's your goal with your bond allocation.
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This allows you to mitigate sequence of returns risk and somewhat mitigate a big shit the day before you FIRE.
If you have to FIRE on a very specific day then I agree get your bonds in place so that a market crash is not an issue when that day rolls around. Personally I'm not constrained by FIREing on an exact date and even if I had my bonds in place I would not FIRE into the teeth of a severe market crash. I'd keep working and investing until the market recovered coming out in a better position financially and with my mental health intact! ;)
I wouldn't start buying bonds 10yrs out if your purpose is to mitigate a sequence of returns risk on the day you want to FIRE though. That's way too early if that's your goal with your bond allocation.
I guess it depends how you feel about your job security in the event of a recession/ market crash etc.
if you are comfortable that you'll keep your job then I agree that there is little point in being overly conservative with investments pre fire.
Personally, I will just build up a pool of cash over the last 6 months pre-Fire.
I definitely agree that for a normal retirement on a set date then a more conservative approach makes sense. Still, investing in lower returning bonds 10 years ahead of retire,met seems quite bearish.
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You can make the argument what happens if there is a big market crash just before I buy those bonds and FIRE? Well whether the crash happens the day before or the day after I buy the bonds I personally don't see myself stopping work into a serious financial crisis. I'd keep working through the crisis and the FIRE when markets recover even if I had the bonds sitting in my investment account.
I'm cash heavy right now and would use a market crash (or even a nice dip) as a buying opportunity for stocks. Otherwise, I've been saying the same thing to people - depending on my investments and what happens in the market, my 2 to 4 year plan could be delayed as I wouldn't want to FIRE in a bear market, but it all depends, how long, how much, etc.
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I guess it depends how you feel about your job security in the event of a recession/ market crash etc.
if you are comfortable that you'll keep your job then I agree that there is little point in being overly conservative with investments pre fire.
I do contract work that can end at a moment's notice. I hold no EF and no bonds. Being somewhat close to FIRE I have a huge investment account relative to my minimal spending needs. I am also a useful person to have around so I have little fear I could not find work ahead of 75% of the other people in my town should push come to shove. Might not be my dream job, but as long as I am not pulling $$ out of my investments that's fine.
A market crash in the near future would be speed bump on my way to FIRE and whatever hassle it might entail would be worth it coming out the other side and being able to FIRE into the recovery phase.
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You can make the argument what happens if there is a big market crash just before I buy those bonds and FIRE? Well whether the crash happens the day before or the day after I buy the bonds I personally don't see myself stopping work into a serious financial crisis. I'd keep working through the crisis and the FIRE when markets recover even if I had the bonds sitting in my investment account.
I'm cash heavy right now and would use a market crash (or even a nice dip) as a buying opportunity for stocks. Otherwise, I've been saying the same thing to people - depending on my investments and what happens in the market, my 2 to 4 year plan could be delayed as I wouldn't want to FIRE in a bear market, but it all depends, how long, how much, etc.
Right as a bear market starts to recover is the best time to FIRE because it's statistically the least likely to have another big drop in the first few years. I think I would be most comfortable FIREing in a bear market if I hit my "walk away" numbers at that point.
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You can make the argument what happens if there is a big market crash just before I buy those bonds and FIRE? Well whether the crash happens the day before or the day after I buy the bonds I personally don't see myself stopping work into a serious financial crisis. I'd keep working through the crisis and the FIRE when markets recover even if I had the bonds sitting in my investment account.
I'm cash heavy right now and would use a market crash (or even a nice dip) as a buying opportunity for stocks. Otherwise, I've been saying the same thing to people - depending on my investments and what happens in the market, my 2 to 4 year plan could be delayed as I wouldn't want to FIRE in a bear market, but it all depends, how long, how much, etc.
Right as a bear market starts to recover is the best time to FIRE because it's statistically the least likely to have another big drop in the first few years. I think I would be most comfortable FIREing in a bear market if I hit my "walk away" numbers at that point.
Who knows when that time is....
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Just pointing out the math. I certainly wouldn't wait on a bear market if I was ready.
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Does this apply though also before FIRE? The OP is not FIRE'd yet from what I can tell.
Before FIRE you are trying to grow your portfolio quickly so I would be heavy stocks. I plan to only buy my bonds as I am getting ready to FIRE since they serve me no purpose until I am going to pull my money out to live on. I don't need to tame the volatility in my investments when I am just buying and holding.
You can make the argument what happens if there is a big market crash just before I buy those bonds and FIRE? Well whether the crash happens the day before or the day after I buy the bonds I personally don't see myself stopping work into a serious financial crisis. I'd keep working through the crisis and the FIRE when markets recover even if I had the bonds sitting in my investment account.
If you were more worried about such an occurrence you could start buying your bonds earlier.
This works great as long as the market is well behaved before and as you buy bonds. You probably want to start buying bonds before you need them in case the market tanks just before you happen to FIRE. It will slow your progress a little, but not as much as waiting for the market to come back. The allocation is up to you. A 60/40 long term stock/bond is more aggressive than many. JLCollins plans on 75/25, but I bet he has a cushion.
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This works great as long as the market is well behaved before and as you buy bonds. You probably want to start buying bonds before you need them in case the market tanks just before you happen to FIRE. It will slow your progress a little, but not as much as waiting for the market to come back. The allocation is up to you. A 60/40 long term stock/bond is more aggressive than many. JLCollins plans on 75/25, but I bet he has a cushion.
It doesn't matter to me if the market crashes just before I was going to buy bonds or if it crashes right after I do. I am not FIREing into the teeth of a crash with or without bonds. I'll just keep working through the crash and FIRE once my investments have recovered.
I also won't be going as high as 25% - 40% bonds. In fact I am not even looking at it that way. I plan to buy enough bonds to get me through 3 years or normal spending or say 5 years of reduced spending. So that might be $120K of bonds. I have no plans to rebalance the bonds to maintain that allocation. Either I'll spend them during a market crash or I'll just let my stocks out run the bonds so they become a smaller and smaller % of my overall portfolio.
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I also won't be going as high as 25% - 40% bonds. In fact I am not even looking at it that way. I plan to buy enough bonds to get me through 3 years or normal spending or say 5 years of reduced spending.
So 12% bonds? :)
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So 12% bonds? :)
I can't tell you the % since I don't know what my FIRE $$ value will be and I don't know how big a cushion exactly I will want when the day comes to buy the bonds. I would also prefer not to refer to the value of the bonds as a % since I am buying a fixed amount that I don't intend to be maintained as a % of the overall account.
I think a range of $100K to $150K is pretty likely given the likely amounts I'll have invested at the time.
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Retire-Canada - do you therefore intend to utilize a rising equity glide path. So spend your bonds at the start and not replace them.
I was thinking of doing something similar to this but I think I will try and hold my bond component and only utilise it in market downturns so I avoid selling my stock portfolio.
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Retire-Canada - do you therefore intend to utilize a rising equity glide path. So spend your bonds at the start and not replace them.
I was thinking of doing something similar to this but I think I will try and hold my bond component and only utilise it in market downturns so I avoid selling my stock portfolio.
I would hold onto the bonds like you are planning on as long as market returns outrun my withdrawals. If/when a crash occurs I'll spend them. I'll keep the amount of bonds fixed [at the mercy of interest and price changes] with no plans to rebalance or replenish them once spent.
I will write out some sort of investment plan around my bonds before I FIRE. At the moment I'm just gathering the rough strokes of a plan and considering my options.
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I like that approach. I like having some bonds in my portfolio but I see them as you do as being my safety net and mainly for the first 10 years. There is no way though that I would hold 10 years worth of bonds.
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There is no way though that I would hold 10 years worth of bonds.
Agreed. I figure 3 years full spend and say 5 years reduced spend should be enough to get me through a crash. I'm fine with some part-time work so that can easily stretch out quite a ways.
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Retire-Canada - do you therefore intend to utilize a rising equity glide path. So spend your bonds at the start and not replace them.
I was thinking of doing something similar to this but I think I will try and hold my bond component and only utilise it in market downturns so I avoid selling my stock portfolio.
I would hold onto the bonds like you are planning on as long as market returns outrun my withdrawals. If/when a crash occurs I'll spend them. I'll keep the amount of bonds fixed [at the mercy of interest and price changes] with no plans to rebalance or replenish them once spent.
I will write out some sort of investment plan around my bonds before I FIRE. At the moment I'm just gathering the rough strokes of a plan and considering my options.
When your withdrawal strategy is planned*, let me know, I have some code to backtest it historically, so we can see if it's really superior to constant allocation or just some psychological peace-of-mind feel-good placebo BS :)
*It can be arbitrarily complex but only depend on market returns, stash amount, inflation, and only include bonds and US stocks.
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Retire-Canada - do you therefore intend to utilize a rising equity glide path. So spend your bonds at the start and not replace them.
I was thinking of doing something similar to this but I think I will try and hold my bond component and only utilise it in market downturns so I avoid selling my stock portfolio.
I would hold onto the bonds like you are planning on as long as market returns outrun my withdrawals. If/when a crash occurs I'll spend them. I'll keep the amount of bonds fixed [at the mercy of interest and price changes] with no plans to rebalance or replenish them once spent.
I will write out some sort of investment plan around my bonds before I FIRE. At the moment I'm just gathering the rough strokes of a plan and considering my options.
When your withdrawal strategy is planned*, let me know, I have some code to backtest it historically, so we can see if it's really superior to constant allocation or just some psychological peace-of-mind feel-good placebo BS :)
*It can be arbitrarily complex but only depend on market returns, stash amount, inflation, and only include bonds and US stocks.
I don't think my approach is going to be the best approach based on historical data. I think it's more likely to be a feel good placebo.
My approach will be difficult to code up as well because I have the following factors involved in my plan:-
1. 2 years no drawdowns - I will receive 6 months full time pay which I intend to last me 2 years without touching my stash.
2. Post point 1 I'll have 11 years until access Super (I'm Australian and we have a retirement fund which you cannot access until 60). I intend to have 400k-500k saved up. You could code 400k.
3. Super from 60 onwards but that is already at 300k and will grow up until retirement and then up until I reach 60.
4. From 67 onwards we should be able to receive a pension for all our living expenses.
Basically my only possible failure point will be up until point 3. If we make it to 60 we will have more than enough money post that point. I estimate my expenses at 30k -50k per year.
I do have backup options when it comes to getting to point 3. I could go back to work. I could get another job. I could sell my house and downsize.
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When your withdrawal strategy is planned*, let me know, I have some code to backtest it historically, so we can see if it's really superior to constant allocation or just some psychological peace-of-mind feel-good placebo BS :)
*It can be arbitrarily complex but only depend on market returns, stash amount, inflation, and only include bonds and US stocks.
(https://farm5.staticflickr.com/4423/36057423050_b1e741b523_z.jpg)
So I ran some cFIREsim numbers results in table above. Comparing fixed stock/bond allocations to a sliding allocation where I went to 100% stocks in the first 10yrs. Ignore the third column over that says "fixed" I meant to delete that. The sliding allocation always produces lower success rates in cFIREsim.
If you want to simulate some withdrawal strategies you could try:
- $1M and $800K stash with $40K WRs [4% & 5%]
- $120K bonds for $1M & $100K for $800K
- any year where portfolio return is negative take $4K from bonds/-1% of the return up to -10%+ where you'll be at the full $40K
- if portfolio is equal or greater than starting value ignore the bond rule above in a year with negative returns
- don't rebalance, when bonds are gone let them run out and go 100% stocks
I'm open to other ways to implement. Just throwing some ideas to get the ball rolling.
Like Steveo my situation is more complicated and I have a number of government benefits kicking in 10 & 15yrs in plus done the mortgage after 15yrs assuming we don't buy another house. So getting through that first 15yrs is key.
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My glide-path situation is straightforward, but I haven't back-tested it. If you're so inclined gerardc you can probably simulate it the easiest:
Starting with a portfolio of $1M and $475000 in VTI, $275000 in VEU and $250000 in BND. Withdrawal of $36k/yr (fixed).
(copying from my IPS)
- To implement a rising equity glide-path of investments
- this means starting with VTI/VEU/BND of 47.5%/27.5%/25%
- reducing the bond allocation by 2% (1% to each VTI and VEU) a year for the first 10 years
- the final breakdown after 10 years will be 57.5/37.5/5
I don't have any government benefits besides social security eventually and I'll be re-balancing twice a year (on my birthday and 6 months after my birthday) but only the birthday re-balance will move the allocation to more stocks.
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dividendman: I don't have VEU historical data, only US stock and bond.
For basic linearly increasing stock allocations, you can look at this post (https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/msg1634628/#msg1634628).
Retire-Canada, steveo: I'll set a bookmark to implement this when I have a minute.
We should do a "withdrawal strategy contest", that you could submit and I'd backtest, see which one would win :D
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dividendman: I don't have VEU historical data, only US stock and bond.
For basic linearly increasing stock allocations, you can look at this post (https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/msg1634628/#msg1634628).
Retire-Canada, steveo: I'll set a bookmark to implement this when I have a minute.
We should do a "withdrawal strategy contest", that you could submit and I'd backtest, see which one would win :D
We should have a comp but on the flip side I'm not sure if I want to know because I don't think my approach will be optimum. I think the best approach would probably be 100% stocks. I don't feel comfortable though with 100% stocks.
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We should have a comp but on the flip side I'm not sure if I want to know because I don't think my approach will be optimum. I think the best approach would probably be 100% stocks. I don't feel comfortable though with 100% stocks.
Being in denial does not solve the problem though :P
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We should have a comp but on the flip side I'm not sure if I want to know because I don't think my approach will be optimum. I think the best approach would probably be 100% stocks. I don't feel comfortable though with 100% stocks.
Being in denial does not solve the problem though :P
It'd be good to see the analysis. I don't think it'd change my decision though. I've picked an asset allocation and an approach and I'm cool with it. I like having some bonds to smooth the road out a bit.
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I have run some additional cFIREsim simulations using my personal data [Gov't benefits] and try the fixed vs. sliding equity options. I get a 1% increase going from 80/20 stocks/bonds to 100/0 over the first ~10yrs. So that's like 95.3% to 96.3%. It's small difference so I am not claiming any major victory and it requires a higher % of bonds than I was planning on and a continual slide from 80/20 to 100/0 regardless of market conditions.
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I am 60 yrs old and planning on 5% WDR from a 100% equity portfolio. I use cFIREsim with a 6% maximum WDR if the market tanks and a 4% minimum if the market starts going up. 3% WDR covers all expenses (including health care until my wife and I are 65) which gives me a 2% buffer. Plus I can always start SS early if the market crashes. I also plan on keeping 1yrs living expenses in cash/ST bonds+ a HELOC for another years expenses (I don't count the cash or home equity in my portfolio). Naturally I never run out of money because I am taking a percentage of my yearly balance. However, cFIREsim shows my annual withdrawals could drop as far as 66% from my initial withdrawal. As long as the bear market lasts less than 5 years , I can keep a reasonable lifestyle. Not a 100% chance, but good enough for me.
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These models assume that you can stomach the market drops and not panic sell. There's a lot riding on this money and a $200k drop in value from a $1m portfolio isnt easy for most people.
We've all been spoiled from this bull market, and if you sell on the way down and miss the recovery you'll never make that money back.
The higher your withdrawal rate the more important this is.
Only a 20% drop? Meh.
I've been investing since 1990, so I've been through a couple of true market crashes, 100% in stocks.
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If I tell cfiresim I plan to be flexible on withdrawals and that I own some property, it wants me to start at a nearly 8% SWR. I delete the property entry but it still thinks 5% is a good idea for 40 years.
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These models assume that you can stomach the market drops and not panic sell. There's a lot riding on this money and a $200k drop in value from a $1m portfolio isnt easy for most people.
We've all been spoiled from this bull market, and if you sell on the way down and miss the recovery you'll never make that money back.
The higher your withdrawal rate the more important this is.
Only a 20% drop? Meh.
I've been investing since 1990, so I've been through a couple of true market crashes, 100% in stocks.
I'm with TomTX, I've been 100% stocks since the mid 80's so I've seen crashes in 1987, 2001, 2008. 5% WR with a 100% Equity allocation is the way to go.
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I've been 100% stocks since the mid 80's so I've seen crashes in 1987, 2001, 2008. 5% WR with a 100% Equity allocation is the way to go.
I agree with staying with equities. Keep in mind that the Trinity study was based on a mix of stocks and bonds, so it was somewhat conservative. Historically, bonds have returned less than stocks. As has already been pointed out, the bonds mitigate market fluctuations and risk. If you can stomach the risk of bear markets, your asset allocation should be more aggressive in search of higher returns.
I will probably only be at or above 5% during the next 12 months. I FIRE in just 10 days, and will be spending lots of money to make the house how I want it. After that is complete, my spending will drop to 4% or less. 100% stocks and mutual funds. In my case, bear market risk is mitigated with a military pension, beginning next month.
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I've been 100% stocks since the mid 80's so I've seen crashes in 1987, 2001, 2008. 5% WR with a 100% Equity allocation is the way to go.
I agree with staying with equities. Keep in mind that the Trinity study was based on a mix of stocks and bonds, so it was somewhat conservative. Historically, bonds have returned less than stocks. As has already been pointed out, the bonds mitigate market fluctuations and risk. If you can stomach the risk of bear markets, your asset allocation should be more aggressive in search of higher returns.
I will probably only be at or above 5% during the next 12 months. I FIRE in just 10 days, and will be spending lots of money to make the house how I want it. After that is complete, my spending will drop to 4% or less. 100% stocks and mutual funds. In my case, bear market risk is mitigated with a military pension, beginning next month.
The Trinity Study was updated (https://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) to include a range of AAs, including 100% stocks.
You've never seen this chart before?
(http://resource.fpanet.org/resource/FDBBDD81-1D09-67A1-AC763874BA782A88/Cooley-Table-3.jpg)
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Something is fishy when the 20 and 25 year periods at a certain WR are zeroed, yet the 30 has residual cash.
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That is indeed fishy.
Maybe there was a bad sequence of returns that started 26-29 years ago? (So it could be included in the 25 year interval dataset but not the 30 year dataset.)
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Something is fishy when the 20 and 25 year periods at a certain WR are zeroed, yet the 30 has residual cash.
These are median numbers, so it's entirely possible.
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(http://resource.fpanet.org/resource/FDBB93B6-1D09-67A1-AC372ACFA85F761B/Cooley-Table-2.jpg)
I like this chart better from that article.
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Thanks. This table is interesting and comforting. I am planning a 4%WR with a 75/25 portfolio which the table gives a 100% chance of success. Hooray! The table only goes up to 30 years, and I am planning for a 45 year retirement but I do not expect that would make a substantial difference to the results.
Our current portfolio is 80/20 but we are down 5% ($50K) in the last 5 months and it is causing my DH distress. I think I'll take it up to 75/25 for his sake and then hold the line, forwarding him every article I see about the wisdom of the simple buy and hold philosophy.
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Our current portfolio is 80/20 but we are down 5% ($50K) in the last 5 months and it is causing my DH distress.
The key is not to look at the total unless you need to. Especially if you know it's likely to cause distress.
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Thanks. This table is interesting and comforting. I am planning a 4%WR with a 75/25 portfolio which the table gives a 100% chance of success. Hooray! The table only goes up to 30 years, and I am planning for a 45 year retirement but I do not expect that would make a substantial difference to the results.
Our current portfolio is 80/20 but we are down 5% ($50K) in the last 5 months and it is causing my DH distress. I think I'll take it up to 75/25 for his sake and then hold the line, forwarding him every article I see about the wisdom of the simple buy and hold philosophy.
Having everyone on board is important.
IIRC, the "peak" for success was something like 90% stocks/10% bonds - but it's all pretty flat in the 75%-100% stocks range.
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Thanks for posting the updated charts. They further confirm that 100% equities is the place for me. Especially the one with the dollar values. Compare the 30 year all equity portfolio to the same length of time with 25% bonds. It's a significant difference.
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I happened upon the Success Rate chart a couple of weeks ago (gocurrycracker's blog I think) and found it enlightening. I have particular interest in the shorter time frames represented because I have responsibility for managing my mother's finances. I'm estimating a 15 year horizon that her funds need to last (based on actuarial tables + family history)
This is a really informative thread. Thanks for the effort some of you guys put into it.