I think Wade is getting more conservative because the recent market performance has made him and his colleagues less confident in their original numbers. They now see that sequence of returns can have a major impact and it appears that their original assumptions about yields may have been overly optimistic. Because so many people have paper-only portfolios and rely on the research to decide what their acceptable withdrawal rate will be, these folks decided to redo their research and publish their findings.
Application of the SWR is easiest to follow with paper assets. The procedure most often suggested is to take the SWR the first year and increase the dollar amount of withdrawals every year by the rate of inflation. If you have a $1M portfolio, the first year you withdraw $40,000 if you rely on the 4% SWR. If inflation is 2 percent that year, the next year you withdraw $40,800. If inflation is 3 percent in that year, you withdraw $42,024 the following year, and so on.
If you have a $1M portfolio, earn $50,000 in dividends and withdraw $40,000, what's your withdrawal rate? 4 percent, leaving you with $1,010,000. You don't withdraw 4 percent of the portfolio the next year, you withdraw $40,000 plus the inflation percentage of that $40,000. You withdraw the $40,800, not the $40,400 that is 4 percent of the year-end portfolio. If the portfolio earns $20,000 in net dividends and declines by 20 percent over the first year, you still withdraw the $40,800 the second year. Oops, you are now over 5 percent. A few bad years (sequence of returns) will put you in a tailspin. If you can't supplement this paper portfolio with earned income or some other source of income, you had better cut your spending dramatically.
I don't agree that dividends and rental income equal a 0 percent SWR. The SWR is used to take a snapshot. You multiply the initial value of the portfolio, whatever comprises that portfolio, by the selected SWR to get your first year's spendable income from that portfolio. However, spending only the net dividend and rental income insures you do not decumulate and that every piece of a business or real estate asset that was there for you on Day 1 is producing income for you until you sell it. Spend LESS than that, and you will be able to buy more pieces of businesses and real estate assets to insure you have a prosperous retirement and you won't be holding your breath waiting for the next round of SWR research.
MMM relies on earned income and "withdrawal" of the net income from his rental property. If he reinvested all of the net rental income and relied only on earned income, his withdrawal rate would be zero. Not decumulating and allowing the stash to grow (even adding to it when rent plus earnings exceed expenses) is the key to his success.
Make sense?