I have been reading that a 4% swr is old school and does not work in todays environment. Has anyone lived through the great recession withdrawing 4% and how is your savings holding out?
My spouse and I ER'd in June 2002, just when the tech wreck was getting really interesting, and then rode our asset allocation through the Great Recession.
It's exciting when your anticipated 4% SWR means that your actual withdrawal spikes up to 6% in 2008 and then to nearly 8% in 2009, and you haven't even done anything to your portfolio... just watched it melt away like a shave ice on a hot sidewalk. By the middle of 2009, even though the markets were beginning to recover, it was all too easy to believe the doom & gloom.
Except that we had a few confidence-building tools on our side: a military pension is an inflation-adjusted annuity, and we knew that we could cut our spending if we needed to. We also had a 90% equity asset allocation (which turned out to be very volatile) with two years' spending in cash, so we were able to ride out the first two years without cashing in any of those equities. Then the value of that portfolio came roaring back.
It turns out that we were "simply" tracing one of the portfolio values that's a member of the 95% success rate, not the 5% failures. It's just what FIRECalc and FinancialEngines.com predicted for us in 2002. We might've been near the outside of the envelope, but we were still within the success rate. Lots of other investors were probably still within the envelope, too, but they panicked at the bottom and cashed out-- then sat on the sidelines as the markets recovered. That's definitely failure territory.
Raddr's hapless Y2K investor retired at the peak of the markets and blithely kept up his 4% SWR, boosting his spending every year for inflation. These days he's spending so much of his portfolio each year that it may not be able to recover during this bull market (however long it lasts), so he's probably going to be one of the 5% failures. In Raddr's world he goes bankrupt and ends eating at the soup kitchen while sleeping under a highway overpass. In the real world? He'd probably have cut his spending to the bone, found cheaper housing, taken a part-time job, and decided to live on his Social Security at age 62.
Wade Pfau was one of the first to show that the 4% SWR is a bad idea when asset valuations are very high (like 2000 and 2007). However he's also one of the first to show how humans overcome the weaknesses of the 4% SWR with some common sense-- annuitizing a portion of our portfolio (longevity insurance, even if it's just Social Security), cutting spending during recessions (even if it's just for a year or two) and having a different asset allocation than the original Bengen & Trinity Study models that led to the 4% SWR (spending the cash first).
What probably saved our own portfolio was retiring at the pit of the first bear market (30 months after Raddr's Y2K robot). Valuations were pretty low when we ER'd so our portfolio rose dramatically during the next five years and was able to absorb the shock of 2008-09. (It's recovered all of its value since then, despite some aggressive spending on home improvement.) We also kept a high-equity portfolio (because the rest of it was annuitized) yet we were spending cash during the worst of the recession instead of cashing in those equities.
The "problem" with the 4% SWR is that computer models don't adequately reflect how we humans really spend our assets. Wade Pfau is probably going to be among the first to figure out how to build a better model, and it'll still look a lot like the original 4% SWR with some defenses to use during a recession.
Here's more explanations & links:
http://the-military-guide.com/2011/11/16/is-the-4-withdrawal-rate-really-safe/http://financialmentor.com/free-articles/retirement-planning/how-much-to-retire/are-safe-withdrawal-rates-really-safeGuyton has a model that allows a higher SWR than the original 4% model, although Guyton's spending rules are pretty darn complicated so I'm not even going to get into them here. Bob Clyatt (of "Work Less, Live More") built a model that cuts back spending by 5% during recessions, and that's enough to get past most of the failures. Others have noted that almost all retiree spending declines with age, which has been true for us even after just 12 years. It could be simply that it declines with age because old retirees run out of money, but it appears to be a combination of declining mobility (no more backpacking in Himalayan hostels) and having spent one's ER optimizing their spending with their values. It could also reflect that ERs have the time to seek out the real bargains (even if it's just frequent flyer mileage arbitrage) and no longer need a lot of money to live the lives they choose.
So here's the reality: when you hit your portfolio value for your 4% SWR, then 95% of the time you're going to have more money than you need. You insure against the other 5% by annuitizing some of that portfolio (even if it's just SS) and then using common sense during recessions.
Another reality of being human is that your ER budget is going to turn out to be overly
conservative generous. You won't cut back your lifestyle, but you'll find a lot of discounts & bargains. Your ER is also going to facilitate the discovery of some passion that you're going to turn into a paying hobby. When I ER'd I didn't predict that I'd be installing a photovoltaic system that paid for itself in just six years, or buying a cheap Prius and slashing my driving miles, or spending lots of time surfing cheap longboards and doing my own home
entertainment improvement, or pulling in the big blogger bucks.
And if you're one of those ERs who enjoys landlording or who built a diversified portfolio of dividend-paying equities... then you're absolutely going to have more income than you need. One of the ERs from Early-Retirement.org, ClifP, saw his dividend stock income cut by only 10% during the entire Great Recession despite the headline carnage. A few of his equities cut their dividends by far more than that, but his portfolio is diversified.
Besides the flexibility being advocated here, which is definitely advisable, I like Nords' strategy of having a fixed income to cover your most basic living expenses (geez Nord, can you get any more shout-outs on this forum lately??!). That way if the shit hits the fan, you at least won't be worrying about the basics. Agreed that if you're on a pretty bare-bones budget it could be difficult to find places to cut, so having some safe income in a long retirement can be good for your portfolio and peace of mind.
I don't think I've ever heard anyone on this site advocate taking a constant 4% SWR like a drone, regardless of circumstances. So take that 4% SWR with a grain of salt.
Besides the flexibility being advocated here, which is definitely advisable, I like Nords' strategy of having a fixed income to cover your most basic living expenses
Pfau also recommends annuitizing a basic income level.
As Arebelspy points out, a lot of my game plan turns out to have come from Pfau's playbook. I've had plenty of time to read everybody else's playbooks, too, and add them to our game plan. After 12 years I guess survivor bias is working in my favor...
As for that bare-bones budget, I agree that there won't be much room to cut-- but it might be enough. It also won't take much part-time employment to cover any gaps. You can get to a $30K budget by cutting $20K of spending from your $50K budget, or by adding $5K of employment to your $25K income. But it would really suck to have to get back to your $50K budget by adding $25K of employment to your $25K income.