4% withdrawal rate

[nastle]

So I think it’s assumed now that 4% rate is outdated
what’s the new safe withdrawal rate ? 3% ?
Does it depend on the size of your portfolio?

e.g a person a with 1 million and person b with 500k
both with 3% withdrawal rate will have very different lifestyle

does this rate assume past returns in market ?
How much does a average portfolio ( let’s say 70/30 bonds stock) of a retiree is expected to grow per yr to allow a 3% withdrawal rate ?

thanks

[Nysoz]

No one knows nothing.

But yeah the trinity study showed 4% is safe for 30 years looking at worst case scenarios.

The safe withdrawal rate shows you how much you should save up with an expected spend in retirement. So if you’re calculating to spend $20k a year then $500k should be ok. Spending $40k a year then saving $1M should be ok.

There isn’t much consensus about what the new swr should be, but there seems to be agreement that flexible spending should make things last longer in times of trouble. In that case, a bigger FI target just provides additional cushion to spend less during those troubled times than the smaller one.

One can argue this time it’s different or not with monetary policy/political environment and such but I’m calculating 3% swr with flexible spending if needed to be on the safe side.

[Larry Ragman]

I agree, no consensus, but the Early Retirement Now blog has been grappling with this issue methodically for some years. He has a series that is worth reading if you can devote a few hours. https://earlyretirementnow.com/safe-...l-rate-series/

TL;DR - 4% fine for traditional retirement and you can spend more some years if you are flexible enough to spend less in down markets; consider a conservative asset allocation for 3-5 years around retirement date. For early retirees, modeling suggests 3.5% and a higher proportion of equities in the AA.

[Dewangski1]

You can play with simulators across different withdrawal rates, AAs, and durations to see how everything works out for you. I think a site is called something like “portfoliovisualuzer.com”

I think biggest challenge for withdrawals is sequence of return risk. This is where the flexibility stated above comes in. 4%, even 5%, works in decent times, but not when bad times hit, and even worse if the bad times are at the beginning of the withdrawal years. This is where 4% fails. So if you can plan for wiggle room in your withdrawals, taking less in bad times, then 4% can still work. Importantly, this is why many, myself included, advocate for some kind of bucket strategy blended in for emergency and risk mitigation.

[Hatton]

WCI and POF have both written articles on the 4% rule. Basically it holds up for the great depression and the high inflation of the 70s. Would it hold up for weimar republic type inflation? I think not. You should know that it was designed to cover a standard retirement. Working until 60-65 and living no more than 30 years on the nest egg. The allocation is 50% government bonds and 50% stocks. ERNs series is great. Sequence of returns can bite you early in retirement. What to do? Having a cash bucket helps. Oversaving helps. Working a few extra years all help.

[Tangler]

I agree, no consensus, but the Early Retirement Now blog has been grappling with this issue methodically for some years. He has a series that is worth reading if you can devote a few hours. https://earlyretirementnow.com/safe-...l-rate-series/

TL;DR - 4% fine for traditional retirement and you can spend more some years if you are flexible enough to spend less in down markets; consider a conservative asset allocation for 3-5 years around retirement date. For early retirees, modeling suggests 3.5% and a higher proportion of equities in the AA.

Perfect post!

Big ERN is the man for this.

His series is perfect if you want a deep dive.

I heard him on the choose FI podcast and he said basically (my interpretation):

4% is risky

3.5% is all but guaranteed

Flexibility and intelligent adaptation are essential components of early retirement.

My opinion: when you can live off 3% you are basically working for fun.

You will die with $. Probably a lot.

[Kennyt7]

SORR and Longevity and high healthcare are the major risks in ret.
C. Benz from Morningstar says the SWR now is 3.3%
Times are much different now because of rates so low
The past results were based on Treasuries yielding around 5%

[Larry Ragman]

SORR and Longevity and high healthcare are the major risks in ret.
C. Benz from Morningstar says the SWR now is 3.3%
Times are much different now because of rates so low
The past results were based on Treasuries yielding around 5%

Re long term interest rates, not quite right. The Trinity Study covered the 20th century. Long.term rates were under 5% for most of the time - through 1965 or so anyway. And for long periods rates were actually rising slowly. Key point is that the study back tested in 30 year periods with many different underlying economic conditions.

[Lordosis]

4% gives a nice Target for early to mid-career people to shoot for. When I get to 25 times my spending then I can look and reevaluate the numbers. It's still a ways off so a lot can change in the next decade or so. You'll have to truly evaluate your spending and see what you are accounting for and what you are not accounting for. You need to figure out which of your spending is flexible and which are fixed. Don't forget to include periodic things like purchase of a new car or major home repair. Having a firm spending number is just as important as selecting it withdrawal rate and asset allocation.

I figure when I get to that 25 times I won't just immediately pull the trigger even if the math works out. Knowing myself I would like some buffer and even with a flexible plan I will probably have a lower than 4% withdrawal rate. However I don't think it's absolutely necessary if you're willing to be flexible.

I hear about this bucket strategy all the time. I guess it makes sense to spend from cash if there's a big market downturn which can help prevent issues with SORR. If the market drops precipitously you can spend from cash rather than sell your stocks low. But the questions I have is when do you know when to use the cash? What if the market drops more and it would have been better to save that cash for later. Or if it is down for a prolonged period of time. Or if it only drops 10 or 15% and stays there for a while and doesn't trigger you to use your cash? Seems to be you have to know the future a little bit in order for the strategy to work well.

Also having a few years spending in cash during 90% of the time would really be quite the drag. I wonder if it is really worth it in the end?

For most of the people here it doesn't really matter because everybody's going to be well past FI and cash will just be extra insurance so you can sleep at night.

[StarTrekDoc]

If you have 3-5 years cash buffer, SORR is largely mitigated.

If greater depression occurs, a lot of planned retirement spending probably will occur naturally too at most of our level of spend...just look at your spend now vs 2019.

We plan all this by setting the FI goalposts. Lean, regular, fat. Which essentially tracks 2.5-4% rates.

[Hatton]

If you have 3-5 years cash buffer, SORR is largely mitigated.

If greater depression occurs, a lot of planned retirement spending probably will occur naturally too at most of our level of spend...just look at your spend now vs 2019.

We plan all this by setting the FI goalposts. Lean, regular, fat. Which essentially tracks 2.5-4% rates.

I really agree that the cash bucket is for SORR mitigation. I can speak to the psychology of cash in retirement. When you have no more earned income I think it would be easy to panic and make poor decisions. I found that in the COVID downturn the fact that I knew I had about 500K in cash allowed me to view it as an opportunity rather than panic. I recognized that this could be the start of a bad sequence for a new retiree like myself. I tax loss harvested and actually bought some stock. The cash allowed me to do this. I lost 1.3 million in 3 weeks during this time. Of course it came back nicely. The cash and bond positions allow you to sleep and occasionally be opportunistic.

[okayplayer]

I really agree that the cash bucket is for SORR mitigation. I can speak to the psychology of cash in retirement. When you have no more earned income I think it would be easy to panic and make poor decisions. I found that in the COVID downturn the fact that I knew I had about 500K in cash allowed me to view it as an opportunity rather than panic. I recognized that this could be the start of a bad sequence for a new retiree like myself. I tax loss harvested and actually bought some stock. The cash allowed me to do this. I lost 1.3 million in 3 weeks during this time. Of course it came back nicely. The cash and bond positions allow you to sleep and occasionally be opportunistic.

Hatton, does the drag of cash on your returns (say during the past 9mo) bother you at all? Or does the cash portion of your portfolio represent a small enough portion of your overall portfolio that it is negligible?

Even the paltry yield of VTSAX is 1.2%, so I imagine that decreases your need for cash somewhat.

[Tangler]

Hatton is my hamster.

She is the test animal.

I am hoping for her success and learning from her journey!

[Hatton]

Hatton, does the drag of cash on your returns (say during the past 9mo) bother you at all? Or does the cash portion of your portfolio represent a small enough portion of your overall portfolio that it is negligible?

Even the paltry yield of VTSAX is 1.2%, so I imagine that decreases your need for cash somewhat.

No when I was accumulating I kept no cash. My portfolio is doing great. I have been letting cash accumulate and not rebalancing into bonds.

[Rad498]

NO ONE knows what swr is for the future because that would require knowing future returns.

But 4% is reasonable as long as you have some room for adjustment if things aren’t going well. Its worked well through the worst of the worst times.

Remember that most of these studies don’t take into account the odds of dying which lowers the probability of you running out of money. As if everyone is guaranteed a 30-40 yr retirement.

As a physician, you can keep your medical license active, practice part time or do a bit of locums which can be a backup in the unlikely case of you running into money troubles if your very risk averse.