simple Q about safe withdrawal

[jsmoove123]

Been reading about safe withdrawal rates in retirement, with the 4% number thrown around a lot.

Can someone explain to me why this is the right amount? This seems like you'd be able to live indefinitely at the 4% spending rate. Does anybody ever do the calculation that allows you to whittle down your huge 25x retirement fund?

[VagabondMD]

Here is the truth about the safe withdrawal rate. There may be simple questions, but there are no simple answers, and even the term "safe withdrawal rate" is misleading.

Some of the best analysis that I have read is this ongoing 15 part blog series on Early Retirement Now: https://earlyretirementnow.com/2017/05/24/the-ultimate-guide-to-safe-withdrawal-rates-part-15-sequence-of-return-risk-part2/

After reading some of the later articles, I am convinced that it is foolhardy to attempt to maximize income solely from a big pot of money for a long period of time. Instead, it is more advantageous to develop revenue streams and or accept a lower SWR.

[CM]

I agree with Vagabond about the earlyretirementnow series.

You might also look at two previous threads on this site: "Your Safe Withdrawal Rate Is Not Safe," and "The 4% Rule Is Not Safe for FIRE."

[jsmoove123]

Wow, I've only had a chance to read a couple of articles in that series, but I am now thoroughly frightened of the SRR monster. semi-rhetorical question: How and why should one expect to develop additional revenue streams in "retirement"? The future sounds so bleak.

[ENT Doc]

jsmoove123 wrote:

Wow, I’ve only had a chance to read a couple of articles in that series, but I am now thoroughly frightened of the SRR monster. semi-rhetorical question: How and why should one expect to develop additional revenue streams in “retirement”? The future sounds so bleak.

Click to expand...

Pension (they exist), real estate, private business investments, etc.  Read more about passive income opportunities.  Why does the future sound bleak?

[Hatton]

As WCI would say the 4% rule would of worked through the depression, 2 world wars, and stagflation.  The jury is still out on 2008 and 2000 sequence issues. I read some of ERNs postings.  My take on this which is from reading about this issue exhaustively for 10-15 years is 4% is ok if you are retiring at 65.  If you retire 55-65 maybe 3.5% and 3% if under 55.  Everyone reading this will in fact have a social security pension which will defray some costs.  Other income streams are great if you have them.  I also agree that one should not invest in "high income" investments as they retire.  Junk bonds and high dividend stocks have significant risks that many people do not recognize.  I have invested in these in the past but as I near retirement I derisked my portfolio.  I read lots of doom and gloom about the 4% rule.  It is different this time because of low bond yields and high PEs and of course the CAPE ratio.  Only the passage of time will tell but I think it likely will hold up.  If it worries you then you need to over save or develop an alternate income stream or just keep working and reevaluating.

[PhysicianOnFIRE]

Ditto on the ERN SWR series recomendation.

For more fun, try the FIRECALC simulator. For fun, I entered initial spending of $100,000, nest egg of $3,000,000, and 50 year retirement. Here are the results:

"Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

FIRECalc looked at the 97 possible 50 year periods in the available data, starting with a portfolio of $3,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 97 cycles. The lowest and highest portfolio balance at the end of your retirement was $-1,328,128 to $59,770,745, with an average at the end of $15,900,425. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 2 cycles failed, for a success rate of 97.9%."

Will it turn out to be correct? That's the $16 million dollar question.

Cheers!

-PoF

[VagabondMD]

Excellent (and timely for this thread) uptake to the ERN series today.

https://earlyretirementnow.com/2017/06/07/the-ultimate-guide-to-safe-withdrawal-rates-part-16-early-retirement-in-a-low-return-world/

SWR of 3.5% is the new magic number.

[Arkad]

I anticipate staying under 3% to be both safe and also to provide for help with tuitions for grandchildren. One thing to keep in mind is that you can also adjust your expenses if needed. I would rather make an adjustment and live on less if needed than work 5 more years just so I may not need to adjust. My feeling is that if you can live on 160k per year, you could probably make it on 120 as well.

[ITEngineer]

Tell me when and how you will die and I can tell you how to die with close to $0.  

In the 'low interest rate' world, I do not understand why people would rather have 5% interest rates and 7% inflation than 1% interest rates and 2% inflation. People forget (or weren't alive) when Nixon froze prices b/c inflation was above 4%. Before the 70's, inflation and interest rates were historically low (though not this low)

[Peds]

dont forget, these were created as a guide post for an imperfect and impossible to guess future situation because everyone wants to be told: how much can I spend!?

also dont forget, the original trinity study found that spending 4% indexed to inflation with a 50:50 portfolio (corporates) lasted 96% of the time based on historical data for a 30 year retirement.

most ppl dont have this exact situation, but its a starting point. nothing more.

[The White Coat Investor]

ITEngineer wrote:

Tell me when and how you will die and I can tell you how to die with close to $0.

Click to expand...

I don't need that information. You want to spend the maximum guaranteed amount possible? Buy a SPIA.

https://www.whitecoatinvestor.com/spia-the-good-annuity/

More info on where 4% comes from:

https://www.whitecoatinvestor.com/the-4-rule-safe-withdrawal-rates/

One of the earliest posts on this blog.