What is generally referred to as the 4% SWR assumes that a person starts with a withdrawal of 4% of the principal balance, then increases the withdrawal each year by the rate of inflation. Based on different equity versus fixed allocations, the data for the past 100 or so years shows the survival rates for such a plan. My question is whether anyone has studied the data to see what the survival rates would be for similar asset allocations where 4% of total principal is withdrawn each year, without fixed adjustments for inflation. Since the portfolio balance would rise and fall in relation to stock/bond performance in any given year, this could result in there being some years where the withdrawal amount would be less than the previous year. By the same token, it could be more...up and down over time. I'm curious whether the survival rates for the straight 4% withdrawal are better or worse than the inflation adjusted method. Does anyone know of any studies on this issue? I'm just curious to see whether a straight 4% does better or worse based on any 30 or 40-year period over the past 100 years or so, similar to the studies done on the inflation adjusted method. Thanks.
You might want to look at this Wade Pfau article:http://advisorperspectives.com/dshort/guest/Wade-Phau-121215...Actually I had a difficult time finding the original study. But here are some by others that may help:https://corporate.morningstar.com/us/documents/ResearchPaper...http://www.fpanet.org/journal/CurrentIssue/TableofContents/A...Intercst may have the best simplified method for doing this.BobRYR Home Fool
There are probably four dozen different studies on the 4% SWR in various iterations online.I'd not trust any of them today.The latest studies on the SRW suggest that 4% will be too much in the future. Some are suggesting 2.5-3%. Safe is relative - especially when based on a Monte Carlo estimate. No one knows what the stock or bond market will do over the next 25-30 years.This is one from just a few days ago:http://www.kitces.com/blog/archives/480-Safe-Withdrawal-Rate...
Mathematically, taking out 4% of of the principal balance as of the beginning of each year will last forever. You can never deplete it from withdrawals.The only way you could deplete the entire balance is by putting it all in a single investment that suffers a complete loss.--Peter
Oops - forgot a point.While it will theoretically last forever, if you don't average 4% earnings on the money, your withdrawals will eventually get pretty small.The difficulty testing your approach is that you need to specify some dollar threshold for the withdrawals where you consider the withdrawal plan to have failed.Where you set that threshold will have a significant impact on the probability of failure.--Peter
Ok, I see the error. You could withdraw 99% each year and still never run out, but you would quickly get to the point where you couldn't afford a speck of dust. I guess that answers my question to some extent.
As others have indicated, this method has some practical problems.Instead of being more-or-less constant like a paycheck, your withdrawal amounts will bounce all around. Your Jan 2009 draw would have been about half of your Jan 2008 draw. And Jan 2010 would be about 1 1/2 times your Jan 2009 draw.It's pretty hard to handle a budget when your income jumps around that much.
ResNullius Two points - #1 The idea that you can withdraw 4.0% safely is at best an approximation. I dare say less than 2% of people know the criterion for the SWR in any study.#2 You have impressed me as somebody who can read and understand. Spend the $65 for this book and read it. http://www.amazon.com/Conserving-Client-Portfolios-During-Re...I have been through this book in detail - found only one number that I could not calculate from data provided. Data appears correct. While Bengen may not have been the creator or the 4% SWR concept, I was not able to find anybody who wrote about this earlier. Google will find a lot of his early work, but this book is the most complete. Personally, after studying this book, I reached two conclusions. First stock returns for the next 10 years will be a bit less than the historic averages (bond will be worse). And 4% carried more risk that I was willing to accept - for me the magic value is 3.9% or less.GordonAtlanta
ResNullius asks,I'm curious whether the survival rates for the straight 4% withdrawal are better or worse than the inflation adjusted method.It would be safer than the inflation-adjusted method since you'd be taking out less money during those periods of big stock market declines like 1929-1933, and periods of high inflation like the late 1970's- early 1980's. Of course, your annual withdrawal would fluctuate quite a bit, so the "straight 4%" would only work for someone with a lot of fat in their retirement budget that could be trimmed in the lean years.intercst
Even if you can't make it on 4% in bear markets it would encourage you to trim expenses instead of blindly raising your withdrawal every year. I went through that in the last two recessions. There's a certain amount I had to take to make ends meet but it was less than the traditional 4% SWR would have allowed. These days I try to take only 3% each year, leaving the other 1% to cover unexpected expenses or big ticket items that I only purchase occasionally. Seems to work pretty well.
Thanks to all. I don't know exactly what I'm thinking about here, but I figured if a 4% withdrawal rate adjusted yearly for inflation had a very high survival rate over 30 to 40 years, then a 4% withdrawal rate without annual inflation adjustments would have to be as good as gold so to speak. Anyway, thanks.
ResNullius writes,Thanks to all. I don't know exactly what I'm thinking about here, but I figured if a 4% withdrawal rate adjusted yearly for inflation had a very high survival rate over 30 to 40 years, then a 4% withdrawal rate without annual inflation adjustments would have to be as good as gold so to speak. Anyway, thanks. I misunderstood what you were asking. I thought you meant take 4% of your year end balance each year (e.g., if you start with $1 million and your portfolio drops 20%, you'd take 4% of $800,000 or $32,000 the next year. if it increased by 20% to $1.2 million, you'd withdraw $48,000.)You seem to be saying "Take $40,000/yr. from a $1 million starting balance forever." Absolutely that's much safer. If inflation is 3% per year, in about 23 years you'll be effectively taking only $20,000/year from the portfolio in real terms.intercst
I misunderstood what you were asking. I thought you meant take 4% of your year end balance each year (e.g., if you start with $1 million and your portfolio drops 20%, you'd take 4% of $800,000 or $32,000 the next year. if it increased by 20% to $1.2 million, you'd withdraw $48,000.)No, intercst, you got it right the first time. The above is what I was thinking when I asked the question. I just can't seem to frame the question without messing it up. Thanks.
To anyone who wonders why 4% is the oft-quoted withdrawl rate. That came from something done in 1998 known as the Trinity Study. Some finance professors at Trinity University back-tested the stock market and bond market, putting a sum into each with different percentages, and then coming up with a chart predicting how likely it was your money would last. For instance, a portfolio of 100% stocks at a 4% withdrawal rate had a 98% chance of lasting 30 years, whereas a 12% withdrawal had only a 33% chance of lasting. Scroll down to page 5 for charts, and formulas are included on other pages:http://www.afcpe.org/assets/pdf/vol1014.pdfAs for “where did the 2% withdrawal rate idea come from” – that is from something called the Life of Riley Index, which assumes you drop half your money into the S&P 500, half into government bonds and tells you what percentage yield you’re likely to get. Then it assumes you want to live at about the 75% percentile and tells you how much it would take, in savings, to sustain that level of income, to live the “life of Riley”. It topped $3M in 2012.http://assetbuilder.com/blogs/scott_burns/archive/2009/06/19... Obviously, Your Mileage May Vary in all retirement theories and scenarios.
As some one observed recently, and as I have often stated, all the "plans" and "equations" in the world cannot help you if the following fits you:"...most Americans are financially illiterate..."Bingo!You can put away all the money you want, but what is it then doing? Sitting in some CD or a bank? Stuck in some heaven-only-knows-how-good-it-is mutual fund? Do you KNOW what it is doing? Do you actively study what your retirement fund is doing?We had nowhere near what they say we should have had when we retired 10 years ago, but here we are, enjoying life, even after getting whacked by the 2008 mess! We also withdraw more than 4% most years, but so what? I manage it myself and work at making sure we get decent dividends and/or growth to make it up, and I do better than the S&P or the Dow, anyway! If people expect to dump huge amounts in some account and then have someone else manage it for them, at some juicy cost, they deserve whatever they get.Wake up, people! Learn. Find out what YOU can do for yourself!Vermonter
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |