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Author: FlaBuckeye Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76078  
Subject: Safe Withdrawal Rate Date: 10/8/2007 10:51 AM
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We've all been following the 4% plan for many years for folks fortunate to retire early, but what % should those who worked up to their normal retirement age use? 30 yrs is the max I plan on being around. Don't plan on leaving a large inheritance, the kids are doing fine.
Any words of wisdom?
Thanks,
Jim
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Author: iamdb Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59492 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/8/2007 12:52 PM
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An inflation-adusted 4% is a good starting point. I target 5% of previous year-end portfolio value, but that means accepting a distribution that varies with market value, including lower distributions when the market is down. If you can live with the variation, taking a fixed percentage (less than the long-term expected return) seems a safer way to withdraw than inflation-adjustment.

db

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59495 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/8/2007 1:35 PM
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FWIW, I've been funding a scholarship at my alma matter (LSU-Shreveport) through a brokerage account. I am operating it like a retirement account, figured it would give me practice for when I was retired. I have been using a 5% withdrawal rate. I started with 25% in cash (5% times 5 years) and kept that as my base. My rebalancing would keep that amount of cash is the minimum. The first couple of years I was taking out a couple more hundred dollars than what the portfolio produced. Now, at about year 4, the portfolio is growing faster than withdrawals. In a couple years I should be able to increase the amount of the scholarship.

JLC

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59501 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/8/2007 2:28 PM
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30 yrs is the max I plan on being around

From what I've read, 4% is right in the ballpark for a 30 year pay-out.

       Retire Early Safe Withdrawal Study - (1871-2000) - CPI vs. PPI						
Pay Out Period	        10 Yrs	20 Yrs	30 Yrs	40 Yrs	50 Yrs	60 Yrs
Optimal Stock Allocation  48%	66%	74%	77%	82%	85%
Investment Expenses	0.20%	0.20%	0.20%	0.20%	0.20%	0.20%

	Withdrawals indexed with the PPI					
100% Safe - PPI	8.47%	4.78%	3.81%	3.54%	3.35%	3.24%
98% Safe - PPI	8.48%	4.80%	4.01%	3.77%	3.59%	3.44%
95% Safe - PPI	8.71%	5.26%	4.33%	4.45%	3.81%	3.78%
90% Safe - PPI	9.35%	5.62%	4.78%	4.82%	4.50%	4.23%

	Withdrawals indexed with the CPI-U					
100% Safe - CPI-U	8.84%	5.16%	4.26%	4.08%	3.86%	3.70%
98% Safe - CPI-U	9.00%	5.32%	4.40%	4.12%	3.93%	3.83%
95% Safe - CPI-U	9.27%	5.51%	4.52%	4.25%	3.99%	3.92%
90% Safe - CPI-U	9.78%	5.70%	4.71%	4.56%	4.29%	4.08%

2old


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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59507 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/8/2007 4:55 PM
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I am not a fan of the SWR so take my opinion with a grain (or a full shaker) of salt.

Before I would ever settle for 4% from a retirement account where I am not concerned with leaving money to the kids, I would look at an immediate annuity. I just ran a quick quote for a 70 yr old male and you could get a 29 yr period-certain immediate annuity (can't do 30 yr)that pays a 6.4% distribution with no inflation (or 3.85% with a 3%inflation kicker). I am sure that there are better deals out there so shop around.

I figure 6.4 is better than 4 as you are not guaranteed to have your money grow to account for inflation on the SWR. You could take the extra 2.4% and set it aside (invested) and let it grow to help offset future inflation and still have a higher guaranteed income stream.

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59512 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/8/2007 8:28 PM
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From what I've read, 4% is right in the ballpark for a 30 year pay-out.

Retire Early Safe Withdrawal Study - (1871-2000) - CPI vs. PPI
Pay Out Period 10 Yrs 20 Yrs 30 Yrs 40 Yrs 50 Yrs 60 Yrs
Optimal Stock Allocation 48% 66% 74% 77% 82% 85%
Investment Expenses 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%

Withdrawals indexed with the PPI
100% Safe - PPI 8.47% 4.78% 3.81% 3.54% 3.35% 3.24%
98% Safe - PPI 8.48% 4.80% 4.01% 3.77% 3.59% 3.44%
95% Safe - PPI 8.71% 5.26% 4.33% 4.45% 3.81% 3.78%
90% Safe - PPI 9.35% 5.62% 4.78% 4.82% 4.50% 4.23%

Withdrawals indexed with the CPI-U
100% Safe - CPI-U 8.84% 5.16% 4.26% 4.08% 3.86% 3.70%
98% Safe - CPI-U 9.00% 5.32% 4.40% 4.12% 3.93% 3.83%
95% Safe - CPI-U 9.27% 5.51% 4.52% 4.25% 3.99% 3.92%
90% Safe - CPI-U 9.78% 5.70% 4.71% 4.56% 4.29% 4.08%

2old


Do you have a source for this? Preferably a link to the source? Very interesting.

cliff

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59513 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/8/2007 8:35 PM
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>> Do you have a source for this? Preferably a link to the source? Very interesting. <<

Here:

http://retireearlyhomepage.com/restud1.html

#29

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59515 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/8/2007 8:51 PM
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Here:

http://retireearlyhomepage.com/restud1.html

#29

Thanx.

cliff

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59523 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/9/2007 11:56 AM
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Sorry I didn't reference the link originally. I had copied the charts into one of my spreadsheets, and, quite frankly, had forgotten exactly where I got it from! 8-()

2old

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Author: BordLyron Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59563 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/10/2007 9:18 PM
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... you are not guaranteed to have your money grow to account for inflation on the SWR.

Hawkwin


Seems like every post I've read detailing the SWR 4% doohickee has mentioned that you DO adjust withdrawals upward at the inflation rate (not necessarily 3%, but what the actual rate every year). This seems to make it seem a lot better than 6.4% with no inflation adjustment (assuming you live for 10 or more years after retirement). Am I wrong here?

Byron

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Author: canonian Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59571 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/11/2007 7:39 AM
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As much as I see SWR get pounded on these boards one has to know how much they can earn on the money they have at retirement before defining such a number. You could have a higher SWR if your money is earning 10% versus 3%..

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Author: BordLyron Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59573 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/11/2007 8:28 AM
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Seems like every post I've read detailing the SWR 4% doohickee has mentioned that you DO adjust withdrawals upward at the inflation rate (not necessarily 3%, but what the actual rate every year). This seems to make it seem a lot better than 6.4% with no inflation adjustment (assuming you live for 10 or more years after retirement). Am I wrong here?

Byron


SEEMS like I need to expand my vocabulary... (not to mention using verbs when appropriate)

Byron

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59574 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/11/2007 8:28 AM
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As much as I see SWR get pounded on these boards one has to know how much they can earn on the money they have at retirement before defining such a number. You could have a higher SWR if your money is earning 10% versus 3%.

No, you miss the point and it's an important one. SWR is a rate which is a worst case scenario over multiple years. So, over a 30 year period you WILL earn 10% at times, but you WILL also lose 10% SWR does NOT give you the maximum you can earn, rather it gives you what you can spend over say 30 years and be guaranteed, in the worst case scenarios over the life of the stock market, with various asset allocations specified, not to run out of funds.

In many, in fact most cases you will earn more. But in no case, during the time when you can no longer earn money, will you run out of funds before your plan does. At retirement, or early retirement, NOT running out of funds is VERY important.

Hockeypop

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59578 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/11/2007 11:05 AM
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Am I wrong here?

I have no idea. Your best bet is to visit the homepage for that info. My guess is that it is not indexed for inflation unless it is a straight assumed inflation rate (as adding in a random variable of inflation would make it even more difficult to predict think 1970s vs 2007).

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59629 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/12/2007 12:01 PM
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so many withdrawls to make, so little time....

Yes, the above charts are indexed for inflation - note the PPI and CPI-U. Thus the chart gives the intital rate and allows for increasing the withdrawl each year. Which seems to make it better than the 3.85% 29 year annuity. (The difference we all know is fees.)

These are not hard and fast numbers, and it does not guarantee you won't run out of money. It just says that using historical returns you would not have run out. There are many assumptions built into these numbers and as with any financial model - contains flaws. It does provide a reasonable starting point, a target to shoot for.

Some people take out more if they have a good year. Which is entirely fine. As one poster mentioned he rides up and down with the returns of the year, again entirely fine. It depends on the structure of your portfolio.


d(SWR)/dT

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59631 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/12/2007 1:14 PM
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Yes, the above charts are indexed for inflation - note the PPI and CPI-U. Thus the chart gives the intital rate and allows for increasing the withdrawl each year. Which seems to make it better than the 3.85% 29 year annuity

Thanks for the clarification..

There are no relevant fees on an immediate annuity. You give a lump sum for a guaranteed payout over a lifetime or a specific period or both. All that really matters if the amount of money you get and for how long.

The quick quote I provided is not likely indicative of what is the best rate available (so there may be some that beat the CPI-U). Fidelity, Vanguard, TIAA-CREF all likely provide better immediate annuity rates than my quote (as I had to pull that one from a for-profit site).

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59632 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/12/2007 1:26 PM
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Hawkin: There are no relevant fees on an immediate annuity. You give a lump sum for a guaranteed payout over a lifetime or a specific period or both. All that really matters if the amount of money you get and for how long.

Au contriare! When you buy an annuity, they base the payout on some interest rate. Now, they are not doing this out of the goodness of their hearts. They charge a fee for their services, same as for any other service, so your interest rate is reduced by that fee.

cliff

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59637 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/12/2007 1:53 PM
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Au contriare! When you buy an annuity, they base the payout on some interest rate. Now, they are not doing this out of the goodness of their hearts. They charge a fee for their services, same as for any other service, so your interest rate is reduced by that fee.

By that rationale, a CD has a "fee."

The "fee" is not relevant. Only the interest rate is relevant.

If company A makes 7% on immediate annuity but gives you 4%, then the relevant "fee" is 3%. If company B makes 6% on the annuity but gives you 3.5%, the "fee" is 2.5% but you get a lower interest rate.

If that was a CD, would you buy the 4% CD or the 3.5% CD? Does it matter that the "fee" is lower on company B? Absolutely not - and there is no way that you will even know what that "fee" is. Each bank and insurance company will have different profit margins so where BoA might breakeven at 5.5% on their CDs, Chase might breakeven at 5.65%. If they both offer CDs at 5%, the "fee" difference for Chase doesn't hurt your 5%.

Good article in Fortune a few weeks ago on the shrinking margins BoA now makes on their CDs (they have higher expenses than some of their competitors).

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59638 of 76078
Subject: Re: Safe Withdrawal Rate Date: 10/12/2007 1:55 PM
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>> If company A makes 7% on immediate annuity but gives you 4%, then the relevant "fee" is 3%. If company B makes 6% on the annuity but gives you 3.5%, the "fee" is 2.5% but you get a lower interest rate.

If that was a CD, would you buy the 4% CD or the 3.5% CD? Does it matter that the "fee" is lower on company B? Absolutely not - and there is no way that you will even know what that "fee" is. Each bank and insurance company will have different profit margins so where BoA might breakeven at 5.5% on their CDs, Chase might breakeven at 5.65%. If they both offer CDs at 5%, the "fee" difference for Chase doesn't hurt your 5%.
<<

Very good point. It's similar to people asking about what investments they should use to minimize their taxes when what they should usually be interested in is maximizing after-tax returns.

#29

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