No. of Recommendations: 5
There have been several posts, much banter and diatribe about the Safe Withdrawl Rate (SWR) from a retirement portfolio. Some folks say 4% is akin to suicide, how can you risk it? That will deplete your principle! We have even produced literature on the facts: Facts that purport a specific portfolio-asset allocation is the best and has been backtested to demonstrate a SWR. And I am concerned because I see that some Fools are getting the wrong impression that anything above 4% spells doom to there retirement nest egg. Fools, this is not the case!

A retirement portfolio designed only by back testing can never be optimal, it's wrong! This is more than just a past performance does not guarantee future returns issue. Then sometimes we carry that error forward and suggest limiting ones withdraw rate to something that has 100% survivability based on the back tested portfolio. I want all Fools to enjoy their retirement and not limit SWR until they start retirement and then you can approximate what that rate is - NOT BEFORE. You can use 4% as a guide in planning [its 100% conservative] - but that should be the end of its use. Just like you should not decide what your asset allocation is going to be until you start that withdrawl.

intercst has his webpage references http://www.retireearlyhomepage.com/moresafe.html
that shows a SWR that has 100% survivability based on back testing and can be used to plan how much you may need as a balance when you start retirement, but it should stop there! This webpage does not mean that 4% is the SWR for a portfolio TODAY. [note, intercst, if you are implying this then sorry, but we obviously disagree]

Right now, (TODAY) any one on this board can design a portfolio that can have an annual 4% withdraw rate, 30 year pay-out, the same 100% survivability and have an ending balance greater than the present
So why would you limit yourself to 4%?

Retirement portfolio construction is not new, but it has been overlooked in both acedemia and in the financial planning community. Many who are just beginning to evaluate retirement portfolios are falling into a trap that has been set by years of training. A paradigm, that may be needlessly reducing their retirement quality of life. Intercst is doing his job to get information out there. And I will commend him for his efforts. But use his information to increase your knowledge and not fall victim to a paradigm.

In deciding a stock, index or a mutual fund allocation we use historical data to determine average returns, variability. This is all we have because the future returns are unknown. So we back test allocation models - from these tests we say - for an example 75% S&P and 25% 5 yr T-Bonds is the optimal portfolio. The problem creating a retirement portfolio this way is that the back tested data for bonds is not the best source of information concerning the future returns on bonds. Under the assumptions that intercst has made, this would be his suggested optimal portfolio given everything is unknown and we beleive past performance does indicate future returns.

We know what todays returns on T-Bonds are going to be - for the next 30 years!

So 4% is not todays SWR. The 4% is the MAXIMUM - SWR that has 100% survivability in a preset portfolio using past data and an unknown future. It is a good data point - but that is all. We are not under the criteria used in the testing.

The Doctors PX
Use the 4% as a guide in your growth time to plan the amount you will withdraw at retirement and make sure you get the necessary nest egg. When it comes to actual or close to actual retirement you need to look at the present situation and then decide what asset allocation is the most productive for your risk/reward trades and then - determine your minimum SWR, it will be over 4% since, as intercst has shown by his calculation, that is the historical LOW - Not the number you should use when you retire.

DrTarr

Print the post Back To Top
No. of Recommendations: 5
I agree and disagree. For most folks, the fear of running out of money in retirement is their greatest fear. By sticking with a conservative withdrawal rate, these folks sleep better at night knowing that they'll never run out of money, plus their kids will be rich when they're six feet under. Yes, for most folks, it is possible to have a withdrawal rate of 5% or more, with a very high level of assurance that the money will last until they are dead. The important thing is for people to use their brains to figure this stuff out for themselves, because the folks out there who earn their living giving advice don't know what the hell they are talking about. Their only interest is in taking as much of your hard earned money as they can for themselves.
Print the post Back To Top
No. of Recommendations: 0
The important thing is for people to use their brains to figure this stuff out for themselves
-----------*,*----------

THE KEY!

DrTarr
Print the post Back To Top
No. of Recommendations: 2
I don't quite get your point here. I see the argument that this is backtested and things could actually be worse (i.e. the past doesn't necessarily predict the future), but you said that's not what it's about.

But it seems to me you're making the reverse argument. That yeah, it's been that bad in the past, but is it really likely to be again? Well, if that's the point, to that I would respond that you don't seem to realize the gravity of the situation. It's one thing to say "lets now plan our financial future around great depression numbers", and I can't argue with that. But while you're working you can always work longer if there's an unexpected market downturn, or save more.

But when you're retired, well, that's about all she wrote. If you run out of money when you're 85, there's not too much you can do. The idea of withdrawing too much and using up your nest egg is much much more serious than if the market underperforms your expectations at other times in life. For that reason, I would really suggest that 4% is the MAXIMUM withdrawl rate that one should start out with. I would rather it be less to prepare for the possibility of a worse than historical market condition. It is much much better to pass on at age 85 with much more money than you thought, than to run out of money at that age and have 10 more years to life.
Print the post Back To Top
No. of Recommendations: 9
DrTarr writes,

The Doctors PX
Use the 4% as a guide in your growth time to plan the amount you will withdraw at retirement and make sure you get the necessary nest egg. When it comes to actual or close to actual retirement you need to look at the present situation and then decide what asset allocation is the most productive for your risk/reward trades and then - determine your minimum SWR, it will be over 4% since, as intercst has shown by his calculation, that is the historical LOW - Not the number you should use when you retire.


That's true that 4% is the historical low, but it's also probably the number you should use when you retire.

If you're willing to bet that something like the Crash of 1929 and the Great Depression could never happen again, maybe you can bump it up to 4.5%. Other people may say things are going to hell and the future will be worst than the past and use their crystal ball to say that 3% is the safe withdrawal rate.

Over the past 135 years, the maximum 30-year SWR has ranged from a high of 12.43% for someone retiring in 1950 with a 100% S&P500 portfolio to a low of 4.32% for someone retiring in 1966 with only a 10% allocation to the S&P500. The problem is that someone retiring today doesn't know where in this range of possibilities (4.32% to 12.43%) his retirement will fall, so picking something on the low end is prudent.

I used 4% back in 1994 when I retired at age 38. Many well-dressed, impecciably-credentialed financial advisors were advising 7% to 10% SWRs at the time.

Glad I used 4%.

intercst



Print the post Back To Top
No. of Recommendations: 0
But when you're retired, well, that's about all she wrote. If you run out of money when you're 85, there's not too much you can do. The idea of withdrawing too much and using up your nest egg is much much more serious ,,,,,
-----------*,*------------
Yes, running out of money in retirement is far worse than during income years.

I would really suggest that 4% is the MAXIMUM withdrawl rate that one should start out with.

Ignoring current conditions?

Here is where we are in disagreement! While you are looking only at the worst case (4%) and preparing for worse of the worst historical market conditions, you are in a paradigm that ignores the CURRENT FACTS.

Intersct
Over the past 135 years, the maximum 30-year SWR has ranged from a high of 12.43% for someone retiring in 1950 with a 100% S&P500 portfolio to a low of 4.32% for someone retiring in 1966 with only a 10% allocation to the S&P500. The problem is that someone retiring today doesn't know where in this range of possibilities (4.32% to 12.43%) his retirement will fall, so picking something on the low end is prudent.


THIS IS WRONG!
We have some knowledge of were in the range we are currently at.

While this may be for 100% S&P the 12.43% is not the maximum. Because it only uses the back testing data and does not look at current conditions! For example, Father retired back in the early 80's, he was like DeltaOne - preparing for worse than worse. His portfolio allocation - almost all laddered bonds, RISK FREE GOVERNMENT BONDS,

His SWR - maintaining principle - 14.03%, YES a fortunate SON, well DAD. I am not even sure what the max would have been but I will calculate it and I will bet it exceeds 15%.

Now, I understand that 12.43% was the max you calculated given some assumptions about allocation. And you did a good job - but the failure of this and its use going forward is in that the portfolio only used backtested data and ignored the then CURRENT FACT, the risk free rate for the next thirty years was known.

I used 4% back in 1994 when I retired at age 38. Many well-dressed, impecciably-credentialed financial advisors were advising 7% to 10% SWRs at the time.

I am certainly not well dressed and impeccably credentialed but looking at the then current conditions - T Bill/Bond rates were 5-6%, so my recommendation would be based on a combination of that fact and the historical average for the S&P - not the historical for both! And if I use the worst 30 years data from your webpage, then I get.
PORTFOLIO:
S&P 5.13%
Bonds ~5.5%

Now - why would you settle for a maximum of 4% withdraw. If you want to prepare for the worst of the worst - 100% bonds. SWR ~5-6%



The Doctors Point!
If father had gone into his retirement blindly using a number based only on the back testing data (4%) for over the last 34 years of retirement he would not have been able to do MANY MANY of the things he did. That extra 10% would have been great for me, but I would rather he spent that in "HIS" retirement.






Print the post Back To Top
No. of Recommendations: 8
DrTarr writes,

While this may be for 100% S&P the 12.43% is not the maximum. Because it only uses the back testing data and does not look at current conditions! For example, Father retired back in the early 80's, he was like DeltaOne - preparing for worse than worse. His portfolio allocation - almost all laddered bonds, RISK FREE GOVERNMENT BONDS,

His SWR - maintaining principle - 14.03%, YES a fortunate SON, well DAD. I am not even sure what the max would have been but I will calculate it and I will bet it exceeds 15%.


TIPS didn't exist back in 1980's, so your father's 14% coupon on LT Gov't bonds isn't increased for inflation each year. The 12.43% SWR for the S&P500 for someone retiring in 1950 is increased each year for inflation. (don't forget that SWR is defined as "the initial withdrawal rate, increased for inflation each year, that would not deplete the portfolio before the end of the pay out period".

Financial Planer Jaye Jarrett did a 2001 study on the SWR for a 100% LT Gov't bond portfolio using the Ibottson Databook for investment returns. He examined 44 rolling 30-year pay out periods from 1926 to 1999 (i.e., 1926-1956, 1927-1957 ... 1969-1999) The worst case 30-year period only gave you a 2.42% SWR. Inflation took its toll.

The story of frugal living guru Joe Dominguez (author of Your Money or Your Life) should also give 100% Gov't bond investors pause.

Despite a career on Wall Street (and presumed understanding of long-term equity returns), Dominguez invested in only US Treasury securities when he retired in 1969 at age 31 and continued to champion that approach up until his death in 1997. Dominguez retired in 1969 with a $100,000 portfolio and $7,000 per year in living expenses. An August 1996 Kiplinger's Personal Finance Magazine article revealed that Dominguez was then living on about $13,000 per year. To keep pace with inflation, $7,000 in 1969 would need to grow to $30,360 by 1996 to maintain the same purchasing power. Dominguez managed this loss of spending power with unusual living arrangements (he lived in a group home with about 30 other people) and a lot of composting and the washing and reusing of tin foil and wax paper -- a strategy that few early retirees would tolerate.


intercst
Print the post Back To Top
No. of Recommendations: 0
Dominguez managed this loss of spending power with unusual living arrangements (he lived in a group home with about 30 other people) and a lot of composting and the washing and reusing of tin foil and wax paper -- a strategy that few early retirees would tolerate.

Tin foil hats are a sure bet for success among those living on the street or in flop houses. It's cheap, but I don't know many who would want to do it, plus the galatic interference in reception via tin foil hats can be hard on anyone's SWR.

Print the post Back To Top
No. of Recommendations: 0
Over the past 135 years, the maximum 30-year SWR has ranged from a high of 12.43%
--------------*,*---------------
Really?


Unless she retired anytime during 1981.

30 year T-bond
Dec-81 13.48
Nov-81 12.91
Oct-81 14.36
Sep-81 15.19
Aug-81 14.78
Jul-81 13.96
Jun-81 13.30
May-81 13.06
Apr-81 13.65
Mar-81 12.65
Feb-81 12.97
Jan-81 12.28

DrTarr
Glad DAD didn't unnecessarily short his retirement by using only a 4%.
Print the post Back To Top
No. of Recommendations: 0
tin foil hats can be hard on anyone's SWR
------------*,*--------------
Not sure where Dominquez came from but!

Res and I seem to be some what in agreement - you need to use the brain - covered by foil or not - to calculate what your withdraw rate is at the time you retire. If you default to the mindless 4% looking only baclward, you could be cutting your retirement short. And, if you are a typical retiree, and the 4% does not cut it - then what, put on the foil, stay up late in deperate worry honey, cause we are going to go broke, and live under an overpass before we die.

DrTarr
Print the post Back To Top
No. of Recommendations: 4
DrTarr writes,

Over the past 135 years, the maximum 30-year SWR has ranged from a high of 12.43%
--------------*,*---------------
Really?


Unless she retired anytime during 1981.

30 year T-bond
Dec-81 13.48
Nov-81 12.91
Oct-81 14.36
Sep-81 15.19
Aug-81 14.78
Jul-81 13.96
Jun-81 13.30
May-81 13.06
Apr-81 13.65
Mar-81 12.65
Feb-81 12.97
Jan-81 12.28

DrTarr
Glad DAD didn't unnecessarily short his retirement by using only a 4%.


These 30-year T-bond rates are not adjusted for inflation. The SWR is much less than 12% to 14%.

You'd have to hold back and reinvest a sizeable portion of your 14% coupon each year to protect yourself against 30-years of inflation.

intercst
Print the post Back To Top
No. of Recommendations: 7
DrTarr seems long on contempt for 4% SWR, but I haven't seen anything concrete in the way of suggestions. "Use Your head?" That stopped working some years ago. Do you have a crystal ball that says you can see what bond yields and the stock market will do for the next five years? My crystal ball is busted, has been for some time.

DrCliff
Print the post Back To Top
No. of Recommendations: 0
DrCliff

I hope that using your head has not stopped working!

First, my suggestion is that you use the 4% or around that to try and determine your nest egg requirements.

Second, when it comes time to retire you model a portfolio using your risk tolerance - [in this argument we are limiting to only the S&P and Bonds] and then determine your SWR.

For my example - starting at 4% would have been ridiculos for my Father. Because he knew at the time of his retirement - EVEN FACTORING INFLATION, he could withdraw more [at least double] and still have the same principle in 30 years.

I do not have a crystal ball as far as bond yields for the next five years, but they are guaranteed by the government and available on Yahoo!

Dr.Tarr
Print the post Back To Top
No. of Recommendations: 1
For my example - starting at 4% would have been ridiculos for my Father. Because he knew at the time of his retirement - EVEN FACTORING INFLATION, he could withdraw more [at least double] and still have the same principle in 30 years.

If you are saying that when bond yields are double digit, then 4% is too low, I agree. Sadly when bond yields are double digit, so is inflation.

cliff
... remembers the 60's and 70's.
Print the post Back To Top
No. of Recommendations: 0
cliff
... remembers the 60's and 70's.

Retired Jan 1, 2006. Please ignore previous post, if applicable.

cliff
Print the post Back To Top
No. of Recommendations: 0
Cliff,

Congrats on retiring!

I do not remember investing in the 60's [other things seemed to be higher on the priority list] but did buy my first stock in the 70's. And by the time that Dad retired in the 80's was facsinated how it all worked. After returning to school for MS in Finance (working for Doctorate but life was to expensive) I found retirement portfolio management even more bizzare. As intercst pointed out - several folks in real nice clothes were telling Dad that he could easily add another 1/3 to his income by withdrawing the full 15% from his account, instead of the 8% I suggested as his max. Pension is about 1/2 his normal income.


I am saying that when bond yields are up, that 4% is low. So I have contempt for this as a predefined number. Is is fluid! So when some one fortunate enough to reach retirement looks at his portfolio - he needs to look at the current conditions - such as bond yield, and then calculate the SWR - It is as simple as that.

I'd love to be at Bad Manors! Again congrats!

DrTarr

Print the post Back To Top
No. of Recommendations: 0
Please note that while I may have suggested 8% back in the mid to end of the 80's - I am not advocating that type of rate at this present time..


Print the post Back To Top
No. of Recommendations: 0
These 30-year T-bond rates are not adjusted for inflation.
----------*,*-------------

OK

My original argument was based on the 4% and portfolio depleted by the end of the period. And then followed with maintaining balance which makes the comparison number 3.79%

Then you throw in the inflation curve ball - So I will compare to the 2.9% number that is listed on the website. [I know this is for 75/25 but it is the comparison number]

http://www.retireearlyhomepage.com/moresafe.html

DX
The maximum 100% survivable inflation adjusted withdrawl rate of a portfolio constructed in 1980-1981 of 100% Government securities, using actual data [Inflation, Returns] from 1980 - 2005, and historical averages for inflation (that back testing stuff) and the current T-Bill for yield 2005-2010 .

SWR = 6.61% > 2.9%

And since this period is 5/6 of the way finished and consists of T-Bonds, I am pretty sure that a crash like 1929 will not drastically affect the outcome.

HX
Use the numbers provided.
From your post:
The worst case 30-year period only gave you a 2.42% SWR. Inflation took its toll.
The best one that I have calculated, and I only calculated 1 w/30 yr payout, was 6.63%


PX
So my thought for SWR - 100% government bonds.
If bonds are at the worst level - SWR 2.42%
If bonds are again in the stratoshpere - SWR 6.63%
Anywhere inbetween - interpolate.

Inflation adjusted - maintain principle.

(neglecting small caps) Adjust the asset allocation of the portfolio toward the S&P depending on current T-Bill yields. X/(100-X) in the lowest, (100-X)/X in the highest depending on risk tolerance.

Print the post Back To Top
No. of Recommendations: 2
Dr Tarr writes,

PX
So my thought for SWR - 100% government bonds.
If bonds are at the worst level - SWR 2.42%
If bonds are again in the stratoshpere - SWR 6.63%
Anywhere inbetween - interpolate.

Inflation adjusted - maintain principle.

(neglecting small caps) Adjust the asset allocation of the portfolio toward the S&P depending on current T-Bill yields. X/(100-X) in the lowest, (100-X)/X in the highest depending on risk tolerance.


Actually, if you took a 6.63% SWR from a 100% S&P500 portfolio in 1980, you'd have about 7 times your original principal today, 25 years later. A much better performance than the 100% LT Gov't bond portoflio.

That's probably why you see very few people who've studied this issue suggest a 100% fixed income portfolio.

intercst
Print the post Back To Top
No. of Recommendations: 1
So my thought for SWR - 100% government bonds.

My thoughts about what to do with 100% government bonds... wake up, sell at least 50% of them and put it in the market.


I understand your point, but I don't think we have nearly enough data to say that different SWR in different conditions depending on bond rates. I mean, we have exactly 3 years in the last ~100 when government bonds were yielding more than 10%. And exactly 7 of over 8%. So I'm not exactly about to depend my retirement on that kind of sample. Who's to say how things will perform next time that's the case, although hopefully it won't ever be.

That's the unfortunate problem with all of this SWR stuff. There's not a lot of independent data. There are only 3ish entirely independent 30 years periods that we can look at. Accepting some overlap, there's maybe 6 or 7 at-least-half-independent periods.


And here's another issue. What if the situation changes. It's 80-81 all over again and I retire on 6.63% SWR. But then, 10 years later, when I'm still alive, kicking and hopefully have many years less, the situation now calls for your 2.42% rate. What am I supposed to do, live on one third of the income by magic? I would much much rather know that I'm being on the even more cautious side of cautious, and with a plan I can stick with, not one that may change based on 'current conditions' that may not match past experiences in those conditions anyway.
Print the post Back To Top
No. of Recommendations: 0
That's probably why you see very few people who've studied this issue suggest a 100% fixed income portfolio.

I seem to recall that YKW proposed this as one of him many early alternatives to living smart and retiring secure.
Print the post Back To Top
No. of Recommendations: 1
>> That's probably why you see very few people who've studied this issue suggest a 100% fixed income portfolio. <<

True. Though if the long bond hit 14% like it did in 1981, it would be mighty tempting. It's unlikely inflation would run that high, that long.

#29
Print the post Back To Top
No. of Recommendations: 0
So my thought for SWR - 100% government bonds.
-------------*,*--------------
This was in NO WAY - a recommendation from me for 100% government bonds for any ones retirement portfiolios.

This was merely my take on if some one were to want to form such a portfolio! And the conclusion about SWR for such a set up.

I am sorry for the confusion.

Actually, if you took a 6.63% SWR from a 100% S&P500 portfolio in 1980, you'd have about 7 times your original principal today, 25 years later. A much better performance than the 100% LT Gov't bond portoflio.

I totally agree, and that is why I do not undersand why some one would instantly limit their SWR to 4% - without looking at the current conditions - bond yield and then readjusting as the same as rebalancing a portfolio. That is the only problem or contempt for the 4% - is that it seems some Fools were going to just use 4% as a maximum - no matter what. I thought that was (f)oolish.

True. Though if the long bond hit 14% like it did in 1981, it would be mighty tempting. It's unlikely inflation would run that high, that long.

At 14%, it was great, in Dad's situation (which BTW was not 100% T's) as the interest rates came down, the bonds prices soared quite nicely (2-3X). But I still would not put 100% in bonds.

But then, 10 years later, when I'm still alive, kicking and hopefully have many years less, the situation now calls for your 2.42% rate.

Again - rebalance and understand that at that time you may be limited to 4%, 3% or what ever you calculate will survive that economic down period. But do not just go ahead blindly with a preset number in the good times!

wake up
Good Morning!


DrTarr
Again - just want Fools to enjoy their retirement and not AUTOMATICALLY limit to a preset number.
Print the post Back To Top
No. of Recommendations: 1
>> That's probably why you see very few people who've studied this issue suggest a 100% fixed income portfolio. <<

True. Though if the long bond hit 14% like it did in 1981, it would be mighty tempting. It's unlikely inflation would run that high, that long.


But if the long bond does hit 14%, then the market is saying exactly that, that it thinks there is a good probability inflation will remain that high that long. Of course the market is often wrong, but predicting when and in what direction is no simple matter.
Print the post Back To Top
No. of Recommendations: 1
DrTarr,

Is there a ProfessorFeather?

Byron
Print the post Back To Top
No. of Recommendations: 2
Yes,

Joan Marie, I loved her well - yet, she is gone!

My eyes are denied her beauty, my skin deprived her ardous touch.

If by chance you should meet her, introduce yourself, share with her a glass of the finest Clos de Vougeot, and reminisce; for many a night she may restir with great fondness, the days and nights resting in the southern provinces of France, on the well dressed grounds of a certain Maison de Sante.

We penned many a script, and still I feel her by my side. There is a longing to share forgotten treasures, but it is not death that hath taken her. I fear for her soul, something much worse. She is a real estate lawyer in California.

DrTarr



Print the post Back To Top
No. of Recommendations: 0
"I fear for her soul, something much worse. She is a real estate lawyer in California."

Don't fear for her soul, mourn its passing. I live near San Fransisco, in CA, & doubt I will ever be able to afford real estate here. However, I don't blame the lawyers, so I suppose I should retract the second clause of my opening sentence.

Byron

(Who just realized this was a crappy response to an eloquent post.)
Print the post Back To Top
No. of Recommendations: 1

We know what todays returns on T-Bonds are going to be - for the next 30 years!


But we don't know what inflation will be. The SWR is the amount you are to initially withdraw, which is then adjusted by inflation.

Also, there are no 30-year T-bonds left. The latest-expiring ones are 25-year and change (yielding 4.65% or so). Even assuming no inflation, if you use the whole coupon payment, you will end up with less cash than you started with (since you'll buy at 110 and they'll be redeemed at 100). If you invest the extra money, then you don't really know what the end result will be (you'll probably make up the extra 10). But this is totally ignoring inflation.
Print the post Back To Top
No. of Recommendations: 0
Also, there are no 30-year T-bonds left.

The Treasury Direct web site says that they will begin auctioning 30-year T-bonds in Feb. 2006, with 2 auctions per year (Feb. and Aug.)

Here's the link

http://www.treasurydirect.gov/indiv/products/tbonds_glance.htm

foolazis
Print the post Back To Top
No. of Recommendations: 0
The SWR is the amount you are to initially withdraw, which is then adjusted by inflation.
----------*,*----------

EXACTLY!

It is the rate at which you start your withdraw. And it should be adjusted, every year, just like a rebalancing or annual review of stocks.

What I have seen - in the writings of some Fools, is that 4% is a set, can not be exceeded or all will fail, number.

My contention is not with the theory of a SWR, my contention is that it [the number] is not set If when you retire, you just default to 4%, you may be cutting your self short and not enjoying your retirement to the fullest, because of an anchor induced bias - you are stuck with 4%.

One the other side, when you retire 4% may seem to great a risk. Then don't take it if you do not want to. It seems obvious that if the economy is bad you should take out less, I just think if the economy has been good, you should feel just as friskie and take out more. Don't get crazy, but WTF, this is your retirement!

DrTarr


Print the post Back To Top
No. of Recommendations: 5
Never thought I'd let myself get sucked back into this one....

DrTarr, I'm disappointed by this lack of analysis:

When it comes to actual or close to actual retirement you need to look at the present situation and then decide what asset allocation is the most productive for your risk/reward trades and then - determine your minimum SWR, it will be over 4% since, as intercst has shown by his calculation, that is the historical LOW

You've given absolutely no insight whatsoever into how I'm supposed to calculate my minimum safe withdrawal rate at that undisclosed point in the future. Do I again use historical data, which you are asserting is flawed?

The problem creating a retirement portfolio this way is that the back tested data for bonds is not the best source of information concerning the future returns on bonds.

What is the best source of information concerning the future returns on bonds? How does that affect your calculations?

If your only point is that you shouldn't necessarily feel like 4 percent is the only reasonable choice to make, I don't think many would disagree. But I would have hoped that a Hot Topic post would have a little more beef to it and at least suggest some alternative method. As is, this is just resurrecting the same old arguments, in the typical fashion, unsupported by much more than simple assumptions and assertions.

dan
Print the post Back To Top
No. of Recommendations: 0
DrTarr, I'm disappointed by this lack of analysis:
------------*,*--------------
Dan,

Sorry to sucker you in.

You are right, this does lack an analysis as to what you, or anyone should use as a rate, and how to calculate that rate.

If your only point is that you shouldn't necessarily feel like 4 percent is the only reasonable choice to make, I don't think many would disagree.

This was my main point! Sorry. But I was reading plenty of posts that left me with the impression some Fools were limiting their SWR rate under all conditions to 4%. - never anything more!

What if you are living on Friskies and the market just gave you two years of 30% returns?

What is the best source of information concerning the future returns on bonds? How does that affect your calculations?

1. Current yield curve,
2. Macro economic leading indicators
3. Market leading indicators
Then Historical data - also include cycle analysis.

Calculations depend on needs, risk tolerance, goals, horizon, economic assumptions (inflation, returns)

You sit down with plenty of folks, let me know if they all have the same needs, goals, expenses, inflation pressure, estate, (and what they want to leave) etc. Does one estate plan fit all? Does one SWR fit all?

I am not trying to duck calculating a number, or showing how I would do an analysis. I would be happy to do that on individual basis with the same input as to what I would typically get from a client. But one thing I will say, If a client "needs" a withdrawl of the current short term CD rates, That is always possible - with the same 100% survivability even if the rate is well above 4%. Right now 4.7-5.0%

So - for a retirement today, for SWR on needs I am comfortable saying 4.7% anything less is unnecessary.

DrTarr

Print the post Back To Top
No. of Recommendations: 4
DrTarr writes,

I am not trying to duck calculating a number, or showing how I would do an analysis. I would be happy to do that on individual basis with the same input as to what I would typically get from a client. But one thing I will say, If a client "needs" a withdrawl of the current short term CD rates, That is always possible - with the same 100% survivability even if the rate is well above 4%. Right now 4.7-5.0%

So - for a retirement today, for SWR on needs I am comfortable saying 4.7% anything less is unnecessary.


Where are you finding an inflation-adjusted CD with a real yield of 4.7%? The TIPs maturing in 2032 only have a 1.90% real yield.

Don't forget that SWR is the inflation-adjusted withdrawal rate. If I was taking a 4% SWR from a $1 million portfolio and inflation was exactly 3.00% per annum for the next 30 years, I'd take $40,000 in year 1, $41,200 in year 2, $53,757 in year 10, and $97,090 in year 30.

If inflation was 4% for thirty years, the year 30 withdrawal would be $129,736.

A 4.7% CD without an inflation adjustment isn't going to get you there.

intercst

Print the post Back To Top
No. of Recommendations: 0
SWR on needs I am comfortable saying 4.7%
-----------*,*----------------

This is the starting rate and is based on needs - not a 30 year constant rate. IOW, if a brand new retiree today and has a "need" for the money @4.7% then it is safe for him/her to withdraw that amount for this year and still have the 100% survivability at the rate you propose beginning next year. 4% is not the limit in current conditions.

Lets forget the inflation for a moment and focus on the 4% number for a zero balance end of 30 years (75% S&P/25% 5 yr Bonds portfolio.) If 4% is the 100% survivable rate over 30 years, then it must have survived the worst 1 year period.

CALCULATED PORTFOLIO WITH 4% SWR AFTER 1 YEAR

S&P Values - Adjusted Close worst 1 year post WWII.
October 3, 1973 - 108.78
October 3, 1974 - 62.28

5 year Government Bonds
October 3, 1973 - 6.82%
October 3, 1974 - 8.14%


62.28-108.78/108.78 = (-42.7%)

For a $1M portfolio;
The S&P allocation ($750,000) with a 42.7% loss, the final stock value at the end of that year was $429,000.
The Bond allocation ($250,000) was of course subject to rising interest rates, bad for price but irrelavant for return to maturity.

Now if the bonds were laddered $50K each year for the five years.

Year 1 Matured - Returned 6.82% or $53,410 (simple annual coupon)
Year 2 Present Value, $49,390
Year 3 Present Value, $48,825
Year 4 Present Value, $48,303
Year 5 Present Value, $47,820

Sum of Bond allocation $207,748 Taking out the $40,000.

So at the end of year one the $1,000,000 portfolio is $636,748, And by the 4% SWR 100% survivability calculations, this portfolio will survive following the rest of history.


Comparison Portfolio for today:
Assume same percent for the S&P drop and interest rate rise, lets forget the convexity of the curve for simplicity.


50% S&P / 50% 1 & 2 year CD's or Bonds (4.7% 1 year, 4.8% 2 year)

At the end of year 1 the %500,000 in the S&P is now worth $286,500
The CD's, $250,000 each
Year 1 Matured - Returned 4.7% or $261,750
Year 2 Present Value ~$246,950

Final portfolio value at the end of 1 year. $755,200

Now with $755K instead of $636K we can establish the same portfolios used to calculate the 4% withdraw for the duration of the exercise horizon, but the good news is the new retiree met her 4.7% obligation.

To recap:
Worst case 1 year on 75%/25% portfolio leaves $636K
the same case on the 50%/50% portfolio leaves $755K

If 4% works for $636K then it should work for $755K and can be applicable for the next 29 years. But the retiree has met her 4.7% withdraw obligations for the first year. Now we come to the second year, follow the same pattern depending on the last years returns and the current yield curve.

Now, about inflation and residual balance.

Both of these take a toll on removal rates - but the toll is equal on both portfolios (in fact favors current port) - so mute to the comparison.

Current first year SWR:
4.oo% to 4.7o%, depletion of balance
3.79% to 4.45%, retention of balance
and finally
2.9o% to 3.41%, inflation adjusted - retention of balance.


DrTarr
nb These are first year withdraw rates which under current conditions still maintain 100% survivability as shown in other work. These are not constant - over the life maximum rates.

Print the post Back To Top
Advertisement