Traditional SWR - flawed at the core

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Ben Mathew
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Re: Traditional SWR - flawed at the core

Post by Ben Mathew »

tibbitts wrote: Fri Jan 21, 2022 1:06 pm
willthrill81 wrote: Fri Jan 21, 2022 12:54 pm
tibbitts wrote: Fri Jan 21, 2022 12:24 pm
willthrill81 wrote: Fri Jan 21, 2022 10:49 am
tibbitts wrote: Fri Jan 21, 2022 10:45 am
There is another use that some people use SWR for: determining whether/when they can retire. In the absence of SWR, how do you propose someone determine whether/when retirement is possible/practical?
That could be done with relative ease using the ABW method.
When I used an ABW calculator pre-retirement, the result was a SWR, so I don't understand how ABW is different (except maybe in how you arrive at the SWR.)
The specific withdrawal rate in a given year may have been something like 4%, but the method of determining the rates is dramatically different, and they can (and almost certainly will) diverge significantly over time.
But there is no "over time", because we're not considering any later revisions when doing a projection pre-retirement. ABW is just using amortization tables and return assumptions [...]
The ABW simulator does this.
tibbitts wrote: Fri Jan 21, 2022 1:06 pm [...] return assumptions (derived by each person based on who-knows-what) instead of historical data that was used in the studies the "classic" 4% SWR was based on.
I don't think the use of historical or forward looking returns is a meaningful distinction between the ABW and SWR methodologies. You can use historical return assumptions in ABW if you think those are reasonable (VPW does). Conversely, you can calculate SWR rates using any return distribution--not just historical.
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randomguy
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Re: Traditional SWR - flawed at the core

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Ben Mathew wrote: Fri Jan 21, 2022 11:23 am
EddyB wrote: Fri Jan 21, 2022 9:59 am In the 4% SWR paradigm, your first investor is only counting on another 25 years of withdrawals, while your second is counting on 30. While you might raise concerns, no “contradiction” is revealed here.
The contradiction is that both investors are now in identical circumstances. Both are 60 years old with $1.5 million and the same life expectancy. But SWR is telling one to take out $2 million and the other to take out $1.5 million.
Why on earth do you think
a) retiring when the previous 5 years of returns is unknown
b) retiring when the previous 5 years of returns is known
are identical circumstances? They clearly aren't. Once you add information to the problem, you can't use the numbers that were based on information being unknown. This is probability 101....
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Ben Mathew
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Re: Traditional SWR - flawed at the core

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randomguy wrote: Fri Jan 21, 2022 1:29 pm
Ben Mathew wrote: Fri Jan 21, 2022 11:23 am
EddyB wrote: Fri Jan 21, 2022 9:59 am In the 4% SWR paradigm, your first investor is only counting on another 25 years of withdrawals, while your second is counting on 30. While you might raise concerns, no “contradiction” is revealed here.
The contradiction is that both investors are now in identical circumstances. Both are 60 years old with $1.5 million and the same life expectancy. But SWR is telling one to take out $2 million and the other to take out $1.5 million.
Why on earth do you think
a) retiring when the previous 5 years of returns is unknown
b) retiring when the previous 5 years of returns is known
are identical circumstances? They clearly aren't. Once you add information to the problem, you can't use the numbers that were based on information being unknown. This is probability 101....
Highlighted is the source of the contradiction--the SWR strategy is not taking into account new information for the investor who retired 5 years ago and is sticking to a withdrawal amount calculated 5 years ago. Why wouldn't you update the withdrawal calculation to reflect to what you now know--that the first five years of their retirement were terrible and their portfolio is now only $1.5 million? You are taking that information into account for one investor but not the other. You're saying pre-retirement people should take into account new information about their portfolio value, but post-retirement they shouldn't? Makes no sense to me.
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Re: Traditional SWR - flawed at the core

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tibbitts wrote: Fri Jan 21, 2022 1:06 pm
willthrill81 wrote: Fri Jan 21, 2022 12:54 pm
tibbitts wrote: Fri Jan 21, 2022 12:24 pm
willthrill81 wrote: Fri Jan 21, 2022 10:49 am
tibbitts wrote: Fri Jan 21, 2022 10:45 am
There is another use that some people use SWR for: determining whether/when they can retire. In the absence of SWR, how do you propose someone determine whether/when retirement is possible/practical?
That could be done with relative ease using the ABW method.
When I used an ABW calculator pre-retirement, the result was a SWR, so I don't understand how ABW is different (except maybe in how you arrive at the SWR.)
The specific withdrawal rate in a given year may have been something like 4%, but the method of determining the rates is dramatically different, and they can (and almost certainly will) diverge significantly over time.
But there is no "over time", because we're not considering any later revisions when doing a projection pre-retirement. ABW is just using amortization tables and return assumptions (derived by each person based on who-knows-what) instead of historical data that was used in the studies the "classic" 4% SWR was based on.
You're not going to adjust your withdrawals over time? Okay...
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Re: Traditional SWR - flawed at the core

Post by randomguy »

willthrill81 wrote: Fri Jan 21, 2022 11:45 am

Understood. Hopefully, readers will understand that 'common sense' isn't so common in all this. Peter Lynch and others thought that 7% withdrawals were common sense before Bengen showed that the real number has been just over half that.

Peter Lynch was pretty much right about 7%. He was wrong about the chances of that leaving less money than you started with. What begen did was change the conversation from nominal to real....
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Re: Traditional SWR - flawed at the core

Post by Booper »

9-5 Suited wrote: Fri Jan 21, 2022 9:47 am There are two well-known behavioral errors - the sunk cost fallacy and the endowment effect - that both share a common message. It's dangerous to allow information that has already passed to inform decisions about the present and future.

The traditional approach to Safe Withdrawal Rates - pegging withdrawals to the initial portfolio value and then adjusting only for inflation - is obviously wrought with this issue. Take a simple example that exposes the problem:

Investor 1: Retired 5 years ago at 55 with $2M 60/40 portfolio and 4% withdrawal. With bad sequencing, his portfolio is down to $1.5M. Assume 0% inflation for simplicity (ha, I know) and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 2: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

So both investors are 60 years old, retired, 60/40 AA, with $1.5M portfolio and yet would have very different "safe withdrawal" amounts.

So two questions:
(1) does anyone actually advocate a traditional SWR approach like this?
(2) if so, how do you rationalize this when variable withdrawal strategies exist (VPW, ABW, fixed %) that would eliminate this obviously contradictory example above?
Thanks for this post. It's very relevant to my situation.

First let me link to a reference I saw someone here post recently: https://ficalc.app/. It lets you backtest various withdrawal strategies.

Regardless of whatever strategy you choose, I think that the SWR line of thinking answers a question many people have: "OK, I understand that I have a lot of assets. But now that I'm retired, I need an income stream. What type of inflation-adjusted income stream can my assets support? Of course the future is unknowable. But what worked in the past?" The SWR approach is great because it gives you a fixed, inflation-adjust number. Like a salary, which most people are used to.

Your question is very relevant to me. I'm in my early 40s, and last year my expenses were equal to about 4.1% of my end of year balance. I was basically semi-retired the last few years, and just decided to take a job because I actually wanted (as opposed to needed) it.

After discovering ficalc.app I spent a lot of time looking at it. It's great because it shows you which years led to massive ending balances and which ones almost ran out of money. After a while you learn that you just have to accept that start date matters. We all know that selling when prices go down is bad. And in your example, investor #1 did exactly that - for five years straight. And they now plan to do it for 25 more years straight, regardless of market conditions. I do not envy anyone in that position.

I think it would be a good exercise for you to see if the situation you describe for Investor #1 actually ever happened. I.e., is that worse than any US investor has ever seen?
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Re: Traditional SWR - flawed at the core

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randomguy wrote: Fri Jan 21, 2022 2:01 pm
willthrill81 wrote: Fri Jan 21, 2022 11:45 am

Understood. Hopefully, readers will understand that 'common sense' isn't so common in all this. Peter Lynch and others thought that 7% withdrawals were common sense before Bengen showed that the real number has been just over half that.

Peter Lynch was pretty much right about 7%. He was wrong about the chances of that leaving less money than you started with. What begen did was change the conversation from nominal to real....
I don't understand what you mean at all. Had year 2000 retirees with 60% global stock and 40% bonds withdrawn a nominal 7% of their starting balance every year, their portfolio would be almost completely depleted right now.

Had they withdrawn 7% of the portfolio's ending balance every year instead, their inflation-adjusted portfolio value (and withdrawals) would be down 56% from where they started.

Lynch's statement seems to have pretty clearly been based on the long-term historic average of stocks' real return, which was 7%. We know now that the actual returns of stocks and bonds have varied so much that 7% of pretty much anything is too high to have provided anything remotely stable withdrawals or portfolio balance over a lengthy retirement.
Last edited by willthrill81 on Fri Jan 21, 2022 2:15 pm, edited 2 times in total.
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Re: Traditional SWR - flawed at the core

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9-5 Suited wrote: Fri Jan 21, 2022 9:47 am So two questions:
(1) does anyone actually advocate a traditional SWR approach like this?
I don't know anyone who slavishly follows a simplistic SWR.
(2) if so, how do you rationalize this when variable withdrawal strategies exist (VPW, ABW, fixed %) that would eliminate this obviously contradictory example above?
I don't know anyone who slavishly follows a more complicated withdrawal approach either.
Everyone I know uses a personal approach, such as the "withdraw what I need while knowing we have plenty of assets" approach I use.

I suspect you are overthinking things a bit. And if you know and understand common behavioral errors, you also know that these errors are what happens with many human people all the time.
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Re: Traditional SWR - flawed at the core

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willthrill81 wrote: Fri Jan 21, 2022 1:46 pm
tibbitts wrote: Fri Jan 21, 2022 1:06 pm
willthrill81 wrote: Fri Jan 21, 2022 12:54 pm
tibbitts wrote: Fri Jan 21, 2022 12:24 pm
willthrill81 wrote: Fri Jan 21, 2022 10:49 am

That could be done with relative ease using the ABW method.
When I used an ABW calculator pre-retirement, the result was a SWR, so I don't understand how ABW is different (except maybe in how you arrive at the SWR.)
The specific withdrawal rate in a given year may have been something like 4%, but the method of determining the rates is dramatically different, and they can (and almost certainly will) diverge significantly over time.
But there is no "over time", because we're not considering any later revisions when doing a projection pre-retirement. ABW is just using amortization tables and return assumptions (derived by each person based on who-knows-what) instead of historical data that was used in the studies the "classic" 4% SWR was based on.
You're not going to adjust your withdrawals over time? Okay...
How is ABW telling me how much I will have to adjust withdrawals during retirement, before I retire? Most people outside of Bogleheads will not be adjusting their retirement spending much, because they won't have the cushion built into SWR that Bogleheads just assume. I'm guessing the average Boglehead will spend in the 1-2% range of their starting account balances throughout retirement (with probably an occasional lumpy expense exceeding that), so all these discussions are purely academic for them, unless we get some truly horrible investment results. When we get posts saying "I don't know anyone who would stick to a SWR despite..." I think that's more a reflection of Bogleheads' social circles than the population as a whole.
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Re: Traditional SWR - flawed at the core

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tibbitts wrote: Fri Jan 21, 2022 2:17 pm
willthrill81 wrote: Fri Jan 21, 2022 1:46 pm
tibbitts wrote: Fri Jan 21, 2022 1:06 pm
willthrill81 wrote: Fri Jan 21, 2022 12:54 pm
tibbitts wrote: Fri Jan 21, 2022 12:24 pm
When I used an ABW calculator pre-retirement, the result was a SWR, so I don't understand how ABW is different (except maybe in how you arrive at the SWR.)
The specific withdrawal rate in a given year may have been something like 4%, but the method of determining the rates is dramatically different, and they can (and almost certainly will) diverge significantly over time.
But there is no "over time", because we're not considering any later revisions when doing a projection pre-retirement. ABW is just using amortization tables and return assumptions (derived by each person based on who-knows-what) instead of historical data that was used in the studies the "classic" 4% SWR was based on.
You're not going to adjust your withdrawals over time? Okay...
How is ABW telling me how much I will have to adjust withdrawals during retirement, before I retire? Most people outside of Bogleheads will not be adjusting their retirement spending much, because they won't have the cushion built into SWR that Bogleheads just assume. I'm guessing the average Boglehead will spend in the 1-2% range of their starting account balances throughout retirement (with probably an occasional lumpy expense exceeding that), so all these discussions are purely academic for them, unless we get some truly horrible investment results. When we get posts saying "I don't know anyone who would stick to a SWR despite..." I think that's more a reflection of Bogleheads' social circles than the population as a whole.
You're asking how much variation there could be in your withdrawals in the future. That's obviously unanswerable, but history is a pretty good guide. If you're using dynamic return assumptions as I did in the OP of this thread, you'll see that the variability may not be too much because higher past returns, leading to a higher portfolio balance now, was often largely offset by smaller expected returns going forward.

Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
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Re: Traditional SWR - flawed at the core

Post by EddyB »

Marseille07 wrote: Fri Jan 21, 2022 11:39 am
Ben Mathew wrote: Fri Jan 21, 2022 11:23 am
EddyB wrote: Fri Jan 21, 2022 9:59 am In the 4% SWR paradigm, your first investor is only counting on another 25 years of withdrawals, while your second is counting on 30. While you might raise concerns, no “contradiction” is revealed here.
The contradiction is that both investors are now in identical circumstances. Both are 60 years old with $1.5 million and the same life expectancy. But SWR is telling one to take out $2 million and the other to take out $1.5 million.
There is no contradiction.

Investor 1 decided to walk at the age of 55, Investor 2 retired at age 60.

With respect to SWR, Investor 1 has 25 years to go. Investor 2 has 30 years to go. The circumstances are not identical.
Right. I wouldn't disagree if Ben Mathew and 9-5 Suited wanted to say that Investor 1 will be nervous (perhaps recognizing an error in planning for only a 30-year withdrawal period in the first place), but that's distinct from the "contradiction" claimed in the OP.
Last edited by EddyB on Fri Jan 21, 2022 4:11 pm, edited 1 time in total.
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Re: Traditional SWR - flawed at the core

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willthrill81 wrote: Fri Jan 21, 2022 2:09 pm Lynch's statement seems to have pretty clearly been based on the long-term historic average of stocks' real return, which was 7%. We know now that the actual returns of stocks and bonds have varied so much that 7% of pretty much anything is too high to have provided anything remotely stable withdrawals or portfolio balance over a lengthy retirement.
Maybe 2000 will turn out to be one of the 5% failure cases.:) I am I want to say the actually nominal SWR was 6.5% but it has been a long time since I looked at that table and can't even remember if it was in trinity or Begen. The high level point is that comparing a nominal return to a real one is something you should never do. Otherwise you start wondering why use the 4% rule when you can get a 6% annuity payout....
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Re: Traditional SWR - flawed at the core

Post by tibbitts »

willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
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Re: Traditional SWR - flawed at the core

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tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
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Re: Traditional SWR - flawed at the core

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tibbitts wrote: Fri Jan 21, 2022 12:24 pm
willthrill81 wrote: Fri Jan 21, 2022 10:49 am
tibbitts wrote: Fri Jan 21, 2022 10:45 am
9-5 Suited wrote: Fri Jan 21, 2022 9:47 am So two questions:
(1) does anyone actually advocate a traditional SWR approach like this?
(2) if so, how do you rationalize this when variable withdrawal strategies exist (VPW, ABW, fixed %) that would eliminate this obviously contradictory example above?
There is another use that some people use SWR for: determining whether/when they can retire. In the absence of SWR, how do you propose someone determine whether/when retirement is possible/practical?
That could be done with relative ease using the ABW method.
When I used an ABW calculator pre-retirement, the result was a SWR, so I don't understand how ABW is different (except maybe in how you arrive at the SWR.)
Yeah in simple case ABW calculated using a real rate of return and 'g'=0% it comes up with a constant real amount to withdraw, same thing SWR is. ABW method is generally assumed to include redoing the calculation periodically after retirement as circumstances change, whereas the theoretical implication of SWR is 'one and done'. However as most posts have mentioned, a) almost nobody would really view their chosen SWR as inviolate if investment returns are much better or worse than they expected once retired and b) as you say both measures also have important use before retirement. ABW is basically a way of choosing an SWR, in the preretirement context (the period where you can actually do all four of make more $, save >% of them, work longer or spend less, whereas after retirement you can only do the last). But it requires you to explicitly estimate a return, and that has to be apples to apples with whatever history of scenario's led you to choose an SWR directly. To take simple number example, I would estimate expected return of stock now at 4% real pre tax, bonds 0% real pre tax, 60/40 2.4% real pre tax. If I do the Excel PMT function (all 'ABW' really is) for 30 yrs I get 4.7% pre tax equivalent 'salary'* of withdrawal per year. That's higher than 'traditional' 4% SWR for 30 yrs not because ABW is a better method but because I've simplistically assumed the expected return, whereas SWR 'studies' which supported 4% were of relative worst cases but in an era where average realized return of 60/40 was >> 2.4% real pre tax. Kind of a morass to compare those two things. I think it's mistaken to assume the 95% (say) worst case in the past has same return as the 95% worst case looking forward: the center of the future distribution is significantly lower IMO so the left tail likely worse than past left tail also. OTOH with ABW if I use the expected return that's not at all a worst case.
To repeat, as in your point I'm focusing on estimating the required amount *before* retirement.

*ignoring different taxation of an actual salary v dividends, interest, capital gains and return of principal on investment. In real life I'd want to estimate my after tax return to get after tax spending allowable, but that then depends on my tax rates and isn't as general.
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Re: Traditional SWR - flawed at the core

Post by tibbitts »

willthrill81 wrote: Fri Jan 21, 2022 2:33 pm
tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
I would expect expenditures to decline through retirement, though not necessarily as a function of market performance, just as a function of age. There might be some pickup toward the very end of life but as a pattern I'd guess the decline you describe would be expected.
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Re: Traditional SWR - flawed at the core

Post by jebmke »

tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
Me too; I would have guessed that most likely is SS + maybe some savings (e.g CDs) and/or small annuities (purchased or pension).
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Re: Traditional SWR - flawed at the core

Post by randomguy »

willthrill81 wrote: Fri Jan 21, 2022 2:33 pm
tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
Why is this shocking? Imagine you retire with a 4% SWR any time in the past 35 years. How many times are you going to be down in terms of nominal dollars if you invested something like 50/50? Basically ever. In real dollars? 2000-1. Throw in the trend of declining spending as you age (which appears to be unrelated to portfolio preservation), and yeah most people end up with more than they started.

Unfortunately this stuff is hard to act on to allow you to retire earlier or spend more earlier. You have to prepare for the worst even though it is unlikely to show up. Probably the only group that could really use this would be something like the lean FIRE cohort since they can handle things like aa 25% failure rate. They could easily retire with 5% SWR and if they don't have a good first half decade or so, get a job.
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Re: Traditional SWR - flawed at the core

Post by Booper »

EddyB wrote: Fri Jan 21, 2022 2:24 pm
Marseille07 wrote: Fri Jan 21, 2022 11:39 am
Ben Mathew wrote: Fri Jan 21, 2022 11:23 am
EddyB wrote: Fri Jan 21, 2022 9:59 am In the 4% SWR paradigm, your first investor is only counting on another 25 years of withdrawals, while your second is counting on 30. While you might raise concerns, no “contradiction” is revealed here.
The contradiction is that both investors are now in identical circumstances. Both are 60 years old with $1.5 million and the same life expectancy. But SWR is telling one to take out $2 million and the other to take out $1.5 million.
There is no contradiction.

Investor 1 decided to walk at the age of 55, Investor 2 retired at age 60.

With respect to SWR, Investor 1 has 25 years to go. Investor 2 has 30 years to go. The circumstances are not identical.
Right. I wouldn't disagree if Ben Mathew and 9-5 Suited wanted to say that Investor 1 will be nervous (perhaps recognizing an error in planning for only a 30-year withdrawal period in the first place), but that's distinct from the "contradiction" claimed in the OP.
More importantly, it's not clear to me if this situation has ever happened in the history of US markets, which is what the 4% rule (and all backtesting) limits itself to.

A 25% real drop over 5 years - even with a 4% withdrawals - is very steep.
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Re: Traditional SWR - flawed at the core

Post by willthrill81 »

randomguy wrote: Fri Jan 21, 2022 3:21 pm
willthrill81 wrote: Fri Jan 21, 2022 2:33 pm
tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
Why is this shocking? Imagine you retire with a 4% SWR any time in the past 35 years. How many times are you going to be down in terms of nominal dollars if you invested something like 50/50? Basically ever. In real dollars? 2000-1. Throw in the trend of declining spending as you age (which appears to be unrelated to portfolio preservation), and yeah most people end up with more than they started.
Year 2000 retirees with a 60/40 AA and global stocks who used the '4% rule' have actually spent most of their time down in nominal dollars and virtually all of it down in real dollars, as seen here.
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Re: Traditional SWR - flawed at the core

Post by Marseille07 »

Ben Mathew wrote: Fri Jan 21, 2022 1:44 pm You're saying pre-retirement people should take into account new information about their portfolio value, but post-retirement they shouldn't? Makes no sense to me.
That's just how the methodology works. It was designed to measure the likelihood of success in a 30-year retirement.

So of course, accounting of new information changes before / after retirement. This is not contradicting anything imo. Whether you prefer this methodology or not is a different question.
Last edited by Marseille07 on Fri Jan 21, 2022 5:48 pm, edited 1 time in total.
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Re: Traditional SWR - flawed at the core

Post by Booper »

willthrill81 wrote: Fri Jan 21, 2022 5:07 pm
randomguy wrote: Fri Jan 21, 2022 3:21 pm
willthrill81 wrote: Fri Jan 21, 2022 2:33 pm
tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
Why is this shocking? Imagine you retire with a 4% SWR any time in the past 35 years. How many times are you going to be down in terms of nominal dollars if you invested something like 50/50? Basically ever. In real dollars? 2000-1. Throw in the trend of declining spending as you age (which appears to be unrelated to portfolio preservation), and yeah most people end up with more than they started.
Year 2000 retirees with a 60/40 AA and global stocks who used the '4% rule' have actually spent most of their time down in nominal dollars and virtually all of it down in real dollars, as seen here.
For reference: According to ficalc.app using a 60/40 portfolio and 30 years:
-95% of portfolios succeeded (lasted all 30 years)
-8% "nearly failed" (real value < 35% of original)
-17% had "large ends" (> 300% original real value)
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Re: Traditional SWR - flawed at the core

Post by randomguy »

willthrill81 wrote: Fri Jan 21, 2022 5:07 pm
randomguy wrote: Fri Jan 21, 2022 3:21 pm
willthrill81 wrote: Fri Jan 21, 2022 2:33 pm
tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
Why is this shocking? Imagine you retire with a 4% SWR any time in the past 35 years. How many times are you going to be down in terms of nominal dollars if you invested something like 50/50? Basically ever. In real dollars? 2000-1. Throw in the trend of declining spending as you age (which appears to be unrelated to portfolio preservation), and yeah most people end up with more than they started.
Year 2000 retirees with a 60/40 AA and global stocks who used the '4% rule' have actually spent most of their time down in nominal dollars and virtually all of it down in real dollars, as seen here.
Yep that is exactly what I wrote. So we have 2 bad years in the last 40 in real terms. so 95% of all retirees are up. Now that is a lot more than the 80% in the surveys I have seen but I assume their are a lot of underfunded retirees taking out a lot more than 4%. The expectation should be that your portfolio grows. It is the rare case when it shrinks unless you decide that you want it to shrink by increasing spending or going hyperconservative.
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Re: Traditional SWR - flawed at the core

Post by Leesbro63 »

tibbitts wrote: Fri Jan 21, 2022 2:17 pm
How is ABW telling me how much I will have to adjust withdrawals during retirement, before I retire? Most people outside of Bogleheads will not be adjusting their retirement spending much, because they won't have the cushion built into SWR that Bogleheads just assume. I'm guessing the average Boglehead will spend in the 1-2% range of their starting account balances throughout retirement (with probably an occasional lumpy expense exceeding that), so all these discussions are purely academic for them, unless we get some truly horrible investment results. When we get posts saying "I don't know anyone who would stick to a SWR despite..." I think that's more a reflection of Bogleheads' social circles than the population as a whole.
Excellent points. Many Bogleheads find 4%SWR too scary and the general population probably has little wiggle room at 4%.
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Re: Traditional SWR - flawed at the core

Post by Ben Mathew »

Marseille07 wrote: Fri Jan 21, 2022 5:17 pm
Ben Mathew wrote: Fri Jan 21, 2022 1:44 pm You're saying pre-retirement people should take into account new information about their portfolio value, but post-retirement they shouldn't? Makes no sense to me.
That's just how the methodology works.
Yes, that's how the methodology works. And that methodology results in the following contradiction: two people in identical situations are being prescribed different things based on a history that is irrelevant.
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Re: Traditional SWR - flawed at the core

Post by willthrill81 »

randomguy wrote: Fri Jan 21, 2022 5:45 pm
willthrill81 wrote: Fri Jan 21, 2022 5:07 pm
randomguy wrote: Fri Jan 21, 2022 3:21 pm
willthrill81 wrote: Fri Jan 21, 2022 2:33 pm
tibbitts wrote: Fri Jan 21, 2022 2:29 pm
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
Why is this shocking? Imagine you retire with a 4% SWR any time in the past 35 years. How many times are you going to be down in terms of nominal dollars if you invested something like 50/50? Basically ever. In real dollars? 2000-1. Throw in the trend of declining spending as you age (which appears to be unrelated to portfolio preservation), and yeah most people end up with more than they started.
Year 2000 retirees with a 60/40 AA and global stocks who used the '4% rule' have actually spent most of their time down in nominal dollars and virtually all of it down in real dollars, as seen here.
Yep that is exactly what I wrote. So we have 2 bad years in the last 40 in real terms. so 95% of all retirees are up. Now that is a lot more than the 80% in the surveys I have seen but I assume their are a lot of underfunded retirees taking out a lot more than 4%. The expectation should be that your portfolio grows. It is the rare case when it shrinks unless you decide that you want it to shrink by increasing spending or going hyperconservative.
Let's keep things in perspective though. Bonds had their biggest bull run in history from 1981-2012, and stocks also went on an incredible tear from 1981-1999 and again from 2010-2021. There haven't been that many truly bad times to retire in a long time. But we don't have to look too far before all that to see some really difficult periods. Much of the 1960s and 1970s would have been really rough for retirees dependent on their portfolios.

I don't think that retirees should expect their portfolio to grow unless they significantly oversaved. If they are fortunate and get that growth, great.
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Re: Traditional SWR - flawed at the core

Post by randomguy »

willthrill81 wrote: Fri Jan 21, 2022 9:45 pm Let's keep things in perspective though. Bonds had their biggest bull run in history from 1981-2012, and stocks also went on an incredible tear from 1981-1999 and again from 2010-2021. There haven't been that many truly bad times to retire in a long time. But we don't have to look too far before all that to see some really difficult periods. Much of the 1960s and 1970s would have been really rough for retirees dependent on their portfolios.

I don't think that retirees should expect their portfolio to grow unless they significantly oversaved. If they are fortunate and get that growth, great.
Pretty much every single retiree today has retired into those bull markets of both stocks and bonds. When you call someone on the phone for a survey, you aren't going to encounter very many people who retired before 1980. Heck it isn't even like the post 1974 retirees had a really bad run. About half of the 60s/70s were bad. The rest were fine. And then of course the next step is to look beyond the 60s to see how good the 50s and 40s were. Something that happens 70% or so of the time is the expected result. You don't always get the expect result but it showing up isn't surprising or shocking.

It is easy to get deluded about what the expected result is because we normally spend almost no time thinking about what the top 75% of cases will be like because they aren't remotely interesting. Having more money than you planned for is only a problem in the threads where people complain about their RMDs being too large. We spend all of our time focusing on the bottom 25% (and most of the time bottom 5%) because that is where you have interesting choices to make about how much and what risks to take.
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Re: Traditional SWR - flawed at the core

Post by JSNO »

Ben Mathew wrote: Fri Jan 21, 2022 6:34 pm
Marseille07 wrote: Fri Jan 21, 2022 5:17 pm
Ben Mathew wrote: Fri Jan 21, 2022 1:44 pm You're saying pre-retirement people should take into account new information about their portfolio value, but post-retirement they shouldn't? Makes no sense to me.
That's just how the methodology works.
Yes, that's how the methodology works. And that methodology results in the following contradiction: two people in identical situations are being prescribed different things based on a history that is irrelevant.
If as of today, both people are planning to live for another 30 years, then there is a contradiction because both people still need to fund 30 years of retirement.

However, both people planning to live another 30 years from today violates the assumptions underlying the 4% SWR as laid out in the Trinity study. The underlying assumption is that the portfolio needs to last only 30 years. So, the person who retired 5 years ago, is planning to fund another 25 years. The person who retired today needs to fund 30 years. The SWR today for the first person can be higher because their portfolio does not need to last as long.

The contradiction is not inherent in the SWR. What appears to be a contradiction is because the two people (rightly or wrongly) have assessed a different age at which they expect to die. This caused the first person to retire earlier than the second.
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Re: Traditional SWR - flawed at the core

Post by Ben Mathew »

JSNO wrote: Sat Jan 22, 2022 12:18 am
Ben Mathew wrote: Fri Jan 21, 2022 6:34 pm
Marseille07 wrote: Fri Jan 21, 2022 5:17 pm
Ben Mathew wrote: Fri Jan 21, 2022 1:44 pm You're saying pre-retirement people should take into account new information about their portfolio value, but post-retirement they shouldn't? Makes no sense to me.
That's just how the methodology works.
Yes, that's how the methodology works. And that methodology results in the following contradiction: two people in identical situations are being prescribed different things based on a history that is irrelevant.
If as of today, both people are planning to live for another 30 years, then there is a contradiction because both people still need to fund 30 years of retirement.

However, both people planning to live another 30 years from today violates the assumptions underlying the 4% SWR as laid out in the Trinity study. The underlying assumption is that the portfolio needs to last only 30 years. So, the person who retired 5 years ago, is planning to fund another 25 years. The person who retired today needs to fund 30 years. The SWR today for the first person can be higher because their portfolio does not need to last as long.

The contradiction is not inherent in the SWR. What appears to be a contradiction is because the two people (rightly or wrongly) have assessed a different age at which they expect to die. This caused the first person to retire earlier than the second.
You make a fair point about the horizon not being constant between the two investors in the OP. The problem would be easy to show if we had different SWR for different horizons. But if we have only a 30 year SWR, it's not possible to keep things equal between the two people retiring at different dates. But we can keep things almost equal by reducing the time between the two retirement dates. Consider the following modification of the scenarios in OP:

Investor 3: Retired 1 week ago at 60 with $2M 60/40 portfolio and 4% withdrawal. Markets crashed last week and his portfolio is down to $1.5M. Assume 0% inflation for simplicity and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 4: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

Both investors have almost the same horizons (1 week apart) and almost the same and portfolios (1 week's withdrawal apart), but the withdrawals are wildly different ($80K vs $60K). It's because SWR is anchoring on starting portfolio value and not adjusting.
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Re: Traditional SWR - flawed at the core

Post by smitcat »

willthrill81 wrote: Fri Jan 21, 2022 2:33 pm
tibbitts wrote: Fri Jan 21, 2022 2:29 pm
willthrill81 wrote: Fri Jan 21, 2022 2:22 pm Regarding non-BHs not adjusting their retirement spending much, the empirical data I've seen clearly indicates the opposite. Most retirees do not spend down their portfolios much at all, meaning that they must be adjusting their spending over time.
I'm surprised that data shows most retirees even have portfolios, much less that they aren't spending them down.
IIRC, one of the articles I read discussing the issue was looking at those who retired with at least $300k. That's definitely far more than the average retiree has but downright plebian by BH standards.

Regardless, the statement that retirees don't change their spending much does not seem to fit the data we have. David Blanchett's work in this area found their spending declined 1-2% in real dollars every year, for instance.
Agreed - according to the surveys most retirees without fixed payment portfolios do not draw down their retirement assets nearly as much as they could, they are afraid to do that so they adjust their spending downwards.
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Re: Traditional SWR - flawed at the core

Post by JackoC »

Ben Mathew wrote: Sat Jan 22, 2022 1:26 am
JSNO wrote: Sat Jan 22, 2022 12:18 am
Ben Mathew wrote: Fri Jan 21, 2022 6:34 pm
Marseille07 wrote: Fri Jan 21, 2022 5:17 pm
Ben Mathew wrote: Fri Jan 21, 2022 1:44 pm You're saying pre-retirement people should take into account new information about their portfolio value, but post-retirement they shouldn't? Makes no sense to me.
That's just how the methodology works.
Yes, that's how the methodology works. And that methodology results in the following contradiction: two people in identical situations are being prescribed different things based on a history that is irrelevant.
If as of today, both people are planning to live for another 30 years, then there is a contradiction because both people still need to fund 30 years of retirement.

However, both people planning to live another 30 years from today violates the assumptions underlying the 4% SWR as laid out in the Trinity study.

The contradiction is not inherent in the SWR.
You make a fair point about the horizon not being constant between the two investors in the OP. The problem would be easy to show if we had different SWR for different horizons. But if we have only a 30 year SWR, it's not possible to keep things equal between the two people retiring at different dates. But we can keep things almost equal by reducing the time between the two retirement dates. Consider the following modification of the scenarios in OP:
The flaw then would seem to be the application of the same 'received wisdom' SWR for different lengths of retirement. *That's* a contradiction. And
a real life one I'd say judging by threads where people reference 4% for early or even very early retirement. 'The Trinity Study said', but not for periods that long (besides the basic flaw in the whole backward looking method*). Otherwise, some of what's being called 'contradiction' is a) randomness b) ignoring any relationship between asset valuation and expected return, a flaw also shared by referencing 'Trinity Study' or using FIREcalc. As to randomness, you have to make some assumption at t=0. To me an outright contradiction would be in terms of things you could know when you made the decision, not things you later find out. Then, as to changing your decision at t=1, 'ABW' is far from a magic bullet practically. Will you assume lower/higher asset valuation means higher/lower expected return? And as I mentioned last time, the general assumption in applying 'ABW' seems to be to use the expected return as 'r'. But theoretically at least 4% is scaled from a 'worst case' (subject to the basic flaw*).

Some posts have played the 'easy for well off BH's to say' card and it's got some truth to it. I wouldn't dream of depleting our assets by 4% a year to live. But OK, that's influenced by having no need to, we'd have to scale up our lifestyle dramatically from what it's been for decades to spend that much. And at the other end of the spectrum some people could live at a standard not far below what they are used to on SS/pension alone (would be a big reduction in living standard for us) so are also kind of playing around with 'SWR' on some marginal amount in which they haven't included SS/pension present value. Somewhere in the middle it will make a big difference if 4% turns out too optimistic for 30 yrs *from now*, as well as for those making the outright flaky assumption 4% would apply if you retired at 45 (I've seen posts assuming it). But my simple (simplistic?) point, if *at* retirement you say 'Trinity Study, 30yrs, 4%, I have it, I'm retiring' or 'ABW, I'll assume 1.2% real after tax return, 30 yrs, 4%, I have it, I'm retiring', what's the 'contradiction'? And if the ABW person assumes significantly more than 1.2%, as is practically likely, they'll decide to retire sooner. :happy

*not a contradiction just a wrong methodology IMO, using the distribution of past returns as if it's 'the' stationary distribution of returns irrespective of starting valuations. That's a clearly optimistic assumption IMO at historically high starting asset valuations like now. Those valuations don't mean 'crash coming, but you can avoid it by listening to my tactical market calls!', it means unknown future realized return, I have no tactical market call to give, but future returns are reasonably assumed centered around a lower centroid, ie the expected return, than average past return. Therefore '% success' numbers from past studies are too optimistic unless you posit the expected variance is also lower than average past variance, a heroic assumption I'm not willing to make though I can't prove it's untrue.
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Re: Traditional SWR - flawed at the core

Post by martincmartin »

SWR is really answering the question "when can I stop working and retire?"

A fixed SWR is a simplification, like a frictionless plane in physics. It doesn't take into account social security or pension, or big expenses like kids college. It assumes you buy 1/10 of a new car every year, rather than a new car every 10 years.

Even using CPI-U to estimate inflation is an approximation. Different goods have different rates of inflation. Over the last year, cars have gone up much more than inflation, and other things less. The actual inflation you experience will be based on the goods you actually buy, which will be different than the national average.

Also, spending patterns change in retirement. For some people, it goes up as soon as they retire, as they go on trips. For others, it stays the same or even goes down. As you get older, spending on vacations goes down, but on health care goes up.

So it's all just a simplification, a rule of thumb.
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Re: Traditional SWR - flawed at the core

Post by MathWizard »

martincmartin wrote: Sat Jan 22, 2022 10:12 am SWR is really answering the question "when can I stop working and retire?"

A fixed SWR is a simplification, like a frictionless plane in physics. It doesn't take into account social security or pension, or big expenses like kids college. It assumes you buy 1/10 of a new car every year, rather than a new car every 10 years.

Even using CPI-U to estimate inflation is an approximation. Different goods have different rates of inflation. Over the last year, cars have gone up much more than inflation, and other things less. The actual inflation you experience will be based on the goods you actually buy, which will be different than the national average.

Also, spending patterns change in retirement. For some people, it goes up as soon as they retire, as they go on trips. For others, it stays the same or even goes down. As you get older, spending on vacations goes down, but on health care goes up.

So it's all just a simplification, a rule of thumb.
Exactly. The idea of Sustainable Withdrawal Rate (not "Safe") of about 4% came from Bengen to counter those in the 90's believing that they could pull 8-11% annually from their portfolios.

It is a tool for planning and even the subsequent Trinity study stated that if one used a fixed real withdrawal rate that
the strategy should be flexible enough so that downward adjustments in withdrawals would be possible during downturns in the market.
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Re: Traditional SWR - flawed at the core

Post by martincmartin »

9-5 Suited wrote: Fri Jan 21, 2022 9:47 am Investor 1: Retired 5 years ago at 55 with $2M 60/40 portfolio and 4% withdrawal. With bad sequencing, his portfolio is down to $1.5M. Assume 0% inflation for simplicity (ha, I know) and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 2: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

So both investors are 60 years old, retired, 60/40 AA, with $1.5M portfolio and yet would have very different "safe withdrawal" amounts.
The 4% is for a 30 year retirement, roughly retiring at 65, with money lasting until 95. If you retire earlier, you need a lower SWR. In your two examples, with a 5 year difference, the earlier retirement should be using a lower SWR than the later one.

But that won't cover the full gap. In your example, the gap exists because the market was more overvalued when investor 1 retired than when investor 2 could retire. So investor 2 won't have as bad a sequence of returns as investor 1 going forward, because the CAPM is wrong. However, we don't know how much better things will be for investor 2, so we don't know how much to raise the SWR. So we'll be conservative.
So two questions:
(1) does anyone actually advocate a traditional SWR approach like this?
Pretty much. I plan out the money I want to spend in retirement, then compute when I'll be able to retire. I ensure I can spend that much, even if we hit a downturn that's as bad as any previous downturn. And anyway, a lot of expenses are fixed. I'm not going to sell my house in a down market to lower housing expenses, or send my kids to worse schools. That counts as not planning properly. After the first decade of retirement, if we did not actually have a bad sequence of returns, I might find something stupid to blow money on, like stay at a $1000/night hotel, just because I can. But more likely, I'll just leave the money there for the kids to inherit, or donate to charity. Seems better than buying expensive stuff I don't want just because I can.
(2) if so, how do you rationalize this when variable withdrawal strategies exist (VPW, ABW, fixed %) that would eliminate this obviously contradictory example above?
Stock prices aren't a complete random walk, they depend on things like valuations and previous returns. So if there's a bad 5 years before you retire, like investor 2, then you can probably use a higher SWR, since any remaining drop will be more modest, and any recovery sooner (in fact, exactly 5 years sooner). But it's hard to put numbers on these, and I haven't tried.

I haven't tried because I'm retiring in 2 months, and the last 5 years have not, in fact, been a bear market. They've been an incredible bull market. So I really do need to protect against the worst possible bear market, like investor 1.
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Re: Traditional SWR - flawed at the core

Post by randomguy »

Ben Mathew wrote: Sat Jan 22, 2022 1:26 am

You make a fair point about the horizon not being constant between the two investors in the OP. The problem would be easy to show if we had different SWR for different horizons. But if we have only a 30 year SWR, it's not possible to keep things equal between the two people retiring at different dates. But we can keep things almost equal by reducing the time between the two retirement dates. Consider the following modification of the scenarios in OP:

Investor 3: Retired 1 week ago at 60 with $2M 60/40 portfolio and 4% withdrawal. Markets crashed last week and his portfolio is down to $1.5M. Assume 0% inflation for simplicity and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 4: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

Both investors have almost the same horizons (1 week apart) and almost the same and portfolios (1 week's withdrawal apart), but the withdrawals are wildly different ($80K vs $60K). It's because SWR is anchoring on starting portfolio value and not adjusting.
Investor 1 is taking on a 5% chance of failure. Investor 4 is taking on a 0% chance. Less risk, less money..
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Re: Traditional SWR - flawed at the core

Post by Marseille07 »

Ben Mathew wrote: Sat Jan 22, 2022 1:26 am Investor 3: Retired 1 week ago at 60 with $2M 60/40 portfolio and 4% withdrawal. Markets crashed last week and his portfolio is down to $1.5M. Assume 0% inflation for simplicity and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 4: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

Both investors have almost the same horizons (1 week apart) and almost the same and portfolios (1 week's withdrawal apart), but the withdrawals are wildly different ($80K vs $60K). It's because SWR is anchoring on starting portfolio value and not adjusting.
Well 1-week apart and differing by 25% on a 60/40 portfolio is a bit contrived, but your point is clear.

That said, this is why SWR measures the success rate per retirement year. In the example above, Investor 3 is more likely to run out of money than Investor 4; it's akin to retiring in 1966 vs 1982.

There's nothing contradicting about this though; obviously some retirement years are better than others. Remember, the success criteria is only that you have > $0 in your portfolio after 30 years.
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Re: Traditional SWR - flawed at the core

Post by randomguy »

martincmartin wrote: Sat Jan 22, 2022 10:32 am Stock prices aren't a complete random walk, they depend on things like valuations and previous returns. So if there's a bad 5 years before you retire, like investor 2, then you can probably use a higher SWR, since any remaining drop will be more modest, and any recovery sooner (in fact, exactly 5 years sooner). But it's hard to put numbers on these, and I haven't tried.

I haven't tried because I'm retiring in 2 months, and the last 5 years have not, in fact, been a bear market. They've been an incredible bull market. So I really do need to protect against the worst possible bear market, like investor 1.
There have been tons of papers and studies on this using various factors like CAPE10 or recent market performance. First google hit: https://www.fa-mag.com/news/choosing-th ... section=40 . Note how they had the April 2009 person at a 6.5% SWR. Nobody on bogleheads like them because they are optimistic not pessimistic:)
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Re: Traditional SWR - flawed at the core

Post by Leesbro63 »

This thread is really discussing what Kitces calls "The Starting Point Paradox". Here's Kitces research on this. It was done in early 2008, but I think it's still valid. Assuming I understand it correctly, he's saying that the starting point paradox is really about differences in the valuation of the stock market at different retirement times. But that 4% was still safe, even if you retired at a time of the highest valuation. Here's his report on this:


https://www.kitces.com/wp-content/uploa ... y-2008.pdf
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Re: Traditional SWR - flawed at the core

Post by nigel_ht »

jebmke wrote: Fri Jan 21, 2022 9:56 am SWR is not a guarantee, it is a guidepost. While I'm sure there are some people who use a constant (inflation adjusted withdrawal) I have never met anyone who actually does - and I know a lot of retirees.

I'm not sure I could do it. There are some years when my natural spending is below average - and I can't picture how I would go about rushing out to spend up to the constant amount just to satisfy the SWR method.
SWR is a ceiling not a floor.

Nobody has to spend their full SWR amount. However, if you go above the SWR amount then in the worst case historical scenarios you may run out of money before then end of your retirement period.
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Re: Traditional SWR - flawed at the core

Post by nigel_ht »

randomguy wrote: Sat Jan 22, 2022 10:49 am
martincmartin wrote: Sat Jan 22, 2022 10:32 am Stock prices aren't a complete random walk, they depend on things like valuations and previous returns. So if there's a bad 5 years before you retire, like investor 2, then you can probably use a higher SWR, since any remaining drop will be more modest, and any recovery sooner (in fact, exactly 5 years sooner). But it's hard to put numbers on these, and I haven't tried.

I haven't tried because I'm retiring in 2 months, and the last 5 years have not, in fact, been a bear market. They've been an incredible bull market. So I really do need to protect against the worst possible bear market, like investor 1.
There have been tons of papers and studies on this using various factors like CAPE10 or recent market performance. First google hit: https://www.fa-mag.com/news/choosing-th ... section=40 . Note how they had the April 2009 person at a 6.5% SWR. Nobody on bogleheads like them because they are optimistic not pessimistic:)
If you use the CAPE based withdrawal strategy I think the current WR is like 2.something percent.

That’s a hard pill to swallow eh?
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Re: Traditional SWR - flawed at the core

Post by nigel_ht »

9-5 Suited wrote: Fri Jan 21, 2022 9:47 am There are two well-known behavioral errors - the sunk cost fallacy and the endowment effect - that both share a common message. It's dangerous to allow information that has already passed to inform decisions about the present and future.

The traditional approach to Safe Withdrawal Rates - pegging withdrawals to the initial portfolio value and then adjusting only for inflation - is obviously wrought with this issue. Take a simple example that exposes the problem:

Investor 1: Retired 5 years ago at 55 with $2M 60/40 portfolio and 4% withdrawal. With bad sequencing, his portfolio is down to $1.5M. Assume 0% inflation for simplicity (ha, I know) and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 2: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

So both investors are 60 years old, retired, 60/40 AA, with $1.5M portfolio and yet would have very different "safe withdrawal" amounts.

So two questions:
(1) does anyone actually advocate a traditional SWR approach like this?
(2) if so, how do you rationalize this when variable withdrawal strategies exist (VPW, ABW, fixed %) that would eliminate this obviously contradictory example above?
Investor 1 dies 5 years earlier than Investor 2 at age 85.

He has only 25 years remaining of his 30 year retirement.
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Re: Traditional SWR - flawed at the core

Post by randomguy »

nigel_ht wrote: Sat Jan 22, 2022 11:00 am
randomguy wrote: Sat Jan 22, 2022 10:49 am
martincmartin wrote: Sat Jan 22, 2022 10:32 am Stock prices aren't a complete random walk, they depend on things like valuations and previous returns. So if there's a bad 5 years before you retire, like investor 2, then you can probably use a higher SWR, since any remaining drop will be more modest, and any recovery sooner (in fact, exactly 5 years sooner). But it's hard to put numbers on these, and I haven't tried.

I haven't tried because I'm retiring in 2 months, and the last 5 years have not, in fact, been a bear market. They've been an incredible bull market. So I really do need to protect against the worst possible bear market, like investor 1.
There have been tons of papers and studies on this using various factors like CAPE10 or recent market performance. First google hit: https://www.fa-mag.com/news/choosing-th ... section=40 . Note how they had the April 2009 person at a 6.5% SWR. Nobody on bogleheads like them because they are optimistic not pessimistic:)
If you use the CAPE based withdrawal strategy I think the current WR is like 2.something percent.

That’s a hard pill to swallow eh?
It is still ~4% using historical data. You only get the 2% when you use made up numbers from a monte carlo simulators. If your an optmist you believe in history. If your a pessimist you think the models are right. Who knows. Valuations are really tough to evaluate. If the next 10 years are good we will talk about how accounting rules bloated the CAPE10 and how a shift from manufacturing to tech justified a large increase in the historical CAPE10. If things plummet, we will talk about how stupid we all were....
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Re: Traditional SWR - flawed at the core

Post by nigel_ht »

Ben Mathew wrote: Sat Jan 22, 2022 1:26 am
JSNO wrote: Sat Jan 22, 2022 12:18 am
Ben Mathew wrote: Fri Jan 21, 2022 6:34 pm
Marseille07 wrote: Fri Jan 21, 2022 5:17 pm
Ben Mathew wrote: Fri Jan 21, 2022 1:44 pm You're saying pre-retirement people should take into account new information about their portfolio value, but post-retirement they shouldn't? Makes no sense to me.
That's just how the methodology works.
Yes, that's how the methodology works. And that methodology results in the following contradiction: two people in identical situations are being prescribed different things based on a history that is irrelevant.
If as of today, both people are planning to live for another 30 years, then there is a contradiction because both people still need to fund 30 years of retirement.

However, both people planning to live another 30 years from today violates the assumptions underlying the 4% SWR as laid out in the Trinity study. The underlying assumption is that the portfolio needs to last only 30 years. So, the person who retired 5 years ago, is planning to fund another 25 years. The person who retired today needs to fund 30 years. The SWR today for the first person can be higher because their portfolio does not need to last as long.

The contradiction is not inherent in the SWR. What appears to be a contradiction is because the two people (rightly or wrongly) have assessed a different age at which they expect to die. This caused the first person to retire earlier than the second.
You make a fair point about the horizon not being constant between the two investors in the OP. The problem would be easy to show if we had different SWR for different horizons. But if we have only a 30 year SWR, it's not possible to keep things equal between the two people retiring at different dates.
Image

Needs to be updated. I wonder if BigERN has an updated table somewhere.

But we can keep things almost equal by reducing the time between the two retirement dates. Consider the following modification of the scenarios in OP:

Investor 3: Retired 1 week ago at 60 with $2M 60/40 portfolio and 4% withdrawal. Markets crashed last week and his portfolio is down to $1.5M. Assume 0% inflation for simplicity and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 4: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

Both investors have almost the same horizons (1 week apart) and almost the same and portfolios (1 week's withdrawal apart), but the withdrawals are wildly different ($80K vs $60K). It's because SWR is anchoring on starting portfolio value and not adjusting.
Historically both have a 5% failure rate but investor 2 has a lower failure rate when valuations are taken into account.

https://earlyretirementnow.com/2016/12/ ... ation/amp/

Not adjusting isn’t much of a problem if you understand it’s a ceiling and not a floor:

“Oh wow, I lost $500K in a week! Maybe I should trim my expenses?”

If all four investors have the same actual $60K a year expenses then they all have the same risk of portfolio depletion.

If they all have $80K expenses then investor #2 and #4 can’t retire yet.

Folks really like to compare apples to oranges and wonder why the outcomes are strange.
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Re: Traditional SWR - flawed at the core

Post by martincmartin »

randomguy wrote: Sat Jan 22, 2022 10:49 am There have been tons of papers and studies on this using various factors like CAPE10 or recent market performance. First google hit: https://www.fa-mag.com/news/choosing-th ... section=40 . Note how they had the April 2009 person at a 6.5% SWR. Nobody on bogleheads like them because they are optimistic not pessimistic:)
Interesting, thanks!
Leesbro63 wrote: Sat Jan 22, 2022 10:56 am This thread is really discussing what Kitces calls "The Starting Point Paradox". Here's Kitces research on this. It was done in early 2008, but I think it's still valid. Assuming I understand it correctly, he's saying that the starting point paradox is really about differences in the valuation of the stock market at different retirement times. But that 4% was still safe, even if you retired at a time of the highest valuation. Here's his report on this:

https://www.kitces.com/wp-content/uploa ... y-2008.pdf
I hadn't heard of that either, thanks for the reference.
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Re: Traditional SWR - flawed at the core

Post by Ben Mathew »

JackoC wrote: Sat Jan 22, 2022 10:03 am
Ben Mathew wrote: Sat Jan 22, 2022 1:26 am
JSNO wrote: Sat Jan 22, 2022 12:18 am
Ben Mathew wrote: Fri Jan 21, 2022 6:34 pm
Marseille07 wrote: Fri Jan 21, 2022 5:17 pm
That's just how the methodology works.
Yes, that's how the methodology works. And that methodology results in the following contradiction: two people in identical situations are being prescribed different things based on a history that is irrelevant.
If as of today, both people are planning to live for another 30 years, then there is a contradiction because both people still need to fund 30 years of retirement.

However, both people planning to live another 30 years from today violates the assumptions underlying the 4% SWR as laid out in the Trinity study.

The contradiction is not inherent in the SWR.
You make a fair point about the horizon not being constant between the two investors in the OP. The problem would be easy to show if we had different SWR for different horizons. But if we have only a 30 year SWR, it's not possible to keep things equal between the two people retiring at different dates. But we can keep things almost equal by reducing the time between the two retirement dates. Consider the following modification of the scenarios in OP:
The flaw then would seem to be the application of the same 'received wisdom' SWR for different lengths of retirement. *That's* a contradiction. And
a real life one I'd say judging by threads where people reference 4% for early or even very early retirement. 'The Trinity Study said', but not for periods that long (besides the basic flaw in the whole backward looking method*). Otherwise, some of what's being called 'contradiction' is a) randomness b) ignoring any relationship between asset valuation and expected return, a flaw also shared by referencing 'Trinity Study' or using FIREcalc. As to randomness, you have to make some assumption at t=0. To me an outright contradiction would be in terms of things you could know when you made the decision, not things you later find out. Then, as to changing your decision at t=1, 'ABW' is far from a magic bullet practically. Will you assume lower/higher asset valuation means higher/lower expected return? And as I mentioned last time, the general assumption in applying 'ABW' seems to be to use the expected return as 'r'. But theoretically at least 4% is scaled from a 'worst case' (subject to the basic flaw*).
You seem to be evaluating SWR only as a tool to tell you when to retire. You are not considering SWR as a retirement spending strategy. The contradiction OP was trying to get at is from using SWR as an actual retirement spending strategy, sticking to a withdrawal calculated at the start of retirement. This refusal to update to new information leads to contradictions--people in similar situations are told to withdrawal different amounts because of their starting date. Conditions at the starting date determine everything. So people with different starting dates will get different recommendations that persist even if their circumstances become similar. History matters in a way that it shouldn't. It's as if someone stops you in the streets and asks you the directions to the post office, and your response is "where did you start from? My answer is going to depend on that."

But even as a tool for evaluating when to retire, the SWR methodology (though not the 4% estimate) is pretty bad. The 5% failure rate leads to very conservative withdrawals, and would make people work far longer than they need to. The only reason the current rule is a reasonable 4% is that historical returns have been so high. Lower the mean of that distribution to account for high valuations today (like you seem to favor), and you get much lower than 4% SWR. When people try to go down that road, it doesn't get far because it's just so obviously wrong. The SWR of a risky portfolio can become lower than truly safe withdrawals funded by 100% duration matched TIPS. An obviously wrong and pointless result. The methodology is deeply flawed. It's only rescued by high historical returns that lead to reasonable estimate like 4%. Use a forward looking return distribution based on valuations and it falls apart.

You might say, well we can easily fix that by allowing a 10% failure rate, or 20%. It can be made less conservative. True, but the problem is that it's hard to evaluate what percentage to use for a reasonable estimate. That's because SWR is assuming you won't adjust and so it's not creating the right picture to base our decisions on. If you will adjust, then you're not going to run out of money. So calculating the probability of running out of money is not useful. Instead, your retirement spending will be more or less than expected. There's a probability distribution of retirement spending. And that's what people need to see to decide whether they're ready to retire. For those following a variable strategy, the ABW simulator provides that information (screenshot in earlier post). But every strategy has a probability distribution of retirement spending--whether it's made explicit or not. Regardless of the strategy used, it's best to see that underlying distribution and decide whether to retire on the basis of that. Even for people following a fixed spending, the probability of success and failure don't provide enough information because it doesn't capture the magnitude of the success and failure. They too should be looking at a probability distribution of retirement spending.
JackoC wrote: Sat Jan 22, 2022 10:03 am But my simple (simplistic?) point, if *at* retirement you say 'Trinity Study, 30yrs, 4%, I have it, I'm retiring' or 'ABW, I'll assume 1.2% real after tax return, 30 yrs, 4%, I have it, I'm retiring', what's the 'contradiction'? And if the ABW person assumes significantly more than 1.2%, as is practically likely, they'll decide to retire sooner. :happy
If ABW says someone can take out $40,000 if they retired this year, and $40,000 is about sufficient, that person shouldn't retire yet! If g=0%, then there's roughly a 50% chance that their spending will fall below $40,000 next year. They will need a cushion. Entering lower than expected returns as you did above is a simple way to accomplish this. Or one can take a more explicitly probabilistic approach like the ABW simulator and see the distribution of retirement spending.
JackoC wrote: Sat Jan 22, 2022 10:03 am [...] using the distribution of past returns as if it's 'the' stationary distribution of returns irrespective of starting valuations. That's a clearly optimistic assumption IMO at historically high starting asset valuations like now. Those valuations don't mean 'crash coming, but you can avoid it by listening to my tactical market calls!', it means unknown future realized return, I have no tactical market call to give, but future returns are reasonably assumed centered around a lower centroid, ie the expected return, than average past return. Therefore '% success' numbers from past studies are too optimistic unless you posit the expected variance is also lower than average past variance, a heroic assumption I'm not willing to make though I can't prove it's untrue.
Fully agree.
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Re: Traditional SWR - flawed at the core

Post by willthrill81 »

randomguy wrote: Sat Jan 22, 2022 10:49 am
martincmartin wrote: Sat Jan 22, 2022 10:32 am Stock prices aren't a complete random walk, they depend on things like valuations and previous returns. So if there's a bad 5 years before you retire, like investor 2, then you can probably use a higher SWR, since any remaining drop will be more modest, and any recovery sooner (in fact, exactly 5 years sooner). But it's hard to put numbers on these, and I haven't tried.

I haven't tried because I'm retiring in 2 months, and the last 5 years have not, in fact, been a bear market. They've been an incredible bull market. So I really do need to protect against the worst possible bear market, like investor 1.
There have been tons of papers and studies on this using various factors like CAPE10 or recent market performance. First google hit: https://www.fa-mag.com/news/choosing-th ... section=40 . Note how they had the April 2009 person at a 6.5% SWR. Nobody on bogleheads like them because they are optimistic not pessimistic:)
The only other time that CAPE10 was close to its current level was at the beginning of the year 2000. And the 30 year SWR for that period will almost certainly be well above 4%, as discussed here. However, starting bond yields were much higher then than now. If bonds' returns had been closer to what the bond market is currently expecting, the 30 year SWR would likely be very close to 4%, as discussed here.
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Re: Traditional SWR - flawed at the core

Post by Ben Mathew »

randomguy wrote: Sat Jan 22, 2022 10:36 am
Ben Mathew wrote: Sat Jan 22, 2022 1:26 am

You make a fair point about the horizon not being constant between the two investors in the OP. The problem would be easy to show if we had different SWR for different horizons. But if we have only a 30 year SWR, it's not possible to keep things equal between the two people retiring at different dates. But we can keep things almost equal by reducing the time between the two retirement dates. Consider the following modification of the scenarios in OP:

Investor 3: Retired 1 week ago at 60 with $2M 60/40 portfolio and 4% withdrawal. Markets crashed last week and his portfolio is down to $1.5M. Assume 0% inflation for simplicity and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 4: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

Both investors have almost the same horizons (1 week apart) and almost the same and portfolios (1 week's withdrawal apart), but the withdrawals are wildly different ($80K vs $60K). It's because SWR is anchoring on starting portfolio value and not adjusting.
Investor 1 is taking on a 5% chance of failure. Investor 4 is taking on a 0% chance. Less risk, less money..
Both followed the same methodology to arrive at their withdrawal amount. Why is the methodology giving different risk/rewards to different people when they didn't ask for it?
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Re: Traditional SWR - flawed at the core

Post by nigel_ht »

Ben Mathew wrote: Sat Jan 22, 2022 11:42 am
You seem to be evaluating SWR only as a tool to tell you when to retire. You are not considering SWR as a retirement spending strategy. The contradiction OP was trying to get at is from using SWR as an actual retirement spending strategy, sticking to a withdrawal calculated at the start of retirement. This refusal to update to new information leads to contradictions--people in similar situations are told to withdrawal different amounts because of their starting date.
The only thing SWR tells you is that historically you won’t deplete your portfolio if you spend X% Or LESS.

There is no new information. You won’t know if the current period is worse than historical until after you’re dead.

You can refine the probability of failure by using CAPE valuations to achieve a higher SWR. See the ERN article linked above.

It’s still a SWR…just based on slightly different data.
Conditions at the starting date determine everything. So people with different starting dates will get different recommendations that persist even if their circumstances become similar.
This is never true except in highly contrived examples.

When the starting date changes so does portfolio value so the circumstances are no longer similar.
But even as a tool for evaluating when to retire, the SWR methodology (though not the 4% estimate) is pretty bad. The 5% failure rate leads to very conservative withdrawals, and would make people work far longer than they need to.
Eh. I wouldn’t FIRE without a conservative target. The failure conditions most likely appear late in the game where your ability to fix problems becomes far more limited.

Otherwise you’re retiring around 60ish anyway. I dunno that waiting till 65 is “far longer”.

That's because SWR is assuming you won't adjust and so it's not creating the right picture to base our decisions on.
Again, SWR makes no assumptions other that you won’t spend more than the SWR %.
If you will adjust, then you're not going to run out of money. So calculating the probability of running out of money is not useful.
It’s useful to know that your intended withdrawal rate is higher than what would have survived the historical worst case scenario.
If ABW says someone can take out $40,000 if they retired this year, and $40,000 is about sufficient, that person shouldn't retire yet! If g=0%, then there's roughly a 50% chance that their spending will fall below $40,000 next year. They will need a cushion.
And yet if someone can generate $40K a year under SWR they CAN retire now. Especially since vanilla SWR ignores SS.
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Re: Traditional SWR - flawed at the core

Post by willthrill81 »

nigel_ht wrote: Sat Jan 22, 2022 12:06 pm The only thing SWR tells you is that historically you won’t deplete your portfolio if you spend X% Or LESS.
No, it doesn't tell you this, and no metric can. It tells you that your portfolio would not have been prematurely depleted in worst historic period of the PAST.

Without a crystal ball, no one knows what the forward SWR of any strategy will be.
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Re: Traditional SWR - flawed at the core

Post by nigel_ht »

Ben Mathew wrote: Sat Jan 22, 2022 11:52 am
randomguy wrote: Sat Jan 22, 2022 10:36 am
Ben Mathew wrote: Sat Jan 22, 2022 1:26 am

You make a fair point about the horizon not being constant between the two investors in the OP. The problem would be easy to show if we had different SWR for different horizons. But if we have only a 30 year SWR, it's not possible to keep things equal between the two people retiring at different dates. But we can keep things almost equal by reducing the time between the two retirement dates. Consider the following modification of the scenarios in OP:

Investor 3: Retired 1 week ago at 60 with $2M 60/40 portfolio and 4% withdrawal. Markets crashed last week and his portfolio is down to $1.5M. Assume 0% inflation for simplicity and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.

Investor 4: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.

Both investors have almost the same horizons (1 week apart) and almost the same and portfolios (1 week's withdrawal apart), but the withdrawals are wildly different ($80K vs $60K). It's because SWR is anchoring on starting portfolio value and not adjusting.
Investor 1 is taking on a 5% chance of failure. Investor 4 is taking on a 0% chance. Less risk, less money..
Both followed the same methodology to arrive at their withdrawal amount. Why is the methodology giving different risk/rewards to different people when they didn't ask for it?
Both have 5% failure since that’s what 4% over 30 years represents.
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