Withdrawal rate for an early retirement

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EnjoyIt
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

Marseille07 wrote: Wed Nov 25, 2020 6:55 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm I believe the sub 3% people are going way overboard. It’s one thing to retire at retirement age and then figuring out you can comfortably live on 2.5% withdrawals.
Retirement age doesn't matter. If OP can hit 4M by 45 and figure out they can comfortably live on 2% (80K/yr) then nothing wrong with 2% or retiring early. Advocating such an idea isn't going way overboard.
This is the crux. Is the 2% because of fear or is it 2% because they have no desire to spend more. Very big difference here.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

geerhardusvos wrote: Wed Nov 25, 2020 7:03 pm
Marseille07 wrote: Wed Nov 25, 2020 6:55 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm I believe the sub 3% people are going way overboard. It’s one thing to retire at retirement age and then figuring out you can comfortably live on 2.5% withdrawals.
Retirement age doesn't matter. If OP can hit 4M by 45 and figure out they can comfortably live on 2% (80K/yr) then nothing wrong with 2% or retiring early. Advocating such an idea isn't going way overboard.
It’s not necessary for someone to own 7 vehicles. Some people like owning multiple cars (Collectors, off-roading, trucks, RVs, etc). Not everyone has that luxury. But they probably only need one car, maybe two. Advocating that people need 7 cars when no one has ever needed that many cars in the history of the US, is indeed, overboard. Advocating for a 2% wr is way overboard, despite some people having the ability to do it.
See, we're looking at totally different pictures here, and I don't want to argue with you. Our objective functions are drastically different.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

EnjoyIt wrote: Wed Nov 25, 2020 7:19 pm
Marseille07 wrote: Wed Nov 25, 2020 6:55 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm I believe the sub 3% people are going way overboard. It’s one thing to retire at retirement age and then figuring out you can comfortably live on 2.5% withdrawals.
Retirement age doesn't matter. If OP can hit 4M by 45 and figure out they can comfortably live on 2% (80K/yr) then nothing wrong with 2% or retiring early. Advocating such an idea isn't going way overboard.
This is the crux. Is the 2% because of fear or is it 2% because they have no desire to spend more. Very big difference here.
We need to ask the OP, but my understanding is that they are content with spending 80K/year. Of course, we can all increase spending if we want, like flying business / first class.
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Re: Withdrawal rate for an early retirement

Post by Wanderingwheelz »

geerhardusvos wrote: Wed Nov 25, 2020 4:01 pm
7eight9 wrote: Wed Nov 25, 2020 3:58 pm Die in a car crash - you have no problems.
Run out of money in retirement - you have problems.
Right, and I won’t run out of money using between a 3 and 4% withdrawal rate. Can you give me a comprehensive reason why I would run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly? Did you read any of my above post? Do you know something about the future that I don’t?
You wrote, “I won’t run out of money using between a 3 and 4% withdrawal rate.”

Quickly followed by “if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?”

What I took that to mean is “I won’t run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?” Thus, it will have little to do with an actual rate of withdrawal.
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vineviz
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Re: Withdrawal rate for an early retirement

Post by vineviz »

geerhardusvos wrote: Wed Nov 25, 2020 6:41 pm
vineviz wrote: Wed Nov 25, 2020 6:22 pm
geerhardusvos wrote: Wed Nov 25, 2020 3:52 pmNo one has provided evidence in academia or on this forum to suggest that the next 100 years will be much different than the last 100 years economically speaking for the United States. Will it be different? Yes, it’s the future and it’s unknown.
You don’t need to know the future in order to know that the next 30 years have a lower likelihood of supporting a 4% withdrawal rate than any 30 year period in the past.

The CURRENT real yield on bonds and the CURRENT valuation of equities tells you everything you need to know. No crystal ball required.
Those two variables have been discussed at length and nothing has been presented that would dissuade a 3 to 4% WR moving forward
Well, 3-4% is a huge range.

There’s a very low likelihood that the next 30 years will produce a SWR below 3% but an unprecedentedly high likelihood that the next 30 years will produce a SWR below 4%.

Again, the point is that you don’t need to predict the future to know this. The data you need are available today.
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Re: Withdrawal rate for an early retirement

Post by vineviz »

EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm People have been trying to predict future returns for decades. These have been very smart people using math and history to make those predictions. History has proven that they have been wrong over and over again. What makes you think that your predictions are somehow better or more accurate? I see you trying to predict 30+ years of returns and to be honest with you, it seems very nonsensical to even attempt anything more than just a few years ahead.
I’m not “predicting” future returns. Obviously we don’t know what they will be, but there ARE some things we know with certainty. One of those is the expected real yield on Treasury bonds, which LITERALLY tells you the expected range of possible outcomes for SWR over the next 30 years.

Because we don’t know the path of future returns we don’t know WHICH of the possible outcomes we will get. Saying there’s a 10% chance the SWR could be as low as 3.1% isn’t the same as predicting that IT WILL BE 3.1%.
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Re: Withdrawal rate for an early retirement

Post by geerhardusvos »

vineviz wrote: Wed Nov 25, 2020 8:11 pm
geerhardusvos wrote: Wed Nov 25, 2020 6:41 pm
vineviz wrote: Wed Nov 25, 2020 6:22 pm
geerhardusvos wrote: Wed Nov 25, 2020 3:52 pmNo one has provided evidence in academia or on this forum to suggest that the next 100 years will be much different than the last 100 years economically speaking for the United States. Will it be different? Yes, it’s the future and it’s unknown.
You don’t need to know the future in order to know that the next 30 years have a lower likelihood of supporting a 4% withdrawal rate than any 30 year period in the past.

The CURRENT real yield on bonds and the CURRENT valuation of equities tells you everything you need to know. No crystal ball required.
Those two variables have been discussed at length and nothing has been presented that would dissuade a 3 to 4% WR moving forward
Well, 3-4% is a huge range.

There’s a very low likelihood that the next 30 years will produce a SWR below 3% but an unprecedentedly high likelihood that the next 30 years will produce a SWR below 4%.

Again, the point is that you don’t need to predict the future to know this. The data you need are available today.
4% WR over 30 years is rock-solid with 50%+ equities. Nothing has been presented that would make us think otherwise. Add in a little flexibility, and it’s as bulletproof as anything in the financial world.

Right:
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Last edited by geerhardusvos on Thu Nov 26, 2020 12:18 am, edited 1 time in total.
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Re: Withdrawal rate for an early retirement

Post by geerhardusvos »

Wanderingwheelz wrote: Wed Nov 25, 2020 7:53 pm
geerhardusvos wrote: Wed Nov 25, 2020 4:01 pm
7eight9 wrote: Wed Nov 25, 2020 3:58 pm Die in a car crash - you have no problems.
Run out of money in retirement - you have problems.
Right, and I won’t run out of money using between a 3 and 4% withdrawal rate. Can you give me a comprehensive reason why I would run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly? Did you read any of my above post? Do you know something about the future that I don’t?
You wrote, “I won’t run out of money using between a 3 and 4% withdrawal rate.”

Quickly followed by “if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?”

What I took that to mean is “I won’t run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?” Thus, it will have little to do with an actual rate of withdrawal.
Right and this strategy will very likely allow me to withdraw above 3% for the entirety of my 55 year retirement window, and likely above 4% at many points as well.
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vineviz
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Re: Withdrawal rate for an early retirement

Post by vineviz »

geerhardusvos wrote: Wed Nov 25, 2020 8:33 pm
4% WR over 30 years is rock-solid with 50%+ equities. Nothing has been presented that would make us think otherwise. Add an a little flexibility, and it’s as bulletproof as anything in the financial world.
4% WAS rock solid in the past. It’s not rock solid going forward, and even less so with just 50% in stocks. Not with real yields being what they are.
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Re: Withdrawal rate for an early retirement

Post by geerhardusvos »

vineviz wrote: Wed Nov 25, 2020 8:54 pm
geerhardusvos wrote: Wed Nov 25, 2020 8:33 pm
4% WR over 30 years is rock-solid with 50%+ equities. Nothing has been presented that would make us think otherwise. Add an a little flexibility, and it’s as bulletproof as anything in the financial world.
4% WAS rock solid in the past. It’s not rock solid going forward, and even less so with just 50% in stocks. Not with real yields being what they are.
Yields can be negative and have 4% WR work over 30 years, we have already explained that to you many times. Any other variables you want to discuss? So far, you haven’t convinced anybody and the data doesn’t support your assertions.
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Re: Withdrawal rate for an early retirement

Post by Wanderingwheelz »

geerhardusvos wrote: Wed Nov 25, 2020 8:46 pm
Wanderingwheelz wrote: Wed Nov 25, 2020 7:53 pm
geerhardusvos wrote: Wed Nov 25, 2020 4:01 pm
7eight9 wrote: Wed Nov 25, 2020 3:58 pm Die in a car crash - you have no problems.
Run out of money in retirement - you have problems.
Right, and I won’t run out of money using between a 3 and 4% withdrawal rate. Can you give me a comprehensive reason why I would run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly? Did you read any of my above post? Do you know something about the future that I don’t?
You wrote, “I won’t run out of money using between a 3 and 4% withdrawal rate.”

Quickly followed by “if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?”

What I took that to mean is “I won’t run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?” Thus, it will have little to do with an actual rate of withdrawal.
Right and this strategy will very likely allow me to withdraw above 3% for the entirety of my 55 year retirement window, and likely above 4% at many points as well.
If I was going to pack it in at 33 and have a 55 year retirement I’d want to proceed with something more robust than “very likely”.

The risk is one you are already well aware of, no doubt, and that’s the period of time between your 34th birthday and your 44th birthday is unkind to your portfolio.
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Re: Withdrawal rate for an early retirement

Post by geerhardusvos »

Wanderingwheelz wrote: Wed Nov 25, 2020 9:11 pm
geerhardusvos wrote: Wed Nov 25, 2020 8:46 pm
Wanderingwheelz wrote: Wed Nov 25, 2020 7:53 pm
geerhardusvos wrote: Wed Nov 25, 2020 4:01 pm
7eight9 wrote: Wed Nov 25, 2020 3:58 pm Die in a car crash - you have no problems.
Run out of money in retirement - you have problems.
Right, and I won’t run out of money using between a 3 and 4% withdrawal rate. Can you give me a comprehensive reason why I would run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly? Did you read any of my above post? Do you know something about the future that I don’t?
You wrote, “I won’t run out of money using between a 3 and 4% withdrawal rate.”

Quickly followed by “if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?”

What I took that to mean is “I won’t run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?” Thus, it will have little to do with an actual rate of withdrawal.
Right and this strategy will very likely allow me to withdraw above 3% for the entirety of my 55 year retirement window, and likely above 4% at many points as well.
If I was going to pack it in at 33 and have a 55 year retirement I’d want to proceed with something more robust than “very likely”.

The risk is one you are already well aware of, no doubt, and that’s the period of time between your 34th birthday and your 44th birthday is unkind to your portfolio.
That’s OK, I’m way more likely to die in a car crash than run out of money. And I don’t even drive to work anymore 8-)
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Wanderingwheelz wrote: Wed Nov 25, 2020 9:11 pm
geerhardusvos wrote: Wed Nov 25, 2020 8:46 pm
Wanderingwheelz wrote: Wed Nov 25, 2020 7:53 pm
geerhardusvos wrote: Wed Nov 25, 2020 4:01 pm
7eight9 wrote: Wed Nov 25, 2020 3:58 pm Die in a car crash - you have no problems.
Run out of money in retirement - you have problems.
Right, and I won’t run out of money using between a 3 and 4% withdrawal rate. Can you give me a comprehensive reason why I would run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly? Did you read any of my above post? Do you know something about the future that I don’t?
You wrote, “I won’t run out of money using between a 3 and 4% withdrawal rate.”

Quickly followed by “if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?”

What I took that to mean is “I won’t run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?” Thus, it will have little to do with an actual rate of withdrawal.
Right and this strategy will very likely allow me to withdraw above 3% for the entirety of my 55 year retirement window, and likely above 4% at many points as well.
If I was going to pack it in at 33 and have a 55 year retirement I’d want to proceed with something more robust than “very likely”.

The risk is one you are already well aware of, no doubt, and that’s the period of time between your 34th birthday and your 44th birthday is unkind to your portfolio.
Given the other information that geerhardusvos has provided, I suspect that even with early retirement that he'll still get a not insignificant amount of SS benefits down the road, which may reduce his needed withdrawals significantly. Just 10 years of maxing out the SS taxable maximum results in about $13.5k of annual SS benefits at age 62 and $25k at age 70, not counting the spousal benefit. Therefore, he may only be withdrawing 3-4% for 30-35 years and then withdrawing even less after that (if his portfolio hasn't done well). If so, that sounds really secure to me.
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Re: Withdrawal rate for an early retirement

Post by geerhardusvos »

willthrill81 wrote: Wed Nov 25, 2020 10:55 pm Given the other information that geerhardusvos has provided,... that sounds really secure to me.
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Re: Withdrawal rate for an early retirement

Post by YRT70 »

willthrill81 wrote: Wed Nov 25, 2020 1:21 pm
YRT70 wrote: Wed Nov 25, 2020 12:22 pm
willthrill81 wrote: Wed Nov 25, 2020 11:07 am Take a look at Kitces' original post on the topic, with the chart below. The difference in the historic likelihood of success for a rising equity glidepath from 30% stock to 70% stock was 95.1% but 94.6% for a static 40/60. There's no way that the .5% advantage would be statistically significant.
Image
I'm aware of the article. I think you made a mistake in reading the data. The rising equity glide path got 95.1%, while the static 60/40 got 93.2% (not 94.6%) under these assumptions. So that's a 1.9% advantage under his assumptions (historical averages). The static 40/60 did get 94.6%.

Iirc it was in a relatively recent Rational Reminder podcast in which Kitces talked about bond tents. I did not get the impression he has changed his mind about it, at all. He still believes they have a benefit.

Here's another way of looking at Kitces' chart: for 9 of the 10 static AAs there was a rising equity glide path that did better. Sometimes a little, sometimes a lot.
I specifically referenced the 40/60 portfolio, not a 60/40.
My mistake, I read that wrong.
In that table, the rising equity glidepath never improved the historical odds of success by more than .5%.
I guess I look at it differently. Someone using a static 60/40 allocation can increase their chance of succes by 1.9% if they use a 30>70 glide path instead. Someone using a static 70/30 allocation can increase their chance of succes by 2.9% if they use a 30>70 glide path instead.

Of course they could use the static 40/60 and come close but that makes it more likely they (or their heirs) will end up with less money after 30 years.

Here's the relevant paragraph from the Kitces article:
Thus, for instance, a portfolio that starts at 60% in equities and ends at 60% in equities (the intersection of the 60% row and column) has a 93.2% probability of success. However, a portfolio that starts at 30% in equities and finishes at 70% in equities actually has a higher (95.1%) probability of success, not to mention a lower average equity exposure through retirement (an average of only 50% in equities instead of 60%).
https://www.kitces.com/blog/should-equi ... ly-better/

But I do agree that the benefits in this specific scenario (30 years) under these assumptions are relatively small. In ERN's analysis they're more potent, and that's for longer retirements like the topic of this thread.

Here's the relevant quote from Michael Kitces in the Rational Reminder podcast from August 2020:
Can you talk about the concept of a rising equity glide path? Which is contrary to what most people think about when they think about retirement portfolios.

Yeah, absolutely. So, Ben, I think you hit it on it well, right? The traditional view is as we get older, we get more conservative, and we dial down the risk in the portfolio. We have sort of rules of thumb, own 100 minus your age in stocks or 120 minus your age, and just sort of a general view of the older people get, the more conservative their portfolios would become.

[content in excess of copyright fair use removed by admin LadyGeek]
https://rationalreminder.ca/podcast/112

To me that sounds like he still believes in the benefits. Do you have a source where he said otherwise?
Last edited by YRT70 on Thu Nov 26, 2020 3:11 am, edited 2 times in total.
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Re: Withdrawal rate for an early retirement

Post by marcopolo »

vineviz wrote: Wed Nov 25, 2020 8:20 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm People have been trying to predict future returns for decades. These have been very smart people using math and history to make those predictions. History has proven that they have been wrong over and over again. What makes you think that your predictions are somehow better or more accurate? I see you trying to predict 30+ years of returns and to be honest with you, it seems very nonsensical to even attempt anything more than just a few years ahead.
I’m not “predicting” future returns. Obviously we don’t know what they will be, but there ARE some things we know with certainty. One of those is the expected real yield on Treasury bonds, which LITERALLY tells you the expected range of possible outcomes for SWR over the next 30 years.

Because we don’t know the path of future returns we don’t know WHICH of the possible outcomes we will get. Saying there’s a 10% chance the SWR could be as low as 3.1% isn’t the same as predicting that IT WILL BE 3.1%.
I don't think that word means what you think it means.

You keep repeating this as if people here do not understand the concept of an expected value. I don't think that is necessarily the case.

What I, and I suspect others, do not understand is how you can say with such certainty that there is a 10% chance of SWR being below 3.1%. That assumes you somehow know the underlying population density of SWR. That is what people are questioning.

Can you explain how you believe you can known that with certainty?

From other posts, it appears you are using some relationship between current Bond Yields, CAPE, and SWR? that is based on observing historical data. This would allow you to compute a sample density function. But, that does not mean it is necessarily a good representation of the population density function. How do we know the underlying random process is stationary (which would be a necessary assumption for the sample density to be representative of the population density)?

For example, do we have enough data with such low bond yields to know that the std. dev. of future returns does not change dramatically as the yield approaches 0%? Given the significance of negative bond yields, it is hard to imagine that is not the case. This would throw a monkey wrench into any model that simply shifts the density function around the expected value.

Any number of other factors could also change the underlying density function from what has been observed in the past.

Do you believe the underlying density function is stationary?
If so, what do you base that on?
If not, why are you so certain you can literally compute the actual expected value?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Withdrawal rate for an early retirement

Post by klaus14 »

marcopolo wrote: Thu Nov 26, 2020 2:21 am
vineviz wrote: Wed Nov 25, 2020 8:20 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm People have been trying to predict future returns for decades. These have been very smart people using math and history to make those predictions. History has proven that they have been wrong over and over again. What makes you think that your predictions are somehow better or more accurate? I see you trying to predict 30+ years of returns and to be honest with you, it seems very nonsensical to even attempt anything more than just a few years ahead.
I’m not “predicting” future returns. Obviously we don’t know what they will be, but there ARE some things we know with certainty. One of those is the expected real yield on Treasury bonds, which LITERALLY tells you the expected range of possible outcomes for SWR over the next 30 years.

Because we don’t know the path of future returns we don’t know WHICH of the possible outcomes we will get. Saying there’s a 10% chance the SWR could be as low as 3.1% isn’t the same as predicting that IT WILL BE 3.1%.
I don't think that word means what you think it means.

You keep repeating this as if people here do not understand the concept of an expected value. I don't think that is necessarily the case.

What I, and I suspect others, do not understand is how you can say with such certainty that there is a 10% chance of SWR being below 3.1%. That assumes you somehow know the underlying population density of SWR. That is what people are questioning.

Can you explain how you believe you can known that with certainty?

From other posts, it appears you are using some relationship between current Bond Yields, CAPE, and SWR? that is based on observing historical data. This would allow you to compute a sample density function. But, that does not mean it is necessarily a good representation of the population density function. How do we know the underlying random process is stationary (which would be a necessary assumption for the sample density to be representative of the population density)?

For example, do we have enough data with such low bond yields to know that the std. dev. of future returns does not change dramatically as the yield approaches 0%? Given the significance of negative bond yields, it is hard to imagine that is not the case. This would throw a monkey wrench into any model that simply shifts the density function around the expected value.

Any number of other factors could also change the underlying density function from what has been observed in the past.

Do you believe the underlying density function is stationary?
If so, what do you base that on?
If not, why are you so certain you can literally compute the actual expected value?
these are good questions and assigning probabilities to future SWR is hard. But what is your alternative? not doing expected return estimation?

intuitively the mean of the distribution (50p) should be at expected return of the portfolio, plus what you intend to spend from capital based on retirement length. would you agree with this?

then, future SWR probability distribution curve must be worse than any of the past periods simply because expected returns are low, regardless of the shape of the probability distribution curve. do you disagree with expected returns being low?

of course we don't know what lies ahead in future. but we can assign probabilities based on what we know.
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Re: Withdrawal rate for an early retirement

Post by marcopolo »

klaus14 wrote: Thu Nov 26, 2020 4:26 am
marcopolo wrote: Thu Nov 26, 2020 2:21 am
vineviz wrote: Wed Nov 25, 2020 8:20 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm People have been trying to predict future returns for decades. These have been very smart people using math and history to make those predictions. History has proven that they have been wrong over and over again. What makes you think that your predictions are somehow better or more accurate? I see you trying to predict 30+ years of returns and to be honest with you, it seems very nonsensical to even attempt anything more than just a few years ahead.
I’m not “predicting” future returns. Obviously we don’t know what they will be, but there ARE some things we know with certainty. One of those is the expected real yield on Treasury bonds, which LITERALLY tells you the expected range of possible outcomes for SWR over the next 30 years.

Because we don’t know the path of future returns we don’t know WHICH of the possible outcomes we will get. Saying there’s a 10% chance the SWR could be as low as 3.1% isn’t the same as predicting that IT WILL BE 3.1%.
I don't think that word means what you think it means.

You keep repeating this as if people here do not understand the concept of an expected value. I don't think that is necessarily the case.

What I, and I suspect others, do not understand is how you can say with such certainty that there is a 10% chance of SWR being below 3.1%. That assumes you somehow know the underlying population density of SWR. That is what people are questioning.

Can you explain how you believe you can known that with certainty?

From other posts, it appears you are using some relationship between current Bond Yields, CAPE, and SWR? that is based on observing historical data. This would allow you to compute a sample density function. But, that does not mean it is necessarily a good representation of the population density function. How do we know the underlying random process is stationary (which would be a necessary assumption for the sample density to be representative of the population density)?

For example, do we have enough data with such low bond yields to know that the std. dev. of future returns does not change dramatically as the yield approaches 0%? Given the significance of negative bond yields, it is hard to imagine that is not the case. This would throw a monkey wrench into any model that simply shifts the density function around the expected value.

Any number of other factors could also change the underlying density function from what has been observed in the past.

Do you believe the underlying density function is stationary?
If so, what do you base that on?
If not, why are you so certain you can literally compute the actual expected value?
these are good questions and assigning probabilities to future SWR is hard. But what is your alternative?

intuitively the mean of the distribution (50p) should be at expected return of the portfolio, plus what you intend to spend from capital based on retirement length. would you agree with this?

then, future SWR probability distribution curve must be worse than any of the past periods simply because expected returns are low. regardless of the shape of the probability distribution curve. do you disagree with expected returns being low?
I don't have a problem with what you are saying.
My objection was to the poster claiming both the expected returns, expected SWR, and the distribution around them could be known precisely, going as far as to claim it is just simple math to do so.

Do you disagree that computing the expected and the associated distribution requires making some assumptions about the future, and does not literally fall out of knowing current bond yields?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Withdrawal rate for an early retirement

Post by klaus14 »

marcopolo wrote: Thu Nov 26, 2020 4:32 am
I don't have a problem with what you are saying.
My objection was to the poster claiming both the expected returns, expected SWR, and the distribution around them could be known precisely, going as far as to claim it is just simple math to do so.

Do you disagree that computing the expected and the associated distribution requires making some assumptions about the future, and does not literally fall out of knowing current bond yields?
no i don't. but again, if you don't like vineviz assumptions, what are yours? my guess is probably your method would also portray a similar SWR picture.

I think biggest lesson some people in this thread misses is that past SWR is not a guarantee of future SWR. Current return expectations are a better predictor of future SWR. 3.10% being 10p or 40p event is a smaller detail.
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Re: Withdrawal rate for an early retirement

Post by vineviz »

geerhardusvos wrote: Wed Nov 25, 2020 8:59 pm
Yields can be negative and have 4% WR work over 30 years, we have already explained that to you many times.
That’s incorrect, and I think you know it.
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Re: Withdrawal rate for an early retirement

Post by vineviz »

marcopolo wrote: Thu Nov 26, 2020 2:21 am
vineviz wrote: Wed Nov 25, 2020 8:20 pm
I’m not “predicting” future returns. Obviously we don’t know what they will be, but there ARE some things we know with certainty. One of those is the expected real yield on Treasury bonds, which LITERALLY tells you the expected range of possible outcomes for SWR over the next 30 years.

Because we don’t know the path of future returns we don’t know WHICH of the possible outcomes we will get. Saying there’s a 10% chance the SWR could be as low as 3.1% isn’t the same as predicting that IT WILL BE 3.1%.
I don't think that word means what you think it means.

You keep repeating this as if people here do not understand the concept of an expected value. I don't think that is necessarily the case.

What I, and I suspect others, do not understand is how you can say with such certainty that there is a 10% chance of SWR being below 3.1%. That assumes you somehow know the underlying population density of SWR. That is what people are questioning.

Can you explain how you believe you can known that with certainty?
I’m sure many people here know what an expected value is, but clearly there are some very vocal people who do not.

But the expected value of a portfolio’s sustainable withdrawal rate DOES literally flow from a equation that contains just three values: the number of time periods, the portfolio’s average real return,and the portfolio’s standard deviation of real returns.

As long as the returns can be approximated using mean and standard deviation and you have expected values for those three variables then you can calculate the expected SWR.

You make a good point about the potential dangers of reporting overly precise estimates for expected values, but the SWR number is so small it’s hard to avoid.
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Re: Withdrawal rate for an early retirement

Post by smitcat »

willthrill81 wrote: Wed Nov 25, 2020 10:55 pm
Wanderingwheelz wrote: Wed Nov 25, 2020 9:11 pm
geerhardusvos wrote: Wed Nov 25, 2020 8:46 pm
Wanderingwheelz wrote: Wed Nov 25, 2020 7:53 pm
geerhardusvos wrote: Wed Nov 25, 2020 4:01 pm

Right, and I won’t run out of money using between a 3 and 4% withdrawal rate. Can you give me a comprehensive reason why I would run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly? Did you read any of my above post? Do you know something about the future that I don’t?
You wrote, “I won’t run out of money using between a 3 and 4% withdrawal rate.”

Quickly followed by “if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?”

What I took that to mean is “I won’t run out of money if I am actively monitoring my portfolio, my spending, market conditions, and withdrawing accordingly?” Thus, it will have little to do with an actual rate of withdrawal.
Right and this strategy will very likely allow me to withdraw above 3% for the entirety of my 55 year retirement window, and likely above 4% at many points as well.
If I was going to pack it in at 33 and have a 55 year retirement I’d want to proceed with something more robust than “very likely”.

The risk is one you are already well aware of, no doubt, and that’s the period of time between your 34th birthday and your 44th birthday is unkind to your portfolio.
Given the other information that geerhardusvos has provided, I suspect that even with early retirement that he'll still get a not insignificant amount of SS benefits down the road, which may reduce his needed withdrawals significantly. Just 10 years of maxing out the SS taxable maximum results in about $13.5k of annual SS benefits at age 62 and $25k at age 70, not counting the spousal benefit. Therefore, he may only be withdrawing 3-4% for 30-35 years and then withdrawing even less after that (if his portfolio hasn't done well). If so, that sounds really secure to me.
"Given the other information that geerhardusvos has provided, I suspect that even with early retirement that he'll still get a not insignificant amount of SS benefits down the road, which may reduce his needed withdrawals significantly"
Yes - a one or more of these that he has posted about makes all the difference in how you might view safe withdrawal rates..
- his wife may return to full time work
- his side gig makes money now and will continue
- SS will become a factor at some point
- he plans to expand the side gig and income
- the odds of an inheritance are good
Any of these would affect your views of both SWR and AA.
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

vineviz wrote: Wed Nov 25, 2020 8:20 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm People have been trying to predict future returns for decades. These have been very smart people using math and history to make those predictions. History has proven that they have been wrong over and over again. What makes you think that your predictions are somehow better or more accurate? I see you trying to predict 30+ years of returns and to be honest with you, it seems very nonsensical to even attempt anything more than just a few years ahead.
I’m not “predicting” future returns. Obviously we don’t know what they will be, but there ARE some things we know with certainty. One of those is the expected real yield on Treasury bonds, which LITERALLY tells you the expected range of possible outcomes for SWR over the next 30 years.

Because we don’t know the path of future returns we don’t know WHICH of the possible outcomes we will get. Saying there’s a 10% chance the SWR could be as low as 3.1% isn’t the same as predicting that IT WILL BE 3.1%.
If bond returns are low, do you think it is possible people will divert more of their cash to equities which will lead to higher than average returns? What about potentially with a low inflation period, we may have smaller and shorter market corrections where a 1966 does not happen? I guess what I’m saying is that I can’t predict the future, but I can react to the present and always be able to adjust my spending based on what is happening. Because of my human nature of spending less than I make, I suspect there will be plenty of years where the market is flat or only has a small drawdown and I spend less than 4%. Just as there will be plenty of years the market does very well and we spend more than 4%. I think building this kind of flexibility is far more valuable than saying and sticking to a 3.2% withdrawal rate. 4% puts us in the ballpark of where we can be. The rest will happen based on what the market gives us.

Right now, if you forced me to spend 25% less every year, it would not be the end of the world and we will still have a good life. Sure we will need to be a bit more conscious and frugal with our spending, but we would not be devastated. But because we don’t have to cut back right now, I’ll stick with the extra 25%. This is especially true since we recently chose to increase spending by about 15% because we have the cash to do so.

I set my parents up with a 4% withdrawal baseline when they retired. Currently they are very happy with just what SS gives them and they use the returns from their portfolio for large expenses. This year they paid cash for a luxury SUV. Their entire portfolio is for fun discretionary expenses and are very flexible with their spending.
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Re: Withdrawal rate for an early retirement

Post by vineviz »

EnjoyIt wrote: Thu Nov 26, 2020 8:36 am If bond returns are low, do you think it is possible people will divert more of their cash to equities which will lead to higher than average returns?
More demand for equities would reduce expected returns, but the broader point is that scenarios like are already incorporated into expected portfolio returns.

Clearly, the actual returns will probably not be exactly equal to expectations: they’ll be higher or lower. That’s why the whole discussion is a probabilistic one.

And to clarify, I’m not advocating for a fixed withdrawal strategy or advising anyone use a particular withdrawal rate.

The SWR is a statistical measure of a portfolio’s capacity for producing retirement income. Each investor should decide for themselves the best way to tap into that capacity.
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Re: Withdrawal rate for an early retirement

Post by deanmoriarty »

For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement. One needs to reserve the right to change their budget over time, and an overall conservative withdrawal rate will allow unexpected large expenses to be absorbed, when they’ll inevitably occur even decades away.

And I’m not talking about lifestyle creep. For the past 10 years I’ve been keeping my personal inflation rate remarkably low, even negative at times. However, I don’t want to be in the position where I won’t be able to dump $50k for an emergency non-covered medical treatment (e.g. what if I want to get a series of hair transplants at some point? Or cosmetic dental procedures outside coverage? Just a couple silly examples), or a series of expensive international travels that would maybe cost half of my typical yearly budget (e.g. care for sick family).

I think, when one is young, accounting for the variance of expenses is way more important than arguing about a withdrawal rate that assumes a stable level of spending. Life will throw several curveballs over decades, so you want to have buffers.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
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Re: Withdrawal rate for an early retirement

Post by geerhardusvos »

deanmoriarty wrote: Thu Nov 26, 2020 9:06 am For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
Congrats on your upcoming retirement! I think you’re missing the point and also contradicting yourself in the statement. We don’t feel that 3 to 4% withdrawal rate is safe. It is and has been safe for extremely long periods of time. It’s just a fact. Having your baseline expenses at 3% withdrawal rate is historically completely (100%) safe, and anything else that could come up will very likely be covered because you are already taking an ultra safe withdrawal rate of 3%. You can also budget for the potential things that are unknown to ensure your nest egg supports an extra $10,000 per year if you wanted to. All of this can be done at or above a 3% withdrawal rate. I don’t think you realize how drastic of a difference there is in outcome between a 3.9% WR and a 3.8% WR. It dramatically changes the long-term outcome. It is beyond reasonable and way outside of what is necessary to go from a ridiculously safe 3.25% withdrawal rate down to 1.5% withdrawal rate. If you are able to do it, that is totally fine, more power to you. It’s just overwhelmingly unnecessary, especially if you have mostly equities. There is so much padding built into a 3% withdrawal rate, and people forget that. Over 30 year periods, 4% withdrawal rate has a ton of padding as well.

Especially since you have such control over your living expenses, I think you are in need of some recalibration here.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

YRT70 wrote: Thu Nov 26, 2020 12:51 am
willthrill81 wrote: Wed Nov 25, 2020 1:21 pm In that table, the rising equity glidepath never improved the historical odds of success by more than .5%.
I guess I look at it differently. Someone using a static 60/40 allocation can increase their chance of succes by 1.9% if they use a 30>70 glide path instead. Someone using a static 70/30 allocation can increase their chance of succes by 2.9% if they use a 30>70 glide path instead.

Of course they could use the static 40/60 and come close but that makes it more likely they (or their heirs) will end up with less money after 30 years.

Here's the relevant paragraph from the Kitces article:
It's true that higher average stock allocations have been more likely to lead to greater terminal wealth, though in Kitces' example, it would only be late in the retiree's life that the average stock allocation of the rising equity glidepath would be greater than the static 40/60, and most 65 year olds won't survive 20 more years. And keep in mind that even though the 40/60 static AA had the greatest chance of success, the differences between it and some of the other allocations, such as 50/50 and 60/40, are so small as to almost certainly not be statistically significant.

That brings up another point I've made already: I'm not sure that the rising equity glidepath's seeming improvement would have been statistically significant. If it isn't, then the results may be due to random chance.

Also, it's very likely that the 30/70 starting AA for the rising equity glidepath you reference will perform significantly worse over the next decade, the crucial time for current retirees, than the historic average. Bonds are very likely to lose out to inflation over the next decade. As such, I would not recommend that retirees begin with such a low stock allocation unless they risk tolerance would not permit a higher one.
Last edited by willthrill81 on Thu Nov 26, 2020 9:56 am, edited 1 time in total.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

deanmoriarty wrote: Thu Nov 26, 2020 9:06 am For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement. One needs to reserve the right to change their budget over time, and an overall conservative withdrawal rate will allow unexpected large expenses to be absorbed, when they’ll inevitably occur even decades away.

And I’m not talking about lifestyle creep. For the past 10 years I’ve been keeping my personal inflation rate remarkably low, even negative at times. However, I don’t want to be in the position where I won’t be able to dump $50k for an emergency non-covered medical treatment (e.g. what if I want to get a series of hair transplants at some point? Or cosmetic dental procedures outside coverage? Just a couple silly examples), or a series of expensive international travels that would maybe cost half of my typical yearly budget (e.g. care for sick family).

I think, when one is young, accounting for the variance of expenses is way more important than arguing about a withdrawal rate that assumes a stable level of spending. Life will throw several curveballs over decades, so you want to have buffers.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
Withdrawal strategy doesn't eliminate the need for EF imo. Say you have 100K of EF in savings that you maintain at all times, does it really matter if you withdraw 3-4% vs 1.5%?

I'm not advocating for higher WR (I'm on the conservative camp myself), but I don't see what you're describing as the reason for going at 1.5%.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Thu Nov 26, 2020 9:55 am
deanmoriarty wrote: Thu Nov 26, 2020 9:06 am For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement. One needs to reserve the right to change their budget over time, and an overall conservative withdrawal rate will allow unexpected large expenses to be absorbed, when they’ll inevitably occur even decades away.

And I’m not talking about lifestyle creep. For the past 10 years I’ve been keeping my personal inflation rate remarkably low, even negative at times. However, I don’t want to be in the position where I won’t be able to dump $50k for an emergency non-covered medical treatment (e.g. what if I want to get a series of hair transplants at some point? Or cosmetic dental procedures outside coverage? Just a couple silly examples), or a series of expensive international travels that would maybe cost half of my typical yearly budget (e.g. care for sick family).

I think, when one is young, accounting for the variance of expenses is way more important than arguing about a withdrawal rate that assumes a stable level of spending. Life will throw several curveballs over decades, so you want to have buffers.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
Withdrawal strategy doesn't eliminate the need for EF imo. Say you have 100K of EF in savings that you maintain at all times, does it really matter if you withdraw 3-4% vs 1.5%?

I'm not advocating for higher WR (I'm on the conservative camp myself), but I don't see what you're describing as the reason for going at 1.5%.
When you're in the withdrawal phase, your entire portfolio is your 'EF'. The need for a standalone EF is gone. For the same reason, accumulators with significant assets don't generally need a separate EF either. We kicked ours to the curb a while back.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

willthrill81 wrote: Thu Nov 26, 2020 9:57 am
Marseille07 wrote: Thu Nov 26, 2020 9:55 am
deanmoriarty wrote: Thu Nov 26, 2020 9:06 am For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement. One needs to reserve the right to change their budget over time, and an overall conservative withdrawal rate will allow unexpected large expenses to be absorbed, when they’ll inevitably occur even decades away.

And I’m not talking about lifestyle creep. For the past 10 years I’ve been keeping my personal inflation rate remarkably low, even negative at times. However, I don’t want to be in the position where I won’t be able to dump $50k for an emergency non-covered medical treatment (e.g. what if I want to get a series of hair transplants at some point? Or cosmetic dental procedures outside coverage? Just a couple silly examples), or a series of expensive international travels that would maybe cost half of my typical yearly budget (e.g. care for sick family).

I think, when one is young, accounting for the variance of expenses is way more important than arguing about a withdrawal rate that assumes a stable level of spending. Life will throw several curveballs over decades, so you want to have buffers.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
Withdrawal strategy doesn't eliminate the need for EF imo. Say you have 100K of EF in savings that you maintain at all times, does it really matter if you withdraw 3-4% vs 1.5%?

I'm not advocating for higher WR (I'm on the conservative camp myself), but I don't see what you're describing as the reason for going at 1.5%.
When you're in the withdrawal phase, your entire portfolio is your 'EF'. The need for a standalone EF is gone. For the same reason, accumulators with significant assets don't generally need a separate EF either. We kicked ours to the curb a while back.
Wait a minute. The poster is clearly worried about "$50k for an emergency non-covered medical treatment." If this money doesn't come from EF (that you build from the cash withdrawn), then where does it come from?
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Thu Nov 26, 2020 10:02 am
willthrill81 wrote: Thu Nov 26, 2020 9:57 am
Marseille07 wrote: Thu Nov 26, 2020 9:55 am
deanmoriarty wrote: Thu Nov 26, 2020 9:06 am For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement. One needs to reserve the right to change their budget over time, and an overall conservative withdrawal rate will allow unexpected large expenses to be absorbed, when they’ll inevitably occur even decades away.

And I’m not talking about lifestyle creep. For the past 10 years I’ve been keeping my personal inflation rate remarkably low, even negative at times. However, I don’t want to be in the position where I won’t be able to dump $50k for an emergency non-covered medical treatment (e.g. what if I want to get a series of hair transplants at some point? Or cosmetic dental procedures outside coverage? Just a couple silly examples), or a series of expensive international travels that would maybe cost half of my typical yearly budget (e.g. care for sick family).

I think, when one is young, accounting for the variance of expenses is way more important than arguing about a withdrawal rate that assumes a stable level of spending. Life will throw several curveballs over decades, so you want to have buffers.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
Withdrawal strategy doesn't eliminate the need for EF imo. Say you have 100K of EF in savings that you maintain at all times, does it really matter if you withdraw 3-4% vs 1.5%?

I'm not advocating for higher WR (I'm on the conservative camp myself), but I don't see what you're describing as the reason for going at 1.5%.
When you're in the withdrawal phase, your entire portfolio is your 'EF'. The need for a standalone EF is gone. For the same reason, accumulators with significant assets don't generally need a separate EF either. We kicked ours to the curb a while back.
Wait a minute. The poster is clearly worried about "$50k for an emergency non-covered medical treatment." If this money doesn't come from EF (that you build from the cash withdrawn), then where does it come from?
You withdraw the needed funds from your portfolio.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

willthrill81 wrote: Thu Nov 26, 2020 10:05 am
Marseille07 wrote: Thu Nov 26, 2020 10:02 am
willthrill81 wrote: Thu Nov 26, 2020 9:57 am
Marseille07 wrote: Thu Nov 26, 2020 9:55 am
deanmoriarty wrote: Thu Nov 26, 2020 9:06 am For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement. One needs to reserve the right to change their budget over time, and an overall conservative withdrawal rate will allow unexpected large expenses to be absorbed, when they’ll inevitably occur even decades away.

And I’m not talking about lifestyle creep. For the past 10 years I’ve been keeping my personal inflation rate remarkably low, even negative at times. However, I don’t want to be in the position where I won’t be able to dump $50k for an emergency non-covered medical treatment (e.g. what if I want to get a series of hair transplants at some point? Or cosmetic dental procedures outside coverage? Just a couple silly examples), or a series of expensive international travels that would maybe cost half of my typical yearly budget (e.g. care for sick family).

I think, when one is young, accounting for the variance of expenses is way more important than arguing about a withdrawal rate that assumes a stable level of spending. Life will throw several curveballs over decades, so you want to have buffers.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
Withdrawal strategy doesn't eliminate the need for EF imo. Say you have 100K of EF in savings that you maintain at all times, does it really matter if you withdraw 3-4% vs 1.5%?

I'm not advocating for higher WR (I'm on the conservative camp myself), but I don't see what you're describing as the reason for going at 1.5%.
When you're in the withdrawal phase, your entire portfolio is your 'EF'. The need for a standalone EF is gone. For the same reason, accumulators with significant assets don't generally need a separate EF either. We kicked ours to the curb a while back.
Wait a minute. The poster is clearly worried about "$50k for an emergency non-covered medical treatment." If this money doesn't come from EF (that you build from the cash withdrawn), then where does it come from?
You withdraw the needed funds from your portfolio.
That would wreck your WR for the whole year, hence the need for EF.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Thu Nov 26, 2020 10:06 am
willthrill81 wrote: Thu Nov 26, 2020 10:05 am
Marseille07 wrote: Thu Nov 26, 2020 10:02 am
willthrill81 wrote: Thu Nov 26, 2020 9:57 am
Marseille07 wrote: Thu Nov 26, 2020 9:55 am

Withdrawal strategy doesn't eliminate the need for EF imo. Say you have 100K of EF in savings that you maintain at all times, does it really matter if you withdraw 3-4% vs 1.5%?

I'm not advocating for higher WR (I'm on the conservative camp myself), but I don't see what you're describing as the reason for going at 1.5%.
When you're in the withdrawal phase, your entire portfolio is your 'EF'. The need for a standalone EF is gone. For the same reason, accumulators with significant assets don't generally need a separate EF either. We kicked ours to the curb a while back.
Wait a minute. The poster is clearly worried about "$50k for an emergency non-covered medical treatment." If this money doesn't come from EF (that you build from the cash withdrawn), then where does it come from?
You withdraw the needed funds from your portfolio.
That would wreck your WR for the whole year, hence the need for EF.
Money is fungible. It doesn't matter whether you withdraw the funds from a specially designated EF or from your portfolio. Either way, the money is gone.
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Re: Withdrawal rate for an early retirement

Post by sailaway »

Marseille07 wrote: Thu Nov 26, 2020 10:06 am
willthrill81 wrote: Thu Nov 26, 2020 10:05 am

You withdraw the needed funds from your portfolio.
That would wreck your WR for the whole year, hence the need for EF.
That sounds like some complicated mental accounting you have going on there.

Are you saying you have one portfolio for regular expenses and a separate portfolio for irregular expenses?
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Re: Withdrawal rate for an early retirement

Post by YRT70 »

willthrill81 wrote: Thu Nov 26, 2020 9:55 am That brings up another point I've made already: I'm not sure that the rising equity glidepath's seeming improvement would have been statistically significant. If it isn't, then the results may be due to random chance.
Yes you've said that 3 times now :) And I'll keep saying this: while the differences in Kitces' model were relatively small, ERN's analysis showed more potent benefits for long retirements, which is what the OP is asking about.

And I'm not sure if you read what Kitces said in that podcast, but nothing he said there gives me the impression he has changed his mind about it (rising equity glide paths).
Last edited by YRT70 on Thu Nov 26, 2020 10:18 am, edited 1 time in total.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

sailaway wrote: Thu Nov 26, 2020 10:11 am
Marseille07 wrote: Thu Nov 26, 2020 10:06 am
willthrill81 wrote: Thu Nov 26, 2020 10:05 am

You withdraw the needed funds from your portfolio.
That would wreck your WR for the whole year, hence the need for EF.
That sounds like some complicated mental accounting you have going on there.

Are you saying you have one portfolio for regular expenses and a separate portfolio for irregular expenses?
No, just one portfolio for Boglehead and a savings account of EF to accommodate something like "$50k for an emergency non-covered medical treatment." I don't see any complications there.
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Re: Withdrawal rate for an early retirement

Post by vineviz »

willthrill81 wrote: Thu Nov 26, 2020 10:07 am
Money is fungible. It doesn't matter whether you withdraw the funds from a specially designated EF or from your portfolio. Either way, the money is gone.
I agree.

Any viable withdrawal strategy should account for the possibility of uncertain and irregular consumption needs. If you spend more than average one year, you either spend less in future years or permanently reduce the expected size of your terminal wealth.
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Re: Withdrawal rate for an early retirement

Post by sailaway »

Marseille07 wrote: Thu Nov 26, 2020 10:17 am
sailaway wrote: Thu Nov 26, 2020 10:11 am
Marseille07 wrote: Thu Nov 26, 2020 10:06 am
willthrill81 wrote: Thu Nov 26, 2020 10:05 am

You withdraw the needed funds from your portfolio.
That would wreck your WR for the whole year, hence the need for EF.
That sounds like some complicated mental accounting you have going on there.

Are you saying you have one portfolio for regular expenses and a separate portfolio for irregular expenses?
No, just one portfolio for Boglehead and a savings account of EF to accommodate something like "$50k for an emergency non-covered medical treatment." I don't see any complications there.
If this isn't figured in as part of your overall withdrawal rate, you only get one $50k emergency for the rest of your life. If you budget for sinking funds for highly likely events, such as medical emergencies, then that is part of your withdrawal rate.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

vineviz wrote: Thu Nov 26, 2020 10:18 am
willthrill81 wrote: Thu Nov 26, 2020 10:07 am
Money is fungible. It doesn't matter whether you withdraw the funds from a specially designated EF or from your portfolio. Either way, the money is gone.
I agree.

Any viable withdrawal strategy should account for the possibility of uncertain and irregular consumption needs. If you spend more than average one year, you either spend less in future years or permanently reduce the expected size of your terminal wealth.
OK. It sounds to me like the discussion is about treating WR as a ceiling vs average. I won't keep on going with that, as it seems tangential.
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Re: Withdrawal rate for an early retirement

Post by vineviz »

YRT70 wrote: Thu Nov 26, 2020 10:15 am
willthrill81 wrote: Thu Nov 26, 2020 9:55 am That brings up another point I've made already: I'm not sure that the rising equity glidepath's seeming improvement would have been statistically significant. If it isn't, then the results may be due to random chance.
Yes you've said that 3 times now :) And I'll keep saying this: while the differences in Kitces' model were relatively small, ERN's analysis showed more potent benefits for long retirements, which is what the OP is asking about.

And I'm not sure if you read what Kitces said in that podcast, but nothing he said there gives me the impression he has changed his mind about it (rising equity glide paths).
All the so-called analyses supporting a rising equity glide path suffer the same issues: the effects are statistically insignificant and highly dependent on the starting assumptions.

A rising glide path does not generally improve retirement outcomes relative to a static allocation, at least not in terms of success probability or SWR. A rising path might be better for a particular retirement cohort but it is just as likely to be worse, and you probably won’t know for decades which it was.

With yields where they are, it’s likely that a rising path will be marginally worse not better.

That said, loss averse and regret averse investors might derive more utility from a LMP or partial-LMP approach, which has the effect of creating a rising equity glide path. But that’s arguably more an impact of overfunding than of withdrawal strategy per se.
Last edited by vineviz on Thu Nov 26, 2020 10:29 am, edited 1 time in total.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

YRT70 wrote: Thu Nov 26, 2020 10:15 am
willthrill81 wrote: Thu Nov 26, 2020 9:55 am That brings up another point I've made already: I'm not sure that the rising equity glidepath's seeming improvement would have been statistically significant. If it isn't, then the results may be due to random chance.
Yes you've said that 3 times now :) And I'll keep saying this: while the differences in Kitces' model were relatively small, ERN's analysis showed more potent benefits for long retirements, which is what the OP is asking about.

And I'm not sure if you read what Kitces said in that podcast, but nothing he said there gives me the impression he has changed his mind about it.
If we agree that the improvement in 30 year SWRs by the rising equity glidepath is, at best, not significant, then let's agree to table that one.

And regarding the idea of going from 30/70 to a high stock allocation, Karsten said this:
The very long transitions over 60 percentage points (20 to 80% and 40 to 100%) tend to be pretty consistently inferior to the other glidepaths. The 20 to 80% glidepaths are even inferior to the static 80% and 100% allocations! Apparently, the initial stock weight was too low and/or the transition took way too long (even with the accelerated slopes of 0.4% and 0.5%!)
So we can dismiss that idea (i.e. starting at a very low stock allocation) for very long retirements. Equity allocations for early retirees should, for the sake of maximizing both the SWR and overall risk, begin at a minimum of 60%.

However, I definitely agree that where the rising equity glidepath would have historically seemingly made a big difference is for very long retirements when the starting allocation was 60% and rose to 100%. Further, this improvement seemed to be magnified when stock valuations were relatively high, as they are now. So in that regard, I agree with you that the rising equity glidepath appears to make sense, but I would like to see more work done on this area.

The question then becomes how many retirees will be comfortable with an AA approaching and eventually becoming 100% stock.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

vineviz wrote: Thu Nov 26, 2020 10:27 am
YRT70 wrote: Thu Nov 26, 2020 10:15 am
willthrill81 wrote: Thu Nov 26, 2020 9:55 am That brings up another point I've made already: I'm not sure that the rising equity glidepath's seeming improvement would have been statistically significant. If it isn't, then the results may be due to random chance.
Yes you've said that 3 times now :) And I'll keep saying this: while the differences in Kitces' model were relatively small, ERN's analysis showed more potent benefits for long retirements, which is what the OP is asking about.

And I'm not sure if you read what Kitces said in that podcast, but nothing he said there gives me the impression he has changed his mind about it (rising equity glide paths).
All the so-called analyses supporting a rising equity glide path suffer the same issues: the effects are statistically insignificant and highly dependent on the starting assumptions.

A rising glide path does not generally improve retirement outcomes relative to a static allocation, at least not in terms of success probability or SWR. A rising path might be better for a particular retirement cohort but it is just as likely to be worse, and you probably won’t know for decades which it was.

With yields where they are, it’s likely that a rising path will be marginally worse not better.

That said, loss averse and regret averse investors might derive more utility from a LMP or partial-LMP approach, which has the effect of creating a rising equity glide path. But that’s arguably more an impact of overfunding than of withdrawal strategy per se.
I agree that for more typical retirement periods (e.g. 30 years), the rising equity glidepath doesn't seem to be beneficial. But Karsten's analysis seemed to indicate pretty robustly that a rising equity glidepath worked well at improving the SWR for 60 year retirements when the starting stock allocation was at least 60%. Also, this improvement seemed to increase when starting valuations were high, as they are now.
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

Marseille07 wrote: Thu Nov 26, 2020 9:55 am
deanmoriarty wrote: Thu Nov 26, 2020 9:06 am For my early retirement, at around 36 in a year or two (hopefully somewhere around $4M NW), I plan for 1.5% withdrawal rate.

Why? A lot of people on the forum feel that 3-4% should be safe. However, expenses are not always constant, especially for early retirement. One needs to reserve the right to change their budget over time, and an overall conservative withdrawal rate will allow unexpected large expenses to be absorbed, when they’ll inevitably occur even decades away.

And I’m not talking about lifestyle creep. For the past 10 years I’ve been keeping my personal inflation rate remarkably low, even negative at times. However, I don’t want to be in the position where I won’t be able to dump $50k for an emergency non-covered medical treatment (e.g. what if I want to get a series of hair transplants at some point? Or cosmetic dental procedures outside coverage? Just a couple silly examples), or a series of expensive international travels that would maybe cost half of my typical yearly budget (e.g. care for sick family).

I think, when one is young, accounting for the variance of expenses is way more important than arguing about a withdrawal rate that assumes a stable level of spending. Life will throw several curveballs over decades, so you want to have buffers.

The natural consequence, in my mind, is to make your expected baseline of expenses a very low proportion of your net worth (1.5%). Alternatively, aggressively pad your current expenses to account for the much unexpected, and then use that number with a 3% rate. It’s the same thing.
Withdrawal strategy doesn't eliminate the need for EF imo. Say you have 100K of EF in savings that you maintain at all times, does it really matter if you withdraw 3-4% vs 1.5%?

I'm not advocating for higher WR (I'm on the conservative camp myself), but I don't see what you're describing as the reason for going at 1.5%.
I concur with willthrill, we have no need for an emergency fund. We have 30% in bonds and can easily tap them Incase of an emergency. Our portfolio is our emergency fund. Actually what an emergency fund is nothing more than adding more fixed income that you now have to figure out how to manage. When do you tap into it? How do you replenish it? Is it part of your 25x portfolio or does having the EF make your portfolio 26x? It is added complexity for no additional benefit for us.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Maybe I should email Karsten (i.e. Big ERN) directly, but I would really like to see someone combine and test several of the factors that he and others have found have at least potentially improved historic SWRs for very long retirements: rising equity glidepaths, modest gold allocations, McClung's 'prime harvesting' approach,
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Re: Withdrawal rate for an early retirement

Post by marcopolo »

klaus14 wrote: Thu Nov 26, 2020 5:18 am
marcopolo wrote: Thu Nov 26, 2020 4:32 am
I don't have a problem with what you are saying.
My objection was to the poster claiming both the expected returns, expected SWR, and the distribution around them could be known precisely, going as far as to claim it is just simple math to do so.

Do you disagree that computing the expected and the associated distribution requires making some assumptions about the future, and does not literally fall out of knowing current bond yields?
no i don't. but again, if you don't like vineviz assumptions, what are yours? my guess is probably your method would also portray a similar SWR picture.

I think biggest lesson some people in this thread misses is that past SWR is not a guarantee of future SWR. Current return expectations are a better predictor of future SWR. 3.10% being 10p or 40p event is a smaller detail.
What do I Do?

I am earl y retired for several years now, so this more than an academic excersize for me.

What I do is accept the fact that there are a lot of uncertainties in life.

I have run different models using historical data, as well as Monte Carlo based. I have done sensitivity analysis by derating returns in the historical data, as well as varying the expected return numbers in the Monte Carlo process, because even if one could compute the expected return accurately, you can never be certain which realization you will encounter.

All of this led me to get comfortable with WR somewhere around 3ish percent. I don't try to be more precise than that, and I don't claim to know if that is "safe", or too risky. We only use this a very rough guideline to keep a loose eye on spending. We spend what we want, and see where we are coming out as the year progresses. Some years we have spent a lot more than others, but that has been Ok so far, as they markets have done well, so our actual WR rate has been sub-3%. We recognize returns could be a lot worse going forward, and we will adapt, as a lot of our spending is discretionary.

What I do NOT do is pretend i can know any of this with a great degree of precision and ridicule anyone that does not agree with me.
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Re: Withdrawal rate for an early retirement

Post by YRT70 »

vineviz wrote: Thu Nov 26, 2020 10:27 am
YRT70 wrote: Thu Nov 26, 2020 10:15 am
willthrill81 wrote: Thu Nov 26, 2020 9:55 am That brings up another point I've made already: I'm not sure that the rising equity glidepath's seeming improvement would have been statistically significant. If it isn't, then the results may be due to random chance.
Yes you've said that 3 times now :) And I'll keep saying this: while the differences in Kitces' model were relatively small, ERN's analysis showed more potent benefits for long retirements, which is what the OP is asking about.

And I'm not sure if you read what Kitces said in that podcast, but nothing he said there gives me the impression he has changed his mind about it (rising equity glide paths).
All the so-called analyses supporting a rising equity glide path suffer the same issues: the effects are statistically insignificant and highly dependent on the starting assumptions.

A rising glide path does not generally improve retirement outcomes relative to a static allocation, at least not in terms of success probability or SWR. A rising path might be better for a particular retirement cohort but it is just as likely to be worse, and you probably won’t know for decades which it was.
When I look at the data provided by ERN I come to different conclusions. The equity glide path starting at 60% did exactly what I like: it provided a higher SWR during the worst case scenario's of the past.

Image

I agree with ERN's conclusion:
Early retirees need the power of equity expected returns to make the nest egg last for many decades. Even more so than the traditional retiree at age 65! But that exposes us to Sequence of Return Risk. An equity glidepath can alleviate some of the negative effects of Sequence of Return Risk. But it shouldn’t come as a surprise that you will never completely eliminate the risk. For a given withdrawal rate, say 3.5%, we can only reduce the failure rate while leaving some residual risk. And likewise, the 4% rule would still not be safe for today’s early retirees even with an equity glidepath.

Moreover, an equity glidepath is like an insurance policy. A hedge against a tail event! On average it will cost you money, but if and when you need it the most it will likely pay off. Exactly when the static stock/bond allocation paths had their worst sustainable safe withdrawal rates you get slightly better results but you also give up some of the upside if the equity market “decides” to rally some more right after your retirement. But that’s a good problem to have!
https://earlyretirementnow.com/2017/09/ ... nt-page-2/

Will it stop working in the future? I'm not sure. I'll see. Hopefully I'll never find out.
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Re: Withdrawal rate for an early retirement

Post by CalPoppy »

For some perspective:

When the CFPs at Vanguard Personal Advisory Services conduct a portfolio analysis, they like to see an estimated success rate of 80% or better.

And Bernstein states: "But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning." More context here: http://www.efficientfrontier.com/ef/901/hell3.htm
Last edited by CalPoppy on Thu Nov 26, 2020 11:25 am, edited 1 time in total.
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Re: Withdrawal rate for an early retirement

Post by BogleFan510 »

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Re: Withdrawal rate for an early retirement

Post by marcopolo »

vineviz wrote: Thu Nov 26, 2020 6:37 am
marcopolo wrote: Thu Nov 26, 2020 2:21 am
vineviz wrote: Wed Nov 25, 2020 8:20 pm
I’m not “predicting” future returns. Obviously we don’t know what they will be, but there ARE some things we know with certainty. One of those is the expected real yield on Treasury bonds, which LITERALLY tells you the expected range of possible outcomes for SWR over the next 30 years.

Because we don’t know the path of future returns we don’t know WHICH of the possible outcomes we will get. Saying there’s a 10% chance the SWR could be as low as 3.1% isn’t the same as predicting that IT WILL BE 3.1%.
I don't think that word means what you think it means.

You keep repeating this as if people here do not understand the concept of an expected value. I don't think that is necessarily the case.

What I, and I suspect others, do not understand is how you can say with such certainty that there is a 10% chance of SWR being below 3.1%. That assumes you somehow know the underlying population density of SWR. That is what people are questioning.

Can you explain how you believe you can known that with certainty?
I’m sure many people here know what an expected value is, but clearly there are some very vocal people who do not.

But the expected value of a portfolio’s sustainable withdrawal rate DOES literally flow from a equation that contains just three values: the number of time periods, the portfolio’s average real return,and the portfolio’s standard deviation of real returns.

As long as the returns can be approximated using mean and standard deviation and you have expected values for those three variables then you can calculate the expected SWR.

You make a good point about the potential dangers of reporting overly precise estimates for expected values, but the SWR number is so small it’s hard to avoid.

There is a lot of assumptions packed into the highlighted paragraph. They may or may not be true. The underlying distribution is likely quite complex, and the parameters may change over time.

I generally agree with you qualitatively that expected returns and SWR are likely to be lower going forward. My only disagreement is with your assertion that their expected value can be computed precisely and accurately as you claim.

Your three input formula does NOT produce THE expected value, it produces AN expected value, based on your assumptions, which may or may not be accurate. The inputs themselves are also subject to the same problem.
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

BogleFan510 wrote: Thu Nov 26, 2020 11:18 am
EnjoyIt wrote: Wed Nov 25, 2020 7:19 pm
Marseille07 wrote: Wed Nov 25, 2020 6:55 pm
EnjoyIt wrote: Wed Nov 25, 2020 6:48 pm I believe the sub 3% people are going way overboard. It’s one thing to retire at retirement age and then figuring out you can comfortably live on 2.5% withdrawals.
Retirement age doesn't matter. If OP can hit 4M by 45 and figure out they can comfortably live on 2% (80K/yr) then nothing wrong with 2% or retiring early. Advocating such an idea isn't going way overboard.
This is the crux. Is the 2% because of fear or is it 2% because they have no desire to spend more. Very big difference here.
This is basically our situation. We are not buying a new car because our Prius gets us to our state park which is free to hike, where we want to go, at 40mpg, in leather seats with a navigation system that still orients us just fine. As market returns exceed expectations we phase in some extra luxury, but most of it seems silly.

SWR is helpful for planning pre retirement,but we dont really have an income budget. We just keep living our lives as we have always done and only really monitor travel spending, because the rest doesnt vary much. 2% is about where we are in mid 50s, and it seems a generous income we dont actually spend. All and all, if this continues we will be decreasing our percentage with time, as our assets will keep growing.
This is a great place to be with the ability to have some very large one off expenses if desired or needed.

No reason why one year you can’t spend an extra 2% on something you desire. Maybe rent a vacation house for the summer or some other one off event. No problem it is in your real of possibilities.

Many of us don't retire finding themselves with more money than we need so we need to figure out a plan. 4% is a decent starting point and then adjust as needed.
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