Withdrawal rate for an early retirement

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marcopolo
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Re: Withdrawal rate for an early retirement

Post by marcopolo »

Marseille07 wrote: Sat Nov 28, 2020 11:09 pm
marcopolo wrote: Sat Nov 28, 2020 11:03 pm What does it mean to virtually track 80k in an EF?
What is it actually invested in?
What advantage is there to this mental, or in this case spreadsheet accounting of dollars in different virtual buckets?

During working years I can see keeping an EF as a way to get through possible periods of unemployment without touching your portfolio.

When you are in retire, it seem your entire portfolio is essentially your EF. Pull from it what you need.
The idea isn't that complicated, instead of actually selling AA and withdrawing cash, you just keep tabs on a spreadsheet so the money stays invested in the AA.

"Pull from it what you need" is right, but you need some way to track your spending to avoid overspending. That's what I use virtual buckets for.
How does keeping separate buckets for EF help overspending any different than when pulling from the portfolio as needed and keeping track of what you spend.

How do you treat those virtual dollars in an EF any different than the other the dollars in rest of your portfolio?
Once in a while you get shown the light, in the strangest of places if you look at it right.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

marcopolo wrote: Sat Nov 28, 2020 11:35 pm
Marseille07 wrote: Sat Nov 28, 2020 11:09 pm
marcopolo wrote: Sat Nov 28, 2020 11:03 pm What does it mean to virtually track 80k in an EF?
What is it actually invested in?
What advantage is there to this mental, or in this case spreadsheet accounting of dollars in different virtual buckets?

During working years I can see keeping an EF as a way to get through possible periods of unemployment without touching your portfolio.

When you are in retire, it seem your entire portfolio is essentially your EF. Pull from it what you need.
The idea isn't that complicated, instead of actually selling AA and withdrawing cash, you just keep tabs on a spreadsheet so the money stays invested in the AA.

"Pull from it what you need" is right, but you need some way to track your spending to avoid overspending. That's what I use virtual buckets for.
How does keeping separate buckets for EF help overspending any different than when pulling from the portfolio as needed and keeping track of what you spend.

How do you treat those virtual dollars in an EF any different than the other the dollars in rest of your portfolio?
If you're keeping track then that's fine, same thing. It wasn't stated you keep track and I didn't assume so.
YRT70
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Re: Withdrawal rate for an early retirement

Post by YRT70 »

Marseille07 wrote: Sat Nov 28, 2020 12:46 pm
YRT70 wrote: Sat Nov 28, 2020 3:31 am I agree on the behavioural risks. For longer retirements the improvement in SWR was sometimes more than marginal.

Image
Source: https://earlyretirementnow.com/2017/09/ ... lidepaths/
I don't like this chart because it is not testing rising glidepath. "Worst time to retire" (i.e. right before a market crash) is not the same as "worst time for rising glidpath."

In order to really test what rising glidepath is made of, we need to look at the years such that a retirement horizon is *ending* when the markets crashed, such as 2009-01-01.
If the markets crash at the end of your retirement it likely won't matter much because it's more likely you had good returns before that. Sequence of Returns Risk refers to getting bad returns in the first part of the retirement. The rising equity glide path (or bond tent) is a strategy aimed at reducing this risk. Michael Kitces explains it here: https://www.youtube.com/watch?v=5dbPdCdFRrs

The fragment starts after ~22:50 minutes.
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birdog
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Re: Withdrawal rate for an early retirement

Post by birdog »

Marseille07 wrote: Sat Nov 28, 2020 10:13 pm Just a thought experiment, but we all have some EF buffer that's sufficient. I would say for most people's monthly day-to-day needs are met with 20K just fine. But if for whatever reason that's not sufficient, prepare 50K, 100K or whatever. The point is, there's some amount somewhere above which you stop worrying about portfolio volatility because you have enough cash stocked up.
This has become my approach. I don't want to feel the stress, during first years of retirement, that would come along with a lack of confidence in my ability to safely spend from my investment portfolio. During accumulation years I either had no EF or a small one. Now that I'm within a year or two of retirement I'm building a larger EF. I'm not excited about the cash drag, especially in today's low interest rates on savings accounts, but I view it as insurance against SORR. Perhaps it gets tapped into after the first ten years of retirement if it's not been sufficiently reduced by then.

Example: Retirement starts (late 40's). I harvest dividends each quarter from taxable acct (which is 3x larger than my IRAs) and sell shares in taxable account in amount equal to dividends in IRAs (on DRIP). Then I sell additional shares in taxable account to get to my SWR since dividends alone won't quite get me there. Then we have a market downturn of say 20%. I continue to harvest my dividends from the taxable account as well as sell shares in taxable acct equal to amount of dividends that are automatically reinvested in my IRAs. But the amount worth of additional shares that I need to sell in taxable in order to get to my SWR amount are now taken from my cash buffer (HYSA). With two years of expenses in HYSA, this approach gets me over 9 years of withdrawals from cash buffer before it's depleted.

I'm protecting against SORR in early retirement by having a low SWR as well as a cash cushion to draw from during market drops. This cash cushion is intended to get me through the first ten years and can be depleted after that. Thoughts?
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

birdog wrote: Sun Nov 29, 2020 8:20 am
Marseille07 wrote: Sat Nov 28, 2020 10:13 pm Just a thought experiment, but we all have some EF buffer that's sufficient. I would say for most people's monthly day-to-day needs are met with 20K just fine. But if for whatever reason that's not sufficient, prepare 50K, 100K or whatever. The point is, there's some amount somewhere above which you stop worrying about portfolio volatility because you have enough cash stocked up.
This has become my approach. I don't want to feel the stress, during first years of retirement, that would come along with a lack of confidence in my ability to safely spend from my investment portfolio. During accumulation years I either had no EF or a small one. Now that I'm within a year or two of retirement I'm building a larger EF. I'm not excited about the cash drag, especially in today's low interest rates on savings accounts, but I view it as insurance against SORR. Perhaps it gets tapped into after the first ten years of retirement if it's not been sufficiently reduced by then.

Example: Retirement starts (late 40's). I harvest dividends each quarter from taxable acct (which is 3x larger than my IRAs) and sell shares in taxable account in amount equal to dividends in IRAs (on DRIP). Then I sell additional shares in taxable account to get to my SWR since dividends alone won't quite get me there. Then we have a market downturn of say 20%. I continue to harvest my dividends from the taxable account as well as sell shares in taxable acct equal to amount of dividends that are automatically reinvested in my IRAs. But the amount worth of additional shares that I need to sell in taxable in order to get to my SWR amount are now taken from my cash buffer (HYSA). With two years of expenses in HYSA, this approach gets me over 9 years of withdrawals from cash buffer before it's depleted.

I'm protecting against SORR in early retirement by having a low SWR as well as a cash cushion to draw from during market drops. This cash cushion is intended to get me through the first ten years and can be depleted after that. Thoughts?
How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have. I don't know about folks here but I always have 20K~30K in checking; I don't run it down to $0 and worry if I might overdraw. That'd be a dumb concern I don't need to have.

Building up cash cushion / EF is a similar story.
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willthrill81
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
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birdog
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Re: Withdrawal rate for an early retirement

Post by birdog »

Marseille07 wrote: Sun Nov 29, 2020 9:28 am
birdog wrote: Sun Nov 29, 2020 8:20 am
Marseille07 wrote: Sat Nov 28, 2020 10:13 pm Just a thought experiment, but we all have some EF buffer that's sufficient. I would say for most people's monthly day-to-day needs are met with 20K just fine. But if for whatever reason that's not sufficient, prepare 50K, 100K or whatever. The point is, there's some amount somewhere above which you stop worrying about portfolio volatility because you have enough cash stocked up.
This has become my approach. I don't want to feel the stress, during first years of retirement, that would come along with a lack of confidence in my ability to safely spend from my investment portfolio. During accumulation years I either had no EF or a small one. Now that I'm within a year or two of retirement I'm building a larger EF. I'm not excited about the cash drag, especially in today's low interest rates on savings accounts, but I view it as insurance against SORR. Perhaps it gets tapped into after the first ten years of retirement if it's not been sufficiently reduced by then.

Example: Retirement starts (late 40's). I harvest dividends each quarter from taxable acct (which is 3x larger than my IRAs) and sell shares in taxable account in amount equal to dividends in IRAs (on DRIP). Then I sell additional shares in taxable account to get to my SWR since dividends alone won't quite get me there. Then we have a market downturn of say 20%. I continue to harvest my dividends from the taxable account as well as sell shares in taxable acct equal to amount of dividends that are automatically reinvested in my IRAs. But the amount worth of additional shares that I need to sell in taxable in order to get to my SWR amount are now taken from my cash buffer (HYSA). With two years of expenses in HYSA, this approach gets me over 9 years of withdrawals from cash buffer before it's depleted.

I'm protecting against SORR in early retirement by having a low SWR as well as a cash cushion to draw from during market drops. This cash cushion is intended to get me through the first ten years and can be depleted after that. Thoughts?
How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have. I don't know about folks here but I always have 20K~30K in checking account; I don't run it down to $0 and worry if I might overdraw. That'd be a dumb concern I don't need to have.

Building up cash cushion / EF is a similar story.
I'm targeting a 2 to 2.5% SWR for when I retire in the next one to two years. A high CAPE10 and low interest rates coupled with an early retirement have convinced to be very conservative (at least in the beginning). I have a high paying job (that I do hate) that doesn't require me to work for another ten years to reach my goals. (A SWR of 2% is 30% higher than what I'm currently spending per year but I expect a higher spend rate due to travel and a loosening of the purse strings in the early years of my retirement.) Karsten's study of a cash cushion is what sparked my interest regarding it. A lot of personal finance is psychological and a large cash cushion (especially in early retirement) would largely alleviate the stress that would come with a bear market. Being able to withdrawal just dividends from an investment portfolio and supplement the remaining dollars that are needed from a cash cushion (instead of being forced to sell shares) that would last for several years (nine in my example) would allow me to sleep much better at night.
Last edited by birdog on Sun Nov 29, 2020 9:51 am, edited 1 time in total.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I do use it. If I have 20K in checking and go for a nice vacation & spend 10K, that's coming out of this cushion. It's not every month, but the cushion is definitely used.
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willthrill81
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

Marseille07 wrote: Sun Nov 29, 2020 9:50 am
willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I do use it. If I have 20K in checking and go for a nice vacation & spend 10K, that's coming out of this cushion. It's not every month, but the cushion is definitely used.
Well, to paraphrase Marie Antoinette, if you use it, then you don't have it. You will have to replenish that $10k from somewhere, whether from increasing your withdrawals or spending less elsewhere.
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Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

birdog wrote: Sun Nov 29, 2020 9:50 am I'm targeting a 2 to 2.5% SWR for when I retire in the next one to two years. A high CAPE10 and low interest rates coupled with an early retirement have convinced to be very conservative (at least in the beginning). I have a high paying job (that I do hate) that doesn't require me to work for another ten years to reach my goals. (A SWR of 2% is 30% higher than what I'm currently spending per year but I expect a higher spend rate due to travel and a loosening of the purse strings in the early years of my retirement.) Karsten's study of a cash cushion is what sparked my interest regarding it. A lot of personal finance is psychological and a large cash cushion (especially in early retirement) would largely alleviate the stress that would come with a bear market. Being able to withdrawal just dividends from an investment portfolio and supplement the remaining dollars that are needed from a cash cushion (instead of being forced to sell shares) that would last for several years (nine in my example) would allow me to sleep much better at night.
That's a very safe approach. I actually went the opposite, I was thinking 2.5% but now thinking I can probably do 3%; I do suggest you include your travel budget in planning future expenses though. I'm in the same boat, I don't spend much but if I include travel post-retirement then I feel 2.5% SWR might be tight.

With that said, even if I do 3%, the EF approach would stop withdrawals after the bucket is full - which would effectively reduce my WR, so it's safer than it appears (not that 3% is considered aggressive).
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

willthrill81 wrote: Sun Nov 29, 2020 9:52 am
Marseille07 wrote: Sun Nov 29, 2020 9:50 am
willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I do use it. If I have 20K in checking and go for a nice vacation & spend 10K, that's coming out of this cushion. It's not every month, but the cushion is definitely used.
Well, to paraphrase Marie Antoinette, if you use it, then you don't have it. You will have to replenish that $10k from somewhere, whether from increasing your withdrawals or spending less elsewhere.
That's been the plan all along. Of course, I won't increase withdrawals so spending less elsewhere is the only solution after a 10K vacation. No other reasonable way to avoid overspending.
EnjoyIt
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

birdog wrote: Sun Nov 29, 2020 9:50 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am
birdog wrote: Sun Nov 29, 2020 8:20 am
Marseille07 wrote: Sat Nov 28, 2020 10:13 pm Just a thought experiment, but we all have some EF buffer that's sufficient. I would say for most people's monthly day-to-day needs are met with 20K just fine. But if for whatever reason that's not sufficient, prepare 50K, 100K or whatever. The point is, there's some amount somewhere above which you stop worrying about portfolio volatility because you have enough cash stocked up.
This has become my approach. I don't want to feel the stress, during first years of retirement, that would come along with a lack of confidence in my ability to safely spend from my investment portfolio. During accumulation years I either had no EF or a small one. Now that I'm within a year or two of retirement I'm building a larger EF. I'm not excited about the cash drag, especially in today's low interest rates on savings accounts, but I view it as insurance against SORR. Perhaps it gets tapped into after the first ten years of retirement if it's not been sufficiently reduced by then.

Example: Retirement starts (late 40's). I harvest dividends each quarter from taxable acct (which is 3x larger than my IRAs) and sell shares in taxable account in amount equal to dividends in IRAs (on DRIP). Then I sell additional shares in taxable account to get to my SWR since dividends alone won't quite get me there. Then we have a market downturn of say 20%. I continue to harvest my dividends from the taxable account as well as sell shares in taxable acct equal to amount of dividends that are automatically reinvested in my IRAs. But the amount worth of additional shares that I need to sell in taxable in order to get to my SWR amount are now taken from my cash buffer (HYSA). With two years of expenses in HYSA, this approach gets me over 9 years of withdrawals from cash buffer before it's depleted.

I'm protecting against SORR in early retirement by having a low SWR as well as a cash cushion to draw from during market drops. This cash cushion is intended to get me through the first ten years and can be depleted after that. Thoughts?
How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have. I don't know about folks here but I always have 20K~30K in checking account; I don't run it down to $0 and worry if I might overdraw. That'd be a dumb concern I don't need to have.

Building up cash cushion / EF is a similar story.
I'm targeting a 2 to 2.5% SWR for when I retire in the next one to two years. A high CAPE10 and low interest rates coupled with an early retirement have convinced to be very conservative (at least in the beginning). I have a high paying job (that I do hate) that doesn't require me to work for another ten years to reach my goals. (A SWR of 2% is 30% higher than what I'm currently spending per year but I expect a higher spend rate due to travel and a loosening of the purse strings in the early years of my retirement.) Karsten's study of a cash cushion is what sparked my interest regarding it. A lot of personal finance is psychological and a large cash cushion (especially in early retirement) would largely alleviate the stress that would come with a bear market. Being able to withdrawal just dividends from an investment portfolio and supplement the remaining dollars that are needed from a cash cushion (instead of being forced to sell shares) that would last for several years (nine in my example) would allow me to sleep much better at night.
My goodness, you hate your job, have enough wealth currently to sustain 2% withdrawal while spending 30% more than you currently spend. I don’t understand why you are still working.

I would have quit or moved to another job a long time ago. At worst I would have switched to something more enjoyable at 4%. Maybe stick it out to 3.5% because of fear.
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birdog
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Re: Withdrawal rate for an early retirement

Post by birdog »

EnjoyIt wrote: Sun Nov 29, 2020 10:26 am My goodness, you hate your job, have enough wealth currently to sustain 2% withdrawal while spending 30% more than you currently spend. I don’t understand why you are still working.

I would have quit or moved to another job a long time ago. At worst I would have switched to something more enjoyable at 4%. Maybe stick it out to 3.5% because of fear.
Very valid points. I didn't start to hate my job until very recently when changes outside my control necessitated a very long commute be made more often along with other changes that introduced inefficiencies which resulted in harder work for lower pay. I don't have enough wealth to currently support the numbers you quoted above, but I should within the next year or two. When those numbers are hit, I walk. It's scary for me to walk from a very high paying job at age 47, especially given current market valuations, unless I feel like I'm a bit over-prepared. Plus, switching to another job would delay my targeted retirement due to the certain decrease in salary.
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Re: Withdrawal rate for an early retirement

Post by FrugalInvestor »

willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I'm retired and have a cash cushion which I constantly use and periodically replenish (annually). I wouldn't call mine an emergency fund but rather a cash working reserve and it serves multiple purposes for me. First, it provides convenient and readily accessible funds for ongoing living expenses. Second, it lets me sleep well at night when the market tanks knowing that I don't need to think about withdrawing from taxable accounts during particularly bad times - this is important because we currently live off of our taxable account. Third, it allows me to plan my withdrawals with tax efficiency in mind. Finally, it can fund a short term 'emergency' and allow me a more flexible time-frame in which to get the account re-filled, or to decide to reduce spending over time to cover that expense.

In other words this cash provides flexibility and peace of mind, both of which I greatly value.
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EnjoyIt
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

birdog wrote: Sun Nov 29, 2020 11:00 am
EnjoyIt wrote: Sun Nov 29, 2020 10:26 am My goodness, you hate your job, have enough wealth currently to sustain 2% withdrawal while spending 30% more than you currently spend. I don’t understand why you are still working.

I would have quit or moved to another job a long time ago. At worst I would have switched to something more enjoyable at 4%. Maybe stick it out to 3.5% because of fear.
Very valid points. I didn't start to hate my job until very recently when changes outside my control necessitated a very long commute be made more often along with other changes that introduced inefficiencies which resulted in harder work for lower pay. I don't have enough wealth to currently support the numbers you quoted above, but I should within the next year or two. When those numbers are hit, I walk. It's scary for me to walk from a very high paying job at age 47, especially given current market valuations, unless I feel like I'm a bit over-prepared. Plus, switching to another job would delay my targeted retirement due to the certain decrease in salary.
About 2 years ago I did just that. I had 25x expenses and went part time at a lower capacity. Best decision I ever made. Since then we have increased spending so that it continues to match 25x expenses. Sure sitting around another year or two would have made me much more money but I am much happier, enjoy work now, and most importantly I am healthier.

Another interesting thing that occurred is although my income was cut in half, my actual take home was only about 33% pay cut. Plus my work related and commute expenses went down making the cut even less significant.

Anyways, good luck with your next 1-2 years.
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EnjoyIt
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

FrugalInvestor wrote: Sun Nov 29, 2020 11:47 am
willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I'm retired and have a cash cushion which I constantly use and periodically replenish (annually). I wouldn't call mine an emergency fund but rather a cash working reserve and it serves multiple purposes for me. First, it provides convenient and readily accessible funds for ongoing living expenses. Second, it lets me sleep well at night when the market tanks knowing that I don't need to think about withdrawing from taxable accounts during particularly bad times - this is important because we currently live off of our taxable account. Third, it allows me to plan my withdrawals with tax efficiency in mind. Finally, it can fund a short term 'emergency' and allow me a more flexible time-frame in which to get the account re-filled, or to decide to reduce spending over time to cover that expense.

In other words this cash provides flexibility and peace of mind, both of which I greatly value.
Cash reserves cost money. Piece of mind costs money. Losing your wits during market turmoil costs even more money. Personal finance is personal. Our cash reserve is 1-2 months of peak expenses. We do this so that we don’t accidentally overdraft. Our bonds is our emergency fund.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: Withdrawal rate for an early retirement

Post by garlandwhizzer »

birdog wrote:

It's scary for me to walk from a very high paying job at age 47, especially given current market valuations, unless I feel like I'm a bit over-prepared. Plus, switching to another job would delay my targeted retirement due to the certain decrease in salary.
A 2% - 2.5% withdrawal rate even given today's generous valuations and zero interest rates should not be a problem. I retired at 50 with 100% equity and planned on a market return of 7% real, which at the time in 1997 in the go-go dot com bubble after 15 years of exuberant bull market didn't seem like too much of a stretch for me. I planed at that time a 7% expected real return so that my portfolio value would not drop over time. I have since then learned a bit about risk and I had to make some tough choices along the way. Overall, however, it has worked out very well, the last 23 years have been the best of my life and my portfolio which has always been heavily tilted to equity is larger now than it was the day I retired 23 years ago.

A couple of pieces of advice. First, keep a very substantial allocation to equity regardless of what you think the market is going to do. Don't let fear push you into age in bonds or anything close to it. That worked 20 years ago when bonds yielded 6%+, but not today. If inflation and rising rates are in our future, a heavy portfolio exposure to bonds will produce the opposite of safety.

I do not believe we will ever return to long term average PE1 or PE10. Those numbers may be useful in a sense to know how severely the market may be over or under valued, but both have been systematically rising for more than a decade. There is so much wealth concentrated now in the investing class that with bonds yielding expected zero real or less, stocks even at current generous valuations are a relative bargain. The equity risk premium is alive and well. All that money has to be invested somewhere and there is likely to be persistent inflation in investment assets. People say inflation is dead, and in most areas of the economy that appears to be true. But all investment assets, bonds most so, but also stocks, real estate, gold, etc., continue to be richly valued. There is massive demand from investment dollars and limited supply of what look like attractive investment opportunities relative to what existed 3 decades ago. Prices of all investment opportunities have gone up and will likely continue to do so, interrupted from time to time by bear markets. Bull markets last longer historically than bear markets and they are more vigorous. Time is on the side of equity investors in general as long as they don't panic.

The second point that I will make is about an emergency fund. I know a lot of people on the Forum argue against having one. But when you're retired and have no pension and must come up with generous living expenses every year, IMO it's money well spent. I keep a lot of equity still at age 73 (>70% at present) which means that my portfolio continues to be volatile. I therefore keep 2 - 3 years of living expenses in either MMF or very short term quality bonds in my personal account so that sales be access considerable money without generating any taxes at all for as long as 3 years. What I am doing with this is buying time. Given 34 years to thing about a problem I'll come up with a solution. Bear markets may be severe but typically there is a substantial rebound sooner than that. So the problem usually solves itself. This is especially so now as we saw with the Covid-19 bear market. There was so much money sitting in bonds and MMF yielding long term expected returns of nothing real. When equity prices dropped sufficiently, investors swooped in the same way they did in 2009 shortly after it looked like the entire global financial system was on the verge of collapse.

So I hold a substantial emergency fund in non-tax-deferred account which allows me to tolerate more risk on the equity side and still sleep at night. It also allows me to hold onto my longer duration quality bonds which during equity disasters tend to appreciate in value, buffering portfolio losses. It's hard to sell your only appreciating asset when your high allocation to equity is tanking. Also, MMF tolerate inflation better than longer duration bonds which may be important if the emergency crisis turns out to be stagflation.

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Re: Withdrawal rate for an early retirement

Post by CalPoppy »

FrugalInvestor wrote: Sun Nov 29, 2020 11:47 am
willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I'm retired and have a cash cushion which I constantly use and periodically replenish (annually). I wouldn't call mine an emergency fund but rather a cash working reserve and it serves multiple purposes for me. First, it provides convenient and readily accessible funds for ongoing living expenses. Second, it lets me sleep well at night when the market tanks knowing that I don't need to think about withdrawing from taxable accounts during particularly bad times - this is important because we currently live off of our taxable account. Third, it allows me to plan my withdrawals with tax efficiency in mind. Finally, it can fund a short term 'emergency' and allow me a more flexible time-frame in which to get the account re-filled, or to decide to reduce spending over time to cover that expense.

In other words this cash provides flexibility and peace of mind, both of which I greatly value.
This is my experience too. More specifically it’s for emergencies + working capital + lumpy expenses. The peace of mind it provides is a bonus.

Being retired, it sure felt good to have it this year when the markets tanked, my part-time consulting income disappeared overnight, and an unexpected house repair expense hit.
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Re: Withdrawal rate for an early retirement

Post by CalPoppy »

Rob1 wrote: Sun Nov 29, 2020 1:03 pm
FrugalInvestor wrote: Sun Nov 29, 2020 11:47 am
willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I'm retired and have a cash cushion which I constantly use and periodically replenish (annually). I wouldn't call mine an emergency fund but rather a cash working reserve and it serves multiple purposes for me. First, it provides convenient and readily accessible funds for ongoing living expenses. Second, it lets me sleep well at night when the market tanks knowing that I don't need to think about withdrawing from taxable accounts during particularly bad times - this is important because we currently live off of our taxable account. Third, it allows me to plan my withdrawals with tax efficiency in mind. Finally, it can fund a short term 'emergency' and allow me a more flexible time-frame in which to get the account re-filled, or to decide to reduce spending over time to cover that expense.

In other words this cash provides flexibility and peace of mind, both of which I greatly value.
This is my experience too. More specifically it’s for emergencies + working capital + lumpy expenses. The peace of mind it provides is a bonus.

Being retired, it sure felt good to have it this year when the markets tanked, my part-time consulting income disappeared overnight, and an unexpected house repair expense hit.
For what it is worth, things that I appreciate now that my younger self struggled with:
  • Holding cash in an emergency fund
  • A significant allocation in bonds
  • A paid off mortgage (although I still have a small mortgage compared to net worth)
  • The value of “peace of mind” these bring
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Re: Withdrawal rate for an early retirement

Post by EnjoyIt »

Rob1 wrote: Sun Nov 29, 2020 1:12 pm
Rob1 wrote: Sun Nov 29, 2020 1:03 pm
FrugalInvestor wrote: Sun Nov 29, 2020 11:47 am
willthrill81 wrote: Sun Nov 29, 2020 9:35 am
Marseille07 wrote: Sun Nov 29, 2020 9:28 am How low is a low SWR? I think our approaches are similar but I don't regard the cash cushion as something to deplete - it's just something to always have.
Why have a cash cushion if you aren't going to use it?
I'm retired and have a cash cushion which I constantly use and periodically replenish (annually). I wouldn't call mine an emergency fund but rather a cash working reserve and it serves multiple purposes for me. First, it provides convenient and readily accessible funds for ongoing living expenses. Second, it lets me sleep well at night when the market tanks knowing that I don't need to think about withdrawing from taxable accounts during particularly bad times - this is important because we currently live off of our taxable account. Third, it allows me to plan my withdrawals with tax efficiency in mind. Finally, it can fund a short term 'emergency' and allow me a more flexible time-frame in which to get the account re-filled, or to decide to reduce spending over time to cover that expense.

In other words this cash provides flexibility and peace of mind, both of which I greatly value.
This is my experience too. More specifically it’s for emergencies + working capital + lumpy expenses. The peace of mind it provides is a bonus.

Being retired, it sure felt good to have it this year when the markets tanked, my part-time consulting income disappeared overnight, and an unexpected house repair expense hit.
For what it is worth, things that I appreciate now that my younger self struggled with:
  • Holding cash in an emergency fund
  • A significant allocation in bonds
  • A paid off mortgage (although I still have a small mortgage compared to net worth)
  • The value of “peace of mind” these bring
Very interesting and I can agree. We used to have a pretty large cash fund. Then one day I did the math on it and figured that I am wasting money so I went down to 1 month expenses. That added stress of making sure we don’t overdraft. Now I keep 1-2 months in cash. That has been pretty solid and kept us worry free. Whenever we get below expected 1 month spending, we refill the checking account back to 2 months worth. We usually spend less than the one month average where big bulky purchases make the average what it is. So 2 months of expenses in cash can easily last 2-4 months.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

garlandwhizzer wrote: Sun Nov 29, 2020 12:26 pm A couple of pieces of advice. First, keep a very substantial allocation to equity regardless of what you think the market is going to do. Don't let fear push you into age in bonds or anything close to it. That worked 20 years ago when bonds yielded 6%+, but not today. If inflation and rising rates are in our future, a heavy portfolio exposure to bonds will produce the opposite of safety.
Are you still 100/0? That'd be very gutsy. I'm planning to go from 80/20 to 90/10 next week.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

I think I'll take an evidence-based approach to EF using high watermark. Basically the idea is that I'll look at the highest emergency expenditure I've ever had and hold that much in EF minus cash on hand that I always have for day-to-day transactions.

If the highest ever emergency expenditure was 35K then I'll hold 20K in cash and 15K of EF virtually tracked, for example. If something happens in the future topping 35K then I'll update the watermark & EF bucket accordingly.
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Re: Withdrawal rate for an early retirement

Post by DDM4inv79 »

Marseille07 wrote: Tue Nov 17, 2020 10:25 pm
geerhardusvos wrote: Tue Nov 17, 2020 10:06 pm
nptit wrote: Tue Nov 17, 2020 8:58 pm I am doing some planning/simulation regarding early retirement say 45 years old.
What would be a safe withdrawal rate for a bogleheads portfolio with an allocation of 70% (US and Intl stocks) and 30% (Bonds)?
I am targeting 4 MM portfolio size with a 2% withdrawal rate yielding 80K of income each year.
Do you think 2% is the appropriate withdrawal rate for an early retirement if possible to attain this at around 45 years old or what would be the withdrawal rate to target?
Thanks!
There is no reason to plan for anything lower than 3% withdrawal rate with anything above 50% equities. 70/30 is a great asset allocation. You will likely be fine with a 3.5% or 4% WR. Perpetual withdrawal rate for your acid allocation is around 3.25%. Your $4 million portfolio will easily sustain $120,000 per year, And can almost certainly be increased over time even past inflation rates. We will retire at age 32 or 33 and will start at around 3.5% withdrawal rate.

https://portfoliocharts.com/2016/12/09/ ... etirement/

Image
I know this chart is quoted a lot, but it's very dangerous if you read the fine print: "The success criterion is a final asset value of zero as in the Trinity Study."

So OP's 4MM portfolio having $1 left after 30 years is considered "success" based on the study. Sure, the OP didn't run out of money...but is it really success? It's highly debatable in my opinion.
That same blog has the corresponding tables for when you require a higher final portfolio value:
"The Ultimate Guide to Safe Withdrawal Rates – Part 2: Capital Preservation vs. Capital Depletion"
https://earlyretirementnow.com/2016/12/ ... depletion/
For example:
Image
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

DDM4inv79 wrote: Sun Nov 29, 2020 11:21 pm
Marseille07 wrote: Tue Nov 17, 2020 10:25 pm
geerhardusvos wrote: Tue Nov 17, 2020 10:06 pm
nptit wrote: Tue Nov 17, 2020 8:58 pm I am doing some planning/simulation regarding early retirement say 45 years old.
What would be a safe withdrawal rate for a bogleheads portfolio with an allocation of 70% (US and Intl stocks) and 30% (Bonds)?
I am targeting 4 MM portfolio size with a 2% withdrawal rate yielding 80K of income each year.
Do you think 2% is the appropriate withdrawal rate for an early retirement if possible to attain this at around 45 years old or what would be the withdrawal rate to target?
Thanks!
There is no reason to plan for anything lower than 3% withdrawal rate with anything above 50% equities. 70/30 is a great asset allocation. You will likely be fine with a 3.5% or 4% WR. Perpetual withdrawal rate for your acid allocation is around 3.25%. Your $4 million portfolio will easily sustain $120,000 per year, And can almost certainly be increased over time even past inflation rates. We will retire at age 32 or 33 and will start at around 3.5% withdrawal rate.

https://portfoliocharts.com/2016/12/09/ ... etirement/

Image
I know this chart is quoted a lot, but it's very dangerous if you read the fine print: "The success criterion is a final asset value of zero as in the Trinity Study."

So OP's 4MM portfolio having $1 left after 30 years is considered "success" based on the study. Sure, the OP didn't run out of money...but is it really success? It's highly debatable in my opinion.
That same blog has the corresponding tables for when you require a higher final portfolio value:
"The Ultimate Guide to Safe Withdrawal Rates – Part 2: Capital Preservation vs. Capital Depletion"
https://earlyretirementnow.com/2016/12/ ... depletion/
For example:
Image
Yeah I posted the last chart (final asset value = 1.0 x initial). Imo this is the most valuable article of ERN.
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Re: Withdrawal rate for an early retirement

Post by birdog »

garlandwhizzer wrote: Sun Nov 29, 2020 12:26 pm
birdog wrote:

It's scary for me to walk from a very high paying job at age 47, especially given current market valuations, unless I feel like I'm a bit over-prepared. Plus, switching to another job would delay my targeted retirement due to the certain decrease in salary.
A 2% - 2.5% withdrawal rate even given today's generous valuations and zero interest rates should not be a problem. I retired at 50 with 100% equity and planned on a market return of 7% real, which at the time in 1997 in the go-go dot com bubble after 15 years of exuberant bull market didn't seem like too much of a stretch for me. I planed at that time a 7% expected real return so that my portfolio value would not drop over time. I have since then learned a bit about risk and I had to make some tough choices along the way. Overall, however, it has worked out very well, the last 23 years have been the best of my life and my portfolio which has always been heavily tilted to equity is larger now than it was the day I retired 23 years ago.

A couple of pieces of advice. First, keep a very substantial allocation to equity regardless of what you think the market is going to do. Don't let fear push you into age in bonds or anything close to it. That worked 20 years ago when bonds yielded 6%+, but not today. If inflation and rising rates are in our future, a heavy portfolio exposure to bonds will produce the opposite of safety.

I do not believe we will ever return to long term average PE1 or PE10. Those numbers may be useful in a sense to know how severely the market may be over or under valued, but both have been systematically rising for more than a decade. There is so much wealth concentrated now in the investing class that with bonds yielding expected zero real or less, stocks even at current generous valuations are a relative bargain. The equity risk premium is alive and well. All that money has to be invested somewhere and there is likely to be persistent inflation in investment assets. People say inflation is dead, and in most areas of the economy that appears to be true. But all investment assets, bonds most so, but also stocks, real estate, gold, etc., continue to be richly valued. There is massive demand from investment dollars and limited supply of what look like attractive investment opportunities relative to what existed 3 decades ago. Prices of all investment opportunities have gone up and will likely continue to do so, interrupted from time to time by bear markets. Bull markets last longer historically than bear markets and they are more vigorous. Time is on the side of equity investors in general as long as they don't panic.

The second point that I will make is about an emergency fund. I know a lot of people on the Forum argue against having one. But when you're retired and have no pension and must come up with generous living expenses every year, IMO it's money well spent. I keep a lot of equity still at age 73 (>70% at present) which means that my portfolio continues to be volatile. I therefore keep 2 - 3 years of living expenses in either MMF or very short term quality bonds in my personal account so that sales be access considerable money without generating any taxes at all for as long as 3 years. What I am doing with this is buying time. Given 34 years to thing about a problem I'll come up with a solution. Bear markets may be severe but typically there is a substantial rebound sooner than that. So the problem usually solves itself. This is especially so now as we saw with the Covid-19 bear market. There was so much money sitting in bonds and MMF yielding long term expected returns of nothing real. When equity prices dropped sufficiently, investors swooped in the same way they did in 2009 shortly after it looked like the entire global financial system was on the verge of collapse.

So I hold a substantial emergency fund in non-tax-deferred account which allows me to tolerate more risk on the equity side and still sleep at night. It also allows me to hold onto my longer duration quality bonds which during equity disasters tend to appreciate in value, buffering portfolio losses. It's hard to sell your only appreciating asset when your high allocation to equity is tanking. Also, MMF tolerate inflation better than longer duration bonds which may be important if the emergency crisis turns out to be stagflation.

Garland Whizzer
Thank you for the thoughtful reply. I am in agreement with you regarding a high equity allocation and substantial emergency fund. I also will not have a pension and am hoping to delay SS until age 70. I am currently at 85-15 and was going to trend towards 75-25 for retirement but am instead adjusting that to 80-20 in light of low interest rates. (I agree with Warren Buffett that stocks will outperform bonds over the next decade.) I am currently pouring most of my monthly investing contributions into my emergency fund (cash cushion) in the form of a HYSA (Marcus). At my current savings rate I will hit two years of expenses in my EF in slightly less than a year from now. That should allow my exit from my current job.

I believe your observation regarding systematically rising PEs is spot on as well.
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Re: Withdrawal rate for an early retirement

Post by birdog »

Marseille07 wrote: Sun Nov 29, 2020 6:36 pm Are you still 100/0? That'd be very gutsy. I'm planning to go from 80/20 to 90/10 next week.
I believe he said he was >70% equities right now.

Why the change from 80/20 to 90/10 for you?
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

birdog wrote: Mon Nov 30, 2020 7:41 am
Marseille07 wrote: Sun Nov 29, 2020 6:36 pm Are you still 100/0? That'd be very gutsy. I'm planning to go from 80/20 to 90/10 next week.
I believe he said he was >70% equities right now.

Why the change from 80/20 to 90/10 for you?
Low interest rates. Imo this helps equities more than bonds. Also, higher equity AA is better if you can stomach the drawdowns (which I can). My 401K already doing 100/0 today.
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Re: Withdrawal rate for an early retirement

Post by birdog »

Marseille07 wrote: Mon Nov 30, 2020 9:29 am
birdog wrote: Mon Nov 30, 2020 7:41 am
Why the change from 80/20 to 90/10 for you?
Low interest rates. Imo this helps equities more than bonds. Also, higher equity AA is better if you can stomach the drawdowns (which I can). My 401K already doing 100/0 today.
That was my guess. Are you retired or close to it?
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

birdog wrote: Mon Nov 30, 2020 9:52 am
Marseille07 wrote: Mon Nov 30, 2020 9:29 am
birdog wrote: Mon Nov 30, 2020 7:41 am
Why the change from 80/20 to 90/10 for you?
Low interest rates. Imo this helps equities more than bonds. Also, higher equity AA is better if you can stomach the drawdowns (which I can). My 401K already doing 100/0 today.
That was my guess. Are you retired or close to it?
Kind of, but 40% or so of my portfolio is doing very risky trading. I don't hit my target if I exclude this portfolio.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

I wouldn't use 4% SWR in retirement, especially for an early retirement. Financial Samurai recommends 0.5% WR as our bond yields are really low.
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Re: Withdrawal rate for an early retirement

Post by sailaway »

Marseille07 wrote: Tue Jun 01, 2021 11:52 pm I wouldn't use 4% SWR in retirement, especially for an early retirement. Financial Samurai recommends 0.5% WR as our bond yields are really low.
That recommendation was so poorly written that it was retracted.
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Re: Withdrawal rate for an early retirement

Post by Mountain Doc »

Marseille07 wrote: Tue Jun 01, 2021 11:52 pm Financial Samurai recommends 0.5% WR as our bond yields are really low.
Well that one takes the cake. 200 years of expenses... that guy must have found the fountain of youth.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

sailaway wrote: Tue Jun 01, 2021 11:56 pm
Marseille07 wrote: Tue Jun 01, 2021 11:52 pm I wouldn't use 4% SWR in retirement, especially for an early retirement. Financial Samurai recommends 0.5% WR as our bond yields are really low.
That recommendation was so poorly written that it was retracted.
I'm not aware it was. I see it was *updated* on 4/26/21: https://www.financialsamurai.com/proper ... awal-rate/

I even found the words of wisdom I had missed before:
0 Percent Withdrawal Rate

Once I left work, I challenged myself to not withdraw any money from my retirement accounts. In other words, I enacted a 0 percent withdrawal rate.
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Re: Withdrawal rate for an early retirement

Post by LadyGeek »

USAFperio has a question which I've moved to a new thread. See: [Best source for current rate of inflation (for retirement withdrawal)?]

(Thanks to the member who reported the post.)
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Re: Withdrawal rate for an early retirement

Post by sailaway »

Marseille07 wrote: Wed Jun 02, 2021 12:28 am
sailaway wrote: Tue Jun 01, 2021 11:56 pm
Marseille07 wrote: Tue Jun 01, 2021 11:52 pm I wouldn't use 4% SWR in retirement, especially for an early retirement. Financial Samurai recommends 0.5% WR as our bond yields are really low.
That recommendation was so poorly written that it was retracted.
I'm not aware it was. I see it was *updated* on 4/26/21: https://www.financialsamurai.com/proper ... awal-rate/

I even found the words of wisdom I had missed before:
0 Percent Withdrawal Rate

Once I left work, I challenged myself to not withdraw any money from my retirement accounts. In other words, I enacted a 0 percent withdrawal rate.
It was originally a guest post on another blog.

I do not see words of wisdom. As a matter of fact, it looks more like trolling. Even if he is referring to tax sheltered accounts, this may or may not be the optimum strategy. And rent money isn't actually that different than any other investment income, so using it instead of dividends or selling something is just funny accounting.
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Re: Withdrawal rate for an early retirement

Post by randomguy »

Marseille07 wrote: Wed Jun 02, 2021 12:28 am
sailaway wrote: Tue Jun 01, 2021 11:56 pm
Marseille07 wrote: Tue Jun 01, 2021 11:52 pm I wouldn't use 4% SWR in retirement, especially for an early retirement. Financial Samurai recommends 0.5% WR as our bond yields are really low.
That recommendation was so poorly written that it was retracted.
I'm not aware it was. I see it was *updated* on 4/26/21: https://www.financialsamurai.com/proper ... awal-rate/

I even found the words of wisdom I had missed before:
0 Percent Withdrawal Rate

Once I left work, I challenged myself to not withdraw any money from my retirement accounts. In other words, I enacted a 0 percent withdrawal rate.
Why on earth would you take advice from anyone who thinks the 4% rule has anything to do with interest rates in 1994-1998? That shows such a fundamental misunderstanding of the problem that it would be hard to take anything he writes seriously. Seriously how did the interest rates in 1994 affect the 30 year retirement of someone who retired in 1950? Do interests travel back through time? And if you had a 5 year severance package, of course you wouldn't be spending down your portfolio. That is like saying I am working, how much should I be taking out of my portfolio....

I used to like FS but the past couple years have been click bait articles that make zero sense and I have to assume are written to generate clicks with outlandish claims and opinions.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

randomguy wrote: Wed Jun 02, 2021 10:22 am Why on earth would you take advice from anyone who thinks the 4% rule has anything to do with interest rates in 1994-1998? That shows such a fundamental misunderstanding of the problem that it would be hard to take anything he writes seriously. Seriously how did the interest rates in 1994 affect the 30 year retirement of someone who retired in 1950? Do interests travel back through time? And if you had a 5 year severance package, of course you wouldn't be spending down your portfolio. That is like saying I am working, how much should I be taking out of my portfolio....

I used to like FS but the past couple years have been click bait articles that make zero sense and I have to assume are written to generate clicks with outlandish claims and opinions.
I think 0.5% is too low. I also think 4% is too high for an early retirement. I've run a bunch of sims and it seems like 2.5%~3.5% makes the most sense.
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Re: Withdrawal rate for an early retirement

Post by ljford7 »

Marseille07 wrote: Wed Jun 02, 2021 12:28 am
0 Percent Withdrawal Rate

Once I left work, I challenged myself to not withdraw any money from my retirement accounts. In other words, I enacted a 0 percent withdrawal rate.
So he got another job (not retired)?
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Re: Withdrawal rate for an early retirement

Post by randomguy »

Marseille07 wrote: Wed Jun 02, 2021 10:34 am
randomguy wrote: Wed Jun 02, 2021 10:22 am Why on earth would you take advice from anyone who thinks the 4% rule has anything to do with interest rates in 1994-1998? That shows such a fundamental misunderstanding of the problem that it would be hard to take anything he writes seriously. Seriously how did the interest rates in 1994 affect the 30 year retirement of someone who retired in 1950? Do interests travel back through time? And if you had a 5 year severance package, of course you wouldn't be spending down your portfolio. That is like saying I am working, how much should I be taking out of my portfolio....

I used to like FS but the past couple years have been click bait articles that make zero sense and I have to assume are written to generate clicks with outlandish claims and opinions.
I think 0.5% is too low. I also think 4% is too high for an early retirement. I've run a bunch of sims and it seems like 2.5%~3.5% makes the most sense.
You can debate exactly what a reasonable number is. 3-3.5% for 40-50 year retirements are pretty defensible numbers. But thinking that 10 year rates in 1998 are where the 4% rule came from shows that the author is clueless on the subject. He might be knowledge about other areas but it makes it impossible to take any of his SWR seriously.

If he wanted to postulate that SWR is correlated with 10 year rates, that might be interesting. But I think he will find it has pretty low historical correlation. The 1966 retiree with a 5.5% 10 year didn't have a very good SWR. The 1946 retiree with a 2% 10 year had a good one. We have had low interest rates (both real and nominal) in the past and the 4% rule has been fine. Obviously this time might be different. But I personally lose more sleep over a 15 years of negative stock returns than I do about if my bonds are returning 1% or 5%.
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Re: Withdrawal rate for an early retirement

Post by willthrill81 »

randomguy wrote: Wed Jun 02, 2021 10:51 am
Marseille07 wrote: Wed Jun 02, 2021 10:34 am
randomguy wrote: Wed Jun 02, 2021 10:22 am Why on earth would you take advice from anyone who thinks the 4% rule has anything to do with interest rates in 1994-1998? That shows such a fundamental misunderstanding of the problem that it would be hard to take anything he writes seriously. Seriously how did the interest rates in 1994 affect the 30 year retirement of someone who retired in 1950? Do interests travel back through time? And if you had a 5 year severance package, of course you wouldn't be spending down your portfolio. That is like saying I am working, how much should I be taking out of my portfolio....

I used to like FS but the past couple years have been click bait articles that make zero sense and I have to assume are written to generate clicks with outlandish claims and opinions.
I think 0.5% is too low. I also think 4% is too high for an early retirement. I've run a bunch of sims and it seems like 2.5%~3.5% makes the most sense.
You can debate exactly what a reasonable number is. 3-3.5% for 40-50 year retirements are pretty defensible numbers. But thinking that 10 year rates in 1998 are where the 4% rule came from shows that the author is clueless on the subject. He might be knowledge about other areas but it makes it impossible to take any of his SWR seriously.

If he wanted to postulate that SWR is correlated with 10 year rates, that might be interesting. But I think he will find it has pretty low historical correlation. The 1966 retiree with a 5.5% 10 year didn't have a very good SWR. The 1946 retiree with a 2% 10 year had a good one. We have had low interest rates (both real and nominal) in the past and the 4% rule has been fine. Obviously this time might be different. But I personally lose more sleep over a 15 years of negative stock returns than I do about if my bonds are returning 1% or 5%.
Your concerns are valid. The historic data are very clear that stock returns have had a far stronger correlation with SWRs than have bond returns.
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

willthrill81 wrote: Wed Jun 02, 2021 4:19 pm
randomguy wrote: Wed Jun 02, 2021 10:51 am
Marseille07 wrote: Wed Jun 02, 2021 10:34 am
randomguy wrote: Wed Jun 02, 2021 10:22 am Why on earth would you take advice from anyone who thinks the 4% rule has anything to do with interest rates in 1994-1998? That shows such a fundamental misunderstanding of the problem that it would be hard to take anything he writes seriously. Seriously how did the interest rates in 1994 affect the 30 year retirement of someone who retired in 1950? Do interests travel back through time? And if you had a 5 year severance package, of course you wouldn't be spending down your portfolio. That is like saying I am working, how much should I be taking out of my portfolio....

I used to like FS but the past couple years have been click bait articles that make zero sense and I have to assume are written to generate clicks with outlandish claims and opinions.
I think 0.5% is too low. I also think 4% is too high for an early retirement. I've run a bunch of sims and it seems like 2.5%~3.5% makes the most sense.
You can debate exactly what a reasonable number is. 3-3.5% for 40-50 year retirements are pretty defensible numbers. But thinking that 10 year rates in 1998 are where the 4% rule came from shows that the author is clueless on the subject. He might be knowledge about other areas but it makes it impossible to take any of his SWR seriously.

If he wanted to postulate that SWR is correlated with 10 year rates, that might be interesting. But I think he will find it has pretty low historical correlation. The 1966 retiree with a 5.5% 10 year didn't have a very good SWR. The 1946 retiree with a 2% 10 year had a good one. We have had low interest rates (both real and nominal) in the past and the 4% rule has been fine. Obviously this time might be different. But I personally lose more sleep over a 15 years of negative stock returns than I do about if my bonds are returning 1% or 5%.
Your concerns are valid. The historic data are very clear that stock returns have had a far stronger correlation with SWRs than have bond returns.
I now believe that the Financial Samura article wasn't very good. Why on earth they based their analysis on yields in 1994-1998 is beyond me.
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Re: Withdrawal rate for an early retirement

Post by Normchad »

ljford7 wrote: Wed Jun 02, 2021 10:50 am
Marseille07 wrote: Wed Jun 02, 2021 12:28 am
0 Percent Withdrawal Rate

Once I left work, I challenged myself to not withdraw any money from my retirement accounts. In other words, I enacted a 0 percent withdrawal rate.
So he got another job (not retired)?
Or ad revenue from that click bait site. These should not be taken seriously.
59Gibson
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Re: Withdrawal rate for an early retirement

Post by 59Gibson »

I do not understand how anyone can take a 0.5% swr seriously lol. 200x to last 30-50 yrs. Hard times indeed, Charles Dickens would even shudder at the thought! May as well spend what you have now and enjoy it now.
Marseille07
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Re: Withdrawal rate for an early retirement

Post by Marseille07 »

Has anyone studied "constant-percentage" withdrawal method for early retirees?

As far as I've run sims, we can actually go as high as 5.5% WR for a 30-year retirement horizon. While the portfolio doesn't grow much (obviously), it allows one to withdraw quite a bit of cash throughout the horizon. This sounds high but actually in-line with the VPW table.

My question is, what are some good ways to evaluate various constant-percentage withdrawal rates? Obviously the lower the WR, the more initial cost to generate the same amount of expense but safer (for example, if you need 100K/year then 4% needs 2.5M, 2% needs 5M, 1% needs 10M etc etc). But unlike constant-dollar SWR, there's no equivalent of "success rate" in constant-percentage. Any metrics we can use to objectively compare various withdrawal rates?
marcopolo
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Re: Withdrawal rate for an early retirement

Post by marcopolo »

Marseille07 wrote: Tue Jul 06, 2021 12:08 am Has anyone studied "constant-percentage" withdrawal method for early retirees?

As far as I've run sims, we can actually go as high as 5.5% WR for a 30-year retirement horizon. While the portfolio doesn't grow much (obviously), it allows one to withdraw quite a bit of cash throughout the horizon. This sounds high but actually in-line with the VPW table.

My question is, what are some good ways to evaluate various constant-percentage withdrawal rates? Obviously the lower the WR, the more initial cost to generate the same amount of expense but safer (for example, if you need 100K/year then 4% needs 2.5M, 2% needs 5M, 1% needs 10M etc etc). But unlike constant-dollar SWR, there's no equivalent of "success rate" in constant-percentage. Any metrics we can use to objectively compare various withdrawal rates?
One approach that I think would be reasonable is to set a floor on withdrawals. That is a minimum amount you are able/willing to live on in a given year. Then, test to see if the constant percentage withdrawal amount ever falls below that threshold. An alternate approach is to use a constant percentage, with a constant dollar floor on withdrawals in any given year, and then see if the portfolio survived.

The two sound similar, but are a bit different. In the first case, if in any given year the constant percentage withdrawal would result in breaching your threshold, you declare a failure, even if the portfolio goes on to great gains in future years.
In the second, in such years, you go ahead and withdraw the floor amount even if it exceeds your target percentage. Then, if the market recovers, you are back to using constant percentage. Failure only occurs if portfolio runs out of money.
Once in a while you get shown the light, in the strangest of places if you look at it right.
AlohaJoe
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Re: Withdrawal rate for an early retirement

Post by AlohaJoe »

Marseille07 wrote: Tue Jul 06, 2021 12:08 am My question is, what are some good ways to evaluate various constant-percentage withdrawal rates? Obviously the lower the WR, the more initial cost to generate the same amount of expense but safer (for example, if you need 100K/year then 4% needs 2.5M, 2% needs 5M, 1% needs 10M etc etc). But unlike constant-dollar SWR, there's no equivalent of "success rate" in constant-percentage. Any metrics we can use to objectively compare various withdrawal rates?
Utility functions, certainty equivalent withdrawals, semideviations, the ulcer index. None of them have quite the same simple intuitive appeal of "failure rates", though.
nigel_ht
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Re: Withdrawal rate for an early retirement

Post by nigel_ht »

AlohaJoe wrote: Tue Jul 06, 2021 1:11 am
Marseille07 wrote: Tue Jul 06, 2021 12:08 am My question is, what are some good ways to evaluate various constant-percentage withdrawal rates? Obviously the lower the WR, the more initial cost to generate the same amount of expense but safer (for example, if you need 100K/year then 4% needs 2.5M, 2% needs 5M, 1% needs 10M etc etc). But unlike constant-dollar SWR, there's no equivalent of "success rate" in constant-percentage. Any metrics we can use to objectively compare various withdrawal rates?
Utility functions, certainty equivalent withdrawals, semideviations, the ulcer index. None of them have quite the same simple intuitive appeal of "failure rates", though.
Well…you can figure out the failure rate if you can establish your minimum survival expenses.

And perhaps your minimum happiness expenses. No more than X% years under happiness expenses and no years below survival expenses.

But since these are subjective…perhaps use $40K as happiness and $30K as survival? That’s mostly equivalent to 4% rule with built in margins (aka European river cruise).
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midareff
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Re: Withdrawal rate for an early retirement

Post by midareff »

Chip wrote: Mon Nov 23, 2020 10:16 am
lostdog wrote: Mon Nov 23, 2020 9:48 am After reading this, I get the feeling most bogleheads are overly cautious and over time I keep seeing the withdrawal rate dive even more. What gives?
It may not be "most" bogleheads, just the ones who post to these threads. I've mostly given up tilting at that particular windmill.
A Shiller PE of 38 and a Real ROR for IT Treasuries at -1.6% ... that's what gives.
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canadianbacon
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Re: Withdrawal rate for an early retirement

Post by canadianbacon »

Marseille07 wrote: Tue Jul 06, 2021 12:08 am Has anyone studied "constant-percentage" withdrawal method for early retirees?

As far as I've run sims, we can actually go as high as 5.5% WR for a 30-year retirement horizon. While the portfolio doesn't grow much (obviously), it allows one to withdraw quite a bit of cash throughout the horizon. This sounds high but actually in-line with the VPW table.
It is essentially VPW but more conservative because with VPW your WR increases (slowly) over your lifetime.

As with VPW, it's a good idea to do some backtesting. While it's true that you can't easily deplete the portfolio, you may end up living on (for example) 60% of your starting budget for a decade or more.
Bulls make money, bears make money, pigs get slaughtered.
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David Jay
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Re: Withdrawal rate for an early retirement

Post by David Jay »

Marseille07 wrote: Tue Jul 06, 2021 12:08 amHas anyone studied "constant-percentage" withdrawal method for early retirees?

As far as I've run sims, we can actually go as high as 5.5% WR for a 30-year retirement horizon. While the portfolio doesn't grow much (obviously), it allows one to withdraw quite a bit of cash throughout the horizon. This sounds high but actually in-line with the VPW table.
Constant percentage withdrawals work fine mathematically. Plus, you can never fully deplete your portfolio (math joke).

Merriman is in the same ballpark with you - his data looks closer to 6% of remaining portfolio. The problem is the wild swings in withdrawal amount. For someone using those withdrawals directly for living expenses, seeing a 30% drop in cash flow from one year to the next is ugly.
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