Morningstar released their new report on SWR. [Safe Withdrawal Rate]

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numerica
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Morningstar Safe Withdrawal Rate study

Post by numerica »

[merged into existing thread - moderator prudent]

Morningstar study released today suggests that retirees are unlikely to enjoy investment returns of recent past and estimates that the standard rule of thumb be lowered to 3.3% from 4%.
https://www.morningstar.com/content/dam ... tent=32633
The study also proposes various strategies that can support higher rates. As with any such study, there are assumptions and caveats, but also plenty food for thought and discussion.
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Re: Morningstar released their new report on SWR.

Post by UKFred »

willthrill81 wrote: Thu Nov 11, 2021 2:33 pm
AlohaBill wrote: Thu Nov 11, 2021 1:40 pm Tell me , Will,
Did Taylor know what the future would bring?
Of course not. But that's irrelevant. My point is that if your specific retirement period was one of the best in world history, the fact that your withdrawal strategy (or lack thereof) worked well for you during that period doesn't matter. Almost any halfway reasonable withdrawal approach, including having no plan at all, would have worked pretty well.

We don't base withdrawal strategies on the best historic periods; rather, we tend to focus on the worst, as we should.
We’ll put. Many people seem to find this difficult to understand.
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Experts say the 4% rule, a popular retirement income strategy, is outdated

Post by DTL123 »

[Merged into existing discussion -- moderator oldcomputerguy]

This article appeared on CNBC yesterday. Who agrees or disagrees?

https://www.cnbc.com/2021/11/11/the-4pe ... dated.html
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Re: Experts say the 4% rule, a popular retirement income strategy, is outdated

Post by SmileyFace »

Deja Vu
Always passive
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New study on Safe Withdrawals by Morningstar

Post by Always passive »

[Thread merged into here --admin LadyGeek]

Here it is
https://www.morningstar.com/articles/10 ... ades-ahead
For those that subscribe to the WSJ, there is a summary of the work in today's paper
Comments?
stan1
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Re: New study on Safe Withdrawals by Morningstar

Post by stan1 »

Already being discussed here:
viewtopic.php?p=6324200#p6324200
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Re: Morningstar released their new report on SWR.

Post by Grt2bOutdoors »

randomguy wrote: Thu Nov 11, 2021 12:01 pm
BrooklynInvest wrote: Thu Nov 11, 2021 10:06 am What would be a reasonable - and actionable - methodology for "variable"?

Meaning, if I say 3.5% is my baseline do I budget for 3.3% if the market had a down year prior? Or is having a down year currently? From practical perspective I'm not cancelling/downscaling vacations if the market has a bad month. But if I plan 6 months out I could use prior 6 months as my evaluation timeframe?
With a super conservative rate like 3.5%, I would vote for like 3 or 4 years so you don't jerk around in response to market noise. Lets remember to have issues, you can ignore things like 2008-9. They are too short to matter. You need a decade+ of horrible returns to have problems. If you have a more aggressive SWR (say 5%), than moderately scaling back after shorter poor performance makes more sense.
What about if you are in a moribund Japan-like scenario?
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Chadnudj
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Re: 4% no good anymore

Post by Chadnudj »

HomerJ wrote: Thu Nov 11, 2021 2:43 pm
supersharpie wrote: Thu Nov 11, 2021 2:41 pm
skor99 wrote: Thu Nov 11, 2021 2:22 pm https://www.cnbc.com/2021/11/11/the-4pe ... dated.html

Finally the experts are catching up it seems … Do folks agree that 4% is too optimistic ?
No, I think the authors of the study are being too pessimistic. For over a decade now I have heard from the Wade Pfaus of the world about low expected future returns on stock investments and yet, what do ya know, market returns have remained as robust as ever.

If anything, the 4% rule is going to leave you at the with me of your life with a huge pile of cash that you didn't get to spend during your "good years."
Wade Pfau told us 3% was the new 4% starting in 2011... And has been repeating it ever since.
And the subsequent 10 years basically saw returns that would have justified a SWR higher than 4%.

(Not to pick on Mr. Pfau at all....but more to show how little anyone can predict these things. Seems like a VWR is the smartest way to go)
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by LadyGeek »

I merged Always passive's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)
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Re: 4% no good anymore

Post by HomerJ »

Chadnudj wrote: Fri Nov 12, 2021 9:45 am
HomerJ wrote: Thu Nov 11, 2021 2:43 pm
supersharpie wrote: Thu Nov 11, 2021 2:41 pm
skor99 wrote: Thu Nov 11, 2021 2:22 pm https://www.cnbc.com/2021/11/11/the-4pe ... dated.html

Finally the experts are catching up it seems … Do folks agree that 4% is too optimistic ?
No, I think the authors of the study are being too pessimistic. For over a decade now I have heard from the Wade Pfaus of the world about low expected future returns on stock investments and yet, what do ya know, market returns have remained as robust as ever.

If anything, the 4% rule is going to leave you at the with me of your life with a huge pile of cash that you didn't get to spend during your "good years."
Wade Pfau told us 3% was the new 4% starting in 2011... And has been repeating it ever since.
And the subsequent 10 years basically saw returns that would have justified a SWR higher than 4%.

(Not to pick on Mr. Pfau at all....but more to show how little anyone can predict these things. Seems like a VWR is the smartest way to go)
Not "basically higher"... Like a lot higher... Like someone probably could have retired in 2011 and pulled 8% a year and still be in good shape right now.

2011 may end up being as good a time to retire as 1982, yet we had a ton of very serious predictions from experts about how bad everything was going to be.

They said this in 2011,2012,2013,2014,2015,2016,2017,2018,2019,2020,2021, and soon they will be saying it in 2022.

Sooner or later they will be right. But not because the experts actually know enough to predict anything.
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59Gibson
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Re: 4% no good anymore

Post by 59Gibson »

HomerJ wrote: Fri Nov 12, 2021 9:51 am
Chadnudj wrote: Fri Nov 12, 2021 9:45 am
HomerJ wrote: Thu Nov 11, 2021 2:43 pm
supersharpie wrote: Thu Nov 11, 2021 2:41 pm
skor99 wrote: Thu Nov 11, 2021 2:22 pm https://www.cnbc.com/2021/11/11/the-4pe ... dated.html

Finally the experts are catching up it seems … Do folks agree that 4% is too optimistic ?
No, I think the authors of the study are being too pessimistic. For over a decade now I have heard from the Wade Pfaus of the world about low expected future returns on stock investments and yet, what do ya know, market returns have remained as robust as ever.

If anything, the 4% rule is going to leave you at the with me of your life with a huge pile of cash that you didn't get to spend during your "good years."
Wade Pfau told us 3% was the new 4% starting in 2011... And has been repeating it ever since.
And the subsequent 10 years basically saw returns that would have justified a SWR higher than 4%.

(Not to pick on Mr. Pfau at all....but more to show how little anyone can predict these things. Seems like a VWR is the smartest way to go)
Not "basically higher"... Like a lot higher... Like someone probably could have retired in 2011 and pulled 8% a year and still be in good shape right now.

2011 may end up being as good a time to retire as 1982, yet we had a ton of very serious predictions from experts about how bad everything was going to be.

They said this in 2011,2012,2013,2014,2015,2016,2017,2018,2019,2020,2021, and soon they will be saying it in 2022.

Sooner or later they will be right. But not because the experts actually know enough to predict anything.
+1 For as long as I can remember there have been experts claiming the mkt is in trouble, it depends on who's timeline. If you're talking 1 yr the mkt way be over valued but as most here have multi decade plans it shouldn't matter as much. Even after 2000-02 tech bubble experts were claiming same thing in 03,04,05,06,07(5 yrs where the mkt soared) 08-09 hit... But then in 2010- it was this is just a "dead cat bounce". They have no clue.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by AlohaBill »

Ukfred, you don’t seem to understand that swr or sorr was put out by the financial industry and voodoo mathematical numerologists to scare the very few who have savings. The individual retiree has to take withdrawal year by year. Everything else is whistling Dixie.
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Re: Morningstar released their new report on SWR.

Post by randomguy »

Grt2bOutdoors wrote: Fri Nov 12, 2021 9:23 am
randomguy wrote: Thu Nov 11, 2021 12:01 pm
BrooklynInvest wrote: Thu Nov 11, 2021 10:06 am What would be a reasonable - and actionable - methodology for "variable"?

Meaning, if I say 3.5% is my baseline do I budget for 3.3% if the market had a down year prior? Or is having a down year currently? From practical perspective I'm not cancelling/downscaling vacations if the market has a bad month. But if I plan 6 months out I could use prior 6 months as my evaluation timeframe?
With a super conservative rate like 3.5%, I would vote for like 3 or 4 years so you don't jerk around in response to market noise. Lets remember to have issues, you can ignore things like 2008-9. They are too short to matter. You need a decade+ of horrible returns to have problems. If you have a more aggressive SWR (say 5%), than moderately scaling back after shorter poor performance makes more sense.
What about if you are in a moribund Japan-like scenario?
What about it? The SWR for that period was in the 3.5% range (for a normal 50/50 portfolio) so you probably didn't need to make cuts. And waiting 3 years to cut spending by 10% isn't going to make or break your retirement.

You can choose to react to the wild market gyrations immediately if you want. When things like march 2020 happen you can cut your spending on the spot. After all the great depression might be starting up. But the odds are against it. If you react in 1 month or 3 years doesn't change the numbers much. Spending 35k instead of 30k for 3 years is only 15k.
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Re: 4% no good anymore

Post by Chadnudj »

59Gibson wrote: Fri Nov 12, 2021 10:06 am
HomerJ wrote: Fri Nov 12, 2021 9:51 am
Chadnudj wrote: Fri Nov 12, 2021 9:45 am
HomerJ wrote: Thu Nov 11, 2021 2:43 pm
supersharpie wrote: Thu Nov 11, 2021 2:41 pm

No, I think the authors of the study are being too pessimistic. For over a decade now I have heard from the Wade Pfaus of the world about low expected future returns on stock investments and yet, what do ya know, market returns have remained as robust as ever.

If anything, the 4% rule is going to leave you at the with me of your life with a huge pile of cash that you didn't get to spend during your "good years."
Wade Pfau told us 3% was the new 4% starting in 2011... And has been repeating it ever since.
And the subsequent 10 years basically saw returns that would have justified a SWR higher than 4%.

(Not to pick on Mr. Pfau at all....but more to show how little anyone can predict these things. Seems like a VWR is the smartest way to go)
Not "basically higher"... Like a lot higher... Like someone probably could have retired in 2011 and pulled 8% a year and still be in good shape right now.

2011 may end up being as good a time to retire as 1982, yet we had a ton of very serious predictions from experts about how bad everything was going to be.

They said this in 2011,2012,2013,2014,2015,2016,2017,2018,2019,2020,2021, and soon they will be saying it in 2022.

Sooner or later they will be right. But not because the experts actually know enough to predict anything.
+1 For as long as I can remember there have been experts claiming the mkt is in trouble, it depends on who's timeline. If you're talking 1 yr the mkt way be over valued but as most here have multi decade plans it shouldn't matter as much. Even after 2000-02 tech bubble experts were claiming same thing in 03,04,05,06,07(5 yrs where the mkt soared) 08-09 hit... But then in 2010- it was this is just a "dead cat bounce". They have no clue.
One other point (unless I'm missing it in the Morningstar study) is that they use US equities and bonds for the 60-40, which impacts the analysis in 2 ways: (1) if you hold international stocks/bonds as part of your AA, those markets may outperform US equities/bonds and allow a higher SWR; (2) comparing US stock returns in the past (when those companies were far more dependent on US-only revenues) to now (when almost all US stocks have significantly large international revenue streams) may suggest the predictions for future returns Morningstar are using are far too conservative.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by WoodSpinner »

Reading this analysis leaves me a bit confused….

First off, I requested the full paper from Morningstar which is a more detailed analysis than the abstract linked above (https://www.morningstar.com/content/dam ... tent=32633). My comments below refer to the detailed paper, not the abstract.
  1. Is there a standard definition of what a SWR means? I always thought it was a 95% probability based on historical returns of each rolling 30 year period with an asset mix of 50% S&P500/50% 10 year Treasuries (e.g. Bengen’s study). The Morningstar analysis uses a 90% probability and a very different portfolio mix. See Exhibit 8 for detailed assumptions. In addition, it spaces the rolling 30 year periods by 5 year starting intervals, rather than using each available 30 year period.
    Thus, the 50% stock, 50% fixed-income portfolio consists of: 37.5% U.S. large stock
    12.5% U.S. small stock
    20% U.S. intermediate-term government bond
    10% U.S. long-term government bond 10% U.S. long-term corporate bond 10% U.S. 30-day Treasury bills
    Exhibit 3 shows the safe withdrawal rates for each of the six asset allocations over 13 rolling 30-year time horizons. The first time period begins in January 1930 and concludes in December 1959, while the final time period starts in January 1990 and concludes in December 2019.
    Monte Carlo simulation: Rather than assess what actually occurred over a time period—as with, say, Bengen’s research—this paper simulates potential results, assuming the same market conditions and inflation rate that existed during that time period. For example, from 1950 through 1980, a portfolio that consisted of 50% stocks and 50% fixed-income securities returned an average of 8.20% per year, with an annualized standard deviation of 7.77%. The average rate of inflation was 4.01%. The calculation for the safe withdrawal rate for the 1950-79 time period creates 1,000 hypothetical return patterns that cluster around these averages.
  2. The historical analysis section of the paper does NOT seem to agree with the oft sited 4% Rule of Thumb (See Exhibit 3). Perhaps I am not interpreting the analysis correctly but It makes me question their methodology,
  3. Exhibit 4 puzzles me since it shows the range of SWR over the 13 year selected periods for the 6 portfolio AA analyzed. I don’t understand why this is view of the analysis is helpful.
  4. I found Exhibit 5 frustrating since it only shows the SWR for 2 of the 5 portfolios analyzed . It would have been more useful to show all 5 plus the SWR across all periods that met the 90% criteria.
  5. Exhibit-8/9 are very useful for understanding the assumptions for the forward looking SWR analysis. I think there are some important conclusions from this analysis that also align with the historical analysis.
    • An AA from 30/70 to 70/30 seem to be the sweet spot for maxing the SWR
    • Holding too much in Fixed Income significantly lowers the SWR, growth assets play an important role.
    • Holding too much in Equities lowers the SWR but not nearly as much as holding too little
Thoughts?
Last edited by WoodSpinner on Fri Nov 12, 2021 3:17 pm, edited 4 times in total.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by H-Town »

Wanderingwheelz wrote: Thu Nov 11, 2021 8:55 am It looks like they came up with 3.3% as the safe withdrawal rate for a balanced portfolio.

https://www.morningstar.com/articles/10 ... ades-ahead
At the end of the day, man plans and God laughs. You roll with the punches, adapt, and survive.

How many people out there in the position to save $1 million for retirement? (40,000 / 4%)?

If you are resourceful enough to save $1 million from scratch, you are more well equipped to deal with whatever the market throws at you.

And if you're still worried, I don't know what to tell you aside from the fact that therapy should be covered with your health insurance.
Time is the ultimate currency.
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Re: Morningstar released their new report on SWR.

Post by coffeeblack »

Kenkat wrote: Thu Nov 11, 2021 2:30 pm
coffeeblack wrote: Thu Nov 11, 2021 1:00 pm All the people who start with 4% and adjust for inflation each year and never change anything please stand up.

What if you don't adjust for inflation a few years because your personal spending may not need it?

What if you spending goes down after 75 years old like most studies suggest it does?

What about social security?

Perhaps you won't take several vacations each year or may take less vacations one year and more the next based on the market etc.?

Perhaps you do all the above?

Flexibility.
There is a lot of discussion around here about 25x expenses and 4% inflation adjusted withdrawal rates. All great as a target to shoot for, but I think you are right - no one (ok, very few) actually end up doing it that way when it comes to drawing down your portfolio in real life.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by FactualFran »

SonnyDMB wrote: Thu Nov 11, 2021 3:32 pm I believe the original 4% rule of thumb was based on 95% confidence ? The authors show 3.1 for 95% confidence. Can I interpret that to mean the authors feel the next 30 years will be 22.5% worse than any previous time in US history?
The original 4% rule had a success rate of 100%, using annual data from 1926 to 1992. According to Determining Withdrawal Rates Using Historical Data by William P. Bengen:
Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent [Figure 1(B)], followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by vitaflo »

WoodSpinner wrote: Fri Nov 12, 2021 10:53 am Reading this analysis leaves me a bit confused….

First off, I requested the full paper from Morningstar which is a more detailed analysis than the abstract linked above (https://www.morningstar.com/content/dam ... tent=32633). My comments below refer to the detailed paper, not the abstract.
  1. Is there a standard definition of what a SWR means? I always thought it was a 95% probability based on historical returns of each rolling 30 year period with an asset mix of 50% S&P500/50% 10 year Treasuries (e.g. Bengen’s study). The Morningstar analysis uses a 90% probability and a very different portfolio mix. See Exhibit 8 for detailed assumptions. In addition, it spaces the rolling 30 year periods by 5 year starting intervals, rather than using each available 0 year period.
Thanks for the link. What I noticed in here is that every portfolio they tested had 10% in cash (except the 100% stock portfolio). Their expected return on cash was less than half what their expected return on bonds were. I don't know about you, but I don't expect to keep 10% of my portfolio in cash.

I also notice the portfolio they use in Exhibit 8 has 20% in International stocks and bonds. Their expected return for those is higher than Large US stocks. Personally I have more in international stock than that, but many may have less.

So, really unless your portfolio matches what they are using for their portfolio, your SWR may be higher (or lower) than what they are advocating here. As it is, given they are saying any stock percentage from 30-60% will give an SWR of 3.3% over 30 years, they are basically saying that at best portfolios will only keep up with inflation for 30 years, no more.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by HomerJ »

FactualFran wrote: Fri Nov 12, 2021 12:31 pm
SonnyDMB wrote: Thu Nov 11, 2021 3:32 pm I believe the original 4% rule of thumb was based on 95% confidence ? The authors show 3.1 for 95% confidence. Can I interpret that to mean the authors feel the next 30 years will be 22.5% worse than any previous time in US history?
The original 4% rule had a success rate of 100%, using annual data from 1926 to 1992. According to Determining Withdrawal Rates Using Historical Data by William P. Bengen:
Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent [Figure 1(B)], followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.
That study didn't include 1966-1996 which was one of the failures (3.8% worked, but not 4% - you ran out of money in year 28 or 29 if you pulled 4% blindly)
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by willthrill81 »

HomerJ wrote: Fri Nov 12, 2021 12:36 pm
FactualFran wrote: Fri Nov 12, 2021 12:31 pm
SonnyDMB wrote: Thu Nov 11, 2021 3:32 pm I believe the original 4% rule of thumb was based on 95% confidence ? The authors show 3.1 for 95% confidence. Can I interpret that to mean the authors feel the next 30 years will be 22.5% worse than any previous time in US history?
The original 4% rule had a success rate of 100%, using annual data from 1926 to 1992. According to Determining Withdrawal Rates Using Historical Data by William P. Bengen:
Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent [Figure 1(B)], followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.
That study didn't include 1966-1996 which was one of the failures (3.8% worked, but not 4% - you ran out of money in year 28 or 29 if you pulled 4% blindly)
But even that depends on which data and AA is used. For instance, Kitces found that the '4% rule' worked throughout all of U.S. history.

However, whether it worked for 29 or 30 years is squinting at a gnat, IMHO.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by Wanderingwheelz »

H-Town wrote: Fri Nov 12, 2021 10:54 am
Wanderingwheelz wrote: Thu Nov 11, 2021 8:55 am It looks like they came up with 3.3% as the safe withdrawal rate for a balanced portfolio.

https://www.morningstar.com/articles/10 ... ades-ahead
At the end of the day, man plans and God laughs. You roll with the punches, adapt, and survive.

How many people out there in the position to save $1 million for retirement? (40,000 / 4%)?

If you are resourceful enough to save $1 million from scratch, you are more well equipped to deal with whatever the market throws at you.

And if you're still worried, I don't know what to tell you aside from the fact that therapy should be covered with your health insurance.
All I said is it looks like they came up with 3.3% as their best guess.

We’re all free to use our own methodologies, of which there are many. There’s no dummies on Bogleheads, so I agree that most here can deal with whatever the market throws at us.
Being wrong compounds forever.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by bhsince87 »

Hmm. So apparently the Morningstar number is based on simulations, while the traditional 4% number is based on real data (backward looking, though).

I guess you have to choose your poison there.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by lws »

Fascinating topic.
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Re: Morningstar released their new report on SWR.

Post by SteadyOne »

Mike Scott wrote: Thu Nov 11, 2021 11:40 am Generally speaking, with longer terms than 30 years and many charts and graphs etc... everything begins to more or less converge on a perpetual withdrawal rate which also happens to fall in the range of 3-3.5%. Around that, individual circumstances are very individual.
Great point. In terms of scale, the difference between 3% and 4% is not material.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by Ocean77 »

Why not just take 4% of whatever balance you have each year, then you'll never run out.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by willthrill81 »

Ocean77 wrote: Fri Nov 12, 2021 4:46 pm Why not just take 4% of whatever balance you have each year, then you'll never run out.
You certainly can, but it means that your withdrawals will be just as volatile as your portfolio. For many, that's a pretty meaningful bug.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by bhsince87 »

Ocean77 wrote: Fri Nov 12, 2021 4:46 pm Why not just take 4% of whatever balance you have each year, then you'll never run out.
You could also take 8% or 10% or whatever every year, and you'll never run out.

You might get down to a few cents, though.
Time is what we want most, but what we use worst. William Penn
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by willthrill81 »

bhsince87 wrote: Fri Nov 12, 2021 4:12 pm Hmm. So apparently the Morningstar number is based on simulations, while the traditional 4% number is based on real data (backward looking, though).

I guess you have to choose your poison there.
And the problem is that according to most Monte Carlo simulations, the historic record was significantly 'smoother' than it should have been. MC simulations with 'synthetic' data (e.g., specified mean returns and standard deviation) or that randomly choose historic years' returns routinely come up with scenarios worse than the worst of history (e.g., Great Depression followed by the Great Financial Crisis followed by 1970s' stagflation, etc.) as well as other scenarios better than the best of history. This has been referred to as the 'fat tails' problem, as Derek Tharp described and illustrated well here. The problem can be at least partly resolved, but it's usually not addressed at all.
For instance, when comparing a Monte Carlo analysis of 10,000 scenarios based on historical 60/40 annual return parameters to historical returns, it turns out that 6.5% of Monte Carlo scenarios are actually worse than even the worst case historical scenario has ever been!
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https://www.kitces.com/blog/monte-carlo ... l-returns/
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by SquawkIdent »

bhsince87 wrote: Fri Nov 12, 2021 4:58 pm
Ocean77 wrote: Fri Nov 12, 2021 4:46 pm Why not just take 4% of whatever balance you have each year, then you'll never run out.
You could also take 8% or 10% or whatever every year, and you'll never run out.

You might get down to a few cents, though.
Here we go again. This is just one leg of the retirement stool. How volatile you want this is up to you.

You control the components in it and how much fluctuation you want in it.

Why is this method of withdrawal treated as anything more or less than that?

Pensions, SS, cash, bonds, etc. all play a part in limiting your year to year fluctuations.

Blindly taking 4% (or whatever the going rate is now) and adding an inflation component early year to it is a lot more risky IMHO.

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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by FactualFran »

HomerJ wrote: Fri Nov 12, 2021 12:36 pm That study didn't include 1966-1996 which was one of the failures (3.8% worked, but not 4% - you ran out of money in year 28 or 29 if you pulled 4% blindly)
The study included the 1966 as the starting year, but used average data for the final 3 years of a 30 year period that started with 1966. 1966 was the starting year for which the portfolio lasted 33 years. Calculations using the actual post 1992 data, which became available after the study was done, do not change that result. The initial withdrawal rate that resulted in the portfolio lasting 30 years was very slightly higher with the actual data than with the average data for the final 3 years.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by HomerJ »

FactualFran wrote: Fri Nov 12, 2021 6:27 pm
HomerJ wrote: Fri Nov 12, 2021 12:36 pm That study didn't include 1966-1996 which was one of the failures (3.8% worked, but not 4% - you ran out of money in year 28 or 29 if you pulled 4% blindly)
The study included the 1966 as the starting year, but used average data for the final 3 years of a 30 year period that started with 1966. 1966 was the starting year for which the portfolio lasted 33 years. Calculations using the actual post 1992 data, which became available after the study was done, do not change that result. The initial withdrawal rate that resulted in the portfolio lasting 30 years was very slightly higher with the actual data than with the average data for the final 3 years.
Hmm... I wonder where I read that 1966 was a failure year with 3.8% SWR (which is close enough to 4% that I don't care).

But I stand corrected.
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Re: Morningstar released their new report on SWR.

Post by Grt2bOutdoors »

randomguy wrote: Fri Nov 12, 2021 10:35 am
Grt2bOutdoors wrote: Fri Nov 12, 2021 9:23 am
randomguy wrote: Thu Nov 11, 2021 12:01 pm
BrooklynInvest wrote: Thu Nov 11, 2021 10:06 am What would be a reasonable - and actionable - methodology for "variable"?

Meaning, if I say 3.5% is my baseline do I budget for 3.3% if the market had a down year prior? Or is having a down year currently? From practical perspective I'm not cancelling/downscaling vacations if the market has a bad month. But if I plan 6 months out I could use prior 6 months as my evaluation timeframe?
With a super conservative rate like 3.5%, I would vote for like 3 or 4 years so you don't jerk around in response to market noise. Lets remember to have issues, you can ignore things like 2008-9. They are too short to matter. You need a decade+ of horrible returns to have problems. If you have a more aggressive SWR (say 5%), than moderately scaling back after shorter poor performance makes more sense.
What about if you are in a moribund Japan-like scenario?
What about it? The SWR for that period was in the 3.5% range (for a normal 50/50 portfolio) so you probably didn't need to make cuts. And waiting 3 years to cut spending by 10% isn't going to make or break your retirement.

You can choose to react to the wild market gyrations immediately if you want. When things like march 2020 happen you can cut your spending on the spot. After all the great depression might be starting up. But the odds are against it. If you react in 1 month or 3 years doesn't change the numbers much. Spending 35k instead of 30k for 3 years is only 15k.
From 1989 to present day period, the SWR for that period was 3.5%? in Japan? They had decades of bad returns.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by Grt2bOutdoors »

willthrill81 wrote: Fri Nov 12, 2021 3:31 pm
HomerJ wrote: Fri Nov 12, 2021 12:36 pm
FactualFran wrote: Fri Nov 12, 2021 12:31 pm
SonnyDMB wrote: Thu Nov 11, 2021 3:32 pm I believe the original 4% rule of thumb was based on 95% confidence ? The authors show 3.1 for 95% confidence. Can I interpret that to mean the authors feel the next 30 years will be 22.5% worse than any previous time in US history?
The original 4% rule had a success rate of 100%, using annual data from 1926 to 1992. According to Determining Withdrawal Rates Using Historical Data by William P. Bengen:
Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent [Figure 1(B)], followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.
That study didn't include 1966-1996 which was one of the failures (3.8% worked, but not 4% - you ran out of money in year 28 or 29 if you pulled 4% blindly)
But even that depends on which data and AA is used. For instance, Kitces found that the '4% rule' worked throughout all of U.S. history.

However, whether it worked for 29 or 30 years is squinting at a gnat, IMHO.
What I think about is not what has occurred, but what could occur. You know the saying, past performance is not indicative of future performance, what would be the effect if you had poor equity returns, far below that of all U.S. history - that would probably throw a serious wrench in folks plans .
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Re: Morningstar released their new report on SWR.

Post by randomguy »

Grt2bOutdoors wrote: Fri Nov 12, 2021 9:12 pm
randomguy wrote: Fri Nov 12, 2021 10:35 am
Grt2bOutdoors wrote: Fri Nov 12, 2021 9:23 am
randomguy wrote: Thu Nov 11, 2021 12:01 pm
BrooklynInvest wrote: Thu Nov 11, 2021 10:06 am What would be a reasonable - and actionable - methodology for "variable"?

Meaning, if I say 3.5% is my baseline do I budget for 3.3% if the market had a down year prior? Or is having a down year currently? From practical perspective I'm not cancelling/downscaling vacations if the market has a bad month. But if I plan 6 months out I could use prior 6 months as my evaluation timeframe?
With a super conservative rate like 3.5%, I would vote for like 3 or 4 years so you don't jerk around in response to market noise. Lets remember to have issues, you can ignore things like 2008-9. They are too short to matter. You need a decade+ of horrible returns to have problems. If you have a more aggressive SWR (say 5%), than moderately scaling back after shorter poor performance makes more sense.
What about if you are in a moribund Japan-like scenario?
What about it? The SWR for that period was in the 3.5% range (for a normal 50/50 portfolio) so you probably didn't need to make cuts. And waiting 3 years to cut spending by 10% isn't going to make or break your retirement.

You can choose to react to the wild market gyrations immediately if you want. When things like march 2020 happen you can cut your spending on the spot. After all the great depression might be starting up. But the odds are against it. If you react in 1 month or 3 years doesn't change the numbers much. Spending 35k instead of 30k for 3 years is only 15k.
From 1989 to present day period, the SWR for that period was 3.5%? in Japan? They had decades of bad returns.
The 10 year was yielding about 7% in 1989 and over the next 15 years declined to .3%. And it was a period of low inflation. And we often see the market in terms of US dollars. If you keep things in yen, it isn't as bad. And a lot of Nikki 225 charts don't include dividends. You can google the thread for details. but I don't remember anyone disputing the math...
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Re: Morningstar released their new report on SWR.

Post by HomerJ »

Grt2bOutdoors wrote: Fri Nov 12, 2021 9:12 pm
randomguy wrote: Fri Nov 12, 2021 10:35 am
Grt2bOutdoors wrote: Fri Nov 12, 2021 9:23 am
randomguy wrote: Thu Nov 11, 2021 12:01 pm
BrooklynInvest wrote: Thu Nov 11, 2021 10:06 am What would be a reasonable - and actionable - methodology for "variable"?

Meaning, if I say 3.5% is my baseline do I budget for 3.3% if the market had a down year prior? Or is having a down year currently? From practical perspective I'm not cancelling/downscaling vacations if the market has a bad month. But if I plan 6 months out I could use prior 6 months as my evaluation timeframe?
With a super conservative rate like 3.5%, I would vote for like 3 or 4 years so you don't jerk around in response to market noise. Lets remember to have issues, you can ignore things like 2008-9. They are too short to matter. You need a decade+ of horrible returns to have problems. If you have a more aggressive SWR (say 5%), than moderately scaling back after shorter poor performance makes more sense.
What about if you are in a moribund Japan-like scenario?
What about it? The SWR for that period was in the 3.5% range (for a normal 50/50 portfolio) so you probably didn't need to make cuts. And waiting 3 years to cut spending by 10% isn't going to make or break your retirement.

You can choose to react to the wild market gyrations immediately if you want. When things like march 2020 happen you can cut your spending on the spot. After all the great depression might be starting up. But the odds are against it. If you react in 1 month or 3 years doesn't change the numbers much. Spending 35k instead of 30k for 3 years is only 15k.
From 1989 to present day period, the SWR for that period was 3.5%? in Japan? They had decades of bad returns.
See, this is where the math comes in... This is why sub 3.33% is so crazy. 3.33% works if you can get 0% real return. 0%.

3.5% isn't a high bar... It's like 3 inches off the ground. As long as dividends and the bond side returns a tiny bit above inflation, 3.5% still works.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by vanbogle59 »

willthrill81 wrote: Fri Nov 12, 2021 5:00 pm And the problem is that according to most Monte Carlo simulations, the historic record was significantly 'smoother' than it should have been.
History was smoother than it SHOULD HAVE BEEN??? :confused
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by willthrill81 »

vanbogle59 wrote: Fri Nov 12, 2021 10:41 pm
willthrill81 wrote: Fri Nov 12, 2021 5:00 pm And the problem is that according to most Monte Carlo simulations, the historic record was significantly 'smoother' than it should have been.
History was smoother than it SHOULD HAVE BEEN??? :confused
Surely you jest! (Insert Leslie Nielsen line here)
I should have clarified: smoother than what the MC simulations indicate that it 'should' have been.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by willthrill81 »

Grt2bOutdoors wrote: Fri Nov 12, 2021 9:15 pm
willthrill81 wrote: Fri Nov 12, 2021 3:31 pm
HomerJ wrote: Fri Nov 12, 2021 12:36 pm
FactualFran wrote: Fri Nov 12, 2021 12:31 pm
SonnyDMB wrote: Thu Nov 11, 2021 3:32 pm I believe the original 4% rule of thumb was based on 95% confidence ? The authors show 3.1 for 95% confidence. Can I interpret that to mean the authors feel the next 30 years will be 22.5% worse than any previous time in US history?
The original 4% rule had a success rate of 100%, using annual data from 1926 to 1992. According to Determining Withdrawal Rates Using Historical Data by William P. Bengen:
Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent [Figure 1(B)], followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.
That study didn't include 1966-1996 which was one of the failures (3.8% worked, but not 4% - you ran out of money in year 28 or 29 if you pulled 4% blindly)
But even that depends on which data and AA is used. For instance, Kitces found that the '4% rule' worked throughout all of U.S. history.

However, whether it worked for 29 or 30 years is squinting at a gnat, IMHO.
What I think about is not what has occurred, but what could occur. You know the saying, past performance is not indicative of future performance, what would be the effect if you had poor equity returns, far below that of all U.S. history - that would probably throw a serious wrench in folks plans .
And what should be done in response to that possibility? Flexibility in one's spending is probably the best antidote. And perhaps a truly diversified portfolio, one with more than just stocks and bonds.
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Re: Morningstar released their new report on SWR.

Post by willthrill81 »

Grt2bOutdoors wrote: Fri Nov 12, 2021 9:12 pm From 1989 to present day period, the SWR for that period was 3.5%? in Japan? They had decades of bad returns.
According to Portfolio Charts, since 1970, the 30 year SWR for a Japanese investor experiencing Japanese inflation with a 50/50 AA for only Japanese stocks and bonds was 3.4%. Splitting half of their stock holdings between Japanese and either U.S. or ex-U.S. stock (the split didn't matter) would have boosted that to 3.8%.

And if they had combined international stock diversification with 10% in gold rather than in stocks or bonds (it didn't matter which), the 30 year SWR would have been 4.3%, better than the worst historic period for U.S. retirees only invested in stocks and bonds.

I know that many don't like gold, but it's a historical fact that even a small allocation to it would have benefited most retirees in developed nations at least in the worst historic periods since 1970.
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Re: 4% no good anymore

Post by Fran K »

Triple digit golfer wrote: Thu Nov 11, 2021 2:30 pm
Even if your portfolio only keeps up with inflation, 4% will last you 25 years.

A 3.3% rate means zero real returns, that the portfolio will only keep up with inflation. That seems overly conservative to me.
This is what I am thinking. Are the "experts" implying we should expect zero real returns for the next 30 years?

What is the incentive for the wealth management "professionals" to do anything *but* paint the most conservative picture possible so that everyone puts more money in their retirement accounts?
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by snackdog »

4% has always worked and probably always will. In most situations it will be wildly conservative. Everyone is predicting a market drop worse than anything historical. I predict a continued great run up. Chinese and Indian middle class investors will pile in the next 50 years and push the market up to ever newer highs, along with a few inconsequential dips.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by 59Gibson »

50+ yrs =2.75%
40yrs = 3.25%
30 yrs =3.75%
20yrs = 4.75
A little extra conservative but not getting into 50-75X. IMO
Assuming 40/60-60/40 portfolio.
Last edited by 59Gibson on Sat Nov 13, 2021 7:53 am, edited 1 time in total.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by lostdog »

I wonder if these low SWR articles are written to serve financial planners.

Their clients will continue to work longer and the financial planner still gets paid...
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by Fran K »

lostdog wrote: Sat Nov 13, 2021 7:52 am I wonder if these low SWR articles are written to serve financial planners.

Their clients will continue to work longer and the financial planner still gets paid...
This. Anyone else as cynical as lostdog and me?
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by randomguy »

willthrill81 wrote: Fri Nov 12, 2021 10:42 pm
vanbogle59 wrote: Fri Nov 12, 2021 10:41 pm
willthrill81 wrote: Fri Nov 12, 2021 5:00 pm And the problem is that according to most Monte Carlo simulations, the historic record was significantly 'smoother' than it should have been.
History was smoother than it SHOULD HAVE BEEN??? :confused
Surely you jest! (Insert Leslie Nielsen line here)
I should have clarified: smoother than what the MC simulations indicate that it 'should' have been.
And is your take away:
a) We got lucky and only saw an bottom 15% result not a bottom 5% result
b) The MC model is wrong....

Nobody doubts there can be worse cases. In some reality US&Russia nuke each other over Cuba and we have a 0% SWR or the 2020 insurrectionists actually topple the government, but trying to put numbers on that is a bunch of guess work. Are they .001%, .1%, 1% , or 10% cases is tough say. And stuff rapidly breaks down in the extremes. What is your 10% in gold going to do for you when the government passes a bill that bans private gold ownership? Or maybe going forward 2000-9 is a bad is it can get since the government will pull the strings better than it did in 1929/1966. Maybe we just got lucky and our future SWR will all be closer to 5%.

The stock market isn't some natural thing like radioactive decay where the our models are pretty accurate. They aren't. But lets say our model was accurate, the inputs that are fed in aren't. People are taking historical data, fudging it, and then pumping them into the model. The error bars on this type of stuff is huge. Being off by .5% in returns or .5% inflation or the markets being 10% more or less volatile really change the tail ends of the distributions.

Since the late 90s I have been reading about how rates are low and have no where to go but up. Stocks have also been historically overvalued pretty much the whole period. Go calculate the PE10 of pre 1990 and compare it to post 1990 and we have a 30 year period where we basically have never even been average. 30 years is a really long time for bubble.... I am sure they will be right eventually but if it is in my lifetime is a different question.
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Re: 4% no good anymore

Post by randomguy »

Fran K wrote: Sat Nov 13, 2021 7:07 am
Triple digit golfer wrote: Thu Nov 11, 2021 2:30 pm
Even if your portfolio only keeps up with inflation, 4% will last you 25 years.

A 3.3% rate means zero real returns, that the portfolio will only keep up with inflation. That seems overly conservative to me.
This is what I am thinking. Are the "experts" implying we should expect zero real returns for the next 30 years?

What is the incentive for the wealth management "professionals" to do anything *but* paint the most conservative picture possible so that everyone puts more money in their retirement accounts?
A 3.3% SWR does not mean that that we have 0% real return for 30 years. The real CAGR of the market from 1966-1995 was 5% and the 10 year had a CAGR of 2.75%. Those would have supported ~7% SWR. And yet the SWR for that period was just a bit under 4%.

Historically the more likely case is a really bad 15 year period (think negative stock and bond returns) that deplete the portfolio enough so that by the time you get good returns, the portfolio is depleted. There are some other edge cases (i.e. everything goes great for 20 years and then bonds drop 95% and stocks drop 50% over the next 2 years) where you can get really low SWRs where it doesn't matter if the overall return is good because you can't survive the bad times.
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Re: 4% no good anymore

Post by Wanderingwheelz »

Fran K wrote: Sat Nov 13, 2021 7:07 am
Triple digit golfer wrote: Thu Nov 11, 2021 2:30 pm
Even if your portfolio only keeps up with inflation, 4% will last you 25 years.

A 3.3% rate means zero real returns, that the portfolio will only keep up with inflation. That seems overly conservative to me.
This is what I am thinking. Are the "experts" implying we should expect zero real returns for the next 30 years?

What is the incentive for the wealth management "professionals" to do anything *but* paint the most conservative picture possible so that everyone puts more money in their retirement accounts?
Morningstar is heavily supported by the financial services conglomerate. Advertisers may not be too thrilled if they’d come up with a SWR of 5.3% since advisors are paid on their clients AUM. The less retirees withdrawal the less their personal income is affected.

Yesterday, I saw a comment from a financial advisor on Twitter saying that one of his main risks is retirees withdrawing their assets, thus harming his personal income as an AUM advisor. He was defending the AUM business model, compared to a flat fee model. Obviously, these people can be motivated to slow retirees withdrawal of funds. Morningstar knows this, too.
Last edited by Wanderingwheelz on Sat Nov 13, 2021 10:49 am, edited 1 time in total.
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Re: Morningstar released their new report on SWR. [Safe Withdrawal Rate]

Post by stocknoob4111 »

I'm good with 4%, it survived 1966-96 and that was severely brutal, the probability of a repeat of that is low.. but even if it does repeat you will be good.

Also Small Caps and International are historically cheap so diversification would give you even more safety. I have 20% Small and 20% International.
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