9-5 Suited wrote: ↑Fri Jan 21, 2022 9:47 am
Investor 1: Retired 5 years ago at 55 with $2M 60/40 portfolio and 4% withdrawal. With bad sequencing, his portfolio is down to $1.5M. Assume 0% inflation for simplicity (ha, I know) and he is happily withdrawing $80,000 per year ($2M x 4%) and considers that appropriate.
Investor 2: Retires today at 60 with $1.5M 60/40 portfolio and 4% withdrawal. He is happily withdrawing $60,000 per year ($1.5M x 4%) and considers that appropriate.
So both investors are 60 years old, retired, 60/40 AA, with $1.5M portfolio and yet would have
very different "safe withdrawal" amounts.
The 4% is for a 30 year retirement, roughly retiring at 65, with money lasting until 95. If you retire earlier, you need a lower SWR. In your two examples, with a 5 year difference, the earlier retirement should be using a lower SWR than the later one.
But that won't cover the full gap. In your example, the gap exists because the market was more overvalued when investor 1 retired than when investor 2 could retire. So investor 2 won't have as bad a sequence of returns as investor 1 going forward, because the CAPM is wrong. However, we don't know how much better things will be for investor 2, so we don't know how much to raise the SWR. So we'll be conservative.
So two questions:
(1) does anyone actually advocate a traditional SWR approach like this?
Pretty much. I plan out the money I want to spend in retirement, then compute when I'll be able to retire. I ensure I can spend that much, even if we hit a downturn that's as bad as any previous downturn. And anyway, a lot of expenses are fixed. I'm not going to sell my house in a down market to lower housing expenses, or send my kids to worse schools. That counts as not planning properly. After the first decade of retirement, if we did not actually have a bad sequence of returns, I might find something stupid to blow money on, like stay at a $1000/night hotel, just because I can. But more likely, I'll just leave the money there for the kids to inherit, or donate to charity. Seems better than buying expensive stuff I don't want just because I can.
(2) if so, how do you rationalize this when variable withdrawal strategies exist (VPW, ABW, fixed %) that would eliminate this obviously contradictory example above?
Stock prices aren't a complete random walk, they depend on things like valuations and previous returns. So if there's a bad 5 years before you retire, like investor 2, then you can probably use a higher SWR, since any remaining drop will be more modest, and any recovery sooner (in fact, exactly 5 years sooner). But it's hard to put numbers on these, and I haven't tried.
I haven't tried because I'm retiring in 2 months, and the last 5 years have not, in fact, been a bear market. They've been an incredible bull market. So I really do need to protect against the worst possible bear market, like investor 1.