Kitces on 4% SWR and Sequence Risk (bond, mutual funds, retirement plan, invest)

[k374]

Very informative and good to see someone as respected as Kitces express so much optimism that 4% SWR is quite safe after all even with some Sequence risk. Infact he specifically says that 4% SWR was modeled with sequence risk in mind otherwise it would've been the 6% SWR.

This is refreshing because there are so many experts today saying that 4% SWR does not work anymore due to bond yields being low etc. 4% SWR does not primarily come from bond yields but rather an average portfolio return.

[leastprime]

^ composed of a theoretical 60/40 equity/bond. Exactly what is in the 60/40 is unknown to me.

We are quite happy to live below our means; Until we can't.
The theoretical SWR assumes that ALL of your retirement assets is comprised of a 60/40 index benchmark.

[mathjak107]

Originally Posted by leastprime

^ composed of a theoretical 60/40 equity/bond. Exactly what is in the 60/40 is unknown to me.

We are quite happy to live below our means; Until we can't.
The theoretical SWR assumes that ALL of your retirement assets is comprised of a 60/40 index benchmark.

noooooooooooo , a safe withdrawal rate is not based on 60/40 only , in fact it was never even an original allocation as 50/50 was in bengens first work so get that 60/40 thing out of your head and forget it!

the safewithdrawal rate was founded by bill bengen .

Bengen obtained a copy of Ibbotson Associates’ Stocks, Bonds, Bills, and Inflation yearbook, which provides monthly data for a variety of U.S. asset classes and inflation since January 1926. He decided to investigate using the S&P 500 index to represent the stock market and intermediate-term government bonds to represent the bond market.

He constructed rolling thirty-year periods from this data (1926 through 1955, then 1927 through 1956, and so on), using historical simulations.He calculated the maximum sustainable withdrawal rate for each rolling historical period. this illustrated the role of market volatility and sequence risk in a way that assuming a constant portfolio return does not.

his “SAFEMAX” was the highest sustainable withdrawal rate for the worst-case retirement scenario in the historical period. With a 50/50 allocation for stocks and bonds, the SAFEMAX was 4.15%, and it occurred for a new hypothetical retiree in 1966 who experienced the 1966–1995 market returns.

he recommended that retirees maintain a stock allocation of 50–75%, writing in his 1994 article, “I think it is appropriate to advise the client to accept a stock allocation as close to 75 percent as possible, and in no cases less than 50 percent.”


The original 4 Percent Rule article written by Bengen in 1994 actually showed a 100% chance of success for a minimum of 33 years (or more) when using a withdrawal rate of 4 percent and making inflation adjustments annually from a portfolio containing 50/50 stocks and bonds.

It was the Trinity Study article 4 years later in 1998 that further validated the 4 Percent. This was the data set that assigned a 95% success rate to making inflation adjusted 4.0 percent withdrawals from a 50/50 stock and bond nest egg.

So why the difference? Why did Bengen get 33 years and the Trinity Study got a 95% success rate over 30 years? The difference was in the bonds. Bengen used intermediate treasury bonds in his calculations while the Trinity Study used-long term corporate bonds.

When Bengen analyzed different withdrawal rates, he looked at how long your money would last with 100% certainty.
The Trinity Study, on the other hand, fixed the number of years and instead looked at the probability of success for a given withdrawal rate WITH DIFFERENT ALLOCATIONS .

In the 2011 update to the Trinity Study, it was shown that a portfolio with 75/25 stocks and bonds and an inflation adjusted withdrawal rate will have a 100% chance of success for 30 years as opposed to a 96% chance with 50/50 stocks and bonds.

In addition, they also looked at something else that could be very important: How much money you would “end” retirement with. This part of retirement planning is important if you plan to pass money on to heirs or a noble cause. As you might guess, portfolios with a higher allocation to stocks ended retirement with larger amounts

If you’re an early retirement seeker and need your money to last you a lot longer than 30 years, one of the interesting things that Bengen mentions in his original article is that a rate of 3.5 percent with inflation adjustment worked for nearly every rolling period he studied for over 50 years!

If you’re on the other side of the fence and can stomach a little more “risk” in order to use a higher withdrawal rate than 4.0, then you should check out the table of results in the Trinity Study. It provides you with a whole bunch of probabilities where you can simply pick the one that you feel works for you .

[mathjak107]

Originally Posted by k374

Very informative and good to see someone as respected as Kitces express so much optimism that 4% SWR is quite safe after all even with some Sequence risk. Infact he specifically says that 4% SWR was modeled with sequence risk in mind otherwise it would've been the 6% SWR.

This is refreshing because there are so many experts today saying that 4% SWR does not work anymore due to bond yields being low etc. 4% SWR does not primarily come from bond yields but rather an average portfolio return.

as long as you maintain a 2% real return over the first 15 years of a 30 year retirement , mathematically a 4% draw will hold ...kitces found every failure happened , whether it was 1906, 1927, 1929,1937 , 1965 ,1966 which were our worst cases , happened in the first 15 years ..even the biggest bull markets after that point had to little left to save the retirement .

[recently laid off]

The rare failure of the 4% rule that occurred had nothing to do with low bond yields but the high inflation in the 1970s.

[mathjak107]

Originally Posted by recently laid off

The rare failure of the 4% rule that occurred had nothing to do with low bond yields but the high inflation in the 1970s.

the worst group in history 1965/1966 failed because of real returns over the first 15 years being so poor even though the 30 year period was pretty okay ...

here is the 15 year and 30 year data for the failure periods . all failed because of the first 15 year real returns .

suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

[recently laid off]

If someone had invested a million dollars in 1989 (30 years ago) in these three very popular balanced mutual funds and took out an inflation-adjusted 4% annual withdrawal and died today their kids would be rich:

VWELX would have $9,031,027

VWINX would have $6,719,594

FBALX would have $7,459,331


Takeaway: A 4% withdrawal over the last 30 years would have been too conservative. You could have taken out an annual 8.5% inflation-adjusted rate and still have money left today.

[mathjak107]

you can't just do a simple 4% inflation adjusted subtraction each year pretending never to have down years while spending down if that is what you did ...

it is sequence risk not returns that matter most ...the exact same average return can vary by 15 years from the best sequence to the worst sequence in how long that money would last ... the same average could leave you with 3x more than you started vs totalyl broke depending on the order of the losing years .

[NewbieHere]

I don’t mind if I have to leave large estate by following 4%.

[mathjak107]

we use a dynamic method that safely lets us spend more when we are up with a minimal cut if things are down ...it is far easier then a straight 4% which if you are not taking raises along the way other than inflation can leave way to much money not enjoyed while still leaving some for heirs .

our kids can have whatever is left but we didn't work , save and invest a lifetime not to enjoy as much as we can .