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Old 02-01-2016, 09:20 AM
 
Location: Columbia SC
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While not cast in stone, the old rough rule of thumb was one could withdraw 4% for their retirement from their retirement investments and probably not run out of money as the investments would grow.

Is this still the norm and would it change (to what amount) as one ages?

For example if 4% is sound at say 65 then what would be sound at 75?
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Old 02-01-2016, 10:40 AM
 
Location: Florida
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There are a lot of studies on the 4% and as a rule of thumb for younger people I think it is a good starting point.
In general the rule says you will live 30 years in retirement. Thus if you start at 75 and not 65 the percent would be higher.
Remember estimate your life expectancy as the life expectancy from the tables assumes 50% of the people liver longer than the life expectancy stated.
Because of the low interest rates the 4% would not hold up today. Maybe 3%.
Remember the rule is the worst case so you could have lots of money left at death. Thus you probably want to modify your withdraws based on you annual investment balance.
The big risk area is if your investments lose significant dollars in the first few years of retirement you can run the risk of running out of money.
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Old 02-01-2016, 10:47 AM
 
Location: Haiku
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That "rule" was formulated in William Bengen in 1994. In his paper he set out some conditions that went into his calculation. One of those was an AA (asset allocation) of 60/40 (stocks/bonds), another was the starting age of 60-65, and another was a longevity of the person, which he assumed to be 30 years. He also assumed a return on equities of 10.3%, a bond interest rate of 5.2% and an inflation rate of 3%. None of those latter figures apply today, so that is one thing to be aware of.

But to answer your question - if you were to retire later than what Bergen assumed, your longevity would be less and your total spend-down would be less, so your SWR (safe withdrawal rate) would be higher. But since the current economic climate means the old 4% rule is not likely valid any longer, I really doubt if your SWR would be greater than 4% by retiring at 75 today.
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Old 02-01-2016, 11:23 AM
 
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Quote:
Originally Posted by TwoByFour View Post
That "rule" was formulated in William Bengen in 1994. In his paper he set out some conditions that went into his calculation. One of those was an AA (asset allocation) of 60/40 (stocks/bonds), another was the starting age of 60-65, and another was a longevity of the person, which he assumed to be 30 years. He also assumed a return on equities of 10.3%, a bond interest rate of 5.2% and an inflation rate of 3%.
this is so far from true .

there were no assumptions of returns on bonds or stocks made , that is ridiculous .

not sure where you came up with that fact but go back to wherever you got it and tell them they better research it better because it makes no such assumption of returns and if you understand how it works and what it shows you would see why it is a ridiculous assumption.

bill used rolling 30 year periods of time and tested those rolling time frames as they unfolded using each years own results to see what was the maximum draw a retiree could take first year and adjust each year by inflation without running out of money before 30 years .

so bill's study ended up identifying the worst time frames in history and based on those results he found the safe draw rate had it to be lowered to about 4% .

the trinity study took it a step further . the trinity study not only tested a wide range of asset allocations but assigned a success rate to them with at least 90% a passing grade .


so how bad do conditions have to be for 4% to fail ?


the first 15 years of a 30 year retirement are the most crucial . the worst time frames identified by bill were someone starting to retire in 1929 ,1937 , 1965/1966

how bad were things that the safemax draw rate ended up at 4% when without these 4 time frames you could have drawn 6.50% ?

you would need real returns over the first 15 years less then these , which are pretty awful .

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%

so the 4% safe withdrawal rate is based on these poor time frames and as bad as they are 4% passed .


the 4% safe withdrawal rate is based on some pretty nasty periods and returns . to date the only group we have that is even close is the y2k retiree . but so far even they are passing .


don't let anyone tell you that the safe withdrawal rates as per bills safemax or the trinity study are based on any kind of average returns or interest rates , that is just false .

Last edited by mathjak107; 02-01-2016 at 11:52 AM..
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Old 02-01-2016, 12:52 PM
 
Location: Haiku
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Quote:
Originally Posted by mathjak107 View Post
this is so far from true .

there were no assumptions of returns on bonds or stocks made , that is ridiculous .

not sure where you came up with that fact but go back to wherever you got it and tell them they better research it better because it makes no such assumption of returns and if you understand how it works and what it shows you would see why it is a ridiculous assumption.
Read the Appendix of his paper. In it he states assumptions made and the assumptions I listed were his. He made those assumptions based on historical data. The rolling averages he used were from an era in which the average bond rate was 5.2%. He assumed those historical trends would be valid today. Obviously a bond rate of 5.2% just does not apply to today's bonds - it has not in several years and is not likely to for many years if ever again.

No financial adviser that I have read believes that Bengen's SWR of 4% is valid in today's climate.

Last edited by TwoByFour; 02-01-2016 at 01:08 PM..
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Old 02-01-2016, 02:03 PM
 
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you have it backwards . he didn't figure those numbers as his criteria . that was just the results the markets produced overall like saying the stock market averaged 9% the last 100 years .

most financial writers are not researchers and as a result have no clue what that 4% rate is made up of or how bad it really is based on . it is one of the most misunderstood numbers out there . you would be surprised how many think it is based on market and interest rate average returns .

bill tried drawing different percentages and inflation adjusting them until he hit a number the worst time frames could get through and have money left at 30 years .

you have some 30 year periods that were great and ones that had awful crap happen . it was those absolute worst time frames bill was interested in . the returns , interest rates and horrible inflation in the worst groups were worse then anything we saw in modern day times .

so while bills safe max actually would have allowed a 6.50% withdrawal rate when the four crappy 30 year periods appeared in his numbers he had to knock everything down to 4% so they would not run out of money

the 4% safe withdrawal rate is based on a combo of PATHETIC market returns , interest rates and inflation combinations happening .

merely average returns would have allowed 6.50% . but the 4% "rule " is not based on any averages , it is based on the absolute worst time frames making it through .

here is a great explanation below of how it works , but get the idea out of your head that it is based on any returns except the worst to date and it is based on noooooooooo average returns or average interest rates . .

so far we have not had any events worse then the 1965/1966 group saw . could we ? sure we could , we never did but it is possible .

but that is why this is NOT A RULE AND NEVER MEANT TO BE A RULE .

IT IS ONLY A WAY TO BALLPARK YOUR FIRST YEAR . AFTER THAT YOU HAVE TO MONITOR THINGS AND MAYBE EVEN TAKE A PAY CUT . THERE IS NOT A FINANCIAL PLANNER WORTH A DIME WHO EVER SAID TO A CLIENT TAKE 4% A YEAR , INFLATION ADJUST AND HAVE A NICE LIFE -C-YA .


https://www.kitces.com/blog/what-ret...ly-based-upon/

Last edited by mathjak107; 02-01-2016 at 02:35 PM..
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Old 02-01-2016, 09:44 PM
 
Location: Haiku
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mathjak - I am glad you understand the so-called 4% rule. A lot of people do not understand that it is based on historical performance data and it is not at all certain, or likely, that past performance will be repeated in the future. For instance, many things have already changed since Bengen did his study in 1994 - current intermediate US Treasury bond interest rate is about 2.1%, while the average for the period that Bengen used was 5.2%. Dividend return during Bengen's period averaged about 4.4% and dividends now are about 1.7%. Those are big changes and substantially change how a portfolio performs.

The 4% rule (don't get too hung up on the word "rule" - that is just what people call it, but you are right it is not an ironclad rule at all, just a guideline) was probably a reasonable guideline in 1994 but in 2016 it is very questionable if it should be used at all.
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Old 02-02-2016, 01:55 AM
 
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it all boils down to numbers .

in order to maintain a 4% inflation adjusted draw you need to average a 2% real return over the first 15 years of a 30 year time frame .

why 15 years ? because the damage that can be done early on is not reversible if it is to bad in the first 1/2 of retirement .

every time the worst time frames ran out of money it wasn't because of poor 30 year results . every time frame was killed off in the first 15 years and even though the greatest bull markets ever followed there was not enough money left to grow and mean much .,

that is what both bengen and the trinity study taught us when the common denominator to every failure period is looked at .

that certainly is not all that hard to maintain and it is something we can all monitor and should monitor as time goes on if you are retired . you can start at 4% but a few years in start to make sure you are above that level , you can always clip a 1/2 % or so in draw .

so far 2000 on the stock side is slightly below 2% but a diversified mix would have had bonds doing well and it is maintaining just about that level .

we have had some awful 30 year periods like 1966 where markets sucked for years , and inflation went from 1% to double digits in just a few years time . it was devastating and was worse then if you were the unlucky retiree who retired in 1929 right at the edge of the great depression yet in the end 4% held ..

so that 4% is already based on some nasty nasty results happening in your time frame .

in fact the fidelity calculator uses worst case monte carlo simulations to find even worse cases then the actual historical .

it clipped 15% off my balance with a 40/60 mix assuming i get whacked first year . i am like how did it know ha ha ha because i just retired in july .

so on top of the worst possible outcomes it assumes a pretty nasty drop in year 1 .


in fact if things are merely average you would have more then you started with 30 years later and in fact 67% of the time had more then 2x what you started with 30 years later .

if anything the 4% has been to conservative historically and left to much money on the table unspent .

but your path is easily monitored as time marches on so it isn't a case of having to guess whether it will hold or not in advance . you can't guess , since we can't predict any more then that 1929 or 1966 retiree could by looking at the present .

whether you think it will hold or not you still should at least understand what the 4% safe withdrawal rate is based on if you are going to tell others what you think it is based on .. and it certainly is not based on averages , average returns or anything else except the worst possible returns in history to date and even then some if they are monte carlo simulations as well .

some like blanchett think cuts may have to be made in draw , others like kitces who crunched what makes up that 4% rule mathematically think the numbers show we will need much more pathetic times then the worst of the worst to date to see it break .

even the 2008 retiree is back on track .

Last edited by mathjak107; 02-02-2016 at 02:36 AM..
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Old 02-02-2016, 03:58 AM
 
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one more point .

what can cause the 4% rule to fail is not a steep drop or low rates . a v-shaped drop like 2008 with a pretty quick recovery is a non event . but a modest drop that lasts quite a while can be much more damaging .

the 2008 retire is no different this many years in then any other retiree group with average conditions .

the y2k retiree is a bit more worse off . they are on par with where the 1929 retiree stood balance wise 16 years later . while not great they are still in passing territory but not by much .

while 2/3's of all the 30 year time frames since 1926 left you with more than you started with after spending down 30 years the y2k retiree and 1929 retiree made it through at 4% inflation adjusted but with very little left over .

the take away from all this is that if you are going to invest in equity's and go for a draw rate higher then 2% inflation adjusted which is all fixed income can support and be bullet-proof then you need slack in your spending plan to cut back .

if 5 or 6 years in you still are below a 2% real return average then spending cuts may be warranted if you are prudent .

but if everything in your budget is a need and there are no wants you have nothing to cut back .

so without a bit of discretionary spending in your budged equity's can do more harm then good if things do not go as planned .

Last edited by mathjak107; 02-02-2016 at 04:07 AM..
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Old 02-03-2016, 08:47 AM
 
Location: Whereever we have our RV parked
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My lifestyle has always been to try to live below my income, and save for retirement and those rainy days that inevitably come. Unfortunately, in our life, its raining cats and dogs now. So I'd give the advice I'd give to anyone. Forget the 4% rule cause one day you might need to take a big bite. My personal goal is to try to live on SS and pension and save the extra for when I really need it cause life is taking a big bite.

Of course, if most of you income is from your savings, then I'd just keep it down to 2%. At this point, there's little hope for any boost in retirement income potential.
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