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Morningstar updated their SWR analysis recently. Executive summary is that last year's recommendation of a 3.3% SWR is now changed to 3.8%, based on a better starting point for retirees. In other words, bond yields are higher, and stocks are priced lower on multiples of earnings.
There's a lot more detail in the article, looking at different allocations, timeframes, and withdrawal strategies.
Kitces said no problem with 4% and not only that , to quote him
“ Ultimately, however, Morningstar’s conservative return assumptions – which are comparable to some of the worst periods in the past 140 years – actually serve to highlight the strength of the 4% rule, which was created to withstand just those types of worst-case scenarios. Which means that, even if their historically low projections do come to pass, resulting in returns equal to the worst return scenarios in history, a 4% initial withdrawal rate would still hold up. And while today’s market conditions do merit caution (as there is reason to believe that the next 15 years could experience below-average portfolio returns), in reality, such conditions were precisely what the 4% rule was created for, to begin with!
I guess then i need to learn to spend more cause @ our current wr of 2.5%. Even with helping the kids and grandkids its just not in our nature. No more flying coach will be nice
Over the 122 30 year cycles we have had to date , a 60/40 portfolio has ended 90% of the time with more then you started and 2/3’s of the time ended with 2x what you started if all you did is inflation adjust a 4% swr.
The biggest issue has been leaving to much of what you worked so hard for , not enjoyed
Morningstar updated their SWR analysis recently. Executive summary is that last year's recommendation of a 3.3% SWR is now changed to 3.8%, based on a better starting point for retirees. In other words, bond yields are higher, and stocks are priced lower on multiples of earnings.
There's a lot more detail in the article, looking at different allocations, timeframes, and withdrawal strategies.
morningstar raised from 3.3 to 3.80% compared to their first white paper .
However even at the 3.3% kitces saw no reason 4% would not still be okay .
For Those who don’t want to read kitces’s article , the reason why the morningstar white paper was and still is likely flawed is :
“. Accordingly, the paper’s authors use forward-looking return projections to calculate their future safe withdrawal rate estimates. But the investment return assumptions that Morningstar used for its analysis were so low – with real returns averaging just 5.7% for equities and 0.5% (!) for fixed income over 30 years – that, if those projections were to come to pass, the next 30 years would be among the very worst market environments in U.S. history.
While such conservative return estimates might make sense over a 10- to 20-year time horizon (since research has shown that CAPE ratios are strongly predictive of returns over that time range), extending those assumptions out to 30 years is arguably unrealistic.
In reality, markets tend to revert to the mean, meaning that even the periods with the worst safe withdrawal rates in history contained intervals of offsetting below- and above-average returns, causing each to end out with near-average returns over the full 30-year horizon.”
Last edited by mathjak107; 12-15-2022 at 04:05 AM..
A safe withdrawal rate even with the same exact same return can vary in how long the money lasts , between the best sequence of returns and the worst sequence by15 years over a 30 year retirement…
Morningstars paper as kitces pointed out contained a lot of assumptions that were outliers and never happened even in the worst of times .
The problem here is higher rates means higher inflation and higher spending .
You may have been better off at zero and little inflation and had a better success rate.
You are assuming rates went up and spending stayed the same which it clearly did not
I thought you figured your spending budget as a percentage of your assets. So if your assets fall in value you spend less. That would work for someone like you, MJ with a lot of discretionary income. Is that hard for you because you are trapped in a consumption cycle? There's a term for that - Lifestyle Creep.
Someone on the low end of the scale will have a much larger percent of their income as social security which is indexed for inflation.
While the budget is a percentage of portfolio value that value fluctuates..
The wild card is your spending ..if inflation increased your spending by 10% and all you got is an extra 4% in fixed income and hypothetically stocks are down or flat then you are further behind .
Your portfolio pay check buys less and so to buy the same things you need to draw more out ….
Higher spending increases sequence risk and round and round we go .
The higher the spending the higher the sequence risk.
You can be farther ahead with 1 or 2% on fixed income and 1 or 2% inflation then 4% on fixed income in 7% inflation and a down stock market
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