Safe withdrawl rate & lifespan

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thai_tong
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Safe withdrawl rate & lifespan

Post by thai_tong » Sat Dec 22, 2018 6:05 am

I was curious about how high the SWR gets when you don't have much longer to live, and also for those who retire early enough with 50 or 60 years of life to fund. I checked on firecalc and made a graph of the results

Image

It's interesting that if you have a very long time left to live you still only need a SWR of about 3%.
It's also reassuring that when you get closer to the end of your life the SWR can be relaxed. P.S. 12.5% SWR is for 5 years to live.

slowtraveler
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Re: Safe withdrawl rate & lifespan

Post by slowtraveler » Sat Dec 22, 2018 6:27 am

12.5% makes no sense for 5 years. 100% tips will have a 20% swr.

What are the assumptions?

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Lillailler
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Re: Safe withdrawl rate & lifespan

Post by Lillailler » Sat Dec 22, 2018 7:10 am

The SWR for 5 years life-expectation, in order to be 'safe', has to be based on not running out of money even if actual life turns out to be significantly longer than the expected value, perhaps at two standards deviations above the mean, which would push the rate down.

arcyallen
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Re: Safe withdrawl rate & lifespan

Post by arcyallen » Sat Dec 22, 2018 8:20 am

slowtraveler wrote:
Sat Dec 22, 2018 6:27 am
12.5% makes no sense for 5 years. 100% tips will have a 20% swr.

What are the assumptions?
It also may be based on Sequence of Return Risk for a stock based investment. No one calculates what the SWR is on TIPS :)

Seppia
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Re: Safe withdrawl rate & lifespan

Post by Seppia » Sat Dec 22, 2018 8:36 am

Yeah but being in stocks while only having 5 years left to live doesn't seem like a great plan :)

Anyway, IIRC firecalc assumes no taxes and a TER of 0%, you may want to take that into consideration, plus what is the failure rate at these SWR levels?
Stock market valuations are approximately in the 1637278274th percentile, so a bit more margin of safety seems to be needed

The Old Man
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Re: Safe withdrawl rate & lifespan

Post by The Old Man » Sat Dec 22, 2018 9:17 am

Typical SWR calculations are based on a portfolio composition of stocks and bonds (and sometimes cash). None of these investments (with the exception of TIPS) provide protection against inflation. The observed failures of the SWR occurred during the 60s and 70s which were inflationary eras. Lack of consideration for inflation means any SWR is not safe. The 4% rule is just an artifact of the data.

thai_tong
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Re: Safe withdrawl rate & lifespan

Post by thai_tong » Sat Dec 22, 2018 10:42 am

The usual assumptions of firecalc apply. The 5 year timeframe would fail at a 20% withdrawal rate if there was a bad sequence of returns.
It's true you could just keep your money in a savings account and withdraw an amount that's safe from inflation. For the sake of simplicity I used firecalc's default assumptions for all time frames

Yes taxes also matter, it's a withdrawal rate not an income rate. You'd have to apply your local tax rates to figure out what portfolio you need to support your lifestyle at a given withdrawal rate.

arcyallen
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Re: Safe withdrawl rate & lifespan

Post by arcyallen » Sun Dec 23, 2018 8:03 am

The Old Man wrote:
Sat Dec 22, 2018 9:17 am
Typical SWR calculations are based on a portfolio composition of stocks and bonds (and sometimes cash). None of these investments (with the exception of TIPS) provide protection against inflation.
Stocks! Stocks -are- a very good protection against inflation. Severe inflation aside, inflation directly effects a company and it's profitability on paper, which directly effects the stock price.

The Old Man
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Re: Safe withdrawl rate & lifespan

Post by The Old Man » Sun Dec 23, 2018 8:33 am

arcyallen wrote:
Sun Dec 23, 2018 8:03 am
Stocks! Stocks -are- a very good protection against inflation. Severe inflation aside, inflation directly effects a company and it's profitability on paper, which directly effects the stock price.
The Death of Equities, Business Week 13 Aug 1979
https://ritholtz.com/1979/08/the-death-of-equities/

Discussion on the stock market performance of 1966-1982
https://awealthofcommonsense.com/2014/0 ... eally-bad/

A don't have the data handy but the 4% rule (based on a stock/bond portfolio) breaks down in inflationary eras such as was the case in the 1960s and 1970s. People that cleaned up were in real estate.

Augustus
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Re: Safe withdrawl rate & lifespan

Post by Augustus » Sun Dec 23, 2018 1:54 pm

The Old Man wrote:
Sun Dec 23, 2018 8:33 am
People that cleaned up were in real estate.
That would depend on the timing right? If you bought in the 60s-70s, then from 78-80 interest rates went from 6% to 16%, I'd imagine that real estate values went into free fall since practically everyone borrows to purchase.

classical_Liberal
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Re: Safe withdrawl rate & lifespan

Post by classical_Liberal » Sun Dec 23, 2018 8:12 pm

Back in the 1970's/early 80's many mortgage loans were assumable. This produced a phenomenon where the financial product used to purchase the house actually added value to the house upon sale. IOW two identical houses, the one with an assumable loan was worth more. There were also a lot of seller financed contract wraps with assumable loans. Essentially, the seller ended up financing what we could call a second mortgage today for buyers.

Re stocks and inflation. I think stocks do fare pretty well in inflationary events, but there is some lag time. Of course the underlying cause of inflation, and the speed at which it occurs is very important to look at when anticipating equity performance during inflationary times. Obviously stocks do better with slower, controlled inflation caused by central bank currency meddling or inflation caused by increased demand. Earnings go up over time with prices. OTOH a systemic shock were inflation is caused by higher production costs, like a spike in energy prices, or loss of a low cost trading partner doesn't really increase corporate profits per se. So equities fare less well in the face of this type of inflation.

arcyallen
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Re: Safe withdrawl rate & lifespan

Post by arcyallen » Mon Dec 24, 2018 9:11 am

The Old Man wrote:
Sun Dec 23, 2018 8:33 am
The Death of Equities, Business Week 13 Aug 1979
https://ritholtz.com/1979/08/the-death-of-equities/
I love that article - I've shown it to literally dozens of people over the years. It's a great example of how the media often gets it wrong about predicting any sort of economic metrics. "The Death of Equities" should have been titled "The Birth Of One Of the Greatest Bull Markets Of All Time".

My other favorite (which I can't seem to find a link to) was USA Today's Headline: "Day by Day Dow Slips Away" with no end in sight. It listed all the predictions for it to go much further down with a pretty graph to convince you. That day, however, market the bottom. Dummies.

Like I said in my post, SEVERE inflation aside, stocks do a great job keeping pace with inflation.

The Old Man
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Re: Safe withdrawl rate & lifespan

Post by The Old Man » Mon Dec 24, 2018 9:30 am

arcyallen wrote:
Mon Dec 24, 2018 9:11 am
Like I said in my post, SEVERE inflation aside, stocks do a great job keeping pace with inflation.
As the linked article explains, stocks did terrible in the 1960s-70s.

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prognastat
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Re: Safe withdrawl rate & lifespan

Post by prognastat » Mon Dec 24, 2018 11:51 am

The thing to keep in mind is that no one knows how many years they have left. There's even people that have a terminal illness and are told they have a limited time to live there are enough cases where people end up living far longer to keep in mind that although it's likely you won't live longer it is still a possibility you may and due to this I wouldn't raise SWR.

arcyallen
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Re: Safe withdrawl rate & lifespan

Post by arcyallen » Tue Dec 25, 2018 12:45 pm

The Old Man wrote:
Mon Dec 24, 2018 9:30 am
As the linked article explains, stocks did terrible in the 1960s-70s.
Perhaps I'm not hearing you clearly or I'm not being clear. I keep saying that aside from those severe inflation periods stocks DO keep up with inflation. Are you suggesting that, SEVERE INFLATION ASIDE (that includes the late 60's and 70's) that stocks haven't kept pace with inflation? That's what you original post seemed to suggest.

The Old Man
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Re: Safe withdrawl rate & lifespan

Post by The Old Man » Tue Dec 25, 2018 6:41 pm

arcyallen wrote:
Tue Dec 25, 2018 12:45 pm
… SEVERE INFLATION ASIDE (that includes the late 60's and 70's) that stocks haven't kept pace with inflation?
The 60s and 70s were not severe inflation.

Nomad
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Re: Safe withdrawl rate & lifespan

Post by Nomad » Sat Jan 05, 2019 8:36 am

The figures I use are based on current age, the results are similar.
at 20 spend 2%
at 40 spend 4%
at 60 spend 6%
at 80 spend 8%

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Tyler9000
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Re: Safe withdrawl rate & lifespan

Post by Tyler9000 » Sat Jan 05, 2019 1:35 pm

This calculator will let you quickly generate the same chart for any asset allocation you like: https://portfoliocharts.com/portfolio/withdrawal-rates/

Enjoy! :)

Nomad
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Re: Safe withdrawl rate & lifespan

Post by Nomad » Sat Jan 12, 2019 11:54 am

Tyler9000 wrote:
Sat Jan 05, 2019 1:35 pm
This calculator will let you quickly generate the same chart for any asset allocation you like: https://portfoliocharts.com/portfolio/withdrawal-rates/

Enjoy! :)
Do I need to subtract inflation from this number or is it already included?

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Tyler9000
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Re: Safe withdrawl rate & lifespan

Post by Tyler9000 » Sat Jan 12, 2019 1:39 pm

Nomad wrote:
Sat Jan 12, 2019 11:54 am
Do I need to subtract inflation from this number or is it already included?
Inflation is already included, but you do need to subtract any recurring fees or expenses from your investments.

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