Highest Succesful Withdrawal Rate

[Nomad]

I am very curious as to what is the highest withdrawal rate anyone has gone with successfully for a number of years?

I know 4% is considered pretty safe for 20 years or so using a diversified index-tracker strategy.
However, if someone is very confident in a more complex approach, have they managed to without more per year without reducing their
principle?

[Fish]

Here’s one example of a maximum withdrawal rate study. Assuming 3% COLA, it concludes that a WR of 9-10% could have been sustained over a 25-year timeframe using historical data 1970-2014.

https://retirementincomejournal.com/art ... rspective/

[ertyu]

Basically you need to begin at the bottom of a mkt through, before a major bull mkt. Which is... the exact opposite of now

[IlliniDave]

Without reducing principle is a tough standard. All the Trinity and similar studies are based on not depleting principal entirely, so really aren't comparable. Best bet would be to look at the early 1980s when interest rates were really high, and dividend yields were pretty high too.

[jacob]

Back in the pre-Trinity days FIREs would calculate their target withdrawal rate based on spending/networth and try to create an investment plan that met that demand. In the 1990s it was not uncommon to target 8-10% which was similar to the short-run US equity growth rates (say 1980-2000). The dumb ones pursuing such a strategy would probably have failed more often than not. The smart ones would have adjusted their spending accordingly thus changing the parameters of the original challenge.

To get a theoretical answer, you could just use firecalc and put in various WRs for a given duration (30,40, 50 years..) and see how high you can get the WR before you hit a 100% failure rate.

[Nomad]

@fish
That is an interesting link, they are some very respectable returns. Gives me itchy feet.

[Nomad]

@ertyu

That is one thing I'm concerned about, but with the 'right' diversification and asset classes - whatever they are - maybe this wouldn't be an issue.

[jacob]

For a 50 year retirement, firecalc, says that the maximum WR for the luckiest year was 9.3%. That was a bit of an outlier though. With that amount of aggressiveness, the first portfolios started failing after 8 years with half of them (eyeballing) being depleted after 12-15 years.

[Dream of Freedom]

Of course, the market has performed remarkably well over the last ten years. Anyone trying a higher withdraw rate could have done so successfully. So someone could say that they have a 4%+ wr. That may have been working. That doesn't make it prudent.

[classical_Liberal]

If the definition of success is to never touch original principle, then you have to be flexible in some other way. Otherwise it's kind'a a crapshoot, even with the most stable portfolios. In today's environment it's like getting a 16 against a dealer's face card in blackjack. You might hit and get a 4 or 5 (good investment choices), or the dealer may be hiding a 6 (unforeseen economic boon), but obviously the odds are pretty low.

Wrt flexibility. A couple years ago I was running a ton of historical sims, and found that treating any gains as cashflow, only withdrawing when you had them, made a massive difference. The caveat is when returns were negative you had to have another source of cash flow. For example, I found 6% WR successful in several portfolios, per my definition of never below 80% of original principle, as long as withdrawal only took place after positive return years (ie >0). The mean number of withdrawal years was 23 with data back to the 1920's. On average one would have to figure out a different source of cash flow 7 of 30 years. A different way than most here would look to be flexible for sure, but it works.

[jacob]

(I didn't notice the part about not reducing principle)

A typical approach to higher "WRs" is leveraged real estate. Here the cap rates can be on the order of 10%+ (on cash down after leverage) which works splendidly as long as real estate always goes up!

[Nomad]

@jacob
I've checked out FIRECalc, and it is a lot more useful than the last time I tried it.
I could touch the principle if I factor in a very large window e.g. until aged 100. That should give sufficient leeway.

[Lucky C]

@Nomad you mentioned 20 years. Per cfiresim.com, 11% is the max to end up with more than what you started with after 20 years, in only two starting years out of the entire history,1921 and 1982 (default settings with 75/25 stocks/bonds). CAPE is currently over 5x the CAPE average of 1921 and 1982, and bond yields are about 1/5th the average of those high-yielding years.

Therefore as an easy way (but certainly not the best way) to estimate safe withdrawal rate today, using US stocks and US bonds, you could say 11%/5 = 2.2%. However also note that profit margins are now historically high, and population and productivity growth should be slower than in the 20th century. So maybe > 2% safe withdrawal rate is too optimistic at this point in time.

But if you're one of the top investors in the world, you could be getting in excess of 20% CAGR, at least based on top investors in the US in the 20th century. Here is a post showing returns of two of the best, Walter Schloss and Warren Buffett. In the decades shown, they never had big drawdowns, but inflation was high, so maybe a 15% withdrawal rate would be possible to preserve principal and account for inflation with a 21% CAGR. I've seen sources that say Schloss has maintained 20% returns for over 45+ years, so he has one of the longest track records of significantly beating the market of any investor. So just be like him.

[5ts]

Sticking to one fixed withdrawal amount for the entire run seems insane and anti-ERE. Wouldn't it make more sense to have a few percentage points of flexibility up or down? Why not couple that with the willingness to return to some form of work if things start to go really bad? Seems like that approach would cover a lot more scenarios than just picking a set withdrawal rate with no deviation.

In other words, the withdrawal rate is a guideline and not a fixed rule. Hasn't Jacob taught us this?

[Jin+Guice]

Interesting thread. If the goal is to work as little as possible, then, assuming a few other things, having the highest withdrawal rate possible equals 100% success and ending with no reduction in principle is a failure.

[Nomad]

@5ts
I reckon the amount I spend could be reduced or increased to match the investment performance of the proceeding period.
I'm just curious however, what that is likely to be in real-world terms.

[5ts]

@Nomad
I understand, and deeply appreciate, by the way, what you are trying to do. But we are using the past to predict the future in a time of unhistorical social and technological change. We need a guideline, which is why 4% became that guideline, but we can't really be sure what worked in the past will work in the future. And I think we are overstretching our wings when we try to prise the maximum withdrawal from that same unreliable past.

Nomad, I do not want to rain on your parade. I just want us to be sensible about this. Regardless, I wish you great success.

[Bankai]

If you are a UK index investor chances are you will get about average historical returns going forward considered valuations are not demanding. FTSE100 dividend yield is about 4%, add to that predicted economic growth of 2-3% and you can bank 6-7% real returns over the next decade or so. With paid off house and healthcare covered by NHS 4% should be safe at 4% - if your expenses are typical 50/50 needs/wants, you could cut them in half during bad years getting your WR down to 2%. Assuming average performance you could live off dividend and still grow NW by 2-3% pa. Or just go for 7% and accept real possibility of picking up a job here or there if required.

[classical_Liberal]

I'm just curious however, what that is likely to be in real-world terms.

Tyler9000's portfolio charts has a UK setting. Go over there and see what it looked like historically.

BTW, I'm a huge fan of this type of thinking. Use your ROI from financial capital when you have it, use other forms of cash flow when you don't. This is a really flexible and robust way to look at ERE. Plus it keeps life interesting.

[ertyu]

working for money in a downturn

why are you guys so cavalier, I can't fathom it. So when unemployment is at a historical high and people are getting laid off left and right, you're gonna go find a job? With your CV gap? Sometimes I wonder if people here actually remember what a proper, actual recession is like. Go ask a young person in Spain or Italy, or someone from Venesuela, or someone who lived through the transitions of the formerly planned economies. Or read the history of the great depression.

Anyway, please whoever's thinking of withdrawing 9% 'cause they'll just get a job when the market tanks - it's your life so you can blow it up if you want to, but please don't.