Psychological withdrawal rate

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prudentelo
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Psychological withdrawal rate

Post by prudentelo »

Long lurker, short poster. Finally I think I have something to add to the discussion.

"Psychological withdrawal rate" is as important as "safe withdrawal rate." This is the withdrawal rate where you are psychologically willing to living on financial assets.

For many people, PWR is much higher than SWR. So for some people PWR is like 400%. That means these people are willing to quit their job without a plan with three months expenses in the bank. Many people do this.

Retirement on financial assets becomes possible when PWR is higher than SWR. Danger occurs when PWR is a bit higher than SWR, like 5%. These are people who may do OK for a while and then run out of money at age of 60. FIRE people seem to have a PWR of 0-5% usually.

If you have very low PWR, retirement is never possible because you will never be satisfied you are safe. In this case, pointless to accumulate financial assets.

Retirement requires:

WR < SWR
PWR > WR

ERE should increase PWR, because ERE reduces dependence on money in general, but I see a lot of FIRE and ERE online community have very low PWR. Maybe high PWR people with renaissance skills become entrepreneurs and either become millionaires or blow up.

So PWR might be a bigger barrier to retirement than SWR. What are some techniques for increasing PWR?

Gilberto de Piento
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Re: Psychological withdrawal rate

Post by Gilberto de Piento »

This seems like a helpful distinction to make.

One technique for increasing PWR I've seen mentioned is to do a dry run. For example, to live off of investment income for a period of time before quitting a job. If the dry run works then it will increase confidence that investment income is enough.

7Wannabe5
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Re: Psychological withdrawal rate

Post by 7Wannabe5 »

I agree that this is an important distinction. I am definitely waaaay higher PWR than most members of this forum. I am actually a pretty pleasant person who would be welcomed back anywhere I’ve been employed or otherwise financially supported, but really who needs FU money if you have FU attitude, a half baked scheme and a belly full of optimism. A whole lot can happen in 3 months!

I think variations in PWR are in part inherent, but can also have to do with sunk costs, with positive feedback loop attached.

Dave
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Re: Psychological withdrawal rate

Post by Dave »

I really like the nuance added here, thanks prudentelo.

We've seen dramatic differences in folks' PWR here over the years, and the comparing of the different withdrawal rates is a neat model to frame these situations.

steveo73
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Re: Psychological withdrawal rate

Post by steveo73 »

prudentelo wrote:
Tue Jan 25, 2022 3:10 pm
"Psychological withdrawal rate" is as important as "safe withdrawal rate." This is the withdrawal rate where you are psychologically willing to living on financial assets.
Good concept.
prudentelo wrote:
Tue Jan 25, 2022 3:10 pm
Retirement on financial assets becomes possible when PWR is higher than SWR. Danger occurs when PWR is a bit higher than SWR, like 5%. These are people who may do OK for a while and then run out of money at age of 60. FIRE people seem to have a PWR of 0-5% usually.
I get what you are trying to state it but it's overestimating the value in WR's and SWR's. WR's are estimates because you are estimating your expenses. The best I think you can do is track your expenses and track your FI assets. Then if you feel uncomfortable whilst retired do something about it.

At the end of the day though you can't estimate your expenses for the rest of your life perfectly. I'm on a 5% WR and I put money on it my 5% is safer than a lot of people's 3% WR.
prudentelo wrote:
Tue Jan 25, 2022 3:10 pm
So PWR might be a bigger barrier to retirement than SWR. What are some techniques for increasing PWR?
To me this is where the value lies in your concept.

Here is my take:-

1. You have to recognize that WR's are inherently unreliable because your ability to predict future expenses is inherently unreliable.
2. Factor into your thinking that you will die. It's not just the risk of running out of money. https://engaging-data.com/will-money-last-retire-early/
3. You should understand that no WR can ever be safe. A SWR can't protect you from nuclear war or the zombie apocalypse.
4. Understand that there are costs associated with lowering your WR. Once you can get to a 6% WR you have about a 50% chance of making 30 years. If you get to 5% your money on average will last forever. If your idea of a SWR is below 5% you probably aren't being rational. If anything you are risk averse if you get to 5%.

--> I suppose the key point is to actually understand the math.

Tyler9000
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Re: Psychological withdrawal rate

Post by Tyler9000 »

prudentelo wrote:
Tue Jan 25, 2022 3:10 pm
ERE should increase PWR, because ERE reduces dependence on money in general, but I see a lot of FIRE and ERE online community have very low PWR. Maybe high PWR people with renaissance skills become entrepreneurs and either become millionaires or blow up.

So PWR might be a bigger barrier to retirement than SWR. What are some techniques for increasing PWR?
Welcome! I apologize in advance for my book of a post, but this is an Interesting topic. :D

I admit that the use of the acronym PWR breaks my brain a bit because I know it as "perpetual withdrawal rate" which also applies here. So to keep my thoughts straight I'm going to use PsyWR for the psychological version and PerWR for the perpetual version.

I've had the honor of interacting with lots of people on withdrawal rates over the years and have been able to see all types of reactions. Here are some of the most common stumbling blocks I've seen in terms of accepting larger PsyWRs, and some techniques I've learned to help. You can perhaps think of them as PsyWR Wheaton levels.


0. Knowing that withdrawal rates even exist. So many people go through life without even considering the possibility of living off of their own money, and their PsyWR is essentially negative. The best solution here is casual conversation about the basic concepts. Don't push or evangelize. Just make it seem normal.

1. The vast majority of people have an inherent hangup that holds them back from even thinking financial independence is possible. Often it's some combination of careerism ("My job is my identity. Why would I retire?"), kids ("That sounds great, but I have a family to support."), or personal/political defeatism ("It's impossible because the system is stacked against me"). This is where most of the early retirement blogs play, as they speak to different types of people and try to set good examples. The key here is to find the right niche resource for each person that will address their own unique mental barrier, as pointing someone to a blog that seems out of touch to their own personal concerns will cause them to dig in even deeper.

2. Most people never make it this far, but those that do often go through an excitement phase where the PsyWR is way too high and they just want to quit today, make drastic life changes, and run wild with a dangerously high SWR. That's where I usually tell a few stories about focusing on a sustainable strategy and start dipping the toes into how the math actually works.

3. For those that understand the SWR concept and even have the money to make it work, the single group that seems to have the hardest time raising their PsyWR above a painfully conservative 1-2% is the dividend investing crowd who see investing through the lens of income. "I earn X now, so I need my investments to pay me a regular X in dividends and interest to pay the bills." Trying to explain that it's actually perfectly safe to sell small chunks of those stocks generally doesn't connect. I've had better luck talking about perpetual withdrawal rates that are designed to maintain inflation-adjusted wealth in perpetuity (instead of spending it down to zero), as that usually falls closer to their mental model of maintaining the financial status quo.

4. Even those that know the SWR concepts extremely well often fall into the trap of thinking that the 4% rule is some immutable law of the universe. Often these are highly intelligent people who have a strong respect of "expert" authority without getting into the details themselves. That's sortof my wheelhouse of explaining all of the different assumptions involved in the calculations and pointing people towards the idea that they can raise or lower that number with their own investing choices. Dig into the data, and the true SWR may actually be higher than the PsyWR even for confident retirees.


As I think about my own journey through those psychological steps, I do think there's a relatively common theme that the people who make it to the higher levels share a sense of confidence navigating the unknown. Those who need an expert to tell them exactly what to do in order to not fail probably won't hold on through their first experience with adversity, and their low PsyWR will be a trigger to run back to old career habits. But those who are comfortable with the idea that "I'm actually not sure what will happen but I'm confident I'll figure it out" tend to have higher PsyWRs. That's where concepts like ERE really shine, as the focus on a larger web of goals makes people way more flexible and less focused on singular paths to success.

I suspect this is also why there's a particularly high percentage of engineers in the FIRE community. If it was just about intelligence and income, you'd see lots of retired doctors, lawyers, and bankers too. But you generally don't, and they often don't even get past step 1. My theory is that it's because they're trained to follow hard rules and procedures (medical studies, case law, financial regulations, etc). But engineers (especially those in design fields) are often a lot more comfortable navigating the unknown and inventing novel solutions to hard problems. So where others see a dead end, engineers see a design challenge. The PsyWR is thus a function of one's creative confidence.

Scott 2
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Re: Psychological withdrawal rate

Post by Scott 2 »

I like the concept. A few factors moved my needle:

1. Running plots on a rich broke dead calculator. Balancing risk of death with risk of broke is sobering.

2. Experiencing loss of ability to do things with age. Each phase of life brings unique opportunities - gone forever by 65.

3. Observing the experience of people who get dealt a below average hand. Bodies malfunction all the time. It could absolutely be me. Extra money has very little impact on most of those failure states. Maybe working 10 more years lets me make it an extra 3 years before assisted living drains me? That's a bad deal, IMO.

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Sclass
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Re: Psychological withdrawal rate

Post by Sclass »

A lot more working people I know could retire today if they were comfortable with a WR higher than he industry accepted SWR. The tiny single digit SWR is some kind of fantasy where you die without depleting your capital.

If you can get over the fear of dying broke (as opposed to living broke) you can draw down much higher amounts of capital. Half a million USD can last a long time if you draw to zero while earning a return a few points shy of your WR.

There is some kind of psychological barrier here. I guess after saving up a big nest egg people aren’t comfortable reversing course.

@Tyler I think you’re giving too much credit to engineers. I’ve known a lot and I’d say 98% would not live up to your expectations. Early retirement is admittedly an engineering problem of sorts but given my experience in engineering most engineers cannot define and solve real engineering problems easily. Perhaps it’s the way universities filter for them.

The most common issue I see is they try to stick to known good solutions and seek to eliminate uncertainty.

jacob
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Re: Psychological withdrawal rate

Post by jacob »

Methinks a lot of engineers get stuck optimizing within their construct (WL5) w/o ever questioning it. Making the best of handed-down equations without questioning those very equations.

Laura Ingalls
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Re: Psychological withdrawal rate

Post by Laura Ingalls »

Scott 2 wrote:
Wed Jan 26, 2022 2:28 pm
I like the concept. A few factors moved my needle:

1. Running plots on a rich broke dead calculator. Balancing risk of death with risk of broke is sobering.
Yep as much as I play with it the dead slice just keeps growing and growing.

Tyler9000
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Re: Psychological withdrawal rate

Post by Tyler9000 »

That's fair. I'm probably suffering from my own bubble a bit, as the types of engineers I've spent my career working with are admittedly at least a standard deviation high on the creativity bell curve. I've known plenty of equation-followers, too. So maybe my point is more about personality than career. Some people are just more comfortable than others with their own ability to navigate uncertainty.

WFJ
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Re: Psychological withdrawal rate

Post by WFJ »

My PWR is much lower than the standard SWR, but mostly due to the understanding that long duration estimations are fraught with hazards. If one builds their own simulation program and just slightly plays with the assumptions underlying the 4% rule (volatility and shape of distribution of returns), most plans will bust. This is not including Black Swans which by definition, nobody can predict. If returns are more volatile or slightly non-normal, skewed or fat tails, all estimations become unreliable and can leave one is big trouble, young and broke.

My own personal strategy has been to work when my (income/hour) is near a global maximum and coast FIRE when (income/hour) is near a global minimum. My utility of leisure in the aftermath of the dotcom bust or GFC or possibly the next crises is not less or more than if enjoyed during times of financial booms. I did not plan this, but was coast FIRE from 2002-2005, 2007-2011 and likely to FIRE once again (2022 -2024 when WFH ends and travel opens up) and might be associated with another financial dislocation.

Didn't know of the 4% rule until recently and kind of perplexed how many accept this as a reliable estimate when so many parameters used in the estimation will not be constant in the future. Stats people are very reluctant to make any point estimate and assume this is more of an engineer's perception that there is a "right answer" and not a spectrum of answers with a variety of probabilities (stats), estimate the probability something is not random.

Don't know if there is a WORK/FIRE/WORK/FIRE type strategy as opposed to the _% hurdle goal, but this is what I've done and know of others who follow this strategy.

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Lemur
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Re: Psychological withdrawal rate

Post by Lemur »

Not sure if the chicken or the egg comes first here. Does career choice impact your PsyWR or does a persons psychology make them choose a different quadrant from the outset. The PsyWR is shaped?

Another factor effecting PsyWR is where you're currently at in your career or business (salaryman / businessman respectively). I think these two might have a lower PsyWR whereas the working man and Renaissance-man have a higher PsyWR. The latter two groups are more flexible and are used to the unknown dealing with income/savings.

Take for instance the salaryman making above median income or into the 6 figures. They're at a 4-5% SWR right now. Very hard to shut off that money stream when this is all you know! This leads to a feedback loop of being conservative (what if this happens and so on and so forth). For a businessman, it gets a little easier because you could always sell the business but you've also been raising that baby for a long time and unless you're selling it for true FU money, there is probably some connection you've with holding on. With the working man, they're always used to having periods of high work and low work and they've gotten practice on living off savings.

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Ego
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Re: Psychological withdrawal rate

Post by Ego »

Tyler9000 wrote:
Wed Jan 26, 2022 12:24 pm
I do think there's a relatively common theme that the people who make it to the higher levels share a sense of confidence navigating the unknown.
+1

I also believe it is a function of the number of years a person held a "secure" position. A young person is still bold, perhaps recklessly so. Middle age brings level headedness (for some of us) but a decade or more of earing a safe paycheck saps boldness or confidence. Later in life fear of the unknown dissipates naturally with experience and a larger nest egg.

Image

ETA: That's why I believe it is important to quit before the rapid upslope, otherwise the temptation to buy rather than make solutions is imbedded.

George the original one
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Re: Psychological withdrawal rate

Post by George the original one »

WFJ wrote:
Thu Jan 27, 2022 12:16 am
Didn't know of the 4% rule until recently and kind of perplexed how many accept this as a reliable estimate when so many parameters used in the estimation will not be constant in the future.
Realize that Bengen developed the 4% rule only for a 30-yr retirement at the standard age of 65. It's been co-opted by the RE and ERE crowd as a handy shortcut with the understanding that one has options before age 65 when it doesn't go according to plan (cutting expenses, returning to work, runaway portfolio, etc).

ducknald_don
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Re: Psychological withdrawal rate

Post by ducknald_don »

Lemur wrote:
Thu Jan 27, 2022 10:11 am
Take for instance the salaryman making above median income or into the 6 figures. They're at a 4-5% SWR right now. Very hard to shut off that money stream when this is all you know! This leads to a feedback loop of being conservative (what if this happens and so on and so forth). For a businessman, it gets a little easier because you could always sell the business but you've also been raising that baby for a long time and unless you're selling it for true FU money, there is probably some connection you've with holding on. With the working man, they're always used to having periods of high work and low work and they've gotten practice on living off savings.
Actually I think it's the businessman who will be most used to the feast and famine. That has certainly been my experience. It rarely dries up completely but you are subject to the whims of the market.

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Lemur
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Re: Psychological withdrawal rate

Post by Lemur »

ducknald_don

When I thought of businessman, I think of the ones running a well oiled machine with positive and stable cashflows. Similar to the salaryman in a way.

I see the feast/famine as more the entrepreneur types. I guess that would still put them in the businessman quadrant though so I see where you're coming from.

steveo73
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Re: Psychological withdrawal rate

Post by steveo73 »

Lemur wrote:
Thu Jan 27, 2022 10:11 am
Take for instance the salaryman making above median income or into the 6 figures. They're at a 4-5% SWR right now. Very hard to shut off that money stream when this is all you know!
I reckon it's all psychological. This is exactly what I did and I quit no problems at all.

I think the issue when earning good money is simply lifestyle inflation/consumerism. My wife would go out for coffee with friends and they would talk about getting a pool or a new kitchen or whatever. My mum is continually renovating her house and going on holidays. That lifestyle becomes normal and being different is hard.

steveo73
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Re: Psychological withdrawal rate

Post by steveo73 »

Tyler9000 wrote:
Wed Jan 26, 2022 12:24 pm
Dig into the data, and the true SWR may actually be higher than the PsyWR even for confident retirees.
A 5% WR on average lasts forever.

A 6% WR on average lasts 30 years.

--> this is without any adjustments.
Tyler9000 wrote:
Wed Jan 26, 2022 12:24 pm
I do think there's a relatively common theme that the people who make it to the higher levels share a sense of confidence navigating the unknown
Maybe but I think it's more about not understanding the data especially at a high level.

The problem is your expenses are not set and your portfolio will also have a massive impact on future performance.

I mean if you have a 2% WR living in mum and dads basement (artificially low expenses) and you are 100% in crypto (a customized portfolio) I'd recommend never quitting work.

I'd ask different questions:-

1. Do you have a good handle on your expenses ? Are your current expenses realistic over the course of your lifetime ?
2. Do you have a simple 3 fund or similar portfolio based around index funds ?
3. Do you have any buffer ?

prudentelo
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Re: Psychological withdrawal rate

Post by prudentelo »

I think there is one psychological factor leading to very low WR other than fear of being unable to meet expenses.

That is desire for progression.

With a "runaway portfolio" one can get the feeling of "promotion" over time that often comes with a hierarchical salary job, by increasing the networth passively.

A sense of improving one's condition is important to many people, even if they don't need to do so to satisfy their wants.

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