safe withdrawal rate

[LivingAlmostLarge]

Everyone talks about the 4% withdrawal rate and how it is to ensure you never run out of money for 30 years. But why are we preserving principal? I ask this most seriously. Instead of having enough to "outlive your portfolio" what if you retired and you planned on spending most of it leaving a 10% buffer or 20%?

What would happen if you didn't save as much and so you planned on tapping principal? I mean let's say you live on $40k/year so $1M traditionally. But what if instead you had $800k and withdrew 5%. And you were 45. Then you planned on getting SS at 62 and 70. You needed 17 years of $40k year before it went down. 17 X $40k = $680k. Why would you need more? And then SS gets into the equation and you still have $120k portfolio (assuming no gains above 5%) and you get $10k/year SS. Then you draw $30k year for the next 3 years and you'd fall short of the age 70, but that's assuming 0 gains throughout the 20 years. Also if you backstopped it with at age 45 a paid for home and the $40k is just pure spending you could make cuts along the way.

But even if you didn't, what would be the possibility of needing less to retire? And instead you are dying with almost nothing. Why do we need to preserve our portfolio?

[disneysteve]

Why do we need to preserve our portfolio?

We don't know how long we will live, what the market will do, what inflation will do, what expenses we will incur, etc. There are a lot of unknowns. You can figure out that 5 or 6% WR works if you live to 90 but what happens if you live to 100? What if you end up needing long term care? What if your spouse dies so you lose their SS income?

The bottom line is we can run all the retirement calculators we want but they are all based on past performance and averages. Nobody can predict the future. Given the choice, I'd rather end up with too much money than not enough.

[srblanco7]

Everyone talks about the 4% withdrawal rate and how it is to ensure you never run out of money for 30 years. But why are we preserving principal? I ask this most seriously. Instead of having enough to "outlive your portfolio" what if you retired and you planned on spending most of it leaving a 10% buffer or 20%?

What would happen if you didn't save as much and so you planned on tapping principal? I mean let's say you live on $40k/year so $1M traditionally. But what if instead you had $800k and withdrew 5%. And you were 45. Then you planned on getting SS at 62 and 70. You needed 17 years of $40k year before it went down. 17 X $40k = $680k. Why would you need more? And then SS gets into the equation and you still have $120k portfolio (assuming no gains above 5%) and you get $10k/year SS. Then you draw $30k year for the next 3 years and you'd fall short of the age 70, but that's assuming 0 gains throughout the 20 years. Also if you backstopped it with at age 45 a paid for home and the $40k is just pure spending you could make cuts along the way.

But even if you didn't, what would be the possibility of needing less to retire? And instead you are dying with almost nothing. Why do we need to preserve our portfolio?

As I recollect, the initial study by Bill Bengen that determined a 4% safe withdrawal rate was based on a number of assumptions, including 60/40 portfolio, withdrawal escalated annually for inflation, and a 30 year time horizon. Interestingly, the worst case scenario was not retiring just prior to the great depression, but rather in the late 60s, which meant you were retiring into a period of low stock market returns and high inflation. Under this "worst case" scenario, the portfolio did not preserve principal - though under some/many scenarios a 4% safe withdrawal rate not only preserves principal but also results in portfolio growth.

There are a multitude of variables that can affect SWR - suggest checking out earlyretirementnow.com which has an entire series of posts related to safe withdrawal rate. You can also use firecalc to model safe withdrawal rates, the impact of social security, different time horizons, and decumulation spending models (e.g., constant spending power, % of remaining portfolio, etc.).

Ultimately, there are a multitude of variables to take into account with early retirement, with principal preservation being just one of many. Personally, I'd rather have too much (and leave a bequest to my heirs) than not enough...

[scfr]

The "risk" of having too much at death = family members and charitable organizations get some money when I die.

The "risk" of having too little when nearing end of life = I could get pretty graphic about this if you want me too. But I'll leave more to the imagination and instead ask how one would pay for assistive devices, prescription costs not covered by Medicare, incontinence supplies, home and personal care assistance, etc, etc, etc? When you have to pay someone to come to your house to cut your toenails (because you can no longer do it yourself)? If you don't have the physical flexibility to do that, imagine what else you can't do . . .

I've experienced family members die leaving a bit of money for heirs. And I'm experiencing YOLO family members who are now only able to cover pretty basic needs with lots of help.

I know which one I choose.

[bjl584]

I guess if you knew exactly what your expenses would be for the duration of your retirement, and you knew the exact day you were going to die, then you could run right to zero.
Unfortunately, no one knows that.
I'd rather be in a place where the money never runs out than trying to figure out exactly how much I'll need.

[corn18]

The safe withdrawal rate is based on historical returns since 1881. The 4% rule actually fails 5% of the time. This is due to the sequence of returns being poor. The worst year to retire was 1969. The average real return for that period for a 60/40 portfolio was 5.6% Plug that into any straight line retirement planner and you are rich. The problem is the first 15 years sucked and the second 15 years were better. If you take 1938, the average real return was 6.4% but you had a 100% chance of success and you would end up with way more money at the end than when you started. This is because the first 15 years were good and the last 15 years were bad.

When you decide to retire, you have to decide what you are comfortable with. The folks on bogleheads and earlyretirement are uber conservative. They are targeting a 3% WR. Many of them that are retired are at 2% or less WR. They think that's great. I think they worked too long. They are aghast when I tell them my current WR is 6% or higher. If we don't change anything, our probability of success per firecalc is 75%. That means there is a 25% chance we will run out of money. I'm ok with that. Once SS starts at age 70 (I am 56) we don't need anything more than my military pension and SS which is $114k/yr in today's dollars. So we are willing to spend money on going to see our daughter in S. Korea and flying business vs. cattle class. Or clearing and sodding the back yard so our dog has a place to play. So, we are living by this for the next few years:

“Life is not a journey to the grave with the intention of arriving safely in a well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming, “Wow what a ride!”