Safe Withdrawal Rates

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drumminj
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Safe Withdrawal Rates

Post by drumminj » Sat Feb 06, 2021 7:13 am

Tyler wrote:
Fri Feb 05, 2021 9:47 pm
BTW, if you're running a PP the equivalent SWR is closer to 5% than the 4% the classic studies found by only looking at stocks and bonds. So you may be even farther along than you realize. Congrats!
Does everyone here think these SWRs still hold true in the current climate?

My SO and I are on the glide path to soft-retirement (likely still work, but at least taking time off to disengage and figure out what will make us happy)....I think by Tortoise's description, we're at FI level 3. My model assumes 3% return on our savings, and a 25% effective tax rate -- that should cover our expenses.

The part I struggle with is whether it's still valid to model 3-4% return, or SWR/PWR, with rates so low, assets seeming so bubbly, etc.

Thoughts?
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Safe Withdrawal Rates

Post by Kriegsspiel » Sat Feb 06, 2021 7:55 am

drumminj wrote:
Sat Feb 06, 2021 7:13 am
Tyler wrote:
Fri Feb 05, 2021 9:47 pm
BTW, if you're running a PP the equivalent SWR is closer to 5% than the 4% the classic studies found by only looking at stocks and bonds. So you may be even farther along than you realize. Congrats!

My SO and I are on the glide path to soft-retirement (likely still work, but at least taking time off to disengage and figure out what will make us happy)....
The term du jour is 'semi-ER.' I guess I've also been doing a version of this for years. It's great.
I think by Tortoise's description, we're at FI level 3. My model assumes 3% return on our savings, and a 25% effective tax rate -- that should cover our expenses.

The part I struggle with is whether it's still valid to model 3-4% return, or SWR/PWR, with rates so low, assets seeming so bubbly, etc.
Does everyone here think these SWRs still hold true in the current climate?

Thoughts?
IMO 3% is totally fine. Especially if you're well diversified, and especially especially if you have some slack in your budget. I wouldn't feel good about 100% VTSAX or 100% gold & silver and other super concentrated portfolios, but I can't see a huge diversified war chest going wrong. There are things outside of your control, but you know... set yourself up for success and hope for the best.
You there, Ephialtes. May you live forever.
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Safe Withdrawal Rates

Post by mathjak107 » Sat Feb 06, 2021 8:33 am

drumminj wrote:
Sat Feb 06, 2021 7:13 am
Tyler wrote:
Fri Feb 05, 2021 9:47 pm
BTW, if you're running a PP the equivalent SWR is closer to 5% than the 4% the classic studies found by only looking at stocks and bonds. So you may be even farther along than you realize. Congrats!
Does everyone here think these SWRs still hold true in the current climate?

My SO and I are on the glide path to soft-retirement (likely still work, but at least taking time off to disengage and figure out what will make us happy)....I think by Tortoise's description, we're at FI level 3. My model assumes 3% return on our savings, and a 25% effective tax rate -- that should cover our expenses.

The part I struggle with is whether it's still valid to model 3-4% return, or SWR/PWR, with rates so low, assets seeming so bubbly, etc.

Thoughts?
Kitces did the math .

For 4% to hold you need at least a 2% real return average the first 15 years of a 30 year retirement .

Of course you may end the 30th year with a buck .

All the worst time frames he found which were 1906 ,1927 , 1937 ,1965 and 1966 had the failures occur because the first 15 years left to little to late even though the 30 year records were better.

What would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%
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Safe Withdrawal Rates

Post by Tyler » Sat Feb 06, 2021 11:09 am

drumminj wrote:
Sat Feb 06, 2021 7:13 am
Does everyone here think these SWRs still hold true in the current climate?
...
The part I struggle with is whether it's still valid to model 3-4% return, or SWR/PWR, with rates so low, assets seeming so bubbly, etc.

Withdrawal rates are based on worst case scenarios, so they're already way more battle tested than most people realize. But the full answer is that it depends on the portfolio.

There's no rule of nature that prevents recent economic events from setting a new low withdrawal rate for a portfolio, and I do have a good tool for keeping up with that. Every blue line on the Withdrawal Rates chart tracks the evolving safe withdrawal rates for a single investing year since 1970. The orange line tracks the worst-case scenario.

See the shorter lines with visible endpoints? Those are from retirement periods starting less than 30 years ago. In the default 60/40 portfolio, they're all well above the orange line. That's visual proof that nothing recent is approaching the historical worst case for that portfolio.

Now change the settings to 100% USA-LCV. The shorter lines crossing the longer ones mean that more recent retirement years are setting new lows, and the dotted orange line is my effort at projecting where the SWR will end up once we have a full 30 years of data to study. So yes, large cap value investing is a lot tougher now than it used to be.

For comparison, check out the same chart for the Permanent Portfolio. See how tightly bunched all of the lines are in comparison? That illustrates just how incredibly consistent the PP has been over time, and there's zero evidence that the WRs will be shooting off the rails any time soon.
Last edited by Tyler on Sat Feb 06, 2021 11:25 am, edited 1 time in total.
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Post by mathjak107 » Sat Feb 06, 2021 11:25 am

But as we discussed the standardized worst case scenarios for stress testing the proverbial 4% swr are all pre 1970.....nothing after 1966 was as bad ....1965 and 1966 are the poster children for the historical worst case ...
Last edited by mathjak107 on Sat Feb 06, 2021 11:38 am, edited 1 time in total.
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Post by Tyler » Sat Feb 06, 2021 11:28 am

mathjak107 wrote:
Sat Feb 06, 2021 11:25 am
But as we discussed the standardized worst case scenarios for stress testing the proverbial 4% swr are all pre 1970.....nothing after 1966 was as bad
For the traditional stock/bond blends where those specific worst-case start years apply, the difference between a SWR measured since 1970 and 1870 is still only about 0.3%. I have the data here, including charts pulled straight from Kitces.
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Post by mathjak107 » Sat Feb 06, 2021 11:48 am

But remember ,using the Shiller data set going back to 1870 4% swr actually failed in 1965 /1966 as well as 3 other time frames .

A 5% draw would fail even worse .which it did , it failed 39 30 year cycles to date .

A 60/40 failed to pass some of those worst case scenarios . 5 of them failed

FIRECalc Results. 4% swr
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
FIRECalc looked at the 120 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-272,474 to $4,564,899, with an average at the end of $1,421,482. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 5 cycles failed, for a success rate of 95.8%.

At 5% things turned unacceptable and failed big time so I am not going to say the pp should have a 5% swr planned for day 1

FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
FIRECalc looked at the 120 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-1,443,801 to $3,757,425, with an average at the end of $700,294. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 39 cycles failed, for a success rate of 67.5%.
Last edited by mathjak107 on Sat Feb 06, 2021 12:15 pm, edited 4 times in total.
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Safe Withdrawal Rates

Post by mathjak107 » Sat Feb 06, 2021 11:54 am

Better to start at 4% and develop a system of raises along the way if things are going better than worst case ....

Kitces recommends looking every three years ..if you are 50% higher then the day you retired , take a 10% raise plus inflation adjusting ....look again in 3 years and wash and repeat if still 50% higher , so on and so on .

Drawing 5% day one I would say would be poor judgement until you see how your time frame looks ..compared to worst case scenarios 5% is not a safe withdrawal rate day one , it is just a withdrawal rate it failed to last so many times so right off the bat it does not make the cut to be called a safe withdrawal rate which needs at least a 90% success rate based on the historical worst which were all pre 1970.

At 5% it clocked in at a horrible 67% success rate failing 39x already
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Safe Withdrawal Rates

Post by Tyler » Sat Feb 06, 2021 12:14 pm

I do hear ya, Mathjak. We've had the same debates hundreds of times over the years. :) I encourage everyone to read your objections and browse my FAQ where I address them all. Even if we disagree about how to apply certain research, we're in total agreement that it's important to plan conservatively.

In any case, this isn't a technical SWR thread anyway. So no matter what percentage of your portfolio you feel comfortable spending every year, let's get back to how awesome it is to achieve financial freedom!
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Post by mathjak107 » Sat Feb 06, 2021 12:24 pm

No question reaching financial freedom is awesome ...but I would caution that planning around a 5% draw day one for a 30 year retirement is not considered a safe withdrawal rate and it gets worse going out longer .

Now having said that : with a 60/40

90% of all the 30 year cycles we have had to date have ended with more than you started with .

67% have ended with 2x what you started with

50% have ended with 3x what you started with

And the odds of failure is the same as the odds of ending with 6-8x what you started with .

With hindsight as a guide , if we don’t hit any of the worst case outcomes that the 4% swr is based on , then 6-1/2% would be the typical draw rate

So odds of 5% working is pretty darn good . It just is not considered by definition a safe withdrawal rate day one .

the problem is day one of retirement we never know if it is us that will be the poster child for a failed retirement and one of the worst case scenarios .

So starting lower around 4% and then increasing as things unfold is likely the best way to plan
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Safe Withdrawal Rates

Post by Tortoise » Sat Feb 06, 2021 2:21 pm

Maybe the mods can split off the last page or so into a separate SWR thread since it relates only very loosely to the thread topic of “Milestones to Financial Freedom”?
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Post by dualstow » Sat Feb 06, 2021 4:49 pm

Tortoise wrote:
Sat Feb 06, 2021 2:21 pm
Maybe the mods can split off the last page or so into a separate SWR thread since it relates only very loosely to the thread topic of “Milestones to Financial Freedom”?
Which post do you want the new thread to start with?
RIP Marcello Gandini
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Safe Withdrawal Rates

Post by Tortoise » Sat Feb 06, 2021 5:28 pm

Maybe start the new thread with this post:
viewtopic.php?p=221725#p221725
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
🚧 Should be all set. ✓ I just have to rename the post titles. 🚧
↳ Original thread, 'Milestones to Financial Freedom'
- Ds
Xan, do you think we should have a retirement subsection?
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Re: Safe Withdrawal Rates

Post by I Shrugged » Sat Feb 06, 2021 6:07 pm

When in doubt, make some more money. Why play Russian Roulette?
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Re: Safe Withdrawal Rates

Post by I Shrugged » Sat Feb 06, 2021 6:19 pm

Why, in a world of near zero interest rates, should a 4% SWR hold up? How many of the study periods were at such rates? I’m a big skeptic when it comes to basing investment on past performance anyway. It’s informative, but you need to try to relate it to the here and now.

A few months ago I posted that the yield of my portfolio, including 17% gold, was about 1.2%. A pile of risk assets, and cash, yields 1.2%. Take out the gold and say it’s 2% at most. Talk about priced for perfection.

I understand we are looking for total returns. But it starts with yield pricing.
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Re: Safe Withdrawal Rates

Post by pp4me » Sat Feb 06, 2021 7:20 pm

I Shrugged wrote:
Sat Feb 06, 2021 6:19 pm
Why, in a world of near zero interest rates, should a 4% SWR hold up? How many of the study periods were at such rates? I’m a big skeptic when it comes to basing investment on past performance anyway. It’s informative, but you need to try to relate it to the here and now.
You never know. When my Dad was forced to retire from his career as a milkman due to his deteriorating knees from getting in and out of the milk trucks for so many years it was during a period of runaway inflation. LTT's were paying 14% but not many bought them because you could get CD's at 18%. Everybody seemed to be convinced that times were more bleak than they had been since the great depression. The housing market was almost at a complete standstill and you saw comics in the papers showing home prices going up like the meters on gas station pumps.

All things considered, my parents ended up having a very decent retirement any way, thanks mostly to keeping all their money in CD's because they didn't know any better. Their sequence of returns in the early years will probably put most of us to shame.

I doubt that either of my parents ever heard of SWR. They just learned to get by.

I don't pay much attention to it either. When they laid me off almost five years ago I had calculated that there was no reason for panic based on what I knew about SWR but there are no guarantees of anything in life. I don't even think about SWR and intend to live on my SS + RMD and make do with that if I have to but spending more if things are good and I don't have to (doing a $35k kitchen remodel soon since we can't travel due to COVID). I'm guessing that most retired people adapt in the same kind of way and don't really think that much about SWR's.
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Re: Safe Withdrawal Rates

Post by drumminj » Sat Feb 06, 2021 9:01 pm

dualstow wrote:
Sat Feb 06, 2021 4:49 pm
Tortoise wrote:
Sat Feb 06, 2021 2:21 pm
Maybe the mods can split off the last page or so into a separate SWR thread since it relates only very loosely to the thread topic of “Milestones to Financial Freedom”?
Which post do you want the new thread to start with?
Thanks for forking this, dualstow. I should have just started/linked another thread from the get-go!
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Re: Safe Withdrawal Rates

Post by Kbg » Sat Feb 06, 2021 9:50 pm

I was reading a Kindle book by Wade Pfau "How Much Can I Spend in Retirement?" (free for Amazon+ members) who writes quite a bit on retirement planning...anyway toward the end of the book he was going through various assessments related to this topic with a specific focus on bond ladder strategies. Exhibit 7.18 is a graph that looks like the top right quarter of a circle (sort of) with portfolio amount on the y axis and time on the x. The thing I thought really cool (and I wish someone had a website where you could put this in as a financial check) was that you could use the graph annually to determine if you were okay or not. A plot on the outside the circle meant you are on path/better than required to having sufficient money for your life expectancy or better and inside you were not and needed to cut spending or plan on falling short earlier than your target.

Side note...I now know WAY more about bond laddering than I thought could even be thought about regarding the topic! Chapter 8 is pretty good too.
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Re: Safe Withdrawal Rates

Post by Tyler » Sat Feb 06, 2021 11:08 pm

Kbg wrote:
Sat Feb 06, 2021 9:50 pm
Exhibit 7.18 is a graph that looks like the top right quarter of a circle (sort of) with portfolio amount on the y axis and time on the x. The thing I thought really cool (and I wish someone had a website where you could put this in as a financial check) was that you could use the graph annually to determine if you were okay or not. A plot on the outside the circle meant you are on path/better than required to having sufficient money for your life expectancy or better and inside you were not and needed to cut spending or plan on falling short earlier than your target.
Sounds cool. Any chance you can share more details or post a screenshot?
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Re: Safe Withdrawal Rates

Post by mathjak107 » Sun Feb 07, 2021 1:14 am

I Shrugged wrote:
Sat Feb 06, 2021 6:19 pm
Why, in a world of near zero interest rates, should a 4% SWR hold up? How many of the study periods were at such rates? I’m a big skeptic when it comes to basing investment on past performance anyway. It’s informative, but you need to try to relate it to the here and now.

A few months ago I posted that the yield of my portfolio, including 17% gold, was about 1.2%. A pile of risk assets, and cash, yields 1.2%. Take out the gold and say it’s 2% at most. Talk about priced for perfection.

I understand we are looking for total returns. But it starts with yield pricing.
Because the math behind it says all you need to get is a 2% real return the first 15 years of a 30 year retirement....the odds of 4% failing are the same very low odds as ending with 6x what you started .

Yield on the portfolio is irrelevant when in assets that appreciate. The failures we had happened when returns fell below 1% the first 15 years .

It isn’t that 4% requires average times to survive..it is the fact it is so conservative it is hard to fail..

It failing is not so much based on returns and inflation and rates but on getting really poor sequences

EXECUTIVE SUMMARY

As retirees and their planners adjust to the ‘new normal’ – a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn’t that imply safe withdrawal rates must be below average as well? In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today’s retirees will result in a “new record low” safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000! On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates!


https://www.kitces.com/blog/url-upside- ... al-wealth/

https://www.kitces.com/blog/what-return ... ased-upon/
Last edited by mathjak107 on Sun Feb 07, 2021 3:06 am, edited 7 times in total.
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Re: Safe Withdrawal Rates

Post by mathjak107 » Sun Feb 07, 2021 1:15 am

Kbg wrote:
Sat Feb 06, 2021 9:50 pm
I was reading a Kindle book by Wade Pfau "How Much Can I Spend in Retirement?" (free for Amazon+ members) who writes quite a bit on retirement planning...anyway toward the end of the book he was going through various assessments related to this topic with a specific focus on bond ladder strategies. Exhibit 7.18 is a graph that looks like the top right quarter of a circle (sort of) with portfolio amount on the y axis and time on the x. The thing I thought really cool (and I wish someone had a website where you could put this in as a financial check) was that you could use the graph annually to determine if you were okay or not. A plot on the outside the circle meant you are on path/better than required to having sufficient money for your life expectancy or better and inside you were not and needed to cut spending or plan on falling short earlier than your target.

Side note...I now know WAY more about bond laddering than I thought could even be thought about regarding the topic! Chapter 8 is pretty good too.
Wade is an annuity salesman and has been proven by kitces to be wrong in his math as far as his views on 4% not holding..Wade has typically been the glass is always half empty kind of guy ....which is why he is big on insurance products .

Most of the research he posts is funded by insurance companies
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Re: Safe Withdrawal Rates

Post by mathjak107 » Sun Feb 07, 2021 9:49 am

Personally I gave up on pfau s stuff ....even for free I stopped reading his stuff

I much prefer kitces who at least mathematically makes way more sense and is unbiased from the insurance company subsidies

Guess who paid for these ?

https://static.fmgsuite.com/media/docum ... 08aa7c.pdf

https://www.liquiditymap.com/assets/int ... e-plan.pdf
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Re: Safe Withdrawal Rates

Post by WiseOne » Sun Feb 07, 2021 11:57 am

I'm a lot more worried about unforeseen expenses than about prolonged market conditions that might cause issues with a 4% withdrawal rate.

If your budget includes a healthy dose of discretionary spending and generous budgets for things like groceries, you can temporarily cut spending if there's a market downturn. Or, get a part time job for a bit of extra income, depending on your situation.

But, what if something happens requiring you to hire a home health aide for a long period of time (> 1 year, say), or a major home repair is needed, or any of a number of things that cost a lot of money and will be hard to recover from?

I ended up deciding to pad my retirement budget to ensure some extra savings for these sorts of things. I figured on a cushion of 10% of non-mortgage expenses up until age 70, and 20% after that. It more or less amounts to a reduction in safe withdrawal rate to closer to 3%. The idea is that my portfolio will be most vulnerable to market downturns in the early retirement years, but that's the period when I'm most likely to be able to solve the problem by reducing spending. After age 70 that will get considerably harder, and the chances of needing to hire help will go up. I know this is the reverse of what financial planners typically advise, but I frankly think they aren't understanding the reality. They must think that people will be in perfect health right up to the moment they drop dead of natural causes.
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Re: Safe Withdrawal Rates

Post by mathjak107 » Sun Feb 07, 2021 12:47 pm

Because of copays and deductibles the fact both of us got covid end of year we will likely see 5-10k in out of pockets .

That is on top of an unexpected 15k in dental work .

So crap is always lurking.

The good news is that after 5-1/2 years of retirement and drawing six figures a year from investments , we are a few hundred thousand higher then the day we retired , with almost 6 years less to plan around ...

It certainly is easy enough to monitor how you are doing year after year.

Typically a 4% draw has left you with more than you started 90% of the 120 rolling 30 year retirement cycles we had to date ...

We have a New York partnership plan for long term care ...it covers 3 years in a nursing facility or 6 years in home care .

But we didn’t buy it for the insurance..we bought it because all assets are protected 100% ...no income is restricted , there is no spend down or look back , and a special version of medicaid pays all bills once the insurance is up .

New York is one of the few states that offer 100% asset protection....mostly all state partnership plans are dollar for a dollar .

That means if Medicaid spends 300k than only 300k in assets is protected ...new York offers that too but we also offer 100% asset protection
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Re: Safe Withdrawal Rates

Post by drumminj » Sun Feb 07, 2021 6:54 pm

WiseOne wrote:
Sun Feb 07, 2021 11:57 am
I'm a lot more worried about unforeseen expenses than about prolonged market conditions that might cause issues with a 4% withdrawal rate.

If your budget includes a healthy dose of discretionary spending and generous budgets for things like groceries, you can temporarily cut spending if there's a market downturn. Or, get a part time job for a bit of extra income, depending on your situation.
This is the type of thing that concerns me too, WiseOne. Big expenses like needing to replace a vehicle, etc. I'm still young(-ish) so going back to work part-time may be possible, but it's not guaranteed that jobs will be available.

As far as a big home repair, my expense model includes 1% house annual maintenance based on purchase value. We'll be buying on acreage though, so a considerable of the cost will be the land, so hopefully there's buffer built in there.

Like you, I'm trying to be conservative in every assumption - withdrawal rate, expenses, etc. I'll never make more than I'm making now, so it's far better to work a bit longer in the short-term, then try to go back to work and make 1/10 what I make now part-time...but at some point I want to have the luxury of getting off the hamster wheel and getting to simply stop and enjoy life!
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