PP Safe Withdrawal Rate?

[TripleB]

The "safe" withdrawal rate for the typical "Boglehead" conventional type portfolio that may be Age in Bonds, the rest in Stocks, is commonly stated at 3%. i.e. if you're 70, then it would be 70% intermediate bond fund and 30% stock index fund.

The theory here is that if you are using this conventional portfolio, if you withdraw 3%, then the portfolio should last until you die while allowing you to withdraw the same amount each year in buying power, because the portfolio will grow a bit to adjust for inflation and you're only tapping a little bit into the principal by taking out 3% based on the expected growth of this conservative portfolio.

It's also commonly stated that 4% may be "OK" to withdraw but you're sucking out a larger amount of the principal and you will likely run out in 30 years so if you live too long, then you might not have enough.

Additionally, if you only take out 2% then in theory your portfolio lasts forever, because you're able to never tap into the principal, and the principal is allowed to grow by inflation each year such that your annual withdrawals maintain the same purchasing power.

My question is what is a safe withdrawal rate for the PP? I may be too optimistic, but I fully expect the PP to get 5% to 6% real growth per year with little standard deviation. That would be 8% to 9% growth per year assuming inflation is 3%.

If that's the case, then in theory, one can withdraw 5% to 6% per year, in perpetuity, without hitting the principal and make it last forever. That's significantly more than the 2% rate that this is allowable in for a conventional Boglehead type portfolio.

Since I'm calculating up to 3x greater withdraw rate, which means 3x more spending ability from the same size portfolio, I assume that I must be thinking about this incorrectly. Please comment and let me know if I'm being ridiculous, but in my mind, the 3 tiers of withdraw rates for the PP are:

4% - (the equivalent to the 2% withdrawal of a Bogleheads portfolio) you can take this out in perpetuity, never tap into the principal, because if you get a "bad" year in the PP you might only lose 5% in Real terms, and a single "good" year of a reasonable 10% real return would return you back to normal

8% -  (the equivalent to the 3% withdrawal of a Bogleheads portfolio) you can take this out and it will tap into the principal a bit, but not enough that you would likely run out of money before you die, assuming you live less than 40 years

10% -  (the equivalent to the 4% withdrawal of a Bogleheads portfolio) you can take this out and you will be OK for about 30 years but will have nothing left at the end because you're tapping into the principal

I'm starting to think about "early retirement" using the PP and I've historically been using the 3% "common knowledge" value which seems too conservative considering the higher likely return of the PP relative to a Boglehead conservative 70 year old's portfolio. What does the rest of the board think?

[craigr]

Conservative is always better when you first retire because you can always spend more later if it is too low. But start off too high and you can run out of money when your human capital is waning due to your age and being out of the primary work you did for a career. So I tend to stick to the 3-4% crowd in thinking in these terms.

[notsheigetz]

Conservative is always better when you first retire because you can always spend more later if it is too low.

If you're like my parents in their current situation you will spend a LOT more later, i.e., about 20-25% per year due to my dad having to be in a long term care facility with no end in sight (they're both around 93 years old).

I have what I think are some pretty good plans to avoid that situation myself and I would really rather plan on spending a little more when I first retire while I'm still in good enough health to enjoy it and assume I will spend less later.

[Bean]

I am curious what those long term plans to avoid assisted care in a facility you have, notsheigetz?

Personally, I have seen too many examples of the elderly being thrown into a facility where they are then treated with a tremendous lack of respect (and at exorbitant prices to boot). They are at the mercy of the workers there and it seems that no one is watching. I take care of my 99 yr old dad in my home because I would never trust him to any of these facilities.

I would love to avoid this fate for myself at a later date.

I have always viewed taking care of my elders as a matter of family honor.  So, I guess it really comes down not to what you do investment wise, but in how you raise your children.  If you don't think your kids have honor, I would suggest picking up sweet/dangerous late life hobbies or become a senator.

[TripleB]

Conservative is always better when you first retire because you can always spend more later if it is too low. But start off too high and you can run out of money when your human capital is waning due to your age and being out of the primary work you did for a career. So I tend to stick to the 3-4% crowd in thinking in these terms.

Craig,

Your position seems appropriate, however I'm curious to know how you arrived at those numbers. The 3%/4% rules of the conservative portfolio are based on the expected real return of one of those portfolios being 2% to 3% over long periods of time.

Since the PP expects 6% over long periods, I would think following the same level of conservative thinking, one might assume they could have a higher withdrawal rate on the PP. Unless, you believe a 2% to 3% real return of the PP is all we can hope for going forward.

[craigr]

Since the PP expects 6% over long periods, I would think following the same level of conservative thinking, one might assume they could have a higher withdrawal rate on the PP. Unless, you believe a 2% to 3% real return of the PP is all we can hope for going forward.

No, the portfolio has done 3-6% in the past over rolling periods. It is not 6%. And of course the past cannot predict the future so even 3% may not happen. I am just suggesting that being conservative is the best approach because if you are exceeding expectations you can always go on that Greek Islands vacation later. But if you are blowing through 6% up front and you get a short fall you'll be living in potentially a condition of squalor if the markets go against you.

I am always in favor of being conservative about making investing decisions and plans.

[Ad Orientem]

2% is extremely safe, vulnerable only to an SHTF event.
3% is probably safe. The PP has generally beaten this over time but as Craig notes, the past is not a safe predictor of the future and people in their 50's now are much more likely to live deep into their 90's or even 100's.
4% is dicey. I might consider that if I were retiring late in life and had more abbreviated retirement expectations. But it is definitely risky.
4%+ forget it unless you have a taste for dog food or you have been diagnosed with a fatal illness.

[akratic]

I will personally be psyched if the PP has a 3% real return over the next 70 years.  My understanding is that it's had a 3-5% real return up until this point.

I once wrote a program to figure out the real return (real CAGR actually...) necessary to survive a certain number of years given a starting level of wealth:

NW    20    30    40    50    60    70    80
10  7.76%  9.31%  9.76%  9.92%  9.97%  9.99%  10.00%
11  6.53%  8.25%  8.78%  8.97%  9.05%  9.08%  9.09%
12  5.46%  7.34%  7.95%  8.17%  8.27%  8.31%  8.32%
13  4.51%  6.55%  7.22%  7.49%  7.60%  7.65%  7.68%
14  3.67%  5.85%  6.59%  6.89%  7.03%  7.09%  7.12%
15  2.92%  5.22%  6.03%  6.37%  6.52%  6.60%  6.63%
16  2.23%  4.66%  5.53%  5.90%  6.07%  6.16%  6.20%
17  1.61%  4.15%  5.07%  5.48%  5.67%  5.77%  5.82%
18  1.03%  3.68%  4.66%  5.10%  5.31%  5.42%  5.48%
19  0.50%  3.25%  4.28%  4.75%  4.98%  5.11%  5.17%
20  0.00%  2.85%  3.94%  4.43%  4.68%  4.82%  4.90%
21 -0.46%  2.48%  3.61%  4.14%  4.41%  4.56%  4.64%
22 -0.89%  2.14%  3.31%  3.87%  4.15%  4.31%  4.41%
23 -1.29%  1.81%  3.04%  3.61%  3.92%  4.09%  4.19%
24 -1.67%  1.51%  2.77%  3.38%  3.70%  3.88%  3.99%
25 -2.03%  1.22%  2.53%  3.16%  3.49%  3.69%  3.80%
26 -2.37%  0.95%  2.30%  2.95%  3.30%  3.51%  3.63%
27 -2.70%  0.70%  2.08%  2.75%  3.12%  3.33%  3.47%
28 -3.01%  0.46%  1.87%  2.57%  2.95%  3.17%  3.31%
29 -3.30%  0.23%  1.68%  2.39%  2.79%  3.02%  3.17%
30 -3.58%  0.00%  1.49%  2.23%  2.64%  2.88%  3.03%
31 -3.85% -0.21%  1.31%  2.07%  2.49%  2.74%  2.90%
32 -4.11% -0.41%  1.14%  1.92%  2.35%  2.62%  2.78%
33 -4.35% -0.60%  0.98%  1.77%  2.22%  2.49%  2.66%
34 -4.59% -0.78%  0.82%  1.64%  2.10%  2.38%  2.55%
35 -4.82% -0.96%  0.67%  1.50%  1.98%  2.26%  2.45%
36 -5.04% -1.13%  0.53%  1.38%  1.86%  2.16%  2.35%
37 -5.25% -1.30%  0.39%  1.26%  1.75%  2.05%  2.25%
38 -5.46% -1.46%  0.26%  1.14%  1.64%  1.96%  2.16%
39 -5.66% -1.61%  0.13%  1.03%  1.54%  1.86%  2.07%
40 -5.85% -1.76%  0.00%  0.92%  1.44%  1.77%  1.98%
41 -6.03% -1.90% -0.11%  0.81%  1.35%  1.68%  1.90%
42 -6.22% -2.04% -0.23%  0.71%  1.26%  1.60%  1.82%
43 -6.39% -2.18% -0.34%  0.61%  1.17%  1.52%  1.75%
44 -6.56% -2.31% -0.45%  0.52%  1.08%  1.44%  1.67%
45 -6.72% -2.43% -0.56%  0.43%  1.00%  1.36%  1.60%
46 -6.89% -2.56% -0.66%  0.34%  0.92%  1.29%  1.53%
47 -7.04% -2.68% -0.76%  0.25%  0.84%  1.22%  1.47%
48 -7.19% -2.79% -0.86%  0.17%  0.77%  1.15%  1.40%
49 -7.34% -2.91% -0.95%  0.08%  0.69%  1.08%  1.34%
50 -7.49% -3.02% -1.04%  0.00%  0.62%  1.02%  1.28%

The columns are to last that many years.  The NW value for the rows is "net worth in years", aka assets / yearly_expenses.

For example: If you spend $20k/yr and you have $600k, your NW is 30.  If you want to withdraw from these assets at your current expenses level (inflation adjusted) for 70 years, then you need a 2.88% real return from your investments, or better.

I'm personally gunning for a 33 NW, which will last forever if the PP does 3.03% real, and will last for 70 years if the PP does 2.49% real.

If you really can get 5-6% real with the PP, you can make it 70 years with just 17-19 NW.

PS: A counter-argument to being too conservative before you quit your job is that you might stumble across a relatively painless way to make money in the future.  Writing a book about your favorite investment allocation, for example... 

[TripleB]

I suppose I was estimating the PP at 5% to 6% real returns annualized because I've been hearing the 10% annualized figure for a really long time, and I know inflation averages 3%.

Thus making things a little conservative off those numbers, 5% to 6% real seems reasonable *if* it's going to return 10% nominal and inflation is 3% because even the nominal return and inflation are off by 20% against you (i.e. lower return and higher inflation), you're still easily hitting 5%.

Then again, perhaps I'm failing to consider that while the PP has returned 10% annualized for 30 or 40 years, there was a significant number of years in that time when inflation was 10% to 15% in the 70s, so the weighted average inflation over the last 40 years might be 5% to 6%, making the 10% annualized returns not as good.

[craigr]

Then again, perhaps I'm failing to consider that while the PP has returned 10% annualized for 30 or 40 years, there was a significant number of years in that time when inflation was 10% to 15% in the 70s, so the weighted average inflation over the last 40 years might be 5% to 6%, making the 10% annualized returns not as good.

Yes you are overlaying 10% onto a flat rate of inflation to draw your conclusions which is not a good idea. The portfolio has returned 3-6% over inflation. Now that averages out to around 9.5% CAGR, but sometimes it was higher or lower. If inflation was high the returns were higher. If inflation was low the returns were lower. But looking at real returns the numbers fell (emphasis on *past tense*) between 3-6%. I would hope that they stay there, but this cannot be promised. Again, I'd just be conservative with any kind of withdrawal assumptions you read about any portfolio.

[notsheigetz]

I am curious what those long term plans to avoid assisted care in a facility you have, notsheigetz?

I'm buying a retirement home in a poor country where medical care is cheap and there is no such thing as a long term care facility. If I get to the point my dad is at where he sleeps about 90 percent of the time, I'm sure I can do that a fraction of the cost.

The problem with the American system is that once you get into the system you completely lose control over the situation and there is very little thought given to cost/benefit analysis.

[Pointedstick]

I also plan to avoid long-term care facilities. When I was a child, I witnessed my grandmother waste away in misery and humiliation at one of those places, all the while being squeezed out of every penny she had. The sum total of her entire life's earning power vanished in three miserable, dehumanizing years.

Many of these horrible places charge you more then $5,000 a month. My grandmother's was about 7K IIRC. I priced it out one day and found that it would be far cheaper to hire a full-time nurse to look after an elderly parent in need of care in their own home. I'm hoping my wife and my parents never need round-the-clock care like that, but if they do, both of us are committed to either looking after them ourselves ($), or hiring an in-home nurse ($$$) rather than send them off to one of those death houses ($$$$$$$$$$$$$$$$$$$$$$$$$$$$$$) where you also die penniless, friendless, and stripped of your dignity and humanity, hooked up to machines dedicated to prolonging your physical functions which are worth dozens of dollars every second. Never mind that you die a wasted, humiliated shell of who you once were.

[MediumTex]

I also plan to avoid long-term care facilities. When I was a child, I witnessed my grandmother waste away in misery and humiliation at one of those places, all the while being squeezed out of every penny she had. The sum total of her entire life's earning power vanished in three miserable, dehumanizing years.

Many of these horrible places charge you more then $5,000 a month. My grandmother's was about 7K IIRC. I priced it out one day and found that it would be far cheaper to hire a full-time nurse to look after an elderly parent in need of care in their own home. I'm hoping my wife and my parents never need round-the-clock care like that, but if they do, both of us are committed to either looking after them ourselves ($), or hiring an in-home nurse ($$$) rather than send them off to one of those death houses ($$$$$$$$$$$$$$$$$$$$$$$$$$$$$$) where you also die penniless, friendless, and stripped of your dignity and humanity, hooked up to machines dedicated to prolonging your physical functions which are worth dozens of dollars every second. Never mind that you die a wasted, humiliated shell of who you once were.

Those places often seem to smell like pee as well.

The smell of pee in later years is like an advance scout for the grim reaper.

I think that people's spirits often die long before their bodies do.  In other cultures there are rituals that allow people in these situations to exit the world on their own terms, but here we have this idea that we should squeeze every possible ounce of biological life out of the human body, whether the spirit wants it or not.

[AgAuMoney]

I once wrote a program to figure out the real return (real CAGR actually...) necessary to survive a certain number of years given a starting level of wealth:
...

If you really can get 5-6% real with the PP, you can make it 70 years with just 17-19 NW.

PS: A counter-argument to being too conservative before you quit your job is that you might stumble across a relatively painless way to make money in the future.  Writing a book about your favorite investment allocation, for example... 

But I'd hate to be forced into a painful way of making money because I had to have it...

One BIG caution:

Sequence of returns matters, a lot, because average returns do not matter very much, if at all.

What I mean, is that if during the first years of your retirement your portfolio experiences a loss and/or effective loss, by depleting your assets during those years you reduce what is available to grow in future years even if the future years have great returns and on average your portfolio would have been fine.

Compare with if you first get 20 years of great returns, and the last 10 are stinkers.  By then you should have a nice cushion built up during the above average years, and plus you are likely getting near the end and either spending less, or spending it on medical care.

I think after saving and investing enough, the next most important thing is to be flexible.  If it has been a bad year for your portfolio, cut your expenses.  If it has been a good year, go ahead and treat yourself a bit, but don't spend it all.  Keep some of the extra for a year that doesn't go so well whether it is portfolio shortage or extra needs, having a bit more is always better than running out.

[MachineGhost]

Many of these horrible places charge you more then $5,000 a month. My grandmother's was about 7K IIRC. I priced it out one day and found that it would be far cheaper to hire a full-time nurse to look after an elderly parent in need of care in their own home. I'm hoping my wife and my parents never need round-the-clock care like that, but if they do, both of us are committed to either looking after them ourselves ($), or hiring an in-home nurse ($$$) rather than send them off to one of those death houses ($$$$$$$$$$$$$$$$$$$$$$$$$$$$$$) where you also die penniless, friendless, and stripped of your dignity and humanity, hooked up to machines dedicated to prolonging your physical functions which are worth dozens of dollars every second. Never mind that you die a wasted, humiliated shell of who you once were.

Capitalism != Healthcare.

[notsheigetz]

My mother could only wish to get off for $5k/month. Her rate is around $8200 and it's only an average-rated facility. But that doesn't include all the extras. Only when she gets the bill does she find out about the extras, like daily physical therapy for a month that she knew nothing about.

She looked into the possibility of bringing my dad home and getting a home assistant. The more she looked into it the more she realized it was going to cost at least the same if not more. This is where living in a poor country would really pay off. You can get all the help you need at a fraction of the cost (and this would even include skilled nursing).

My parents provided me with a perfect example of how NOT to manage your retirement nest egg. They retired in 1980 with a nest egg of about $300k - a pretty decent sum at the time. They kept it all in CD's for the next 32 years where it still sits, using the interest to supplement their SS and pension checks. For most of those years they could count on at least $1k /month until lately when it has gotten pretty close to $0. Even without the interest they could have gotten along okay but they never counted on getting in the situation they are in now. You can do the math and figure out how long until my mother is broke - and she's still in fairly good health.

Many of these horrible places charge you more then $5,000 a month. My grandmother's was about 7K IIRC. I priced it out one day and found that it would be far cheaper to hire a full-time nurse to look after an elderly parent in need of care in their own home. I'm hoping my wife and my parents never need round-the-clock care like that, but if they do, both of us are committed to either looking after them ourselves ($), or hiring an in-home nurse ($$$) rather than send them off to one of those death houses ($$$$$$$$$$$$$$$$$$$$$$$$$$$$$$) where you also die penniless, friendless, and stripped of your dignity and humanity, hooked up to machines dedicated to prolonging your physical functions which are worth dozens of dollars every second. Never mind that you die a wasted, humiliated shell of who you once were.

Capitalism != Healthcare.

[Reub]

How could it be as expensive to have him at home as to pay those exhorbitant fees in an institution?

[notsheigetz]

How could it be as expensive to have him at home as to pay those exhorbitant fees in an institution?

My dad would need 24-hour live-in assistance as he can't get out of bed and go to the bathroom by himself. The cost of that when I visited with my mother in July was approximately the same as the institution (I live 1,000 miles away so she can't just call me if she needs help). Since my visit things have apparently gotten even more complicated and she is being told that my dad would need skilled nursing care which the live-in assistant could not legally provide (i.e., administering the insulin shots that my dad is being given). In addition there was an outlay of expenses to make the bathroom accessible, etcetera, etcetera, ad infinitum. So my mother concluded she was better off keeping my dad where he was.

Before he went into the facility my dad actually got in the car which he hadn't driven in a long time and went out and bought himself a dozen donuts. By the time my mother got home he had finished them all and was in a diabetic coma. I'm thinking he may have seen this situation coming and decided to go out on a happy note. Unfortunately, it failed and now he is caught in the American medical system with no hope in sight.

[sophie]

My dad would need 24-hour live-in assistance as he can't get out of bed and go to the bathroom by himself. The cost of that when I visited with my mother in July was approximately the same as the institution (I live 1,000 miles away so she can't just call me if she needs help). Since my visit things have apparently gotten even more complicated and she is being told that my dad would need skilled nursing care which the live-in assistant could not legally provide (i.e., administering the insulin shots that my dad is being given). In addition there was an outlay of expenses to make the bathroom accessible, etcetera, etcetera, ad infinitum. So my mother concluded she was better off keeping my dad where he was.

Before he went into the facility my dad actually got in the car which he hadn't driven in a long time and went out and bought himself a dozen donuts. By the time my mother got home he had finished them all and was in a diabetic coma. I'm thinking he may have seen this situation coming and decided to go out on a happy note. Unfortunately, it failed and now he is caught in the American medical system with no hope in sight.

I'm sure there are plenty of details not included in the above story, but it sounds to me like the skilled nursing situation may only be temporary.  If your dad was able to negotiate a car trip to a store before the coma incident, and if nothing else happened that would result in permanent disability, then you have cause for hope.  Sometimes all that happens is physical deconditioning after an episode like that, which may be the reason for the daily PT.  The fact that your dad received intensive PT without your mother having to argue for it suggests he's in a good place, and also suggests a good prognosis.

Also, unless I'm misinterpreting your story, not sure why your mother is paying cash for those services.  Medicare should cover it.  If your father is under 65, he can still qualify because of the diabetes.  This isn't long term care, it's skilled nursing & acute rehab which is a very different situation, insurance-wise.  You might want to inquire.

My father is in a somewhat similar situation, with Alzheimer's that is now pretty advanced, complicated by a recent brain hemorrhage.  My mother is managing at home with the help of some pretty good home services that is 100% covered, between Medicare and their secondary insurance.  (And me of course since I live nearby.)  We actually kept him out of the hospital except for a 2 day elective admission to get some studies done more conveniently.  It helps that both the general neurologist and me have been vigilant about keeping his medication list down to the bare minimum, and he is in good physical condition to start with because of his habit of doing morning calisthenics every day since 1952.

And - polypharmacy is a HUGE medical problem, and may be part of the issue with your dad too.  I'm routinely shocked at the number of medications that people are taking, and you'd be surprised at how much improvement you can see just from cutting out unnecessary meds.  Your mother might want to review his med list with the primary care physician and ask "why is he on that" with each and every one.  If new meds were added during the hospitalization, then they become primary suspects for his current debilitated state, because you don't really know what the side effects are yet.

Best of luck, and do keep us posted.

[notsheigetz]

And - polypharmacy is a HUGE medical problem, and may be part of the issue with your dad too.  I'm routinely shocked at the number of medications that people are taking, and you'd be surprised at how much improvement you can see just from cutting out unnecessary meds.  Your mother might want to review his med list with the primary care physician and ask "why is he on that" with each and every one.  If new meds were added during the hospitalization, then they become primary suspects for his current debilitated state, because you don't really know what the side effects are yet.

Best of luck, and do keep us posted.

First I ever heard the term polypharmacy but yes it is a HUGE problem. My dad had 30 prescriptions written in a single month. With the help of Google I researched them all and couldn't find any that I, as a layman, could argue with a doctor about. For example, one was an anti-depressant. If I was in my dad's situation I'm sure I'd be depressed too. Just how do you go about telling the doctor to leave him depressed?

Before he went into the facility the doctors had taken him off of all of his prescriptions except for two but he couldn't keep the same doctor. And also, the facility insists that they be bought from a single, local pharmacy so my mother can't shop around like she used to.

My dad will be 94 in January and I don't think anybody believes he is going to be getting any better or ever coming home. Medicaire does pay for most of the medical treatment, thankfully, although I think my mother had to pay for all of those 30 prescriptions because of the donut hole. 

[sophie]

A 93 year old on 30 medications is a travesty!!!!!  If you were on 30 meds you wouldn't be able to get out of bed either, so just imagine the effect that's having on your dad.  I would bet it could be whittled back down to the original two, although it will have to be done gradually and will take some time.  You might want to do that first before thinking about prognosis.

Why couldn't he keep the same MD?  It sounds like that's the person you want to tackle this monstrosity of a medication list.  Your mother can take him out of the home for a physician visit whenever she wants - he's not a prisoner.  There are ambulette services that can help with transport.

It's kind of ironic, but "polypharmacy" is the official medical term for this physician-created problem.  Although, patients who come in expecting the magic pill to solve their problem du jour help get themselves into this kind of trouble, also.

[MachineGhost]

And - polypharmacy is a HUGE medical problem, and may be part of the issue with your dad too.  I'm routinely shocked at the number of medications that people are taking, and you'd be surprised at how much improvement you can see just from cutting out unnecessary meds.  Your mother might want to review his med list with the primary care physician and ask "why is he on that" with each and every one.  If new meds were added during the hospitalization, then they become primary suspects for his current debilitated state, because you don't really know what the side effects are yet.

+1.  With Medicare footing the bill, there's no incentive not to nickel and dime the old farts to death.  I fear the problem is only going to get worse as more Baby Boomers retire.

[TripleB]

A 93 year old on 30 medications is a travesty!!!!! 

That's a little below average. Most people in their 70s+ who live in nursing homes have 40 to 50 active prescriptions at all times based on what I've seen.

[Reub]

That sounds like medical malpractice. The only problem is that many of these most vulnerable of people rarely have advocates looking out for them.

[smurff]

I was reading this thread, thinking about safe withdrawal rates from the PP post-retirement.  But now it looks like there needs to be consideration of a safe withdrawal rate from some 30 drugs by a 90-year-old.  Yikes!