In a post last week I showed that for the majority of retirees the standard recommended spending model in retirement does not match reality. Spending in retirement actually grows by less than inflation over time. In this post I want to show you how using a more realistic sending model impacts how much you can withdraw from your portfolio in retirement.

If we go back and use the same model we used to calculate SWRs, we can adjust annual spending to see the impact of using a more realistic spending model on SWRs. For this post I simply changed the annual spending adjustment in retirement to grow by 1% less than inflation during the 30 year retirement periods (-1% per year real spending). This is actually pretty conservative compared to the actual retiree data.

Second, I took at look at combining a realistic spending model with a flexible spending model I’ve discussed in the past. The Floor Ceiling method basically allows spending adjustments in retirement based on the performance of the portfolio. For this post I used a floor ceiling model with unlimited upside and a max floor of -10% to inflation adjusted spending.

The results are shown in the table below for 30 year retirement periods, a 70-30 SP500 10yr UST bond stock portfolio with data going back to 1929.

The standard retirement model says your SWR is 4.39% for this portfolio. By simply using a more realistic spending model the SWR for the portfolio goes up to 4.90% an increase of almost 12%. The FCM model with its flexible spending says your SWR is 4.84% for this portfolio. By combining both approaches the SWR for the portfolio goes up to 5.39%, an increase of over 22%! That’s a raise of 22% per year in retirement simply by being more realistic and flexible. Very powerful stuff.

For those still building for retirement the implications are perhaps even more impactful. The percentage increases in SWR are equivalent to a reduction in the amount you need to fund your retirement. If you can spend 22% more with these models in retirement it also means you would need 22% less to retire. That could translate into several years of work or no work in this case.

*Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.*

If I retire right now and meet my spending goals, my CWR would start at 7.5%. Most of my portfolio is in GTAA AGG 6, with some in Trending Value. The SWR for GTAA AGG 6 is almost 14%, which means I have enough to retire, but it almost feels too good to be true! I would feel much more comfortable if my CWR was closer to 4 or 5% since it is more realistic to do without trying to “beat the market”.

Jeff, yes it is too good to be true. The problem with SWRs from all these new diversified portfolios is that the data only goes back to 1973. If you used that 14% SWR and looked at the data for the year 2000 and 2008 retiree, similar to what I did in this post, you would quickly be heading toward running out of money. If the SWR for a portfolio does not cover the worst case periods, 1966 in particular, I would view it as suspect.

Given everything I would never recommend an SWR of over 5-6% for a 30 year period, especially in the critical early years of retirement. I view using the diversified portfolios as just stacking the deck in your favor, improving probability of success, especially if forward returns prove to be lower than history as many valuation measures suggest.

Paul

Ahh, I see. Based on your 2013/07/21 post, I kind of had it floating around in the back of my head to decrease SWR by 20% for data only going back to 1973.

However, I totally agree that it is better to play it safe. I hope I am not asking too much, but do you mind sharing the spreadsheet from your “Standing on the edge” post that you linked? I want to see if I can figure it out and plug in values for GTAA AGG 6 with different initial SWR. Hopefully I don’t need to ask for help and thanks in advance!

Jeff, I posted all the return and inflation data so you can run as many ‘simulations as you like. You can find it here.

Paul

Paul, I tried re-creating your results first to make sure I was doing it correct before running my own simulations, but it seems that I am doing something wrong. Would you mind taking a look at the formula in my “Portfolio” column? I would really appreciate it, thanks.

https://docs.google.com/spreadsheets/d/1FQYKYUBGNWBPTXHrpoK1hOrgGn3fkuwIF9e60QldHNc/edit?usp=sharing

Jeff, I don’t see anything wrong. The only difference is you are taking the withdrawal at the beginning of the year, whereas in my calculation I take it at the end. Either way is fine although it gives slightly different results.

Paul