Time for screencast #3. In today’s screencast I cover how the 4% rule, or 4% safe withdrawal rate (SWR), changes for different retirement periods. I thought I had covered this topic in an old post but as turns out I had not. It’s an important topic to cover. This is the first screencast where I cover one of the basic issues with the 4% rule of thumb – that not every retirement period is 30 years.
In the screencast I discuss how the SWR changes for shorter and longer retirement periods. I also start the discussion how it varies with the investment allocation in a retirement portfolio – from the standard 60/40 portfolio to more conservative and aggressive options. Here is the screencast.
For reference, below I included the key table in the screencast that I base my discussion on. The maximum SWR for each retirement period is highlighted in yellow.
As usual if you have questions or comments or suggestions for topics please post them in the comments here or on the video.
13 Comments
jack k · May 12, 2015 at 3:03 pm
Excellent. Thanks.
Mark Borseth · May 12, 2015 at 6:00 pm
Paul, information laid out in an easily to understand screencast!
Thanks,
Mark
Tony · May 13, 2015 at 11:41 am
Hi Paul,
I was just looking at info on this today. Found a good summary of Shiller’s work on the topic here:
Interesting to see how the SWRs don’t change much past 40 years.
Do you have estimated SWRs for the longer retirement periods with the GTAA portfolios? I know you posted some for the 30 year period and had to estimate due to lack of data. I am guessing this would be a much bigger issue when looking at something like a 50 year period.
paul.novell@gmail.com · May 14, 2015 at 10:01 am
It’s a huge issue. The data for GTAA portfolios starts in 1973, so for a 50 year retirement there are only 3 data points. 30 years is the max that is useful for GTAA portfolios IMO.
Paul
Kim · May 13, 2015 at 12:04 pm
Informative as always. Looking forward to more regarding SWRs.
DJPS · May 14, 2015 at 8:16 pm
Thanks for the information. I am trying to allocate our resources for a long (40+) retirement, we sold our business and now have a pile of cash doing nothing. I keep thinking about a recent “Dilbert” cartoon about “diversification” in the current market. He said “don’t buy just one sick cow, diversify and buy a whole herd (of sick cows)”. Seems like if an interest rate increase did happen, it could really scupper a portfolio based on stocks and bonds that started today. Have you got any words of wisdom to help me get started?
paul.novell@gmail.com · May 16, 2015 at 9:28 am
Dominic, not really. I can’t comment on your situation without knowing a lot more about you. My default answer would be to start by studying the basic buy and hold portfolios that I discuss on the blog. Then after you’re comfortable and understand those go on to the more complex TAA portfolios. Then based on your situation and risk tolerance choose 2-3 of the them and allocate to them. If you’re not comfortable doing things yourself, I still recommend studying up on the various portfolios, then go to a tried and true financial advisor. I always recommend Vanguard.
Paul
JOHN STEIN · May 17, 2015 at 3:27 am
Paul : Great job , do you know if the SWR would change much if you were to look
at a portfolio in perpetuity ? Would it hit a rate of around 3.3% (70/30 ).
And can you defined “bonds” for this study .
THANKS
John
paul.novell@gmail.com · May 17, 2015 at 9:21 am
Hey John,
Have no idea. There is not enough data to make a conclusion. But yes it does seem to converge somewhere just above 4%. I would think it would converge to the income generated from the portfolio. And that would vary based on starting yield of the portfolio. So, maybe today that level is just above 2% instead of 3%.
Bonds are US 10 year treasuries.
Paul
Jil Mohr · May 22, 2015 at 1:45 pm
Great…Logical and concise…what a valuable learning tool you are offering people..
paul.novell@gmail.com · May 23, 2015 at 7:47 am
Thanks Jill.
Joe · May 24, 2015 at 12:13 pm
Thanks for sharing this. It simplifies the very complex (at least complex for me).
I’m an accountant by schooling and now a software consultant.
I have this complex spreadsheet that has all these rate and calculations to see when I can retire.
This simplifies that whole thing very nicely.
Unfortunately I have 10 years to go before I hit the road in an rv full time.
Thanks again!
DJPS · May 27, 2015 at 12:44 pm
Thanks for the reply I am looking to invest about 8m all at once, and so I am concerned about getting the right entry point. Risk v return at these prices seems quite unattractive, I’d rather get 0% than minus 25% and I could afford to wait for a better time, but will one ever come?
Comments are closed.