Withdrawal Rate "Floor"

Investing / Others
1

assumptions

  • balanced portfolio (~60/40)
  • very long period (50+ years)
  • mostly ignoring flexibility (back to work, move residency, etc.)

questions

  • in your opinion, what would be a reasonable withdrawal rate floor? i.e. it’s conservative, but not “too” conservative
  • and what are the key variables to get to that result?

example

~2.8%
the portfolio’s total (gains + distributions), net (after fees + taxes), real (after inflation), local (currency) return should lead to a perpetual withdrawal rate. stocks should at least return 4.5% in the long run, which leads to a 2.7% (at 60%) contribution. bonds/diversifiers should at least return 0.5%, which leads to a 0.2% (at 40%) contribution. that’s 2.9% in total, to which a rebalancing bonus of 0.2% is being added. otoh, an additional safety margin of 0.3% is being added/subtracted, for unexpected changes on the expense side.

2

Is this assuming immortality? Or if not, how many years?

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4

I just did my stress testing which is:

  • sequence of returns: -1% (this year), -1%, -3%, -40%, then 4.5% thereafter.
  • annual inflation of 2.5% on all costs
  • additional 3% inflation for health insurance
  • I also assume I withdraw all my pension pots into a VB account just in time for it to lose 40% of the value.
  • Then I increase the planned expenditure by a 28% safety margin.

Assuming I stay in my job until 2028, then I will have enough to last until I’m 80.

If I remove the 28% safety margin, then I can ImmortalFIRE.

My ImmortalFIRE withdrawal rate is around 2.1%.

My MortalFIRE rate is around 2.7% - so is in line with what you have.

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5

If you think about it, the ImmortalFIRE rate should just be the real return of your portfolio.

As long as you live off just the annual gain each year and don’t draw down on the principal, then you will ImmortalFIRE.

6

The Problem is that withdrawal rates can change over time. What I kind of like as a basis is a combination of the LPP Minimum Interest Rate (as a proxy for very safe Investment returns) plus lets say 2% given a 50 year withdrawal. So at the Moment, I would put an absolutely safe withdrawal rate to 3.25% plus CPI. This was however pre any wealth tax.

Consciously a completely different way of approaching things, to give you an alternative data point.

Another approach was 1/PE on the shares sid and Zero on Bonds (given low real return now and in case of inflation high tax burden). That would at the Moment probably give you about 3-3.25% as well for a 60/40.

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7

This is why I model it year by year. The withdrawal rates I stated above is the average of the withdrawal rates for each year (withdrawals in the year divided by retirement pot at the start of that year).

My model is not a ‘clean model’ as it takes my own circumstances, costs etc., but it includes, taxes, wealth taxes and future costs such as budget for kids’ weddings and university. e.g. it spikes to 3.3% in 2051, which is the placeholder wedding date :stuck_out_tongue:

I see the withdrawal rates creeping towards 4% until my pension kicks in (which I don’t take into account in the pension pot) which then means I only need to withdraw <2% most years afterwards.

Without the pension, my withdrawal rate would be 2.5%-3%.

image
Model of real and nominal pension pot

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8

3%. I would be at 1.8% if I retired today. When I do pull the plug i will likely be at 1.5%. Surplus = inheritance

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9

Why would it be less if you retired today? Normally, I’d expect it to be less the later you retire as you have the double whammy of having extra years to build up the pot and also have fewer years to fund in retirement.

11

This is what I thought was reasonable: “sequence of returns: -1% (this year), -1%, -3%, -40%, then 4.5% thereafter.”

i.e. a period of stagnation as we reach a top, a crash, and then a recovery with average of 4.5% thereafter.

13

Sorry, I meant that the answer to your original question is 3%, 33X, that is the historic perpeptual SWR.

If you really want to get into this, look up earlyretirementnow.com. This is a nearly 100 volume series on withdrawal rates, how to optimize AA accordingly and so on. The guy is a math nerd but super smart

As for the 1.8%, I just happen to be below that

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14

^This.

As 3% would be the perpetual safe withdrawal rate with data available so far, I would consider it acceptable to decide to start a new serie during retirement if it is advantageous. That is, if 3% of the current assets is higher than the inflation adjusted withdrawal at that time. I would withdraw 3% and start new inflation adjustments from there.

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15

If you haven’t read ‘Die With Zero’ you might find it useful.

16

I did. And found it excellent. Inheritage will not come at my life‘s end but when need is highest (20-35) for my heirs but not enpugh fpr them not to work and make themselves financial independent

And, travelling and experiences already a 30-40k annual budget :joy:. We can afford more but I would find it wasteful

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17

no adjustments due to swiss environment / CHF, in your opinion?

18

In my opinion, the adjustment comes from inflation adjustments: when we have deflation, the amount withdrawn is actually lower than the previous year.

That’s just an opinion, though. People may feel safer adjusting their spending if the stack gets too low for their taste.

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19

Another way to look at this could be

  • 40% of your portfolio (assuming it maintains its value with 0.5% gain and not high volatility) is enough to last 15 years at 2.9% withdrawal (this percentage is of total value and not just bonds) only from bonds

  • 60% of your high volatility portfolio can refill 100% of your 40% bonds in 15 years with 4.5% average CAGR

This means with 2.9% withdrawal rate, you will never touch your stocks for consumption. You will just keep buying bonds (either using dividends or selling stock gains) to refill the bonds pot and that’s it :slight_smile: perpetually

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20

Yeah. Even as a family of 5 we spend surprisingly little on travel/holidays. We mostly stay close and drive (mainly because it is a nightmare herding small kids in an airport - I still have nightmares about the time when our toddler slipped away and ran past a security gate where we couldn’t retrieve her).

Also, I’ve already seen the very rapid hedonistic adaptation of kids: many teens I’ve noticed sneer their nose if a hotel isn’t at least 4 star and instagram-worthy.

My young kids find even the weekly trip to the supermarket exciting and I’d like to keep it that way as long as I can.

The one thing I think about is a trip to visit Santa - the time to do this is running out. The 6 year old already figured out Santa and the Easter bunny were not real when he woke up early and saw his mum planting the Easter eggs in the garden. Funnily enough, he’s adamant that although Santa and the Easter bunny are ‘fake’, the Tooth Fairy is real!

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