safe withdrawal rate as per fidelity investments

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miket
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safe withdrawal rate as per fidelity investments

Post by miket »

in the junk mail i get from fidelity they recently published a study they've done with some research group concerning safe withdrawal rates. their example was for a 65 year old retiree expecting to live 27 more years. here's their take on the subject - but it's just their take, and not necessarily mine or yours, and certainly not hocus's.......

4% is a pretty safe rate unless you're in all cash, in which case you would have only a 59% chance of surviving your money. their example shows any investments which include at least 20% equities would have better than a 90% chance of surviving.

5% withdrawal is suicide with cash only - just a 4% chance - but even with the best allocation (50% stock, 40% bonds, 10% cash) the most you can get is an 88% certainty.

6% is only doable with larger stock allocations - 85% or even 100% stocks would be needed to reach even a 74% chance.

7% is also doable only with larger stock allocations - 66% chance with 100% allocation.

oddly enough - or maybe not - their study differs considerably with what i get using firecalc. their study seems really skewed towards equities, but then that's the business that fidelity is in so why not???????
peteyperson
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Re: safe withdrawal rate as per fidelity investments

Post by peteyperson »

Yes, well, that's kind of predictable eh?!

Also the asset allocations compared are a-typical.

If you believe that the future may deliver less stellar results than the past & your own formulas & investments are structured to only sell well priced assets and not the ones down that year, then safe withdrawal studies have little usage. If you have a combination of cash, bonds and internationally diversified investments rather than an all-in-one international fund, for instance, then you have a few more ways to not sell shares at half price. This will make all the difference in making your stash last and likely partially boost w/d rates starting from a lower estimate based on lower predicted future returns.

These kind of studies are for people who cannot or won't think for themselves and need to be fed the answers to complex questions. Probably suits the masses but not someone who feels a need to know what their own assumptions are in order to plan with clarity and retire the same way. Most will leap onto a blanket 4% and trust that through and through.

Petey
miket wrote: in the junk mail i get from fidelity they recently published a study they've done with some research group concerning safe withdrawal rates. their example was for a 65 year old retiree expecting to live 27 more years. here's their take on the subject - but it's just their take, and not necessarily mine or yours, and certainly not hocus's.......

4% is a pretty safe rate unless you're in all cash, in which case you would have only a 59% chance of surviving your money. their example shows any investments which include at least 20% equities would have better than a 90% chance of surviving.

5% withdrawal is suicide with cash only - just a 4% chance - but even with the best allocation (50% stock, 40% bonds, 10% cash) the most you can get is an 88% certainty.

6% is only doable with larger stock allocations - 85% or even 100% stocks would be needed to reach even a 74% chance.

7% is also doable only with larger stock allocations - 66% chance with 100% allocation.

oddly enough - or maybe not - their study differs considerably with what i get using firecalc. their study seems really skewed towards equities, but then that's the business that fidelity is in so why not???????
miket
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Post by miket »

peteyperson, i cannot tell you why we americans have so little interest in international investment. we just do.

in my case, my wife and i have traveled to europe many many times over the years - not because we're rich but because she worked for the airlines so we got FREE travel - and we don't consider ourselves insular americans. in fact although we're now FIRE'd, we still travel to europe when we can. and yet when it comes to investing overseas i recoil at the thought of it. at this time we have a grand total of 1% of our investments in an international fund.

dont ask me why.
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Accumulating a 25-year stash is a great start.

Post by therealchips »

Most will leap onto a blanket 4%

That's not all bad. If an adequate retirement stash is actually 50 or 33 times an annual retirement budget, aiming at a 25-year stash is a great start and a necessary mile stone in the accumulation phase. It's a start, in fact, that few people will achieve at any age. The majority prefers conspicuous consumption (which keeps them broke) over prudent and boring saving and investment (which may liberate them economically). It's easy for people to see what kind of car you drive and hard for them to tell whether your house is mortgaged and your retirement plan well-funded. It seems to be taboo to talk about your financial prudence in part because it gives imprudent people an unpleasant reminder of their own recklessness.

Accumulating a 25-year stash is a great start toward financial independence and may or may not be enough in itself, depending on things like the stash owner's age and the diversification of the stash.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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ataloss
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Post by ataloss »

in the junk mail i get from fidelity


I recall that in the old days when I was a fido customer their magazine suggested that planned retirement spending be based on 70-80% of final salary. Some firey person wrote in and asked if that applied to someone such as himself with a 50% savings rate :wink: I was sort of impressed that they published his letter and admitted that he was right.
Have fun.

Ataloss
peteyperson
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Re: Accumulating a 25-year stash is a great start.

Post by peteyperson »

Hey Chips,

I don't wish to be discouraging to a positive goal. I just recall reading people retiring with 25x or less, and also ignoring the present valuation of their non-diversified US stock investment. Retiring with a nice sum but perhaps only just enough becomes far more risky when you give up your job sitting on S&P 500 at avg P/E in the mid 20s. It leaves you with no margin of safety to work with and possibly not able to go back to work to the same kind of job & pay scale.

So 25x is fine as an early goal, I just fear people will take that as gospel as they seem to do on the various Fool FIRE boards and don't appeciate the downside risks involved. They're more subtle and not so easy to appreciate.

Petey
therealchips wrote:
Most will leap onto a blanket 4%

That's not all bad. If an adequate retirement stash is actually 50 or 33 times an annual retirement budget, aiming at a 25-year stash is a great start and a necessary mile stone in the accumulation phase. It's a start, in fact, that few people will achieve at any age. The majority prefers conspicuous consumption (which keeps them broke) over prudent and boring saving and investment (which may liberate them economically). It's easy for people to see what kind of car you drive and hard for them to tell whether your house is mortgaged and your retirement plan well-funded. It seems to be taboo to talk about your financial prudence in part because it gives imprudent people an unpleasant reminder of their own recklessness.

Accumulating a 25-year stash is a great start toward financial independence and may or may not be enough in itself, depending on things like the stash owner's age and the diversification of the stash.
raddr
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Re: Accumulating a 25-year stash is a great start.

Post by raddr »

peteyperson wrote:
I don't wish to be discouraging to a positive goal. I just recall reading people retiring with 25x or less, and also ignoring the present valuation of their non-diversified US stock investment. Retiring with a nice sum but perhaps only just enough becomes far more risky when you give up your job sitting on S&P 500 at avg P/E in the mid 20s. It leaves you with no margin of safety to work with and possibly not able to go back to work to the same kind of job & pay scale.

So 25x is fine as an early goal, I just fear people will take that as gospel as they seem to do on the various Fool FIRE boards and don't appeciate the downside risks involved. They're more subtle and not so easy to appreciate.


I agree. Based on valuation levels and my simulation studies I'd give a 75:25 S&P500:cash portfolio about a 50-60% chance of surviving 40 years at a 4% withdrawal rate. Diversification would be highly recommended for those who are heavily invested in the S&P500 and who want to take out more than about 2-2.5% for 40+ years.
peteyperson
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Re: Accumulating a 25-year stash is a great start.

Post by peteyperson »

raddr wrote: I agree.


Careful! :lol:
raddr wrote: Based on valuation levels and my simulation studies I'd give a 75:25 S&P500:cash portfolio about a 50-60% chance of surviving 40 years at a 4% withdrawal rate. Diversification would be highly recommended for those who are heavily invested in the S&P500 and who want to take out more than about 2-2.5% for 40+ years.


Why would you put survival at 50-60%? Is it because of the problem of selling bonds wihch may be underwater because interest rates have moved up since purchase (whereas if you'd held them to maturity you would have gotten your full investment back) or because people with only two asset classes to work may have to sell equities at inopportune valuations? Or a bit of both?

With things like REITs, inflation-protected treasuries etc, you'd need to have many income streams all stop dead for you to have a complete lack of funding without selling underwater assets to live. It is a balancing act, not wanting too much via the dividend route where you can enjoy deferred capital gains taxation for many years as well. We have a 10% dividend tax rate up to $50,000 income, and 32.5% above that. Rumblings that the UK Govt will be raising the dividend tax rates though. I'm expecting a move to 20% personally, in line with the charge on cash interest below the $50k threshold.

Hope everyone is enjoying the weekend.

Petey
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Re: Accumulating a 25-year stash is a great start.

Post by raddr »

peteyperson wrote: Why would you put survival at 50-60%? Is it because of the problem of selling bonds wihch may be underwater because interest rates have moved up since purchase (whereas if you'd held them to maturity you would have gotten your full investment back) or because people with only two asset classes to work may have to sell equities at inopportune valuations? Or a bit of both?


I don't think that income streams are all that important. It is the expected total return and volatility that count. Remember that 7% real returns for the S&P500 were built into the Trinity/Jarret studies that determined that 4% was a "safe" withdrawal rate. I think that that the chances of achieving like returns in the next few decades is close to nil. :cry:
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Alec
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Mike

Post by Alec »

Three words- "Home country Bias"

And it's not just Americans that we see this with. Studies have shown that in almost every country, people exhibit this bias - investing heavily in companies in their country, and very lightly internationally.

- Alec
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