# Safe withdrawal rates again. Updated from Morningstar



## agent99 (Sep 11, 2013)

Haven't read it in detail, but it seems to cover all the bases:









What's a Safe Retirement Spending Rate for the Decades Ahead?


Simple tweaks can have an appreciable impact on your withdrawal rate.




www.morningstar.ca





They seem to have dropped the old 4% rule to 3.3% for 30yr period. At our age with say, 20yr horizon, 4.9% . Hope my wife doesn't read it


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## AltaRed (Jun 8, 2009)

That is a really cool article. I am going to spend some time studying it.


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## ian (Jun 18, 2016)

I read this over once. For certain....I need to read it again, and probably again after that. 

thanks


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## Mechanic (Oct 29, 2013)

Had a quick look. Very interesting, will read again later. Thanks


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## milhouse (Nov 16, 2016)

Interesting article and I have to read it again to understand it more because it conflicts with what I understood Bengen's more recent research showed as he explained during his interview on the Rational Reminder podcast early this year.
From the podcast, my high level takeaways were:

His updated SWR was closer to 4.5% for a 30 year retirement based on a more broader investment mix, like the inclusion of small caps whereas his original analysis was based on a 50:50 mix of large cap stocks and intermediate treasuries.
The bigger threat to a successful outcome was high (ie double digit) inflation rather than market returns.
The Morningstar article throws me off a bit by estimating that the SWR should be reduced to from 4% to 3.3%. But they do have a valid point that bond yields are very low and equity valuations are very high.


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## AltaRed (Jun 8, 2009)

There have been a few other analyses down in recent months (or past year) that came to a similar conclusion (within a few decimal points) on a 30 year retirement due to low bond yields. The ending of the bond bull brings bond CAGR down to levels not seen before. Alternative investments might juice that a bit but for the average balanced fund (60/40) investor who also pays a bit of MER, something in the 3.3-3.5% range is probably as good as it is going to get going forward. That all said, SWR is far too inflexible to be taken too seriously.


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## milhouse (Nov 16, 2016)

AltaRed said:


> That all said, SWR is far too inflexible to be taken too seriously.


I think that's also a key takeaway. Bengen said as much in the podcast saying that: the 4% rule was a rule of thumb, it was more to be used as a guiding info rather than be applied rigorously in practice, it focuses too much on the worst case scenario, and doesn't factor in governement benefits.
The Morningstar article also specifically says not to interpret the article as recommending a 3.3% SWR and that there are a number of personal preferences to consider when determining the best withdrawal strategy for an individual.


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## prisoner24601 (May 27, 2018)

Nice summary of the levers you can pull and the trade-offs involved. What I don't understand is why "Tolerating a Lower Success Rate" is even a consideration for anyone. It's like setting out on a car journey with no gas stations and saying we have a 90% chance of not getting stranded on the highway depending on traffic and other assumptions. I can hear it now - "OK, but I'm not pushing if we run out of gas".


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## AltaRed (Jun 8, 2009)

Example: If the chances of running out of money at age 99 is 1% with a conservative portfolio, but taking a 2% risk with a more dynamic portfolio could result in a 10% better retirement (10% higher spend), why would one not take the 2% risk option? The odds are so high that one won't make it to age 99 in the first place that a 1% or 2% probability is meaningless. One will generally be incompetent by then anyway and be a ward of someone.


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## HappilyRetired (Nov 14, 2021)

prisoner24601 said:


> Nice summary of the levers you can pull and the trade-offs involved. What I don't understand is why "Tolerating a Lower Success Rate" is even a consideration for anyone. It's like setting out on a car journey with no gas stations and saying we have a 90% chance of not getting stranded on the highway depending on traffic and other assumptions. I can hear it now - "OK, but I'm not pushing if we run out of gas".


Running out of gas and running out of money are two different things. People who withdraw X% per year should be monitoring their portfolio on a regular basis and making adjustments if necessary. It's always possible to tighten expenses and spend less. It's not so easy to stretch a tank of gas further.


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## ian (Jun 18, 2016)

I read many similar articles prior to retirement and they all had valid points.

Looking back over 10 years or so of retirement the one thing was not really discussed at length at that time was the unknown. For us, that meant investment returns much higher than anticipated accompanied by an inflation rate much lower than anticipated. I believe the trick is to take from these only those portions that best match your situation and your personality.

The 100-age equals percentage equities allocation advice was common during that period. Fortunately we decided to follow alternate strategy. It was a prudent strategy given the market the and economy but it was certainly at variance with some of usual advice at the time. Many others did exactly the same with the same or better results than us.

I really do think that flexibility and some common sense is critical to the question of allocation or withdrawal strategies vs following a strict regime. We are 70 percent equites/alternate and 30 percent fixed at the moment. Two, three, whatever years from now we may have pivoted to the complete opposite depending on the market, the economy, and a prudent, conservative approach to our investments.

We review our cash burn in concert with our income and our investment performance. Always adjusted for inflation and the tax liability of any unrealized gains. Current and estimated future. But we certainly do not extend those out 10, 20, or 30 years. Too much can happen in the intervening periods that will make these longer term predictions and formulae invalid. No fancy spreadsheets or formulas. Just back of the envelope type calculations , advisor feedback, and common sense gut feelings of both of us. Plus some good advice gleaned from this forum of course. It should become easier though as the passage of time makes our own horizons that much shorter.


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## AltaRed (Jun 8, 2009)

ian said:


> We review our cash burn in concert with our income and our investment performance. Always adjusted for inflation and the tax liability of any unrealized gains. Current and estimated future. But we certainly do not extend those out 10, 20, or 30 years. Too much can happen in the intervening periods that will make these longer term predictions and formulae invalid. No fancy spreadsheets or formulas. Just back of the envelope type calculations , advisor feedback, and common sense gut feelings of both of us. Plus some good advice gleaned from this forum of course.


I agree the best plan is one that is re-visited on a regular basis, tweaking here and there as necessary. One does need a starting point though, so some standard algorithms are useful leading up to and into early years of retirement. One does need to have a sense of what can be accessed from the portfolio at that time. I suspect almost everyone will tweak their plan, perhaps significantly, by 5 years into retirement. Now 15+ years into retirement, I have certainly made very significant adjustments to the original plan (higher spend rate, higher equity allocation) and use of new directional information such as Variable Percentage Withdrawal. Market performance, inflation and other things beyond one's control are the major influencers in plan adjustments. Time to accept this is the way real life happens.


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## james4beach (Nov 15, 2012)

agent99 said:


> They seem to have dropped the old 4% rule to 3.3% for 30yr period.


I haven't read this one yet, but a couple years ago I did a modelling exercise together with a friend who works professionally in this area. Together we arrived at 3.3% for about 40-50 year horizon.

If this is saying 3.3% for only 30 years, this sounds more conservative than even my own modeling.

As @AltaRed has wisely pointed out, people don't really have to consume rock steady constant withdrawals. We have flexibility in what we can draw down, so as long as one is smart enough to _reduce_ consumption during stretches of very low returns, things would work out better than these SWR studies.


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## james4beach (Nov 15, 2012)

HappilyRetired said:


> Running out of gas and running out of money are two different things. People who withdraw X% per year should be monitoring their portfolio on a regular basis and making adjustments if necessary. It's always possible to tighten expenses and spend less. It's not so easy to stretch a tank of gas further.


Should also be noted that people who withdraw dividends should also monitor their portfolios carefully to evaluate their withdrawal rate.

There is a very common misconception that dividends are somehow immune to the withdrawal rate problem, which isn't true. Dividends are just a withdrawal mechanism. So if you are getting 4.5% in dividends out of your portfolio, you are withdrawing 4.5% and should monitor to make sure it's not excessive.


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## agent99 (Sep 11, 2013)

james4beach said:


> There is a very common misconception that dividends are somehow immune to the withdrawal rate problem, which isn't true. Dividends are just a withdrawal mechanism. So if you are getting 4.5% in dividends out of your portfolio, you are withdrawing 4.5% and should monitor to make sure it's not excessive.


Same old broken record James. Let's not go there again.


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## Gator13 (Jan 5, 2020)

james4beach said:


> Should also be noted that people who withdraw dividends should also monitor their portfolios carefully to evaluate their withdrawal rate.
> 
> There is a very common misconception that dividends are somehow immune to the withdrawal rate problem, which isn't true. Dividends are just a withdrawal mechanism. So if you are getting 4.5% in dividends out of your portfolio, you are withdrawing 4.5% and should monitor to make sure it's not excessive.


Would it be considered excessive to withdraw 100% of the dividends, if you are not touching the principal amount?


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## Gator13 (Jan 5, 2020)

Regarding the Variable Percentage Withdrawal, what would be a reasonable number to use? I would like to adopt this strategy for my registered funds. Thanks


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## AltaRed (Jun 8, 2009)

VPW applies across one's entire portfolio, but the actual $$ value of the appropriate percentage per the VPW Withdrawal Table can be disproportionately sourced from whatever account you wish. Obviously the AT value will vary depending on how the withdrawals are taxed. Taxes are part of one's cash flow spend.

Those who have a % of AUM arrangement with an FA would need to deduct that % of AUM fee (e.g. 1%) from the percentages in the table to account for the robber baron's fee.


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## james4beach (Nov 15, 2012)

agent99 said:


> Same old broken record James. Let's not go there again.


I'm going to keep repeating it until people understand it. People still don't understand this, and books, advisors, and web sites keep feeding them faulty information about dividends.



Gator13 said:


> Would it be considered excessive to withdraw 100% of the dividends, if you are not touching the principal amount?


It depends on how much the dividends work out to, as a withdrawal rate from the portfolio. This has nothing to do with touching principal; there is no such thing really. Or one might say that every dividend touches and eats into principal.

So I'd say the better way to think about this is to forget about the (faulty) notion of "not eating into principal". But rather, how much are the withdrawals?

If the portfolio generates 3% in dividends and you withdraw those, no problem... because 3% is a sustainable amount to withdraw. For example if you hold XIC and just withdraw every dividend, no problem, because XIC's dividend level is in a sustainable level.

But if the dividends are more like 5%, and you're withdrawing them all, that's a very high withdrawal rate. This means you are withdrawing at 5% so you have to monitor (maybe applying variable withdrawal techniques) to make sure you don't deplete the portfolio.

In reality those dividends may get cut back anyway during economic slowdowns, so the problem might solve itself. You'd just have to monitor it over time.

Companies will *usually* only pay out a sustainable level of withdrawals, so I don't think you really have to be overly worried about this problem. But I would still pay close attention if your dividend yields are over say 5% because that's very unlikely to be a sustainable level.


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## londoncalling (Sep 17, 2011)

james4beach said:


> I haven't read this one yet, but a couple years ago I did a modelling exercise together with a friend who works professionally in this area. Together we arrived at 3.3% for about 40-50 year horizon.
> 
> If this is saying 3.3% for only 30 years, this sounds more conservative than even my own modeling.
> 
> As @AltaRed has wisely pointed out, people don't really have to consume rock steady constant withdrawals. We have flexibility in what we can draw down, so as long as one is smart enough to _reduce_ consumption during stretches of very low returns, things would work out better than these SWR studies.


Changing withdrawal rate should be as simple as changing your clothes provided you have enough saved to meet your retirement needs. The key word being needs. With proper planning and good behaviour most should be able to maintain a retirement. Exception to this rule would be that you had significant debt and terrible spending control during your working years or that your desired retirement does not match your nest egg. Of course there is always the "what life does while we are planning" scenarios job loss, tragedy, health etc. I think SWR is a good basis to use in determining a plan. Each plan needs to be revisited to see that it is on track and that it is indeed the right plan.


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## londoncalling (Sep 17, 2011)

Gator13 said:


> Would it be considered excessive to withdraw 100% of the dividends, if you are not touching the principal amount?


Not if meets your needs and the dividend rate keep up with inflation. Using the 3.3% withdrawal rate in the article one could create a safe dividend portfolio with a 3 -3.5% yield. As long as the portfolio continues to grow dividends at the rate of inflation and it meets your spending needs you should be fine. The hurdle is getting a nest egg big enough where you don't have to sell equities to cover your costs.


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## Gator13 (Jan 5, 2020)

james4beach said:


> It depends on how much the dividends work out to, as a withdrawal rate from the portfolio. This has nothing to do with touching principal; there is no such thing really. Or one might say that every dividend touches and eats into principal.


I should have phrased it differently and referred to the number of shares versus the principal. The nice thing about dividends is that they don't eat into the number of shares I own. Similar to my job........ I like getting some money out the company every two weeks versus letting the boss reinvest that money back in the business. 😄


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## agent99 (Sep 11, 2013)

james4beach said:


> I'm going to keep repeating it until people understand it. People still don't understand this, and books, advisors, and web sites keep feeding them faulty information about dividends.


James, 
You are still very young and have no experience managing withdrawal during retirement. 
Keep learning and stop harping on that one thing which has become very tiresome, to me anyway.


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## ian (Jun 18, 2016)

Would not the decision on dividends actually wrest on the value of your investments, your spending habits, age, etc. 

Really no different than any other equity draw down decision that you make. One does not need books, advisors or web sites to figure this one out. Just some basic math and common sense. Not much cheese there.


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## james4beach (Nov 15, 2012)

ian said:


> Would not the decision on dividends actually wrest on the value of your investments, your spending habits, age, etc.
> 
> Really no different than any other equity draw down decision that you make. One does not need books, advisors or web sites to figure this one out. Just some basic math and common sense. Not much cheese there.


But sadly there are some investment vehicles that can get people into trouble.

Remember those "monthly income" funds from a few years ago that had payout ratios over 6% ? Or income trusts? Or how about the covered call ETFs, with yields like 6% or 7% ... so yes one needs common sense, but sometimes investors are led to believe that very high payouts are possible. They're just not sustainable.


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## ian (Jun 18, 2016)

james4beach said:


> But sadly there are some investment vehicles that can get people into trouble.
> 
> Remember those "monthly income" funds from a few years ago that had payout ratios over 6% ? Or income trusts? Or how about the covered call ETFs, with yields like 6% or 7% ... so yes one needs common sense, but sometimes investors are led to believe that very high payouts are possible. They're just not sustainable.


This is like anything else. Buyer beware. You cannot stop people from investing in products that they know nothing about and cannot decipher. I suspect than insurance companies count on this when devising and selling some products. Not to mention ponzi schemes.


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## AltaRed (Jun 8, 2009)

james4beach said:


> But sadly there are some investment vehicles that can get people into trouble.
> 
> Remember those "monthly income" funds from a few years ago that had payout ratios over 6% ? Or income trusts? Or how about the covered call ETFs, with yields like 6% or 7% ... so yes one needs common sense, but sometimes investors are led to believe that very high payouts are possible. They're just not sustainable.


There has been a lot of this product being sold the past several years as interest rates have plummeted. Even some FAs buy some of this shite for their clients, albeit they are not a bad option for an elderly senior who does not care if there is a significant ROC component.


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