No. of Recommendations: 21
For those withdrawing around the "safe" rate of 4% every year, I believe the order of portfolio valuation matters, not the average.
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Doesn't matter much if withdrawing below 3.25%.
I think the notion of SWR of [real] 4% of starting portfolio market value advice is like advising people to subsist on unicorn meat. Does anybody still buy that stuff? But what do I know.
Sequence of returns risk per se doesn't really exist. It's really just "risk that you got bad advice and are withdrawing way too much". If you can't ride out a bad bear, you can't retire with the withdrawal rate you're contemplating, period. It's terrible to simply say to someone "you're not rich enough for that retirement income", but that's way better than saying "you're rich enough" when they clearly aren't.
I'll grant that starting with 4% of a decent estimate of the intrinsic value of the portfolio on retirement day would make some sense. It would be much more defensible. But just try to get someone to agree on the fair value. *
Personally I base retirement withdrawal ideas on a fixed fraction of portfolio liquidated each period, not a forever-fixed real dollar amount of withdrawals.
Putting up with a bit of variation in income hugely simplifies the planning: it eliminates the need for whole swathes of projections of the future, and all the risks arising from errors in those projections. e.g, if you sell 4% of every remaining position every year, you know with certainty that you'll still have 44.2% as many shares of everything after 20 years. If those firms are still around (especially if it's an index), you know for sure you can't go broke. The future market value is unknown and the dividend yield along the way is unknown, but that's better than having those two issues AND not knowing how many shares you'll have later on. And, as mentioned, you know for sure that the average valuation multiple you'll realize along the way is the future average market valuation multiple, within a coupla basis points.
Jim
* Planning a robust strategy is hard, especially if it relies on figuring out what something is worth. A bit of memento mori: Based on a multiple of smoothed real earnings, if the market today were valued as it was at the 1982 bear market low, the S&P 500 would be at 918 right now, including the adjustment for inflation. And that's using current smoothed earnings based on recent history while profit margins have been weirdly high compared to history: even smoothed profits for the broad US market are very high lately, meaning S&P=918 is perhaps an overestimate.
For a SPY-holder really insisting on something resembling the old "real 4% SWR" trope, I'd at least suggest a withdrawal rate of 4% of intrinsic value estimated as (say) the average valuation since 2000 or earlier. So, for example, the S&P 500 has traded at an average of 6.76 times trailing sales since 2000, so use that as your estimate of today's S&P index value, and withdraw 4% of that. Using the sales to end Q3, that would be S&P 500 = 3172. That's 67% of today's S&P value, so start your withdrawals with 67% of 4% = no more than 2.68% of today's starting SPY portfolio value. The notion is that income outcomes like what was typical in the past can only be expected if the starting situation resembles those that were typical in the past.
