Weekend Reading – Is 1.9% the new 4% safe withdrawal rate?
Welcome to a new Weekend Reading edition, questionning whether just 1.9% is the new 4% safe withdrawal rate.
My take on that in a bit!
First up, a few recent articles in case you missed them!
Weekend Reading – Is 1.9% the new 4% safe withdrawal rate?
I don’t make this stuff up!
According to this study, using a comprehensive new dataset of asset-class returns in 38 developed countries, the study highlighted that a 65-year-old couple willing to bear a 5% chance of financial ruin can only withdraw just 2.26% per year from their portfolio, a rate materially lower than conventional retirement withdrawal advice using the 4% rule.
I get my 1.9% rule from the catchy Barron’s title here. According to the study authors, this is what the withdrawal spending rule would be if you wanted the same probability of “financial ruin” (meaning, outliving your money) as the 4% rule had with U.S.-only data vs. developed countries, using new mortality data.
From the study:
“We use SSA mortality estimates for today’s young adults (retirement in 2065) and newborns (retirement in 2085) and find that the increased longevity materially impacts the safe withdrawal rate. For a retired couple willing to accept a 5% chance of financial ruin, the real withdrawal rate of 2.26% for today’s retirees drops to 2.02% for today’s young adults and to 1.95% for today’s newborns.”
Of note, you should know the base case simulation in the study above focuses on the joint investment-longevity outcomes for a couple retiring in 2022 at age 65 who chooses a portfolio strategy of 60% domestic stocks and 40% bonds. As you may know, a 60/40 portfolio has been absolutely hammered this year to date.
On the flipside, any 60/40 portfolio should rise again, “like the phoenix” to borrow some words from Vanguard:
1.9% for a safe withdrawal rate seems dire, considering the following – most Americans don’t or can’t save money.
“In 2021, the average account balance for Vanguard participants was $141,542; the median balance was $35,345. Vanguard participants’ average account balances increased by 10% since 2020, driven primarily by the increase in equity markets over the year.”
“The 401(k) system is the collection mechanism for retirement saving; the bulk of the money now resides in IRAs. The 2019 Survey of Consumer Finances offers a glimpse of how three years of solid economic growth, steady stock market returns, and the continued maturation of the 401(k) system affected households’ retirement savings. The typical household approaching retirement had $144,000 in combined 401(k)/IRA assets, up from $135,000 in 2016. These assets will provide only $570 per month in retirement, an amount whose purchasing power will decline over time with inflation. Overall, the system provides meaningful balances for only the top two income quintiles of households with 401(k)s. Moreover, only half of all households have any 401(k)-related holdings. This somewhat bleak assessment of the nation’s employer-sponsored retirement system can only have been worsened by COVID-19 and the ensuing recession.”
What does this data suggest for you or me, the DIY investor, in Canada?
Not much, for me, really.
You know from my site, I’m a HUGE advocate of spending less than you make, investing the difference, to buy and hold mostly dividend paying stocks for income but also a few low-cost ETFs for growth. That’s my recipe. Your mileage may vary.
As such, it is my plan to have my portfolio value worth far more than the equivalent of $144,000 USD in Canadian dollars (in a few years) to start semi-retirement with.
I’ve accomplished this via the following recipe, compounded over some 20+ years:
This is a personal finance triangle.
Source: Canadian Financial Wiki.
At a high-level, this is pretty much everything you need to know and do to build-wealth.
So, at the top of the triangle, while investment portfolio value is fine and good, I’ve forever been a fan of growing income, spending the dividends and distributions, from what my portfolio generates.
Case in point: I recently published my latest monthly income update.
Part of our portfolio now generates close to $78 per day, every day, some of that tax-free, without any capital withdrawal rate whatsoever.
By “living off dividends”, as I work part-time, I can choose when to withdraw my capital, be strategic with our capital gains where they exist, and have a very predictable income stream for needs and wants.
Mark, be real. $28,000?
I can appreciate some readers may feel defeated when they see that number above. I know for a fact that bothers some poeple – they’ve told me so.
I don’t share it to frustrate or annoy anyone. Look at this chart. I hardly started there….
You need to know it took us decades to get to where we are. We focused on that triangle above as a start and just kept on going…
I share these monthly income updates to inspire, to show others this is real progress in my life, and you have an opportunity to create your own income path – whether that is via individual stocks, ETFs, rental income, private equity, or anything else.
I don’t believe 1.9% is the new 4% safe withdrawal rate whatsoever. It’s probably somewhere in between if you want to be very conservative.
I do believe that figuring out how you will obtain meaningful, tangible income from your portfolio, instead of focusing on your portfolio value, is absolutely the right approach to take.
More Weekend Reading – beyond 1.9% for the new 4% safe withdrawal rate
My latest book giveaway is almost over, enter to win a free copy of Buy This, Not That here.
From The Globe and Mail, some reasons why the TSX will likely outperform the S&P 500 over the next decade (subscribers only). The jist of the article, and what to own for these returns:
“The 2020s mark a secular regime shift: higher inflation/rates/commodity prices and de-globalization, all of which are more supportive for the TSX vs. SPX. Historically, the relative performance of the TSX vs. S&P 500 has closely followed inflation and commodity cycles, and the 2020s’ expected inflation and commodity cycle should translate to the TSX outperforming over the next decade.”
I enjoy reading about the intersections between personal finance and investing, and workplace efficiency.
In Ray Dalio’s book Principles: Life and Work, the billionaire investor and founder of the largest hedge fund in the world, Bridgewater Associates, breaks down nearly everything he’s learned over the course of his career into a set of principles. Among them, these simple but effective meeting rules:
- Have a purpose. Too often I see this in my workplace – a meeting invite with no clear agenda let alone a hint about what the meeting is about in the meeting subject title. Sigh.
- Avoiding “topic slip”. This is challenging, and while having a meeting purpose with agenda should help, people do like to be heard and enjoy tangents. Consider a virtual parking lot or a whiteboard to note tangent ideas. Respect for the meeting facilitator and moderator helps too!
- Assign action items. Seems easy, and obvious, but taking personal responsibility isn’t always so obvious to all.
- Align on decisions. This can be combined with meeting notes or use of a decision-log or other tools. Clear records, no matter how you do it, is key.
- Strive for efficiency. Meetings are value-added when something is accomplished. From Ray: “While open communication is very important, the challenge is to do it in a time-efficient way.”
From the oldie but goodie file, I enjoyed figuring out what it might take to FIRE in Victoria, BC from my Money Mechanic friend.
I enjoyed Dale Robert’s recent Sunday Reads, including some updates on his retirement stock portfolio.
What’s the worst case scenario for stocks? A Wealth of Common Sense has some thoughts, likely a U.S. market down 30% or so could be expected. That means more pain ahead, maybe, possibly, we don’t really know!
Interesting MoneySense read from Jon Chevreau and the team there – on the subject of tontines – coming back into favour to support retirement income planning?
From the article:
“Tontines can be compared to life annuities—or for that matter, defined benefit pension plans. A tontine works by pooling savings from multiple investors. Essentially, those who die earlier subsidize the lucky few who live longer.
Asked for a simple definition of a tontine, Guardian Capital managing director and head of Canadian retail asset management Barry Gordon said it is “a pool of assets that are shared by survivors over time.” In that respect, annuities and defined benefit pensions operate similarly, he said. Indeed, for Guardian Capital, a driving force was the lack of availability of defined benefit plans these days.”
Read on above for more on this interesting subject…
As always, check out my Deals page for any current offers and partnerships you can’t really find anywhere else!
Have a great weekend!
I won’t follow the 4% rule myself, but if you want some quick math, it’s still a decent rule of thumb – with caution!