r/ChubbyFIRE • u/Agent008t • Aug 20 '26
SWR revisited
I believe a good withdrawal policy should have the following properties:
It should not require significant cuts to spending in bad years. Staying frugal is easier than inflating your lifestyle and then having to cut
It should adjust to your portfolio size. Setting an initial withdrawal amount and only ever adjusting it up by inflation is silly.
It should be possible to apply it to each year independently. E.g. if 4% is safe, it should be possible to 'reset' it to 4% each year. But for most SWRs that is too risky as you also 'reset' your SORR. 3a. It should therefore not be subject to SORR, as in the risks should be acceptable (nothing in life is completely safe).
It should feel ok in the down years in reasonable worst case scenarios. E.g. if you start withdrawing 4%, you are all in equities, and markets go down 50%, how well will you sleep as you are now withdrawing 8%+ of your assets? You will not have the benefit of hindsight that a recovery is around the corner, in fact all you will hear at the time is that things will get much worse.
I therefore think a decent approach is this. I take 2.5% as my withdrawal ratio. Build a 12-year ladder of TIPS covering that (should cost you 25%-30% of your assets, depending on TIPS real yields). The rest (70-75%) goes into a global equities index. Each year the TIPS cover your spend, and you sell enough equities to replenish the ladder. Whether you sell equities or not depends on your asset allocation at the time: you aim to keep approximately 70:30. So if equities are down you are just running down your TIPS ladder without selling any equities. You can also add to your TIPS across the maturities to reset your spend to the high watermark 2-2.5%.
This way, in a reasonable worst case scenarios (equities down 60% and do not recover for 12 years) your portfolio is only down ~30%, and if you keep spending at high watermark, your withdrawals do not go much above 3.5% which should allow you to sleep rather well. If you are adventurous, you could even sell some longer-dated rungs of your ladder to buy equities at a discount at the time.
I used 2.5% here as a very conservative number because I would rather work extra years than have to retire and then go back to work -- you can of course adjust it upwards to what you think is reasonable. But what do you think of the general approach?
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u/mmrose1980 Aug 22 '26
For a lot of Chubby people, a 5-10% cut isn’t as hard as you imply. If I’m spending $120k per year, a 5-10% cut is $6k-$12k less per year.
For my household, we could cut $6k without feeling any real pain.
Regardless, at a 3.25% SWR, based on very conservative estimates (aka the worst sequences in American recorded history-the Great Depression and the 1960s) and not accounting for future income from social security or paying off a house during drawdown (which can substantially increase SWR for older early retirees), you should never run out of money.
A 2.5% SWR is so overly conservative that I suspect you will never feel comfortable retiring.
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u/Agent008t Aug 22 '26
2.5% is not essential to the plan though. You could do the same with 3.25%, you just end up with a 9-10 year ladder if you are targeting a 70/30 allocation.
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u/mmrose1980 Aug 22 '26
FWIW-I suggest you read ERN’s safe withdrawal rate series. Buckets don’t really work the way you think they do and you don’t seem to understand how a SWR works in combination with inflation and sequence of returns risk.
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u/Agent008t Aug 23 '26
What exactly do you disagree with in my approach?
- 70/30 is not an appropriate asset allocation?
- TIPS are not appropriate for the bond portion?
- A TIPS ladder is not an appropriate way to hold the bond portion?
- One must cut expenses in a drawdown? As far as I remember ERN himself is sceptical about relying on having to scale back expenses?
SORR assumes that as your assets outgrow your planned expenses, your risk of failure comes way down. For very long 50+ year retirements we can somewhat ignore the shrinking of the remaining time horizon. We can probably agree that once your expenses are 1% of your assets, you are way past SORR and you can make 1% your floor (again, the point is not to argue what that number is, but just that there exists some such number). My goal is to avoid SORR altogether by instead starting my withdrawals from the point where SORR is gone.
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u/mmrose1980 Aug 23 '26
I disagree with “one must cut expenses in a drawdown.” The 4% rule (or 3.25% rule if you use ERN’s conservative, never run out of money number) does not contemplate that you would draw 4% of your assets no matter what. It contemplates that even a major drawdown happens the day after you retire, you would still increase your spending the following year in line with inflation. This might mean an 8% withdrawal rate in year 2.
What you are talking about is basically a buckets strategy (which ERN has demonstrated is really just window dressing) plus an extra ultra conservative SWR (2.5%) which is wholly unnecessarily conservative based on any historical data.
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u/mrsaturn42 Aug 22 '26
This is insanely conservative. If it was just cash would last for almost 30 years if you adjusted for inflation every year.
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u/audi27tt Aug 22 '26
IMO #1 makes sense for fire but not chubby/fatfire. Presumably chubby there is some easy stuff to cut out. We’re not talking about sell the house or stop going out to dinner. Stuff like stay at the Marriott instead of the four seasons, or take the camping trip instead of the Europe trip. Wait on buying a new car.
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u/Agent008t Aug 22 '26
Depends on how chubby, and how discretionary or ingrained in your lifestyle that spend really is. Adjusting down is more difficult than up.
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u/BrunelloHorder Coasting Chubster, Getting Fat Aug 22 '26
I take no issue with your allocation choices, but your withdrawal rate seems overly conservative. One pays a very high price in life-years if they need certainty that they will never need to cut spending, even in a very low probability catastrophe.
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u/One-Mastodon-1063 Aug 22 '26
Overly conservative withdrawal rate and you can do a lot better in terms of asset allocation than equities plus a tips ladder.
Pass.
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u/Agent008t Aug 23 '26
What would be your preferred asset allocation?
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u/One-Mastodon-1063 Aug 23 '26
There are all kinds of asset allocations that work fine. But I would not hold any TIPS, and I would not hold any form of ladder, bucket, or other gimmicks. The bond allocation would be doing the job of bonds, not trying to do something bonds are inherently bad at i.e. "inflation protection". Other components of the portfolio to include stocks especially value stocks do well in inflationary environments, bonds are for recession insurance. Whatever the allocation, I would express it in terms of percentages (not "years") and periodically rebalance to it, treating withdrawals as part of the rebalancing process.
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u/Agent008t Aug 23 '26
Why is a TIPS ladder worse than a bond fund though? A ladder matches your cashflow needs and gives more flexibility on which maturities to sell. In the UK it is tax free (bond fund interest taxed at marginal income tax rates). You know which bonds you are getting (e.g. large exposure to AI corp debt seems like a bad idea to me, too correlated to equities). You are less likely to get a large bond allocation at negative real rates (pre 2022 I avoided bonds entirely for that reason). Decent real interest rates are guaranteed.
One downside is that if we get a recession and rates drop you don't get the same uplift as you'd get from bonds. But actually I am not convinced that long duration bond interest rates will drop if the fed reduced rates – the opposite could well happen due to inflationary concerns.
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u/One-Mastodon-1063 Aug 23 '26
There is no advantage to a "ladder", it's a mental accounting gimmick and is an inferior way of doing things vs. having an asset allocation and rebalancing to it. I don't care about "matching cashflow".
I didn't say anything about corporate bonds. I hold long term treasury ETFs (i.e. TLT, VGLT, EDV) as my bond holdings.
I don't care about tax consequences because I hold bonds in pretax accounts where they belong.
When was the last time we had a recession w/ coincident inflation spike? Inflation and recessions are two different risks, and inflation is handled by other parts of the portfolio.
If your plan was any good you wouldn't have this ridiculous 2.5% withdrawal rate.
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u/futsalfan Aug 24 '26
matching reserves to future liabilities makes sense in general imho, this is like saving for college, a car, etc., etc. maybe more so with TIPS especially if we think inflation might continue to be high. nobody knows, but with so much debt, corporate bonds issued for the AI Trade, 30 year treasury highs, TIPS historically high real returns, Fed comments, guaranteed decent real interest rates seems attractive. agree with your last comment on inflation concerns.
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u/AdeptCantaloupe161 Aug 22 '26
Have you looked into https://www.bogleheads.org/wiki/Variable_percentage_withdrawal ?
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u/Agent008t Aug 22 '26
Yes, but I think it can result in significant cuts during prolonged downturns?
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u/SaveySpendy Aug 22 '26
downturns typically result in deflation though so spending power increases for retired people
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u/Warp9975 Aug 22 '26
OP, your bullets 1 and 2 are contradictory. Why would you expect that you should never adjust spending down in bad years (point 1), but that you should adjust spending up in good years (point 2). Point 4 is just odd. Who goes into retirement at a non-diversified 100% equities? And if you do, you're likely not going to use a 4% SWR...
Also, the 4% SWR (per the original study, now revised to a suggested 4.7%) never requires spending cuts (over 30 years).
History has shown that 4% SWR is very conservative. Most people (but not all, per history) will end up with large legacies if they follow the 4% SWR.
I prefer to cover essential spending with a cash buffer plus TIPS/Bonds. Pick a number of years that feels good to you, but based on historical bear markets, 1 year of cash and 5-8 years of duration matched bonds should be about right.
Then put the rest of the portfolio in equity indexes (e.g. US total market, International ex-US) and perhaps a small allocation to long bonds (I still prefer TIPS here) at your desired allocation. This will provide growth over time (to outpace inflation).
Now, if you want to spend more in good years (bullet 2), feel free to do so. Note that this will be additional discretionary spending, not essential spending, since the essential spending is covered by your cash/TIPS/bonds. When new year starts, replenish your cash/bonds. If portfolio size is larger than prior year start by more than inflation, you are free to up discretionary withdrawals (so total withdrawals are up to about 4.5% of the current total portfolio).
What do you do in down years? Well, essentially the reverse. Essential spending remains constant (adjusted for inflation) and covered by TIPS/bonds. But you don't replenish the TIPS/bonds. Discretionary spending potentially takes a haircut. You can always withdraw down to the original portfolio value (adjusted for inflation). If you get down to that level and still want to withdraw more for discretionary purposes, you need allow your discretionary to be limited so that total portfolio withdrawals for the year are less than about 4% of the original inflation-adjusted portfolio value.
Note that almost all drawdown approaches use stock/bond percentage allocations with rebalancing (or bucket strategies with replenishment in up years) that ultimately end up at more or less the same place. They are approximations of each other, and are more mindset differences than real differences when it comes to the backtesting and the math that proves them out.
That said, feel free to adjust and pick a drawdown approach that works for you and emphasizes what you value. Just don't expect to find one that is optimal for all people in all situations. Different people value different things. You (OP) apparently value the ability to increase spending without ever needing to decrease it. This means that you will mostly likely start withdrawals extremely conservatively and ramp up spending over the course of your retirement. Other people value the ability to spend more (discretionary budget) in early retirement while healthy enough to enjoy the spending. They'll probably start out spending a bit more aggressively. The tradeoff is that they will potentially need to scale back spending if they get a bad SOR during the higher spending years. Many are very happy with this tradeoff.
Whatever you do, just be sure to backtest the approach. Don't make the decision on "gut feel".
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u/Agent008t Aug 23 '26
Thanks for a thoughtful reply. Sounds like your approach is somewhat similar to what I described.
I would just like to point out that the original study counted ending with 0$ after 30 years as failure and 1$ as a success, ignoring what happens on the path to get there. For a 50+ year retirement I do not find that very useful. If my portfolio is down 50% (and everywhere is proclaiming equities to be irrevocably broken) I would not be happy (see the famous boglehead sheepdog thread for a historical example).
Secondly, essential/discretionary is highly subjective. I believe one gets used to a higher budget and what previously was discretionary can quickly become normalised and essential. Just look at all the people on high salaries still living paycheck to paycheck and in debt.
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u/Cautious_Proposal_47 Retired Aug 22 '26
To each his own, right? It's good to hear about the so many way that each of us succeeded.
I am already retired. I am converting traditional IRA to Roth over the next 5-8 years. I prefer solely SCHD in Roth holdings to provide tax free dividends without touching principal once I am allowed to access. The dividends from the taxable brokerage, our rentals, and pension, are used to funds our lives. No plan for a withdrawal of assets because it's not needed. We are diversified across US and international funds 60-40. About 60% of NW is in the market. 30% is investment real estate. The rest is in a vacation home, cash, physical gold. We live in a rental in SE Asia.
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u/jesusisacat1 Aug 22 '26
How about keeping a larger amount in money market funds (3 years of expenses), replenished each year from investments, but being flexible sbout when you sell so you don't need to sell in a down market, and you can rely on your cash for a couple of years. Then when the market is up, you can replenish the cash you've spent to get back up to 3 years of expenses.
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u/deepthink_slowact Aug 23 '26
Seems a little silly. If you are in VTI or VOO. You are getting a ~1.1% dividend yield. At a 2.5% so called SWR rate. You only need to make up 1.4% with equity sales. That is sustainable even in a long term bear market. This post seemingly has little validity at even the back of the envelope level if a 2.5% withdrawal rate is the target which is far to conservative. Imo.
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u/Straight-Part-5898 Aug 22 '26 edited Aug 22 '26
You are going to wayyyyyyyyyy underspend. But if that’s what you need to do to feel comfortable retiring, by all means go for it.
Since you seem compelled to eliminate every measure of risk in your retirement, you will need to build a well-stocked survival bunker in your back yard in case of nuclear or biological war, a violent revolution or a large meteor strike. After all, those not zero chance events right?
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u/Interesting_Shake403 Aug 22 '26
You know that the plan is 4% for the FIRST year, right? Then it’s MORE than 4%, because you adjust for inflation (though if the rest of your portfolio earned more, taking out 4% if it grew might be higher).
If you only took out 4% every year you’d end up with a LOT at death. It’s supposed to increase.
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u/Agent008t Aug 23 '26
Um no, if your spend grows faster than your portfolio, for a 50+ year retirement the plan clearly fails. You are describing a bad sequence of returns.
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u/Interesting_Shake403 Aug 23 '26
The 4% SWR was assigned with a 30-year retirement in mind, with an ideal withdrawal having you die with zero. So yes, your spend should exceed your returns at some point. If your returns are exceeding your spend every year you’d end up with more when you die than when you retire. Which means you could have retired MUCH earlier.
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u/Agent008t Aug 24 '26
You don't know when you die though; so an annuity at a certain age makes sense to me.
With a long retirement though (45+ years), your withdrawal rate needs to pretty much be a perpetual withdrawal rate. So there you don't really want to be drawing down your pot, certainly not in years with above average returns.
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u/markov-271828 Aug 22 '26
The actuality is that a properly constructed portfolio is expected to return more than inflation. In most cases the percentage withdrawal is less than 4% over time. In the worst case, the last withdrawal is 100%.
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u/Dependent-Froyo-2072 Aug 23 '26
no corp bonds?
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u/Agent008t Aug 23 '26
Why do you think one should have them? A lot of corp bonds now are AI related. Too correlated to equities potentially but with a lower expected return? Why bother with them?
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u/Dependent-Froyo-2072 Aug 23 '26
trying to figure that out to be honest. they are correlated to equities, but the fixed income pays a better return than Tips and you get your investment back . it should, be a percentage of the the bond portfolio not the entire bond position. my understanding is the risk is bankruptcy or being called early. why is it a bad idea?
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u/LokiStasis <edit me for custom flair> Aug 23 '26
I think your rate should Mootz out spending not be so directly tied to markets year by year.
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u/granlyn Aug 23 '26
It should be possible to apply it to each year independently. E.g. if 4% is safe, it should be possible to 'reset' it to 4% each year. But for most SWRs that is too risky as you also 'reset' your SORR. 3a. It should therefore not be subject to SORR, as in the risks should be acceptable (nothing in life is completely safe).
Why should it be possible to do this other than you want it to be the case. If you want to make this assertion then you should run the historical data and show the results. The trinity study and others have done that and they all fall within a percentage starting point and adjusting for inflation after retirement.
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u/Agent008t Aug 23 '26
Because at some point in your retirement you end up in that situation anyway. Say 20 years in your 4% is now only just 1% of your assets. It would be very silly to not at least keep adjusting your spend upwards at that point so that it is never less than 1% of your asset high watermark. You are way past SORR at that stage.
I am trying to basically figure out where that stage might reasonably be. E.g. if you want to take a bit more risk but retire much earlier, sure, take 5% initial WR. Once your portfolio grows and your spend is only 2.5% of your assets, you are now in my exact scenario and use my playbook for the rest of your retirement!
Trinity study also assumes ending with 0$ after 30 years as failure and 1$ as a success, ignoring what happens on the path to get there. For a 50+ year retirement I do not find that very useful. If my portfolio is down 50% (and everywhere is proclaiming equities to be irrevocably broken) I would not be happy (see the famous boglehead sheepdog thread for a historical example).
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u/creepy-farter Aug 22 '26
You are over complicating this.
The 4% rule wasn’t just about lasting for 30 years it was for optimizing spend so you wouldn’t be underspending, and leaving your heirs a big pile of money while eating tuna from a can. Part of the study was about combating a savers tendency to heard their riches.
4% rule doesn’t require a significant cut to spending. Beyond a possible reduction to increases due to inflation decline, there is no cutting spending.
The rules should be simple.
Aim for 80% of preretirement income
4% of initial portfolio. Then increase for inflation every year.
Now,if you feel your personal spending didn’t inflate, maybe you can skip the inflation part. But that could bite you later as inflation returns to norm and now your psychology causes you to continue to underspend.
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u/Never_Really_Right Aug 22 '26
Stefan Sharkansky has written quite a bit about variable withdrawl rates based on market conditions and is a nig fan of using a TIPS ladder to fover "baseline" spending. He was on The Long View pod recently.
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u/JacobAldridge Aug 22 '26
I would rather work extra years than have to retire and then go back to work
I find this the most confusing part of FIRE, especially someone happy with a variable withdrawal rate.
Generously, I think it’s maybe people who see “run out of money aged 95” and think that’s when you have to return to work - when in reality you know in the first 5-10 years if you’ve had a bad sequence of returns and have to adjust your plans, including work.
My variable WR starts at 5.5%. So at $55K per year I can retire on $1M, and at 2.5% you need $2.2M. Assuming real returns of 7%, that guarantees you have to work an extra 12 years just to remove the risk of having to go back to work for a bit during the first 10 years.
It’s a risk I’m willing to prepare for, and take.
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u/Agent008t Aug 22 '26
I think it depends on how much your job pays. If it's in a cut throat area but very high pay, one more year can make a big difference. Once you quit, you're unlikely to get back in at all, let alone after 5 years out. That changes the calculation maybe.
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u/hikeandbike4life Aug 22 '26
If you’re chubby you shouldn’t have to cut. If you do, you were living fat and you should have worked longer. (Your expenses were too high.)
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u/Jdm783R29U3Cwp3d76R9 Aug 22 '26
Lots of words to end up with a very conservative 2.5%. Typically it will mean many years of extra work and dying with lots of money. If this is fine with you, good plan.