Are You Obsessed?

Via Abnormal Returns, Elizabeth George says to stop obsessing about your safe withdrawal rate. The starting point is the 4% rule derived by Bill Bengen in 1994 based on a 50/50 allocation of stocks and bonds going back to the 1920's. 

Bengen has since dialed up the number to 4.7% but if you read or watch any interviews with him, he is constantly refining the number. Morningstar comes out with a revised number of its own every year which I have been pretty consistent in making fun of. Changing it every year in the manner they do doesn't help anyone. 

The precise, original implementation is to start at a 4.15% withdrawal rate and then adjust it upward by the rate of inflation. If someone's safe withdrawal dollar amount is $37,000 and then CPI was 3.4%, the following year the new number would be $38,258. I've also made fun of that part of it as being unrealistic. Many years ago, I started saying, "whatever you got, 4%, more precisely, 1% every quarter." 

That certainly is simpler but that was very early into my time as an RIA. I still believe in the simplicity although chances are 5% is ok too but even though the math checks out, it's not what too many people do at least based on my sample size of clients. It's more like, "I need $3500/mo" and that will be it for a while then after a few years, "I need to up it to $4000/mo." 

I've said before, like every advisor, I have a couple of clients who take what should be way too much to be sustainable but the stock market has bailed them out. Every so often, of course a client will need money for something bigger and I either just send it or if it is a problematic amount in terms of the longevity of their money I will say something like, "ok we're obviously going to do what you tell us but this threatens how long the money will last." One time a client responded, "I know but it's for son and I have to do it." 

One thing that several clients do as sort of coincidence is they take monthly withdrawals from their IRAs that are well under 1/12th of their RMD and then in December take a large enough withdrawal to get up to their RMD amount. They are living month to month on what they need and then that lump sum at the end of the year could be for traveling or some other discretionary spending.

George's point in her blog post is similar to my anecdotes about not perpetually tweaking it to the penny. "Financial professionals and FIRE personalities who lead the SWR debates and build complex models to analyze them to the third decimal place are usually so enamored with achievement that they never stop earning anyway" which I thought was pretty funny.

If I am reading correctly, it seems like George pays no heed to it and if that is the case I disagree with that pretty strenuously. What I think makes the concept work is thoroughly understanding what Bengen originally derived. Understanding what it's built on, understanding what type of environment challenges his concept and then moving forward with some reasonable even if not rigid implementation that suits your needs. I would expect any advisor to have this dialed in, it's not rocket science. There's also not much of a barrier to understanding for anyone managing their own accounts but take the time to learn it thoroughly. 

If nothing else, "whatever you got, 4%, more precisely, 1% every quarter" will work for anyone who can be a little flexible, able to take less in years where the markets are down. Even then, there is a work around to the need to be flexible in that way, just set aside 18-24 months of expected withdrawals in cash or some sort of cash proxy to greatly reduce the odds of ever having to sell after a large decline to meet income needs. 

I think George is right about not needing to obsess or overly stress about this. More time spent understanding how it works on the front end should reduce stress but also enhance understanding the reality that anyone taking 8-9% has a real chance of running into trouble or realizing that based on Bengen's process, a 6% withdrawal rate was successful 75% of the time (per Gemini). One of my high spenders does not care about running into trouble, this person is 20 years in taking more than 8-9% in most years but just is not worried. I don't know how but I bet they sleep well at night which is a pretty important component to this topic, having a plan that allows you to sleep.

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