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The Ultimate Guide to Safe Withdrawal Rates – Part 5: Cost-of-Living Adjustments

Welcome back to the Safe Withdrawal Rate Series. Last week we wrote about how Social Security can impact the SWR estimates. Even under the most optimistic assumption (no changes to the Social Security benefits formula), we didn’t think that the 4% withdrawal rate is safe.

But how about tinkering with the inflation adjustments, also called Cost-of-Living adjustments (COLA)? I often hear that one way to save the 4% rule in periods when the stock market doesn’t cooperate is to not do inflation adjustments for a few years. Or simply utilize the fact that we all potentially spend less (in real terms) as we age! How much can we push the initial withdrawal rate in that case?

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With a declining real withdrawal rate, we can afford higher initial withdrawals!

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Guest Post on Budgets are Sexy: My Top 7 Disagreements With Personal Finance Experts

J. Money, the personal finance blogger who runs Budgets are Sexy and RockstarFinance asked yours truly to write a guest post! Wow, what an honor! And, it turns out, this is actually my first guest post ever (not counting the “Christopher Guest Post” on the Physician on FIRE blog two months ago because that’s actually an interview). What did I write about? Initially, I proposed to go on an all-expenses-paid trip to Tahiti to review some luxury resorts and report back, uhm, some time later this year. But J$ had another brilliant idea: write about my favorite finance pet peeves. And it got published today:

My Top 7 Disagreements With Personal Finance Experts

Of course, to read it all, you’ll have to head over to Budgets are Sexy. But please see below for supplemental material, i.e., some of our blog posts on the seven topics:

  1. Safe Withdrawal Rate:
  2. Robo-Advisers:
  3. Emergency Funds:
  4. Bonds to diversify equity risk:
  5. Bond vs. Stock Risk:
  6. Cash as bear market insurance:
  7. Tax loss harvesting:

 

 

 

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The Ultimate Guide to Safe Withdrawal Rates – Part 4: Social Security and Pensions

After a one-week hiatus over the holidays when we wrote about a lighter topic (dealing with debt, booze, and cigarettes, go figure), let’s return to the safe withdrawal rate topic. We’ve already looked at:

  • the sustainable withdrawal rates over 30 vs. 60-year windows (part 1),
  • capital depletion vs. preservation (part 2)
  • and the current expensive equity valuations (part 3).

The bad news was that after all that number-crunching, the sensible safe withdrawal rate with an acceptable success rate melted down all the way to 3.25%. So much for the 4% safe withdrawal rate! That 25x annual spending target for retirement savings just went up to 1/0.0325=30.77 times. Ouch! Sorry for being a Grinch right around Christmas time!

But not all is lost! Social Security to the rescue! We could afford lower withdrawals later in retirement and, in turn, scale up the initial withdrawals a bit, see chart below. How much? We have to get the simulation engine out again!

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With Social Security (and/or a pension) later during retirement, we can afford higher initial withdrawal rates!

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