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3-PEAT Retirement Withdrawal Strategy
Old 01-18-2017, 12:45 PM   #1
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3-PEAT Retirement Withdrawal Strategy

I am entering my 3rd year of retirement. Our strategy to fund our retirement has been pretty simple. We pretend each new year is the first year of our retirement. So at the start of each year, we:


(a) collect data on our current situation
(b) use that data to run calculations in I-ORP and Firecalc to determine the maximum yearly spending our portfolio can support
(c) set the current year's budget within that calculated value and free up enough cash in our portfolio for covering that budget.


This process is repeated each year. While this method will cause our budget to vary depending on the market ups and downs, it feels comfortable to us because we spend a lot on discretionary stuff so can cut back significantly if needed.


James Welch, provider of the I-ORP tool, has written a white paper which defines a very similar strategy he calls “3PEAT”. The name comes from doing 3 steps (similar to the ones above) and repeating them each year. The paper compares the performance of that strategy across 4 historical time periods vs 3 other commonly used strategies. He concludes:


3-PEAT is a practical, safe procedure for managing income over the term of retirement. 3-PEAT avoids plan failures and, as compared to other variable withdrawal methods, increases disposable income, and reduces spending variability.”


If you have an interest in this withdrawal strategy, may be worth your time to read/review/comment on his draft document located at the bottom of his website ( https://www.i-orp.com/ ).
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Old 01-18-2017, 03:03 PM   #2
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We've had numerous threads discussing a similar "ratchet" strategy... I think it makes a lot of sense and reduces the risk of dying filthy rich.
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Old 01-19-2017, 06:48 AM   #3
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How is this different than a percentage of end of year portfolio approach? Assuming you stay at the same level of success in the calculators wouldn't the output end up being the same percentage starting rate each year (e.g. 4%)? The withdrawal would ratchet up each year as the market improved and would then collapse down during a major downturn.
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Old 01-19-2017, 08:01 AM   #4
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Not a bad methodology (better than classic SWR), though it could be an unnecessarily bumpy ride during recessions. I'd probably just recalc over a longer interval than annual - like every five years, as some others here have (audreyh1 IIRC). At any rate, were cutting with an axe, not a scalpel regardless.
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Old 01-19-2017, 08:13 AM   #5
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I do the % of remaining portfolio every year which goes up and down with the markets. The only thing is our spending does not keep up with the withdrawal as the markets heat up, so I let unspent funds accumulate in short-term reserves which can be drawn on in years after large market drops. It happens quite naturally that our spending increases gradually while our income is quite volatile.

We also have a lot of discretionary spending.

And our goal is to draw down our portfolio over our lifetimes without running out of money, and have plenty of funds available for spending in the near term while we are younger and healthy. That is why I don't reinvest unspent funds back into our retirement portfolio.
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Old 01-19-2017, 08:48 AM   #6
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Thanks for the link to i-orp! I've been using ******** ands it's nice to see a different model.

@donheff--the 3PEAT paper shows the practical difference is that you spend slightly differently during the retirement and die with less left over. It uses 5.6% as the fixed percentage of remaining savings to spend.

There's a nice graph on page 9 of https://www.i-orp.com/3-PEAT.pdf.
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Old 01-19-2017, 09:31 AM   #7
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Hmmmm - well 5.6% is a heck of a lot higher than the 3.5% I'm currently using as a 57 year old!

Hmm I think it's telling me that at our ages we could start with 4.8%. That's quite a raise. Too bad they don't compare % remaining portfolio method.

I've run several FIRECALC scenarios and the portfolio starts to shrink pretty good a couple of decades out when you start to go much above 4.3%, and you have to contend with a much more rapidly declining income under the worst bad sequence of returns historical cases.

Of course you've had great income for the first few years.
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Old 01-19-2017, 10:09 AM   #8
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How is this different than a percentage of end of year portfolio approach?
Doneheff – that's a key question I was interested in. I personally want a plan that allows me to spend as much of my portfolio as practical, can't run out of money, and after I pass only has left over an amount that I want to pass onto the kids. This study looks at that specific question. One comparison it provides is to a 5.6% withdrawal strategy (“FP” in the tables) rather than the typical 4%.

Refer to Page 10, Table 1 of https://www.i-orp.com/3-PEAT/3-PEAT.pdf . It compares how much you could spend over your lifetime with various withdrawal plans over various historical periods. Paper calls this "disposable income" or "DI".

The "FP" withdrawal strategy in this table represents spending 5.6% of remaining savings each year. The results are interesting. For example, during "Interbellum" period, 3-PEAT would have allowed $1,810 k of spending over the retirement period (on an initial portfolio value of $1,000 k + some SS). This would have been 25% more (an additional $452 k) over what the 5.6% "FP" method would suggest. For the cases studied, 3-PEAT outperforms the other withdrawal methods in the study in regards to overall disposable income.
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Old 01-19-2017, 10:19 AM   #9
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... One comparison it provides is to a 5.6% withdrawal strategy (“FP” in the tables) rather than the typical 4%.

...
The paper actually shows both.

The "typical 4%" is from Bergen, and is: On Year 1, take out 4%. Increase by inflation rate every year there after. It never looks at portfolio value after that first year.

Fixed Percent looks at portfolio value every year and takes the same % out.

There are a ton of potentially "sustainable withdrawal rate" protocols. I'm not clear if there's any "one true answer"...
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Old 01-19-2017, 10:27 AM   #10
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The paper actually shows both.

The "typical 4%" is from Bengen, and is: On Year 1, take out 4%. Increase by inflation rate every year there after. It never looks at portfolio value after that first year.

Fixed Percent looks at portfolio value every year and takes the same % out.

There are a ton of potentially "sustainable withdrawal rate" protocols. I'm not clear if there's any "one true answer"...
The one true answer is, unless you plan to live well below your means, you're going to have to review your progress and adjust during retirement. Though usually omitted, Bengen's Trinity Study (4% SWR) noted "The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."
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Old 01-19-2017, 10:30 AM   #11
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....Too bad they don't compare % remaining portfolio method......
Audrey1 – The report seemed to have two such methods it used in comparisons. One they called “RMD+”, where annual withdrawals were the savings balance divided by an age constant from IRS tables + 2.7%. The other he called “FP” where they withdrew 5.6% of remaining balance every year. These are defined on page 4 of https://www.i-orp.com/3-PEAT/3-PEAT.pdf .


Table 2 on page 11 compares the downside variability of the spend which sounds like what you are concerned about. All the variable spend methods take big swings. 3-PEAT swings are large (29-53%) but less than the others studied. This variability in spending a key thing users of these methods need to be aware of and be able to adjust for.


How does your “% remaining portfolio method” compare to the ones defined in this study?
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Old 01-19-2017, 10:34 AM   #12
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....At any rate, were cutting with an axe, not a scalpel regardless.....
LOL - 100% agree. Not worth overworking these strategies once one finds a general direction one likes.
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Old 01-19-2017, 10:45 AM   #13
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The paper actually shows both. The "typical 4%" is from Bergen,........
Oops, you are correct, that's one's in this report too. He calls it the "Constant" method.

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There are a ton of potentially "sustainable withdrawal rate" protocols. I'm not clear if there's any "one true answer"...
Fully agree. Anything we use should be just a guideline anyway. Without an incoming paycheck, need to be very flexible.
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Old 01-19-2017, 01:35 PM   #14
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One of the problems with tools like Firecalc is that with a high success rate (80%+) it is most likely we will leave a fortune to our heirs. And by the time we realize we could spend a lot more, we may not be able to do so thanks to health problems and general aging.

There are various decision rules that help us ensure that we have money until the end, while not severely limiting safe spending. The desired result is that we are able to spend more at less risk. But our heirs may not be happy with the amount left to them. The idea is to ratchet spending down a bit in bad times and ratchet it up a bit in good times. By doing so we increase the odds that the portfolio will not fail, and yet avoid sharp changes in spendable income from year to year. Of course, a truly horrific Bear market is going to hurt spending for a long time but these methods are supposed to help us survive and prosper later.

http://www.schulmerichandassoc.com/u...l_profiles.pdf

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Using decision rules dramatically increases the present value of the total withdrawals over scenarios with no decision rules, while still achieving a 99 percent success rate. For example, a uniform withdrawal profile can be created using a safe initial withdrawal rate of 5.3 percent for a 40-year retirement period, versus 2.5 percent with no decision rules.


Surviving a powerful Grizzly Bear market with enough assets to recover is not easy. As one who has lived through a powerful Bear market I think it is best described using Q's words to Picard concerning the Borg:

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You can't outrun them, you can't destroy them. If you damage them the essence of what they are remains; they regenerate and keep coming. Eventually you will weaken, your reserves will be gone... They are relentless.
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Old 01-19-2017, 02:02 PM   #15
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I read the paper with interest. A few of the things I noted:

1. The standard 4% withdrawal rate is less variable than the 3-PEAT model, although this paper has it failing in two of the six time periods studied. My guess would be because it uses a 4% WR at 100% S&P 500 equities. I don't think many are following that AA. I would be interested for the 3-PEAT author to evaluate the 4% WR at 80/20 stocks/bonds.

2. The paper seems to imply that the 30-year cycles were calculated manually. I'm not basing my retirement on some bored and possibly non-detail-oriented college student doing 180 manual runs (6 periods studied times 30 years each). Page 14: "VWS is a spreadsheet to be filled in manually by whatever poor, unfortunate sot who can be recruited to make 30 optimization runs with systematic changes in the initial conditions."

3. Why not use the whole market history to evaluate the 3-PEAT model? Why choose six subsets, and why those subsets? Not answered in the paper, and mildly suspicious.

4. Following the 3-PEAT model requires (a) rerunning the model each year, which requires access to the tool or website, and (b) changing the model slightly at age 90. These are minor nits.

5. I do like the FP / RIMO approach and the iterative aspect of the 3-PEAT model.

6. Figure 2 should be repeated for the other five historical periods studied in the paper. Why weren't they? Cherrypicking?

7. There are many other withdrawal methods; the fact that this paper only compares its model against three others is suspect IMHO because the author is either unaware or chose to ignore.

8. In section 4.5, the following two sentences seem to me to contradict each other: "4% Rule initial entries were the lowest by definition." and "In summary, 3-PEAT produced the [...] lowest DI downside variability."
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Old 01-19-2017, 02:59 PM   #16
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One of the problems with tools like Firecalc is that with a high success rate (80%+) it is most likely we will leave a fortune to our heirs. And by the time we realize we could spend a lot more, we may not be able to do so thanks to health problems and general aging.
...
This is why I've been using VPW plus a sensible way to account for unspent money. It was designed to avoid the underspending issue.

I'd be interested in how the 3-PEAT method improves on VPW if anyone knows. I confess to not having read the working paper above. But I have used I-orp in my early retirement days. It helped me to see that tapping into my Roth was a good strategy until RMD's kick in.
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Old 01-19-2017, 04:01 PM   #17
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I am entering my 3rd year of retirement. Our strategy to fund our retirement has been pretty simple. We pretend each new year is the first year of our retirement. So at the start of each year, we:


(a) collect data on our current situation
(b) use that data to run calculations in I-ORP and Firecalc to determine the maximum yearly spending our portfolio can support
(c) set the current year's budget within that calculated value and free up enough cash in our portfolio for covering that budget.


This process is repeated each year. ....
Makes a lot of sense for people who are comfortable with significant ups and downs.

It's an "increasing percent of current balance" method. Like the VPW, but more dynamic.

I always run this number, but look at other factors as well.
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Old 01-19-2017, 04:03 PM   #18
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I.....Figure 2 should be repeated for the other five historical periods studied in the paper. Why weren't they? Cherrypicking?
If still interested, the paper references a Supplement report. I didn't delve into that report but a quick browse of it shows both Figure 1 and Figure 2 repeated for each of the historical periods studied.
https://www.i-orp.com/3-PEAT/3-PEATsupplement.pdf

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.... 3. Why not use the whole market history to evaluate the 3-PEAT model? Why choose six subsets, and why those subsets? Not answered in the paper, and mildly suspicious.
Good questions. Not specifically answered in the paper. But I noticed that each historical period studied is 30 yrs long. Seems fairly close to the typical retirement time frame. My guess is 30 yr long subsets were chosen rather than the entire market history to better represent a typical retirement time frame.

As to why those specific subsets....The one comment I see in the paper is in Section 3, 1st sentence which says the "3-PEAT was tested with 5 US stock market historical periods to assess how effectively it deals with difficult market situations." So if one thought the chosen periods weren't particularly challenging for various withdrawal strategies, I can see where it might be suspicious. Personally, I thought the periods studied were good choices but I respect other opinions that may differ.

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8. In section 4.5, the following two sentences seem to me to contradict each other: "4% Rule initial entries were the lowest by definition." and "In summary, 3-PEAT produced the [...] lowest DI downside variability."
Yup. The author's claim only holds true for the non-constant withdrawal methods.
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Old 01-19-2017, 04:09 PM   #19
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....I do the % of remaining portfolio every year which goes up and down with the markets. The only thing is our spending does not keep up with the withdrawal as the markets heat up, so I let unspent funds accumulate in short-term reserves which can be drawn on in years after large market drops. ....
I like that idea, dampens the feel of large market drops and associated cuts in budget. Think I'll incorporate that into our plan. Thanks for sharing, I always learn a little bit new around this board.
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Old 01-19-2017, 05:36 PM   #20
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I like that idea, dampens the feel of large market drops and associated cuts in budget. Think I'll incorporate that into our plan. Thanks for sharing, I always learn a little bit new around this board.
If your portfolio grows quickly out of the gate, I think it's a good idea not to get too used to the increasing income and quickly increase spending to match. Better to let spending increase gradually IMO, which is what Midpack was referring to when he mentioned me above.

Currently our spending is about 25% less than what our current portfolio value will support. But I also know that both the bond and stock markets are more than fully valued by most metrics, and that we could easily go down from here or be stuck going sideways for a long time.
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