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35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 05:47 PM   #1
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35 buckets plan, starting WR of 7.4% - punch holes in me plan

For several reasons I do not like the 4% SWR withdrawal plan. First, it plans for a worst case scenario, with no provision for increasing withdrawals in better times. Second, you always die with money in the bank which we would like to avoid because we have no children. Third, it is not clear how to incorporate SS, annuities, spending changes, etc in the withdrawal rate. Finally, I want to spend more than this, especially when I am young.

I have read about some of the plans with spending rules - Guyton etc. I guess what I am proposing is taking these to the extreme.

I have been thinking about alternatives and have come up with what I call the "35 bucket plan" for lack of a better name. Basically, the plan is to take the starting portfolio and divide into one bucket for each year of retirement spending. The amount in each bucket is discounted at an annual (real) rate of 5%. So, for example, I plan to retire at age 50, so the age 50 bucket will start with $74,000, the age 51 bucket will start with $74,000 * .95, the age 52 bucket will have $74,000 *.95 *.95 and so on until age 85. So, if the portfolio returns exactly a 5% real return then you will have $74,000 inflation adjusted to spend each year.

Next, incorporate the changes mentioned earlier. Expected Social Security is subtracted from the buckets starting at age 70. I plan to annuitize the last bucket at age 85 so it starts with six times its normal amount to provide lifetime income after 85. Finally, I plan to spend 1% less each year, so I actually discount at 6% rather than the 5% I expect the portfolio to return.

The main advantage of this plan is a much higher starting withdrawal rate, a starting WR of 7.4% A second advantage is no chance of running out of money. Another advantage is that you end up spending the entire portfolio, although this would be a drawback if you would like to leave an inheritance.

Obviously, the drawback to this plan is that spending will vary greatly from year to year. Because my income during my working years also varies up to 50% (some years I get a bonus some years not, some years my wife works, some years not, etc) I am used to this already.

I have stress tested by seeing what would have happened to someone who retired in 1966 with 100% equities. With a starting portfolio of $1M, they would have had $74,000 to spend in 1966. By 1981 they would have gotten to spend only $25,400 (inflation adjusted). After that the portfolio recovers, and SS kicks in. I consider this to be a worse case scenario because an actual portfolio will have some fixed income along with equities, and conditions are unlikely to be as bad as this.

What is everyone's opinion of this plan? Are there any drawbacks that I am not considering or underestimating? Is 5% real a reasonable return over the next few decades?

I am also looking for advice on a couple of questions from people who are already ER'd.

1. While I am used to income and spending fluctuation, is it different psychologically when you are already ER'd?
2. Is the 1% decrease in inflation adjusted spending realistic given health care costs etc.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 05:54 PM   #2
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

If am used to spending $74000 and have to go down to $25000, might as well shoot me.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 06:11 PM   #3
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

citril,

Are you familiar with FIRECalc? How about the 95% rule?

You can actually have a withdrawal rate up to 9.5%, and the result would be very similar to what you're proposing?

Here is an actual FIRECalc report using 90%. Don't be alarmed by the 0% success report. It just means that you have less money at the end of the test period. Try it out yourself.

Your plan is to spend $95,000 a year, or 9.50% of your starting portfolio. Following the "95% Rule," from Work Less, Live More, each subsequent annual withdrawal will be the greater of 90% of your previous year's withdrawal, or 9.5% of your current portfolio, with no adjustment for inflation (unlike the normal FIRECalc behavior, which uses your starting portfolio, and makes adjustments for inflation). Although the calculations are based on unadjusted withdrawals, the charted withdrawals are shown using 2007 dollars.

FIRECalc looked at the 106 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and taking out $95,000 the first year of your retirement, and the same 9.5% of the current portfolio (or 90% of the previous year's withdrawal) annually thereafter.

The key result: a 0.0% Success Rate
In the 95% Rule from Work Less, Live More, success means the portfolio was as big (after adjustment for inflation) at the end of the 30 years as it was when you started. FIRECalc found that 106 cycles failed, for a success rate of 0.0%.

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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 06:29 PM   #4
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

is it "talk like a pirate day" once again? ... "punch holes in me plan" is eerily reminiscent of AirHeadJordan's first post
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 06:37 PM   #5
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by d
is it "talk like a pirate day" once again? ... "punch holes in me plan" is eerily reminiscent of AirHeadJordan's first post
It was supposed to be a subtle joke to help get attention. I guess its working.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 06:38 PM   #6
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Really? You have any other "subtle" joke?

Quote:
Originally Posted by d
is it "talk like a pirate day" once again? ... "punch holes in me plan" is eerily reminiscent of AirHeadJordan's first post
d, I think you might be right. It might be worse this time.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 06:50 PM   #7
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by Sam
citril,

Are you familiar with FIRECalc? How about the 95% rule?

You can actually have a withdrawal rate up to 9.5%, and the result would be very similar to what you're proposing?

Here is an actual FIRECalc report using 90%. Don't be alarmed by the 0% success report. It just means that you have less money at the end of the test period. Try it out yourself.

Your plan is to spend $95,000 a year, or 9.50% of your starting portfolio. Following the "95% Rule," from Work Less, Live More, each subsequent annual withdrawal will be the greater of 90% of your previous year's withdrawal, or 9.5% of your current portfolio, with no adjustment for inflation (unlike the normal FIRECalc behavior, which uses your starting portfolio, and makes adjustments for inflation). Although the calculations are based on unadjusted withdrawals, the charted withdrawals are shown using 2007 dollars.

FIRECalc looked at the 106 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and taking out $95,000 the first year of your retirement, and the same 9.5% of the current portfolio (or 90% of the previous year's withdrawal) annually thereafter.

The key result: a 0.0% Success Rate
In the 95% Rule from Work Less, Live More, success means the portfolio was as big (after adjustment for inflation) at the end of the 30 years as it was when you started. FIRECalc found that 106 cycles failed, for a success rate of 0.0%.


Thanks Sam. I have used FIRECALC.

The thing I don't like about the 95% rule is that it doesn't take inflation into account. In the 1966 period I looked at, if you use the 95% rule inflation adjusted spending gets as low as $16,000. That would be pretty tough to live on.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 06:52 PM   #8
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

And yours does?

If it's another of your subtle joke (whatever that means), forget it. I'm not interested.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 06:55 PM   #9
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by Sam
It might be worse this time.
i'm afraid you right ... it's beginning to look alot like ...
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 07:20 PM   #10
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by citril

Thanks Sam. I have used FIRECALC.

The thing I don't like about the 95% rule is that it doesn't take inflation into account. In the 1966 period I looked at, if you use the 95% rule inflation adjusted spending gets as low as $16,000. That would be pretty tough to live on.
the advantage of the WR adjusted for portfolio value is that you can use a much higher WR in the beginning (compared with WR adjusted for inflation) but generally you will end up with a lower portfolio since you will withdraw more the good years. Which means that at some point yes you can(will) get a low withdrawal, or a high one too.
If this is unacceptable for you the hybrid or the Guyton methods would the best ones. But I don't think any method with a 7.4% WR will be qualified as safe. What you proposed seems insane. If I understand correctly you will run out of money if your portfolio doesn't return an average of 5%?
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 07:31 PM   #11
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Well, a few questions/observations:

1) I assume you won't make 35 actual accounts. You'll just set up an asset allocation with all your money, then account for each bucket separately via a spreadsheet of some type. And somehow you'll break out the IRA money into some of the buckets, and the taxab;e acconts into others. You shoild budget one week each year to do all the accounting.

2) There's the small issue of the # of buckets. I assume you will drown yourself in year 36? That's the "miracle" of how you get a high withdrawal rate. I don't know why you cite "no chance of running out of maney" as one of the advantages--you've GAURANTEED you'll run out of money in year 36.

Aside from that, it looks great.



F
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 08:01 PM   #12
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by samclem
Well, a few questions/observations:

1) I assume you won't make 35 actual accounts. You'll just set up an asset allocation with all your money, then account for each bucket separately via a spreadsheet of some type. And somehow you'll break out the IRA money into some of the buckets, and the taxab;e acconts into others. You shoild budget one week each year to do all the accounting.
[
2) There's the small issue of the # of buckets. I assume you will drown yourself in year 36? That's the "miracle" of how you get a high withdrawal rate. I don't know why you cite "no chance of running out of maney" as one of the advantages--you've GAURANTEED you'll run out of money in year 36.

Aside from that, it looks great.



F
1. Thats correct. The easiest way to picture it is with separate accounts, but in reality it will be an allocation out of the total portfolio. Hopefully I'll still be sharp enugh to do the spreadsheet calculations when I'm 84.

2. Thats where the annuity comes in. My plan is that the 35th bucket will start with about 60,000. That should be enough to buy an annuity that will pay $32,000 (in inflation adjusted dollars) per year for life. That will be in addition to Social Security (whatever that will worth be by then)
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 08:28 PM   #13
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Of course! The annuity!

The plan is brilliant. To assure you aren't unduly influenced by our crackpot ideas, it would be best to execute it just as you have planned without contamination from outside influences. Don't risk this contamination! In year 36, please check back in with us and let us know how it went.

Welcome back, AirJordan.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 08:40 PM   #14
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

I don't understand the resistance to this idea. It seems fine in theory. It should prevent the nest egg from going to zero, and it should take care of distributing any excess return to annual spending increases.

In practice, I haven't found such an algorithmic approach to spending very useful. Our spending in retirement (now in year 5) has varied widely. Our spending has gone down pretty much each year so far due to lifestyle changes. We have a lot of one-time expenses (like remodeling). And we have a kid, which I'm sure will drive many unexpected expenses.

It's fine to plan, but it's probably more important to adapt.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 08:43 PM   #15
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by samclem
Welcome back, AirJordan.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 08:50 PM   #16
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
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It's fine to plan, but it's probably more important to adapt.
Yep. Hhit sappens.

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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 08:51 PM   #17
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
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I don't understand the resistance to this idea.
Reading my original post again, i don't think I explained it very well.

Plus, my bad joke made people think I was another troll.
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-09-2007, 11:21 PM   #18
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by CybrMike
If am used to spending $74000 and have to go down to $25000, might as well shoot me.


CyberMike, I couldn't agree more! Believe me, DW and I grew up poor and tough and know what it would take to dramatically cut spending. To cut by two-thirds would mean cutting deeply into non-discretionary budget items. If the economy gets bad enough, it could happen. But I'm sure not going to write it into the plan!
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-10-2007, 05:39 AM   #19
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

I understand where you are coming from. I have a similar desire: I want to maximize my spending in the early years of retirement so we (DW and I) can enjoy it, yet have a base income in the later years (for life) to support a reasonable LBYM lifestyle. I am struggling right now with how to do so.

I always try to keep in mind(for my decisions). Calculations are fine to gather some understanding about how the market worked in the past (and may work in the future). However, there is alway the irrational aspect to the market which is the people element (i.e., buyers/sellers and Fear/Greed). Too much risk could turn into a very real personal financial crisis. You might make it work as long as you are willing to cut spending early if problems occur. It really comes down to your expenses and how you support them. Consider creating a contingency plan for several likely scenarios such as high inflation, market drop (possibly sustained), etc... That way you wil better understand how to change course before you are in the middle of a crisis.


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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan
Old 03-10-2007, 05:44 AM   #20
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Re: 35 buckets plan, starting WR of 7.4% - punch holes in me plan

Quote:
Originally Posted by citril
you always die with money in the bank
Actually you dont, and thats a major flaw in this line of consideration.

In many runs, if you observe the detailed data, quite a few of them flirt with a zero balance at some point in their existence.

Providing we dont hit a major market malfunction, you might dial things back to 80-85% and presume that good ingenuity and improvisation will carry the day. I believe in that strategy.

I'm pretty frickin sure you dont double up on the safe rate, improvise and get away with it though.

And then theres that perfectly good possibility of seeing a major market malfunction that'll drive you into the ground.

There is no free lunch. For every reward, theres an equal risk. Usually with bad consequences.

If my choices were to work for another 3-5 years or maybe run out of money when I'm 70 and cant do anything about it, I think i'd choose the former.
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