Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: 4% of what?
Old 03-24-2005, 04:56 PM   #41
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: 4% of what?

Run firecalc (see the link just up above and to the right?)

Put in some numbers you like as far as portfolio size, term of withdrawal and balance of equities and bonds. Only takes a minute. It'll then spew out what would have happened to your sample portfolio during those 'n' year withdrawal terms throughout history. If you believe the future wont be worse than periods in the past (and there have been some doozies), then the maximum withdrawal rate firecalc gives you should be safe for the term you specify.

Generally about 4% is almost 100% safe. You might get away with 5%. You might not.
__________________

__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: 4% of what?
Old 03-24-2005, 05:02 PM   #42
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: 4% of what?

Quote:
As such 5% is not impossible - 4% is the historical worst case scenario for a 30 year period without running out of money for a fairly low diversified portfolio (75% SP500/25% bonds).
Yeah, with a more diversified portfolio (=> lower volatility but similar returns) you should be able to withdraw more. The problem is there isn't a lot of data that is freely available to test this with. I'm planning to use a more diversified portfolio in retirement but not directly plan for "extra" available withdrawals. If they occur I will get them through a variable withdrawal system (e.g. gummy's sensible withdrawals).

Heck, even with the not too diversified "standard" portfolio you can withdraw 5% and still succeed ~85% of the time. Now the problem is what are you going to do if you hit one of the 15% of the time periods? You don't know in advance if you will or not. Also if you are young enough then 30 year withdrawals are not long enough.
__________________

__________________
Hyperborea is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:07 PM   #43
Recycles dryer sheets
 
Join Date: Feb 2005
Posts: 166
Re: 4% of what?

Thanks. Firecalc gives me 4.58 %. Suppose I take my porfolio and divide into two parts. One part gives me 5% forever. That return takes care of my living costs. The other part is invested in stocks for growth. What is wrong with that strategy?
__________________
treypar is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:13 PM   #44
Thinks s/he gets paid by the post
BigMoneyJim's Avatar
 
Join Date: Feb 2003
Location: DFW
Posts: 2,627
Re: 4% of what?

I've heard references that ports are safer if a bad spell doesn't hit in the first few years. How "certain" is this? If you could find out 5 or 10 years into ER if you have to go back to work it would be better than finding out in year 28, assuming a standard deterioration in physcial agility and company spirit.

Intuitively it feels that the historical returns are too overlapped to forecast such a determination with any confidence, though.
__________________
BigMoneyJim is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:14 PM   #45
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: 4% of what?

Quote:
Thanks. Firecalc gives me 4.58 %. Suppose I take my porfolio and divide into two parts. One part gives me 5% *forever. That return takes care of my living costs. The other part is invested in stocks for growth. What is wrong with that strategy?
What are you going to invest in that has a guaranteed 5% forever? Is it inflation adjusted?
__________________
Hyperborea is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:16 PM   #46
Recycles dryer sheets
 
Join Date: Feb 2005
Posts: 166
Re: 4% of what?

No the 5% part would not be inflation adjusted but the other part of my portfolio would take of inflation with stock market growth.
__________________
treypar is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:22 PM   #47
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: 4% of what?

Quote:
I've heard references that ports are safer if a bad spell doesn't hit in the first few years. How "certain" is this? If you could find out 5 or 10 years into ER if you have to go back to work it would be better than finding out in year 28, assuming a standard deterioration in physcial agility and company spirit.
Yeah, if you start pawing through the data (run FIREcalc in verbose mode) then you will find that most failures seem to occur because of bad early sequences - it's also reasonably intuitively obvious. *Start playing with the withdrawal rates - slowly bump it up, see where the failures occur, and then look at the first few years of that return sequence.

Now we've only got somewhere between ~4 and ~100 30-year data series depending on how you count the overlap. *The number of failing sequences is even smaller so doing any meaningful analysis on them is not possible. *You're really only going to get some subjective understanding from this.
__________________
Hyperborea is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:28 PM   #48
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: 4% of what?

Quote:
No the 5% part would not be inflation adjusted *but the other part of my portfolio would take of inflation with stock market growth.
The other stock part of your portfolio in the worst case scenarios historically would be just barely covering the inflation requirements of your withdrawal from it and wouldn't have any extra growth "left over" to cover the other part that you are taking 5% from.

With a roughly historical average inflation of 3.5% your 5% withdrawal would be cut to almost 1/3 of the initial amount in 30 years. *Whether that's ok or not depends on your age, the size of your portfolio, your spending amounts, plans to decrease spending over time, etc. etc. etc.
__________________
Hyperborea is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:32 PM   #49
Recycles dryer sheets
 
Join Date: Feb 2005
Posts: 166
Re: 4% of what?

But the early failures are probably due to stock market weakness. If my portfolio at 5% will take care of me for forever with no pricinpal loss. Then I have the balance to fall back on for growth when the stock market rebounds.
__________________
treypar is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:44 PM   #50
Recycles dryer sheets
 
Join Date: Jul 2002
Posts: 420
Re: 4% of what?

Atl; you might be right - make us an example with some $ nos and what you would invest in. Cheers!
__________________
preben is offline   Reply With Quote
Re: 4% of what?
Old 03-24-2005, 05:51 PM   #51
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,382
Re: 4% of what?

Quote:
But the early failures are probably due to stock market weakness. If my portfolio at 5% will take care of me for forever with no pricinpal loss. Then I have the balance to fall back on for growth when the stock market rebounds.
If you divide into 2 equal parts, and take 5% from the fixed income part, let your equity part alone unless it does very well, and make do with the 5% fixed, you should do fine come hell or high water. Since you are not inflation adjusting along the way, that is more conservative than a 2.5% inflation adjusting SWR on your whole portfolio.

If after 10 years or so you start to feel pinched, and your stocks still aren't doing much, maybe you should reconsider.

Still, it doesn't seem to be a bad plan to me. It would take a lot of money or a small $ draw to make it work.

Mikey

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 07:40 AM   #52
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:
Shhh...dont know if anyone noticed but we just had a nice 2 page (and running) discussion on SWR's where we talked about reasonable rates, variables, valuations, etc and there were no death threats, no lies, no deceptions, no DCM's, etc.

Who'd have thought?

That is only because what is being said is mostly wrong.

Many have said a flat 4% w/r is doable on inflation-adjusted values. This makes the awfully large assumption that future expected returns from today's overvalued market are sufficient to still deliver 4% real.

Fundamental returns are real earnings growth and initial dividend yield. For the S&P 500 they are 1.8% real and 1.8% dividend. 3.6% real. Bogle's speculative return - the adjustment in returns for valuations that move up or down from present levels - would knock of at least 2% from returns over the next decade or 1% over 2 decades. P/Es are moving in the 20-22 range and just under 20 globally. Everything is overvalued. So real returns on the S&P 500 are fair less than 3.6% real over a 20-year period. This is also backed up by Jeremy Grantham's numbers when compressing valuations over just 7 years as he does in his numbers at GMO.com.

When mixing with bonds which offer some of the lowest coupon rates in decades, the returns fall even further.

So big disagreements, no, but not much sense being talked either.

Petey
__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 07:46 AM   #53
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:

What I mean is that your overall portfolio rate of return must be 7.5% or so in order to allow you to take 4% for your SWR, give half a percent to the money managers (and let's not forget the spreads and commissions charged and never seen when your funds buy and sell securities), and still have your portfolio grow by 3% in order to keep the real value intact against inflation.

That allows your next year's portfolio, assuming you started with a million on Jan 1 of this year, and earned the average 7.5% in 2005, to begin 2006 at 1,030,000, the same real value as you had on Jan 1 2005 (assume 3% inflation, the long run average). *(You earned 75k, you spent 40k and gave the managers 5k, leaving you with 30k of increase).*

Actually, from 1900-2002 US real returns were 6.3%, not 7.5%. This data comes from Elroy Dimson of the London Business School and was published in his recent book. 7.5% real returns in the US are highly unlikely from hereon and never actually occurred in the first place. It is a little like the belief that the US has the highest returning stocks market over the past century. This also isn't true either.

Petey

__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 07:51 AM   #54
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: 4% of what?

Quote:


If you were certain about maximum life span, you could almost eliminate risk of portfolio failure in some cases (assuming the TIPS inflation adjustment was accurate) if you are willing to accept a terminal value of zero. I forget who posted this observation...

This depends on what you spending rate is and when you FIRE. You can spend 2.5% of principal if using TIPS over 40 years and retiring at 60 with a lifespan of up to 100. This is enough for most people. Also if one has 20% in TIPS, there is still the other 80% of the portfolio which may survive past 100 if you do.

Petey

__________________
peteyperson is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 10:20 AM   #55
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,382
Re: 4% of what?

Quote:
That is only because what is being said is mostly wrong.
I just felt a strange tremor deep in the earth. Anyone else notice?

Mikey
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 10:56 AM   #56
 
Posts: n/a
Re: 4% of what?

Quote:
Many have said a flat 4% w/r is doable on inflation-adjusted values. This makes the awfully large assumption that future expected returns from today's overvalued market are sufficient to still deliver 4% real.
Pete,

You were making the awfully large assumption that you would never eat into principle, which is not the case.

You don't need 4% real to have a 4% withdrawal rate if you make the rather small assumption that you will die someday
__________________
  Reply With Quote
Re: 4% of what?
Old 03-25-2005, 11:06 AM   #57
Recycles dryer sheets
 
Join Date: Jul 2002
Posts: 420
Re: 4% of what?

Petey; you also use only the SP500 to predict the future real equity returns.
And the trend for dividend payouts seem to be up (albeit one could argue that it has to be taken from the growth no instead).
4% was the worst case historical SWR for a US only fairly non-diversified portfolio - some periods starting at higher valuations than today I believe.
I find it silly to think that anyone can make the kind of 3.6% predictions you try to make.
But if you believe so; then just take only 3.6%. Cheers!
__________________
preben is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 11:53 AM   #58
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Re: 4% of what?

Heh, heh, heh, heh, heh

I'll mention one of my last posts over at NFB during it's death rattle:

It's my world that's round - all others are flat earth stuff.

Of course some wise acre may point out that millions lived and died in the past with a belief that the earth was flat - didn't hurt them a bit.

More than one way to skin a cat - just make sure you watch 'your plan' and adjust as required.

The more I read these forums - the more new wrinkles I see.

Psst - Wellesley, the Norwegian widow, heh, heh, heh!
__________________
unclemick is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 12:32 PM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: 4% of what?

Quote:


That is only because what is being said is mostly wrong.

Many have said a flat 4% w/r is doable on inflation-adjusted values. This makes the awfully large assumption that future expected returns from today's overvalued market are sufficient to still deliver 4% real.

Fundamental returns are real earnings growth and initial dividend yield. For the S&P 500 they are 1.8% real and 1.8% dividend. 3.6% real. Bogle's speculative return - the adjustment in returns for valuations that move up or down from present levels - would knock of at least 2% from returns over the next decade or 1% over 2 decades. P/Es are moving in the 20-22 range and just under 20 globally. Everything is overvalued. So real returns on the S&P 500 are fair less than 3.6% real over a 20-year period. This is also backed up by Jeremy Grantham's numbers when compressing valuations over just 7 years as he does in his numbers at GMO.com.

When mixing with bonds which offer some of the lowest coupon rates in decades, the returns fall even further.

So big disagreements, no, but not much sense being talked either.

Petey
As I've said often, you can have your own opinions, but you cant have your own facts.

What you're basing your opinion on is a set of stats sliced and diced by others, who used those piece parts of information to form an opinion.

I welcome your opinion because its another way of looking at our future prospects. But its not necessarily a fact, nor does someone elses simpler, more complex or simply differing opinion based on someone elses simpler, more complex or simply differering view of the facts "wrong" or "not sensible".

In fact, I saw "yet another analysis" of "credible portions of 20th century stock market data" (ie: the part that supports the thesis being proposed) that said that the vast majority of long term, real returns in the US stock market were almost solely from dividends.

Which made me feel good since I derive most of my income from them, so I was fairly tempted to raise that "opinion" to fact status, which of course would have made anyone investing in the low-dividend S&P500 "wrong".

Just to show how ridiculously good my memory is on broad statements of "fact", I remember on either NFB or Raddrs board (whoops, there goes my good memory) about a year ago you made a broad statement that US treasury bonds were not 100% safe because the treasury has in fact defaulted on them more than once. The indication being that you couldnt really fully "trust" US bonds. Someone challenged you on that assertion and you never responded. I looked into it and except for some securities issued by the confederate government and some by the 'regular' US government around the time of the civil war, no, the US government hasnt defaulted on any treasury bonds.

So while your statement of opinion was more or less 'factual', it didnt really create any likelihood of a current day default problem.

So can we agree to differ on opinions and state the supporting opinions and facts to discuss, rather than proclaiming others "wrong" or "speaking nonsense", and take care to determine what is opinion, what is fact and what is an opinion based on a distilled set of facts, which may or may not be the whole set of facts?
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: 4% of what?
Old 03-25-2005, 02:59 PM   #60
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Re: 4% of what?

Wait a second, did someone pick up the torch unceremoniously dropped by *****?
__________________

__________________
laurence is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 11:55 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.