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4% of what?
Old 03-21-2005, 12:35 PM   #1
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4% of what?

I thought I had the 4% SWR down pat...until I read a recent post. Is the 'generally' accepted 4% SWR widely considered to be a) 4% of the porfolio initial balance or b) 4% of the portfolio annual balance?

I had thought it was the annual balance. I understood that this could result in some lean years when the balance is down due to market changes, so would have to have an adequate starting balance to cover this. But, recently I read that it was 4% of the initial balance. This seems wrong to me because the number will never adjust. By using 4% of the annual balance at least I had some way to cover inflation over time (in the up years) and big purchases from time to time like cars. Comments?
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Re: 4% of what?
Old 03-21-2005, 12:50 PM   #2
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Re: 4% of what?

I understand it is 4% of the initial amount, adjusted for inflation each year thereafter.
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Re: 4% of what?
Old 03-21-2005, 01:06 PM   #3
 
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Re: 4% of what?

Quote:
I thought I had the 4% SWR down pat...until I read a recent post. Is the 'generally' accepted 4% SWR widely considered to be a) 4% of the porfolio initial balance or b) 4% of the portfolio annual balance?

I had thought it was the annual balance. I understood that this could result in some lean years when the balance is down due to market changes, so would have to have an adequate starting balance to cover this. But, recently I read that it was 4% of the initial balance. This seems wrong to me because the number will never adjust. By using 4% of the annual balance at least I had some way to cover inflation over time (in the up years) and big purchases from time to time like cars. Comments?
It is 4% of the initial balance and it does Adjust for inflation. Firecalc adjusts for inflation based on past history, just as it adjusts your balance for market returns based on history.

Obviously, if you took 4% of the annual balance, you would never run out of money!
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Re: 4% of what?
Old 03-21-2005, 01:28 PM   #4
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Re: 4% of what?

The published materials are for the suggested 4% of original port adjusted for inflation.

I consider it whatever I think is reasonable and prudent, in the vicinity of 3-5%, depending on your portfolio composition, historic returns of those asset classes, your comfort with risk and pushing the limits, your comfort with the upside of the asset classes you own, and your own personal needs with regards to consumption.

This calc is the subject of an awful lot of muddy water. I applied it on a personal basis and the only thing I was interested in was the approximate water temperature. When I checked all of the various calculators, recommendations, charts graphs and tools they all suggested a reasonable withdrawal rate that produced an amount of money I could live with. In other words, the water was warm.

Of course there were some that said I needed to live on an amount that I simply couldnt subsist on. Some suggested high flying risky asset classes and withdrawal rates of 6-8% that I wasnt comfortable with. A portfolio of half small cap value and half commodities could produce a very high SWR. Cold water for me.

Some suggested consuming your portfolio over time with the intent that you'd probably be dead at a predetermined time. Hot water!!! HOT!! If I was in my late 60's or 70's, I might consider a 25-30 year plan that eats my principal. In my early 40's...I could have 20 to 80 years ahead of me for all I know.

There is no "SWR" for everyone. Just like there is no portfolio for everyone, no consumption plan for everyone, no ideal vacation for everyone. Its a guideline.
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Re: 4% of what?
Old 03-22-2005, 05:58 AM   #5
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Re: 4% of what?

Thanks for all of your replies. I especially liked the perspective in TH's response (mostly becuase it agreed with mine and as a know it all.....) There are a lot of variables to consider. I'll probably settle on testing the temp each year; with the bounds of never taking MORE than 4% of initial balance or less than 4% of the current balance. That approach will give me a range to work with each year.

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Re: 4% of what?
Old 03-22-2005, 07:13 AM   #6
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Re: 4% of what?

Vanguard suggests that even ** 5%** of the CURRENT
balance is OK.

Cheers,

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Re: 4% of what?
Old 03-22-2005, 08:24 AM   #7
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Re: 4% of what?

Rok, that's exactly what I was thinking. I would have to have a balance that has some 'pad' in it to accomodate the down years. DUring those years I would postpone unneeded expenses (new toys, trips, etc) and focus on fixed expenses to live. During the 'up' years I would spend more freely, but never exceeding 4% of initial balance in any given year. As TH pointed out, asset allocation is a factor too; this is what I'm planning (at 52...may get more conservative later):

50% stocks
40% bonds
10% cash

Stock breakdown 30% S&P, 10% small cap/value, and 10% international.

Bonds are 20% each short term and intermediate term bond funds.

Cash is a mutual fund. Annually money will move from stocks to bonds to mutual fund to checking account as I rebalance after withdrawing.

Does this sound workable?
Not interested in chasing a sector.
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Re: 4% of what?
Old 03-22-2005, 10:56 AM   #8
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Re: 4% of what?

Seems to be as good of a place to post this question as any --

I went to firecal and put in what I considered a reasonable withdrawal rate of 5%. When I first included my total annual that I was going for and my pension as a negative number it came back with only a 27% success rate. When I eliminated my pension and only entered 5% withdraw from 457, it came back as a 97% success rate but still recommended that I lower my withdrawal. Is there a problem with annually taking out 5% of current balance? Currently living / minimal saving on pension with a built in COLA ... using 457 withdrawals as travel monies.
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Re: 4% of what?
Old 03-22-2005, 11:03 AM   #9
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Re: 4% of what?

[quote]The published materials are for the suggested 4%

Some suggested consuming your portfolio over time with the intent that you'd probably be dead at a predetermined time. *Hot water!!! *HOT!! *If I was in my late 60's or 70's, I might consider a 25-30 year plan that eats my principal. *In my early 40's...I could have 20 to 80 years ahead of me for all I know.

TH: I talked to your dad the other day, and he showed me his shoe box full of E Bonds. We both decided that we have given you kids enough over the years, and have decided on a 20 year program.
Have alerted my children, and instructed them to keep a good supply of "revolution" on hand in case I was being pessimistic
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Re: 4% of what?
Old 03-22-2005, 11:13 AM   #10
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Re: 4% of what?

Quote:
... and he showed me his shoe box full of E Bonds. * :)
The scary thing is that I'm pretty sure you meant "E" instead of "EE"!
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Re: 4% of what?
Old 03-22-2005, 12:19 PM   #11
 
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Re: 4% of what?

Quote:
Seems to be as good of a place to post this question as any --

I went to firecal and put in what I considered a reasonable withdrawal rate of 5%. When I first included my total annual that I was going for and my pension as a negative number it came back with only a 27% success rate. When I eliminated my pension and only entered 5% withdraw from 457, it came back as a 97% success rate but still recommended that I lower my withdrawal. Is there a problem with annually taking out 5% of current balance? Currently living / minimal saving on pension with a built in COLA ... using 457 withdrawals as travel monies.
Not sure I follow you here. If you entered your pension as a negative number, you should have had a better success rate than not entering it.

Something is wrong here. Maybe my understanding of what you did?

Maybe you could check the Box that Firecalc provides at the bottom and let it calculate your 100% safe withdrawal amount for you in summary mode.
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Re: 4% of what?
Old 03-22-2005, 12:36 PM   #12
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Re: 4% of what?

Quote:
Seems to be as good of a place to post this question as any --

I went to firecal and put in what I considered a reasonable withdrawal rate of 5%. When I first included my total annual that I was going for and my pension as a negative number it came back with only a 27% success rate. When I eliminated my pension and only entered 5% withdraw from 457, it came back as a 97% success rate but still recommended that I lower my withdrawal. Is there a problem with annually taking out 5% of current balance? Currently living / minimal saving on pension with a built in COLA ... using 457 withdrawals as travel monies.

Gayl,
Did you put your pension in as a negative amount? That might explain the strange results in the percentage success rates.
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Re: 4% of what?
Old 03-22-2005, 12:45 PM   #13
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Re: 4% of what?

Quote:

50% stocks
40% bonds
10% cash

Stock breakdown 30% S&P, 10% small cap/value, and 10% international.

Bonds are 20% each short term and intermediate term bond funds.

Cash is a mutual fund. Annually money will move from stocks to bonds to mutual fund to checking account as I rebalance after withdrawing.

Does this sound workable?
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RatherBFishin;
Looks like a good plan, and the 4% approach you follow makes sense to me. Not everybody is comfortable dialing up and down their spending to accommodate a bad year in the markets, so that is good if you have the flexibility in your budget to expand and contract like that.

I like your portfolio, though after reading Bernstein I am always looking for a few other asset classes that have low correlations with the main stock and bond markets. To that end, commodities, real estate, oil & gas, private equity and market neutral hedge funds are the ones I have picked, and together they make up 20% of the portfolio.

I would think you could drop your cash down to 4% or even zero, and just withdraw from your probably overly-generous short-term bond funds when and if you needed. You'll already be generating cash through the dividends, capgains distributions, interest from the FI, that sort of thing, (probably about 2-2.5% per year even without capgains distributions) with sales of appreciated assets culled at rebalance time to make up any cash shortfall.


That would free up your 10% cash right there for applying, say, to REITs and Commodities, although of course they will seem expensive to get into today, and I am not about to advise anyone on market timing issues for getting into a new asset class (except perhaps to suggest you nibble away at it over a year or two if you are really concerned until you reach your full allocation)

Since you have short term bonds at 20% you are already very conservative, making the need for cash even less in my opinion. You could take another bit out of that short term bond area, putting some of that into perhaps some other bond categories, GNMA, Junk, Foreign bond to get a little more yield.

At this point, 30% cash and short term bonds seems like asking to underperform. With 4% withdrawal you also need to set aside another 3% for inflation. That means you need 7% total portfolio expected return plus fees (say 7.5% overall to be safe). You might find that your current allocation doesn't quite reach that mark, I am not sure, and if not then you are actually set to slowly eat away at principal, on a historical expected returns basis, which is not a great thing.

Do you have expected returns data for your various asset classes? Then you can get a weighted average of them and decide whether the long run expected return on your portfolio is at least 7.5% Let me know if you need them and I can rustle something up. (When some people do these sorts of calculations, they substitute the actual prevailing yields in cash and short term bonds for the long term returns from those asset classes, since there is little to no chance that those returns will surprise on the upside, unlike stocks where you can get any return any year and the historical data are a useful guide.)

The value, small and international tilts on the equity side are good, imo, and the 50% equity feels good to me. Early retirees put a big premium on sleeping well at night.
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Re: 4% of what?
Old 03-22-2005, 01:19 PM   #14
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Re: 4% of what?

5% of your stash, based on year end portfolio balance.

In good years you are up, 2004, 2003.

In bad years you are down, 2001, 2002.

Factor in SS or CPP/OAS and live one day at a time.

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Re: 4% of what?
Old 03-22-2005, 01:30 PM   #15
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Re: 4% of what?

Quote:
TH: I talked to your dad the other day, and he showed me his shoe box full of E Bonds. We both decided that we have given you kids enough over the years, and have decided on a 20 year program.
Have alerted my children, and instructed them to keep a good supply of "revolution" on hand in case I was being pessimistic
Good one Jarhead! Actually he does have EE's, still more than he can probably spend as I manage his bond cache with the treasury's "savings bond wizard" and his stash's value is growing every year. After owning a pile of stocks in the mid 60's to the mid 70s and then deciding to never own a single share ever again, he went with the 'tried and true'. Its worked out for him so far, but he's never kept any debt and has LBYM'd for the last 20 years or so. I havent tried putting anything on the back of his neck yet though. Maybe next year.

He'd probably like to hear from you! He's looking for some more people to beat at golf. He's made it into the top tier 'flight' over there at sun city and he's still winning on a regular basis
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Re: 4% of what?
Old 03-22-2005, 01:33 PM   #16
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Re: 4% of what?

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?
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Re: 4% of what?
Old 03-22-2005, 01:35 PM   #17
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Re: 4% of what?

CutThroat & ESRBob: I initially entered my pension as a negative number as site stated to do inserting '0' as the year b/c I am already drawing the pension. Sounds reasonable but that scenario states that I'm taking out 21.58% of the starting portfolio... in reality I took 5%. Now I've re-entered that I will get the pension beginning with year 1 [even though I'm already on it]. Still states that I am taking 21.58% the first year but the probability rises to 100% success probability for it to last 50 yrs.

Can Firecalc be used by a retiree or should I use another calculator?
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Re: 4% of what?
Old 03-22-2005, 02:01 PM   #18
 
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Re: 4% of what?

Quote:
CutThroat & ESRBob: I initially entered my pension as a negative number as site stated to do inserting '0' as the year b/c I am already drawing the pension. Sounds reasonable but that scenario states that I'm taking out 21.58% of the starting portfolio... in reality I took 5%. *Now I've re-entered that I will get the pension beginning with year 1 [even though I'm already on it]. Still states that I am taking 21.58% the first year but the probability rises to 100% success probability for it to last 50 yrs.

Can Firecalc be used by a retiree or should I use another calculator?

No something your doing is wrong. Your pension reduces your withdrawal. So you enter your nestegg and then enter 5% of that as a withdrawal, and then you enter your pension as a negative amount, which which should reduce your 5% withdrawal.

Where does the 21% number come from? *Slow down and try it again.
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Re: 4% of what?
Old 03-22-2005, 02:05 PM   #19
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Re: 4% of what?

Gayl, to simulate taking out 5% of the current balance,
you need to set the expense ratio to 5% plus the
expected ER of your funds. Remember to set the
blank for initial annual withdrawal to zero.

Cheers,

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Re: 4% of what?
Old 03-22-2005, 02:09 PM   #20
 
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Re: 4% of what?

Quote:
Gayl, to simulate taking out 5% of the current balance,
you need to set the expense ratio to 5% plus the
expected ER of your funds. *Remember to set the
blank for initial annual withdrawal to zero.

Cheers,

Charlie *
I think this may confuse her charlie, I don't think she is using Firecalc this way at the moment.
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