4% rule failures?

[FUEGO]

Quote:

Originally Posted by youbet I don't think that's correct FUEGO. I don't have time for a lengthly explanation right now, but folks following the thread should check out this statement before assuming it to be fact. I'm not saying variable withdrawal plans don't have merit, just that the bolded statement above wouldn't necessarily be true.

You know what, I think you are right. I thought I had checked firecalc's output thoroughly. But it looks like what I thought were real dollar amounts from their output spreadsheet are actually nominal amounts.

When I read this: "Open an (unformatted) Excel spreadsheet showing the inflation-adjusted end-of-year portfolio balances for every year in each of the cycles tested by FIRECalc." I thought it meant the end of year portfolio balances were adjusted for inflation to present them in real terms. "Inflation Adjusted End Portfolio [values]" is the way that real values are presented in the companion spreadsheet from the results page. Hmmm... tricky.

As a result, let me just say I'm going to have to revisit these numbers. And I'm going to edit/delete most of my "research" in my previous post since it is based on a flawed understanding of the firecalc outputs.

This is why it is good to be challenged. I want to thank you, Youbet, for pointing this out. This has radically changed my take on variable withdrawal rates, and I'll have to figure out the variability and level of success IN REAL TERMS now. I seemed to be drawing some pretty amazing conclusions, and I'm glad someone called me on it so I would triple check it.

[bamsphd]

Quote:

Originally Posted by youbet bamsphd - I don't know how you did it, and I'm sure you didn't mean to deceive intentionally, but you show a quote from FUEGO as being mine. I'm referring to the first quote in your post #57. The quoted words are from FUEGO in post #55. You (or the system) attributes them to me. How did you do that?

TYPO.

I think I originally intended to quote part of your post as well. While I was editing down the quotes I must have deleted everything from just after the open quote block of your message through and including the close quote of your message and the open quote of FUEGO's message. The system thus thought I was quoting you and not FUEGO resulting in a misquote.

Sorry I goofed and did not notice.

Just FYI, to do a multi-quote first click the (") button just to the right of the (Quote) button for every post you might want to quote, then finally hit the (Quote) button. Then you to can create crazy misquotes at will.

[FIRE'd@51]

Quote:

Originally Posted by Arnie Yes, there is an implicit assumption that A retired earlier, should have (and did) base his initial WR on a longer period. But that was then and this is now. In spite of A getting an earlier start on ER, they have both experienced the same markets over the last 5 years. They are the same age, have the same expenses, portfolio, AA, etc.

Then A would presumably have a lower SWR than B at this point, so his success probability for the remaining 30 years would be higher.

[Arnie]

Quote:

Originally Posted by FIRE'd@51 Then A would presumably have a lower SWR than B at this point, so his success probability for the remaining 30 years would be higher.

If you mean suggested future SWR and success probability, they should be the same. If you mean A's SWR up to this point, I don't see the relevance. The A & B example was intended to illustrate that one should be able to periodically use the same tool(s) to evaluate their condition as they did to start their retirement.

[Rustic23]

First, I don't depend on Savings as a core part of my retirement.

When the market cratered it went from 14,000 to 7,000. If I had a million dollars in my account when I retired, the 4% rule would say I could live on $40,000 a year. However, if I retired a year later, I would only be able to spend $20,000! I for one, would never feel comfortable continuing to spend as if I had retired with a million.

[Moemg]

Quote:

Originally Posted by Rustic23 When the market cratered it went from 14,000 to 7,000. If I had a million dollars in my account when I retired, the 4% rule would say I could live on $40,000 a year. However, if I retired a year later, I would only be able to spend $20,000! I for one, would never feel comfortable continuing to spend as if I had retired with a million.

Not as drastically but that is exactly what happened to a lot of our members including me . My SWR dropped by over ten thousand dollars . Luckily I had a lot of padding in the budget so it all worked out but it was a scary time .

[ziggy29]

If the 4% rule existed in 1929 and if the Internet existed in 1932, I wonder if people would be talking about its impending "failure" for folks who retired in '29. (It came close that time, but didn't fail.)

[ERD50]

Quote:

Originally Posted by Rustic23 First, I don't depend on Savings as a core part of my retirement. When the market cratered it went from 14,000 to 7,000. If I had a million dollars in my account when I retired, the 4% rule would say I could live on $40,000 a year. However, if I retired a year later, I would only be able to spend $20,000! I for one, would never feel comfortable continuing to spend as if I had retired with a million.

This is similar to the Three Brothers thread. It's not as apples-to-apples as it seems.

edit - I see what I wrote does not address what you said, so I'm striking it. Although it stands as is, so I won't delete it.

So say you retired with $1M and took 4% ($40,000) with the 'market' at 14,000. If you hypothetically retired a year later instead, with the 'market' at 7,000 you wouldn't have a million. You would have ~ $500,000. So FIRECALC would still say take 4%, and 4% of $500,000 is $20,000 not the original $40,000.

There is no inconsistency at all regarding FIRECALC, (edit/add: ) - but it is a 'gap'.

As haha puts it - FIRECALC can make no assumptions about the value of your portfolio when you retire, only the amount of $ you enter. And clearly, having a $1M portfolio at the peak of a bubble is not worth as much as still having $1M after the bubble has burst. (edit/add: ) and in your example, the $500,000 is worth about as much as the $1M from a year earlier, so yes, they should be able to spend about the same. I'll venture that in rough numbers, that 'same' is probably best looked at as an average of the two - about 3%.

But FIRECALC is saying that historically, the $1M portfolio survives 95% of the time at 4%. So if 95% is OK with you, and relying on history is OK with you - there ya' go. It's really the $500,000 guy that could go to 8% in this case (if you could 'trick' FIRECALC to skip the first year of downturns, as is what happens in your construct).

Of course it's hard to know where we are when we are in the middle of a cycle, but I think the intro to FIRECALC should touch on this. If you just saw your portfolio rise in value because we just had a few extra good years, you should be extra conservative with the SWR %. Conversely, if we have had several bad years, you might be able to be less conservative. Human nature probably drives people to the opposite conclusion. And we can' bank on ANY of it.

-ERD50

[haha]

Quote:

Originally Posted by ziggy29 If the 4% rule existed in 1929 and if the Internet existed in 1932, I wonder if people would be talking about its impending "failure" for folks who retired in '29. (It came close that time, but didn't fail.)

The analogy may not be that helpful. In the summer of '32 Shiller PE10 got just below 6. In November 2010, it stands at just under 22. In fact, current levels are closer to the 1929 peak of 32 than to the bottom in 1932.

I know it is tiresome, but valuation rules. And do not be surprised if valuation once again speaks.

Right now there is a Titanic struggle going on between knowledgeable investors' desire to sell over valued securities and their equally strong or stronger desire to milk the Bernanke cow until she gives out.

Interesting times!

Ha

[ERD50]

Related to all this - does anyone know which starting years are the 5% failures in the current data set with the defaults? Keep in mind that the years 1980 on won't be part of a 30 year cycle.

-ERD50

[rob1221]

6% of my portfolio is in stocks it will never be higher than 10% you are making my point that stocks are not a reliable form of income and the puny sub 2% dividends will force you to sell stocks or equity funds to pay the bills this can not be masked by a fancy financial planing fomula unfortunately

[ziggy29]

Quote:

Originally Posted by haha The analogy may not be that helpful. In the summer of '32 Shiller PE10 got just below 6. In November 2010, it stands at just under 22. In fact, current levels are closer to the 1929 peak of 32 than to the bottom in 1932. I know it is tiresome, but valuation rules. And do not be surprised if valuation once again speaks. Right now there is a Titanic struggle going on between knowledgeable investors' desire to sell over valued securities and their equally strong or stronger desire to milk the Bernanke cow until she gives out.

Oh, I know valuation matters, and even in March 2009 the market wasn't nearly as cheap as it was at the bottom in 1932.

For what it's worth, I've long sought a workable mechanical model that takes valuations into account but it's pretty hard to do without "market timing" even if one tries to use purely mechanical triggers. Plus valuation is partially dependent on the "safe" yield on money, and I'd suggest that not all markets are "identically priced" even with the same PE10 (or its reciprocal, the earnings yield). In other words, the higher the yield on cash, the higher the earnings yield has to be in order to "priced" attractively. A market with an earnings yield of 5% (PE10 of 20) might be more attractively priced with "safe" money earning 1% than when "safe" money is earning 4%. One also needs to consider how much extra earnings yield (plus dividends) they are receiving as compensation for accepting market risk.

[rob1221]

Quote:

Originally Posted by Onward Rob, if any meaningful part of your portfolio is in stocks, taking x% of the total each year will lead to a very, very volatile level of income. It could easily swing 30% or more from year to year, and you'd need a very flexible lifestyle. Most people can't handle those swings in their post-retirement income, but if you can, I salute you!

6% of my portfolio is in stocks it will never be higher than 10% you are making my point that stocks are not a reliable form of income and the puny sub 2% dividends will force you to sell stocks or equity funds to pay the bills this can not be masked by a fancy financial planing formula unfortunately...revision, careful reading of my statement will reveal I have 6% in stocks or equities.

[haha]

Quote:

Originally Posted by ziggy29 Oh, I know valuation matters, and even in March 2009 the market wasn't nearly as cheap as it was at the bottom in 1932. For what it's worth, I've long sought a workable mechanical model that takes valuations into account but it's pretty hard to do without "market timing" even if one tries to use purely mechanical triggers. Plus valuation is partially dependent on the "safe" yield on money, and I'd suggest that not all markets are "identically priced" even with the same PE10 (or its reciprocal, the earnings yield). In other words, the higher the yield on cash, the higher the earnings yield has to be in order to "priced" attractively. A market with an earnings yield of 5% (PE10 of 20) might be more attractively priced with "safe" money earning 1% than when "safe" money is earning 4%. One also needs to consider how much extra earnings yield (plus dividends) they are receiving as compensation for accepting market risk.

Definitely I do not want to argue with you- but it can be noted that high PE (low yield) equities have a very long duration, and as such it is not clear to me that they should be compared to contemporaneous interest rates. Andrew Smithers calls this technique "broker valuation".

The other question is -for what purpose is one using valuation? If it is to avoid being blown up, it seems less than prudent to benchmark to historically low interest rates, as interest rates have been known to change.

For myself, pretty much everything I own that can be sold without capital gains taxes has been sold.

Ha

[Onward]

Quote:

Originally Posted by rob1221 the puny sub 2% dividends will force you to sell stocks or equity funds to pay the bills

That's okay. You can sell your stocks or funds and still finance a long retirement as long as you are diversified and keep your withdrawals small (< 4%). That's a safe strategy, if history is any guide.

If history isn't a guide, then all bets are off, and all investements are potentially unsafe.

[rob1221]

Quote:

Originally Posted by Onward That's okay. You can sell your stocks or funds and still finance a long retirement as long as you are diversified and keep your withdrawals small (< 4%). That's a safe strategy, if history is any guide. If history isn't a guide, then all bets are off, and all investements are potentially unsafe.

Baby boomers will be retiring at a rate of 30,000 per day if they are net sellers of stocks to pay bills who will be the net buyers of those equities? gen X gen Y the chinese? never in history have people attempted to live off 401ks and IRAs with a 60% plus equity portfolio even bogle says you should own your age in bonds. The best thing most people can do at or near retirement is get the beta down and boost the monthy cash flow of the portfolio

[haha]

Quote:

Originally Posted by Onward That's okay. You can sell your stocks or funds and still finance a long retirement as long as you are diversified and keep your withdrawals small (< 4%). That's a safe strategy, if history is any guide.

Or so the Germans would have us believe.

[Gotadimple]

Quote:

Originally Posted by rob1221 Baby boomers will be retiring at a rate of 30,000 per day if they are net sellers of stocks to pay bills who will be the net buyers of those equities? gen X gen Y the chinese? never in history have people attempted to live off 401ks and IRAs with a 60% plus equity portfolio even bogle says you should own your age in bonds. The best thing most people can do at or near retirement is get the beta down and boost the monthy cash flow of the portfolio

Good point about portfolio allocation for those near or at retirement. However, if boomers are net seller, buyers will be institutions.

Most of the market is owned and controlled by institutions who buy for themselves. These institutions do not re-sell (mutual funds, etf's) to individual buyers.

-- Rita

[haha]

I wonder about this. Other than hedge funds, which are not exactly owners but more traders, which institutions are not ultimately funded by individuals? Not mutual funds including index funds, when people sell these shares, the fund must sell to cover redemptions. Not pension funds- when boomers retire, whatever pension funds still exist must go into liquidation mode. ETFs? I am not sure, but unless they are to go to huge discounts, it seems that they must also sell if there is big selling pressure on their shares.

Here is recent data on US stock ownership.

http://www.census.gov/compendia/stat...es/10s1164.pdf

So in my mind at least, boomer mass retirements remain an unknown element.

Ha

[rob1221]

Quote:

Originally Posted by Gotadimple Good point about portfolio allocation for those near or at retirement. However, if boomers are net seller, buyers will be institutions. Most of the market is owned and controlled by institutions who buy for themselves. These institutions do not re-sell (mutual funds, etf's) to individual buyers. -- Rita

I think institutions like scholarship funds, mega insurance companies etc will be in the equity market as they have been all along, the issue for me is that baby boomers with these 60/40 portfolios will be huge net sellers and I dont see where all a big new cash infows to instutions will come from to offset hundreds of billions and ultimately trillions baby boomer will need for retirement expenses. In fact many institutions like teachers and other union workers may also be forced sellers to pay defined pensions also. The self funded IRA and 401ks are a huge social experiment maybe it will end well but the economy and demographics are working against us