6% + SWR's

[justin]

Someone else on another thread mentioned that the NUMEBR is the maximum SWR. In my case, playing with the models is helping me to reevaluate that 'maybe' i'll reduce my number from 1.25MM @ 4% to 1.00MM @ 5% even though my models say I could draw 7 or 8% (with Ty@55, Pension@65, SS@67, DWSS@72 and partime to stay busy). cushion built in. That equates to about 3 to 5 years earlier than just taking the conventional wisdom.

My thinking exactly. What if I can retire 3-5 years earlier with a smaller nest egg and not have a significant reduction in spending over time (and potentially a significant increase)?

Or conversely, if I know spending under one model will work based on historical returns, and I choose a more conservative withdrawal strategy to actually take withdrawals, I have in essence improved the safety of my withdrawal strategy (more padding).

 

[cute fuzzy bunny]

daddy-o

If I may, I think your use of the term 'likely' is where you're getting some disagreement. "likely outcome" "likely somewhere in the ballpark" (which is a GOOD one, btw ).

Plausible and reasonable are good words. I have no illusions about my (or anyone elses) ability to get anything figured out anywhere near the range of 'likely'.

 

[justin]

If I may, I think your use of the term 'likely' is where you're getting some disagreement. "likely outcome" "likely somewhere in the ballpark" (which is a GOOD one, btw ).

Plausible and reasonable are good words. I have no illusions about my (or anyone elses) ability to get anything figured out anywhere near the range of 'likely'.

It's just semantics.

 

[SteveR]

It's just semantics.

Like handgrenades and horseshoes.........you just have to be "close enough."

 

[obryanjf]

Yep. There are those like JG who swear the "SW" in SWR stands for Smith & Wesson.

Can I presume you mean I will shoot myself in the foot. You may be right, but it is amazing to me that on this board where most proclaim to adhore the use of financial planners and their ilk, that one is viewed with disdain if they try by their own research; to understand alternative withdrawl schemes, understand volutility, rebalancing schemes, etc. This is viewed as pushing the limits due to undercapitalization, living on the edge, data mining, etc. Presenting the precise output/answer is wrong, the output be slopped up to not provide the precise output. The/a cushion should be built into the answer, I suppose users cannot decide what their cushion should be.

I don't proclaim to have all the answers nor that whats right for me is right for everyone else. I will say that a model that yields 5.x% or even 6.x% is significantly different than one that yields 4.x%.

job

 

[d]

model that yields 5.x% or even 6.x% is significantly different than one that yields 4.x%

it's obviously true ... but the point that others are making is, perhaps, that the model's output it not what is relevant ... rather it's the actual experience which is yet to come, and which cannot be predicted, and which will not be altered by your choice of model.

(readily admiting that one's behaviour might be altered by choice of model)

 

[REWahoo]

Can I presume you mean I will shoot myself in the foot.

No, just like the USAF motto, you'll need to "aim high".

I was attempting a humorous reference to a former poster who frequently touted this as his solution to end of life problems.

Guess you had to be there...

 

[obryanjf]

Sorry,

I'm not known as the humorous type..much to the dismay of DW, FIL, Mom, 7 sisters, etc.

job

 

[Nords]

No, just like the USAF motto, you'll need to "aim high".
I was attempting a humorous reference to a former poster who frequently touted this as his solution to end of life problems. 
Guess you had to be there...

Gosh, his wife better not find out...

 

[haha]

I may be remembering wrong, but I believe Dory mentioned in another thread that a portfolio that hits any nonzero number somewhere along the way, but recovers to allow continuing scheduled payouts is considered a "success". I am just trying to imagine my feelings as my portfolio goes from $x,000,000 to $x0,000. I don't think I would be reminding myself that FireCalc said I was ok. I would out collecting aluminum cans.

IMO, the truth is that there is nothing like a pension for a retiree. If you don't have one of these, you will need conservatism and luck.

Ha

 

[Nords]

I am just trying to imagine my feelings as my portfolio goes from $x,000,000 to $x0,000. I don't think I would be reminding myself that FireCalc said I was ok. I would out collecting aluminum cans.

Well, that is a drop of at least 91%. Ideally by the time you'd lost 40% you'd be cutting back your spending and perhaps picking up the occasional can on your daily walk.

IMO, the truth is that there is nothing like a pension for a retiree. If you don't have one of these, you will need conservatism and luck.

Somewhere an annuity salesman just perked up his ears...

 

[rmark]

Bernstein in "Four Pillars" suggests about 2% below average for stocks, 1% below average for bonds during withdrawal. So my simple model results in -

Saving Withdrawal
Stocks, Reits = 1/pe - costs -2 (taxed on nominal return)
Bonds, Bills = yield - inflation - costs -1

so currently expected return-
stock 5.5% - .5% = 5% while saving, -2% = 3% in withdrawal before tax
bond 5.5% - 3% - .5% = 2% while saving, -1% = 1% in ithdrawal before tax

so a 50/50 mix gives about 2% during withdrawal, reduced to near 1% after tax on nominal return

historically
stock 7% - 2% = 5% while saving, -2% = 3% in withdrawal before tax
bond 6%- 3% - 1% = 2% while saving, -1% = 1% in withdrawal before tax

so current expected return is similar to past averages using low cost index funds to minimize costs.

 

[rmark]

While I enjoy reading research papers (such as Bengen and Guyton), I think most complicated spending rules are in the end just data mining trivia.

In my opinion -

Initially divide portfolio and fixed pensions over remaining IRS life expectancy
1. add inflation to initial withdrawal
2. redivide portfolio and pensions again
spend the lesser of the above

is about as complicated as it can get.

 

[cute fuzzy bunny]

that one is viewed with disdain if they try by their own research; to understand alternative withdrawl schemes, understand volutility, rebalancing schemes, etc.

Can you point out any post where someone has 'viewed you with disdain'? I'm sorry, but I dont see it. I keep hearing these hosuc-like "defenders of the conventional methodology" comments, but I really, truly dont see anyone who says "its 4% or you're a moron" or "anything other than 4% is wrong".

All I've seen is reasonable questions and people pointing out that some of these plans try to place some certainties and measurements on things that are hard to determine with certainty or hard to measure.

Presenting the precise output/answer is wrong, the output be slopped up to not provide the precise output.

Theres the rub. How the hell do you provide a 'precise' number when you have no idea at all whats going to happen on dozens of different vectors that you have no control over and that have highly unpredictable characteristics? What if inflation roars to 20%? What if the stock market drops 80%? What if you or your spouse get extremely sick or die (god forbid)? What if you find yourself in a divorce? What if a dirty bomb gets detonated in NYC or LA? What if your house gets flooded or hit by an earthquake or other non-insurance-paying event?

Even the 4% SWR doesnt accommodate half of this stuff. Going a little more 'pedal to the metal' seems to be imprudent.

Bearing in mind, if you're even still reading at this point, that i didnt know what an SWR was for my first 3 years of ER, I dont practice one at all, and I think they're ridiculous tempests in a teapot. I have the 'ultimate variable rate withdrawal system'. We do what we want and spend what we want, within reason, and if the portfolio is doing great we spend extra. As long as the bottom line portfolio number stays the same or keeps going up, theres no problem.

This is a much simpler calculation than a lot of people make it out to be. We're (early retirees) are in it for the long haul. Presuming we invest in a well balanced, well diversified portfolio and dont blink if things get bad or go too nutty with the spending when things get good, you're going to make 5-11% returns. Where between 5 and 11% is where you get the disagreements and there is no obvious solution to those arguments without a copy of the 2025 new york times or a crystal ball. Inflations going to whack you from 1.5%-5% (depending on where you live and your lifestyle) on average unless something really bad happens, which is plausible. Taxes are going to hit you for an indeterminate amount depending on how you spend, how you withdraw, how you invest and where you live.

So over the long haul, on an annual basis, looking at the rosiest end of this, 11% returns - 1.5% inflation=9.5% minus taxes. The least rosy end is 5%-5%-taxes.

Hmmm...slightly less than zero and slightly under 9.5%. Whats the average of that? 4? 4.25? 4.5?

I think the closer you get to zero, the more you're denying yourself. The closer you get to the 9.5% the slimmer your recoverable margin in the event of failure.

You can throw in social security, annuities, part time working, pensions, and all sorts of other income streams. Then subtract all of the unexpected problems, minidisasters and uncontrollable life events. I'll bet over 30 years they even out.

 

[2B]

From what I've seen of my parents and in-laws, they spent too little. It wasn't because they didn't have it or were running out. It was because they had more than they wanted at the latter stages of life.

What I don't know is whether they "deprived" themselves when newly retired because they worried about running out of money. I can't ask my parents now because they're dead. I can't ask my in-laws bacause of their dementia.

The impact of "later life" care is the variable I'm experiencing now. Both of my in-laws are obsessed with running out of money but they have no idea how much they have or where it's invested. They also have no ability to manage anything. They have enough for both of them for at least 12 years and it's highly unlikely they will both last that long. With only one, the remaining savings will last for eternity -- not withstanding many of CFB's disasters. Once we get rid of their house (that both talk about moving back into but never will), their expenses will be about 40% over their spending prior to their moving to their respective care facilities. This is the "end of life scenario" so there's no need to preserve the portfolio. We can slowly deplete principle without risk.

 

[obryanjf]

The idea that the world may end or nearly so, so there is no reason to plan with the information one has, to me seems odd and misplaced. The same argument could have been made in 1920(Boom), 1930(Depression), 1940(War), 1970(Stagflation), 1990(Clinton, kidding) etc. The world did not end and those that planned probably made out ok. Some that did not plan sailed thru ok and others slowly got buried by inflation, low return CD's or volutility.

I do not know what the next 10, 20 or 50 years will look like in terms of returns. If they look like the great depression and 1970's then I'll be OK because my model survives that plus. If it is worse, then I'll be in trouble, like 300MM other people (minus a couple from this board and the trumps ).

On the SWR, I am sure that 98% (~high number) of retirees do not have a clue what a SWR is or how one is derived, and they do not give a rat's axx. Along 2B's thought; My mom is a decent example. She (&65) and my FIL live in a ~1MM house/farm. Not counting the land, Her WD's are about 5k+SS, his are similar+SS. Her WD% is 1.6%, his is similar. They could not care less about WD rates. I've told her (and him), they are not spending enough, or in other words, they have some flexibility to spend more if they would like. Don't care, don't want. Neither have a clue the amount they should be spending but are happy with want they are spending.

Hopefully by planning for the worst we've seen in 75 years I'll weather the next 50 or so if I make that. Me being 4 years from the age my father passed and understanding my SWR better might allow me to not work till I'm dead. Or it might allow me to change pace quicker than I otherwise would. In fact, that is my plan. Now understanding my SWR better, I putting the wheels in motion to have a soft landing into my ER in a couple of years.

job

 

[d]

they are not spending enough ...but are happy

then they don't have a problem! clueless or otherwise. on the other hand, had they the world best swr model, and were spending the "right amount" but were not happy (with that level of spending), or were quickly running-out of funds, then they'd have a problem.