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Re: A Decision Analysis approach to SWR choices
Old 03-07-2006, 10:13 AM   #21
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Re: A Decision Analysis approach to SWR choices

Quote:
Originally Posted by brewer12345
MB, I am not that comfy with something as "squishy" as the decision analysis score suggested, since I could probably poke half a dozen holes in the methodology pretty easly.* The problem is that making the leap "into the void" is a fundamentally touchy-feely type decision, so it is tough to apply numbers to it.
Brewer, that is a good point.

I would only note that poorly scrutinized "touchy-feely type" thinking is what leads less thoughtful people to play the lottery despite limited resources, buy annuities when better alternatives are obvious, or play it safe to the point of self-deprivation and loss of happiness just so they don't take that 1% chance of partial failure.

A good compromise (for me) is to do the model and the math, consider the winning option, then do a final "sanity check" - basically, how does this conclusion "feel" to me. If the two jive well, I am content with the decision. If there is a disconnect, I re-evaluate my assumptions, often finding that I kind of failed to consider something, had a new insight. That's my "intuition" telling my intellectual side that it is being a jerk. Sometimes, I just go with my gut despite the analysis.

It's a tool, just a tool. But it can be startlingly powerful and insight-generating sometimes.

And, it's free .
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Re: A Decision Analysis approach to SWR choices
Old 03-07-2006, 10:18 AM   #22
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Re: A Decision Analysis approach to SWR choices

Rich: As always, each of us has to dow hat works for them. FWIW, "behavioral finance" is probably one of the hottest areas of research in the field right now.
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Re: A Decision Analysis approach to SWR choices
Old 03-07-2006, 07:11 PM   #23
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Re: A Decision Analysis approach to SWR choices

I think this approach might work very well in the case of a government worker who wants to choose between retiring at time t, with cola'd income of say $50,000; vs. retiring at time t+x with a larger cola's income. Then he can confidently make the assignments of utilities that you suggest. But in my case, and I would imagine in the case of many others who have only their nest-egg plus small and somewhat insecure SS to support them, there is going to be a powerful, asymmetrical interaction between the curve of their net worth, and their happiness. In fact, a severely falling net worth might even turn happy memories of trips, etc., into painful reminders of one's folly.

If my portfolio goes up by $1million, I will like it and feel more like a fat cat, but it would likely have a more powerful effect on my happiness by increasing my security, than by any additional spending I might undertake.

If it goes down by $1 million, I am feeling like shite and wishing I never heard of early-retirement.

In the final analysis, what do you really need to make you happy? A good meal at home is very similar to a good meal in Rome. A glass of Relska vodka is likely indistinguishable from a glass of Grey Goose. And unless you are paying cash for it, you are going to get the same quality sex on*a low budget as on a high one.

In my case, my manhood might even go into hiding at least for a while if I really thought I was heading down the death spiral of a broken retirement.

As the song says- "All I need to make me happy,
Two little kids to call me Pappy..."

And maybe a fat chick in short shorts and dinner at Carl Jr.'s!

Ha
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Re: A Decision Analysis approach to SWR choices
Old 03-07-2006, 09:02 PM   #24
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Re: A Decision Analysis approach to SWR choices

Mmm...six dollar burger...

HONEY! We're going out for dinner!
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Re: A Decision Analysis approach to SWR choices
Old 03-07-2006, 11:09 PM   #25
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Re: A Decision Analysis approach to SWR choices

Rich in Tampa, [I assume Rich as in Ricardo and not Rich as in rico :]

This was a really good post that you have started. You are saying that instead of spending so much time analyzing the data that goes in, spend some time analyzing the data that comes out for your particular situation -- give it some thought and customize it.

Every time that I think I fully understand SWR stuff something like this gives me more insight. Thank you very much. I have touched on this in Monte Carlo analysis that I have done, but not much. For instance, I keep track of instances where I end up having to go back to work for awhile, which is a lot more often than one goes broke.

Yes, a lot of it does depend on your backup plan, too. I liked Larry Swedroe's recent post on the Vanguard Diehards morningstar board about a plan advocating a 5% SWR:
Quote:
7. try this
larry swedroe| 03-03-06 | 07:12 PM
those who have options, like can cut spending or sell other assets to live off of (e.g.second home) or continue working, etc. can take the risk of a higher withdrawal. Those that do not should not because, as in this example, if inflation rises and you cannot cut back on real expenditures your screwed. And too late to do anything about it at that point.

And if you have options you must be prepared to exercise them if the risks in fact do show up
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Re: A Decision Analysis approach to SWR choices
Old 03-08-2006, 08:04 AM   #26
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Re: A Decision Analysis approach to SWR choices

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Originally Posted by kramer
..You are saying that instead of spending so much time analyzing the data that goes in, spend some time analyzing the data that comes out for your particular situation -- give it some thought and customize it.
Quote:

Well put.

I guess the take-home message for me is to keep things in proportion: likelihood of certain things happening on the one hand, and the impact they would create if they did happen. Human nature is to distort these for a lot of reasons, with subsequent decisions that are actually not in your self-interest. It helps me to explicitly consider both factors independently to reduce the risk of these "wrong decision" traps.

Just my $.02.
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Re: A Decision Analysis approach to SWR choices
Old 03-09-2006, 08:48 AM   #27
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Re: A Decision Analysis approach to SWR choices

Rich...thanks for the "tool". For me, it illuminates the simple fact that quantity (SWR) does not necessarily lead to higher quality (FIRE).
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Re: A Decision Analysis approach to SWR choices
Old 03-09-2006, 09:18 AM   #28
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Re: A Decision Analysis approach to SWR choices

Quote:
Originally Posted by kramer
...Yes, a lot of it does depend on your backup plan, too.* I liked Larry Swedroe's recent post on the Vanguard Diehards morningstar board about a plan advocating a 5% SWR:
Kramer
I agree with the M* post and all the others ones that approach SWR percentages more like a taylored suit than one off the rack. Each individual has their own number that will work best for them instead of one number for the masses. Like HA said in his post above

" I think this approach might work very well in the case of a government worker who wants to choose between retiring at time t, with cola'd income of say $50,000; vs. retiring at time t+x with a larger cola's income. Then he can confidently make the assignments of utilities that you suggest."

A couple (or individual) with only SS and a company pension will have a very different retirement funding picture from a couple that has only a 401k or IRA and SS to use to pay the bills and fund self entertainment costs. The more "stuff" you can use to create income the better you can live (more you can spend). Some folks have lesser "needs" than others and that is fine. The problem is when your needs exceed your income.

My income needs and sources will differ from others in retirement. Mine are unique to my situation and my ability to create my nest egg and have company support while in retirement. My SWR will be more like 6% in the first few years and then will decrease to 4-5% and eventually go below 3% as various events and funding needs change during the next 30+ years. Mine will not be a static withdrawl rate but a very flexible one for many reasons. I think folks need to understand that the whole retirement funding process for most folks, is a dynamic process that needs to be tweeked as things change year to year.

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