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Old 08-15-2012, 04:09 PM   #21
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CT:

I suppose that your formula is as good as any of them. They give you some sort of ballpark idea for what kind of money you need to ER.

I also suppose the following questions will arise from such a model.

1) what's a Non discretionary budget ? Is it a Bangladesh style lifestyle budget ? Or something more than that ?

2) many ER's retire way before Social Security sets in. How does that play into the formula ?

3) A 4% variable withdrawal rate always leaves a big unspent nest egg at the end. perhaps there is a better way to utilize that.


By the way, I haven't seen you posting much. haven't you been away for years ? How's the fishing life ?
Your questions answered....

1.) minimum per year to survive in your current living situation (No eating out, entertainment, Vacation etc.) ...If Bangladesh is your lifestyle, then yes. You actually can define this for youself. It's for whatever you need.

2.) Here is what I did on Social Security. I am taking it at age 70...I set aside 10 years of Social Security $$ in Cash and don't count it in my portfolio or asset allocation. I withdraw 1/10 every year until Social Security kicks in.

3.) If you look at Variable Withdrawal formulas, the percentage ramps up as you age....there are various methods, but an example would be 5% at age 70, 6% at age 75, 7% at age 80 etc. etc...... There are various methods out there. The 4% was a starting withdrawal rate.

4.) Yes I have been enjoying life and Fishing a lot....Wintering in Florida. Just booked an African Safari for next June.
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Old 08-15-2012, 04:51 PM   #22
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3.) If you look at Variable Withdrawal formulas, the percentage ramps up as you age....there are various methods, but an example would be 5% at age 70, 6% at age 75, 7% at age 80 etc. etc.....
Yeah, if everything works out well I start flying first class when I am 70.
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Old 08-15-2012, 04:54 PM   #23
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Yeah, if everything works out well I start flying first class when I am 70.
Actually I started in my 40s.......But, you are missing the point....The percentage may be increasing, but the amounts may not be.
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Old 08-15-2012, 05:12 PM   #24
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Also, I am a big proponent of Variable withdrawals in retirement.
Who suggested otherwise? So do all the credible SWR studies, for example:
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One scenario backtested in the [1998] Trinity study suggests that a retiree with a suitably allocated $1 million portfolio could withdraw $40,000 the first year, give herself a cost-of-living adjustment every year afterwards, and have a 98% chance of the portfolio lasting at least 30 years.

Taken literally, such a plan has been criticized as unrealistic. Even if the tests showed that the plan had a 98% success rate over all past time periods, would a prudent person blindly go on steadily increasing withdrawals in a prolonged bear market? It also leads to apparent absurdities. Say that retirees A and B have saved $1 million in 2008, and the market crash reduces their portfolios to $800,000 in 2009. A, however, retires in 2008 while B waits until 2009. The Trinity study bases withdrawals the dollar value of the portfolio at the start of retirement. The value fluctuates with the vagaries of the stock market. Thus, even though their situations are almost identical, in the Trinity scenario, retiree A, by virtue of having retired in 2008, is allowed to withdraw $40,000 plus COLA in 2009; while retiree B, despite being in an almost identical situation, would be allowed only $32,000.

The authors of the paper, however, did not mean for their scenarios to be applied rigidly or uncritically. The article makes this very important statement:
The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
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Old 08-15-2012, 05:37 PM   #25
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Who suggested otherwise? So do all the credible SWR studies, for example:
Not FireCalc. As well as most of the other SWR Calculators.

However, I agree with you that it is foolish to NOT have a Variable Withdrawal Plan, although many have suggested otherwise.
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Old 08-15-2012, 05:39 PM   #26
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Who suggested otherwise? So do all the credible SWR studies, for example:
Ah yes unclemick's unified general theory of chickenheartedness. Math - don do no stinking math! I check the belly button quiver and vary percent of portfolio accordingly.

Of course that falls in the range of 2-6% of prior years ending portfolio value. Also now old enough to play the cheap SOB card - all expenses covered by non-cola pension and early SS if the throttle is really pulled back.

heh heh heh - trained to party by living 30 yrs in New Orleans. Always trying to land between frugle and you can't take it with you. 19 years and counting.
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Old 08-15-2012, 05:41 PM   #27
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Actually I started in my 40s.......But, you are missing the point....The percentage may be increasing, but the amounts may not be.
Not missing the point -- I said "if everything works out well..." In that case, the amounts will be way up.
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Old 08-15-2012, 06:55 PM   #28
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Not FireCalc. As well as most of the other SWR Calculators.

However, I agree with you that it is foolish to NOT have a Variable Withdrawal Plan, although many have suggested otherwise.
"If you tell FIRECalc how much you have, and how much you'll be taking out each year, FIRECalc will show you how such a combination would have fared for the duration of your retirement, in every year for which we have market data." They repeatedly state their results are based on past history only, that no one can predict the future and they don't try, and leave it to the user to decide what's safe.

Where does FIRECALC make any recommendation whatsoever regarding withdrawals? As for "most other SWR calculators", my post said "credible SWR studies."
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Old 08-15-2012, 07:09 PM   #29
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"If you tell FIRECalc how much you have, and how much you'll be taking out each year, FIRECalc will show you how such a combination would have fared for the duration of your retirement, in every year for which we have market data." They repeatedly state their results are based on past history only, that no one can predict the future and they don't try, and leave it to the user to decide what's safe.

Where does FIRECALC make any recommendation whatsoever regarding withdrawals? As for "most other SWR calculators", my post said "credible SWR studies."
OK, you win.....Everyone out there now, that is credible is recommending a Variable Withdrawal Method and No one is recommending a Starting SWR that is inflation adjusted every year for 30 years. The last time I ran FireCalc you inputed an amount you wanted to withdraw and it Inflation adjusted it every year for the time period specified. I have not run it in 5 years, so maybe it's different.

I just agree with the Variable Withdrawals. I guess the 'New' SWR is Variable now.
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Old 08-15-2012, 07:31 PM   #30
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The rules on Firecalc and any of these other calculators that I have looked at (which I admit are quite few, as I think it is an invalid approach) very clearly state that the starting draw is adjusted every year for inflation, not for remaining balance.

But after some years of dicey market experiences, people like to make up their own rules, without consciously repudiating the original basis of the plan.

Constant inflation adjusted draw vs a variable remaining balance adjusted draw just trades a varying asset balance but a constant real withdrawal against a more stable asset balance with a varying annual draw.

There is no magic here, if you look at it clearly. I think if there is considerable cushion, most would opt for letting their income vary- but that has nothing to do with these calculators.

It is quite similar to the trade with varying durations in fixed income assets. Long duration, steadier income but more asset value fluctuation. Shorter duration, very unstable income but more stable balances.

Ha
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Old 08-15-2012, 08:24 PM   #31
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This concern describes us. We are hoping to pull the plug in our mid 30's. So we have to have a safe withdrawal rate adequate to get us through two 30 year periods (although the second thirty year period will likely see us getting some level of SS income).
Be careful about those assumptions. Retiring in your mid-30's puts you at risk of being under 40 quarters of SS earnings history, which would mean zero benefits. If you do manage to work enough quarters to qualify, you will still have many years of zeros when they figure PIA based on 35-years of work history, so expect a very low benefit amount.
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Old 08-15-2012, 08:37 PM   #32
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The rules on Fireclac and any of these other calculators that I have looked at (which I admit are quite few, as I think it is an invalid approach) very clearly state that your starting draw is adjusted every year for inflation, not for remaining balance.
You might want to take another look at FIRECalc. For a few years now FIRECalc has offered the option to instead take a % of each year's remaining portfolio. The outputs are different (since you can never go totally broke by doing this, but your spending power can erode if you take too much). I agree that this is a much more realistic way of planning to do withdrawals.
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Old 08-15-2012, 08:57 PM   #33
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Also, I am a big proponent of Variable withdrawals in retirement. IOW - taking 4% of remaining portfolio with no inflation adjustment. This will protect you from Market downturns. In reality, this is what most retirees do anyway....I doubt that anyone here would take an inflation adjusted 4% into the teeth of a severe bear market. Would this mean that you might have to severely curtail your spending?....Yes....That is why I also maintain that your SWR initially should be twice of what you need, otherwise don't retire..

There has to be some flexibility in your budget to cut back if necessary. (e.g. Vacations, Entertainment, Dining out). I came up with a formula for having 'Enough' $$$ to retire. (The constant of '2' is there to cut expenses by 50%, if need be)...

No right or wrong, but I see things differently.

I'm not taking 4% now (DW is still earning some $), but I did not cut my spending when the market tanked in 2008. I really would have regretted it if I had. The market recovered, but I can't recover a year of fretting over this $ and that penny, no 'Vacations, Entertainment, Dining out', etc.

DW would have told me to go back to work to maintain our lifestyle (which isn't a lot of conspicuous consumption, but we do want to enjoy ourselves), and she'd be right, as she often is when it comes to the important stuff.

Rather than have my spending drop in half, I'd rather take a middle ground of something like 3% WR, and stick to it through the bumps. If there is a long term downward trend, I'll re-evaluate, but I really don't want to adjust my spending in response to the typical 2-3 year cycles we often see.


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Old 08-15-2012, 09:04 PM   #34
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You might want to take another look at FIRECalc. For a few years now FIRECalc has offered the option to instead take a % of each year's remaining portfolio. The outputs are different (since you can never go totally broke by doing this, but your spending power can erode if you take too much). I agree that this is a much more realistic way of planning to do withdrawals.
Thanks, I haven't used it recently. In any case, the principles are the same, and I believe accurately stated.

Ha
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Old 08-15-2012, 09:17 PM   #35
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The rules on Fireclac and any of these other calculators that I have looked at (which I admit are quite few, as I think it is an invalid approach) very clearly state that your starting draw is adjusted every year for inflation, not for remaining balance.

But after some years of dicey market experiences, people like to make up their own rules, without repudiating the original basis of the plan.

Constant inflation adjusted draw vs a variable remaining balance adjusted draw just trades a varying asset balance but a constant real withdrawal against a more stable asset balance with a varying annual draw.

Ha
In addition to what samclem posted, I guess I don't look at FIRECALC as promoting an inflation adjusted WR, I look at it as just 'if you do this, this is what you would have experienced historically'. Once you have that number, you can investigate more.

For me, the value of that is that it takes the historical interaction of inflation and returns into account. I think that's important.

Invalid? I'm curious why you say that. OTOH, I wouldn't try to make the case that they are valid, as we can't know that the future will resemble the past. But anything we do has to have some basis in something. Even if one says that if you spend a fixed % you never run out, that's true, but that fixed % might end up tiny. In retrospect, they may have wished their initial WR was lower?

I know you mention dividend paying stocks from time to time. I guess you are saying that if you only spend the dividends, you have a reasonable history of dividends keeping up with inflation, and the capital is your cushion? Sounds reasonable to me, though I'm not sure personally how to go about selecting those stocks. Many of the past 'Blue Chip' companies that were seen as paying dividends 'forever' are gone or shadows of their former selves. I dunno, it still seems like either method relies on some history, I have trouble seeing either as valid or invalid.

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Old 08-15-2012, 10:02 PM   #36
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In addition to what samclem posted, I guess I don't look at FIRECALC as promoting an inflation adjusted WR, I look at it as just 'if you do this, this is what you would have experienced historically'. Once you have that number, you can investigate more.

For me, the value of that is that it takes the historical interaction of inflation and returns into account. I think that's important.

Invalid? I'm curious why you say that. OTOH, I wouldn't try to make the case that they are valid, as we can't know that the future will resemble the past. But anything we do has to have some basis in something. Even if one says that if you spend a fixed % you never run out, that's true, but that fixed % might end up tiny. In retrospect, they may have wished their initial WR was lower?

I know you mention dividend paying stocks from time to time. I guess you are saying that if you only spend the dividends, you have a reasonable history of dividends keeping up with inflation, and the capital is your cushion? Sounds reasonable to me, though I'm not sure personally how to go about selecting those stocks. Many of the past 'Blue Chip' companies that were seen as paying dividends 'forever' are gone or shadows of their former selves. I dunno, it still seems like either method relies on some history, I have trouble seeing either as valid or invalid.

-ERD50
Good points.Trying to live on capital at a time of low interest rates is very difficult, no matter how you approach it.

I just happen to feel more comfortable, and I am more experienced, with choosing stocks, and planning to try an preserve the real value of the capital. I'll soon be celebrating my 30th year of self financed retirement, (other than 17 months of SS) the first 10 with children, and of course with a nice trimming from a divorce. Once an old horse knows a way to the barn, it's hard to get him to try an alternate one.

After all, this is the time honored approach of well off people, before the era of 401 -Ks, financial planners, and mass investing.

Ha
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Old 08-15-2012, 11:15 PM   #37
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It is really nothing new. He just points out that the SWR literature is based on historical worst case scenarios, not historical averages. Thus, even if we face a low "new normal" for the coming decades there is no reason to assume we are on track for a new worst case scenario.
As I said, no new data but a more optimistic perspective than some of the 2-3% SWR proponents put forward.
I think it's worth noting that almost all SWR studies are still trying to figure out how to account for:
1. Social Security
2. Variable withdrawal systems like Bob Clyatt's 4%/95% system. Yeah, I know the 4% SWR system rises over time because of the inflation bump, but I'm referring to reducing withdrawals after a bad year.
3. Having a SPIA at the start of ER or adding one during ER. (In addition to SS.)
4. The anecdotal tendency for spending to decline with age. Of course this is complicated by late-in-life medical expenses-- or by starting to fly first class after age 70.

A rigid lockstep 4% SWR will fail once in a while, but the above factors give enough wiggle room to allow the portfolio to recover.

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There have always been problems, and there always will be. Until we learn to see into the future, there will always be uncertainty. Is it any different now?
OMG, the more I read the more problems I see, and the more uncertain I am! Is this a problem too? I'm not sure! It must be getting worse!!
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Old 08-15-2012, 11:46 PM   #38
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I think it's worth noting that almost all SWR studies are still trying to figure out how to account for:
1. Social Security
2. Variable withdrawal systems like Bob Clyatt's 4%/95% system. Yeah, I know the 4% SWR system rises over time because of the inflation bump, but I'm referring to reducing withdrawals after a bad year.
3. Having a SPIA at the start of ER or adding one during ER. (In addition to SS.)
4. The anecdotal tendency for spending to decline with age. Of course this is complicated by late-in-life medical expenses-- or by starting to fly first class after age 70.

A rigid lockstep 4% SWR will fail once in a while, but the above factors give enough wiggle room to allow the portfolio to recover.


OMG, the more I read the more problems I see, and the more uncertain I am! Is this a problem too? I'm not sure! It must be getting worse!!
In addition to the factors that you mentioned I can't imagine many Early Retirees continuing to spend that fixed amount blindly while their portfolio goes to zero. I know from personal experience that 2008-2009 while I didn't HAVE to reduce expenses I was a bit more careful and maybe subconsciously (or not) my expenses were a bit lower in those years. I would venture to say that most people that ER do so because they have a pretty good handle on their finances. We'll adjust to most situations if at all within the realm of possibility.

My bad I should have read your number 2 more carefully. Sorry.
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Old 08-16-2012, 12:25 AM   #39
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Every era finds its own way to rephrase the most dangerous of all statements, "This time it's different."

Our era's version is "New Normal." And Bill Gross is our Howard Ruff.

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Old 08-16-2012, 06:27 AM   #40
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The discussion almost seems to be over whether SWR calculators and studies are useless if they only address fixed, inflation adjusted withdrawals. But I don't think it much matters whether Firecalc does that or offers a % of remaining portfolio withdrawal calculation. What matters is that the approach is transparent so you can get useful information. To me the value of SWR studies and calculators is that they give you scenarios of what could happen in the future if you do X and/or what would have happened had you done X at various points in the past. It enables you to put a downturn in perspective. Sure, few would blindly follow an inflation adjusted fixed SWR in the face of a devastating downturn. But who would blindly spend a variable rate based on a fixed percentage of remaining portfolio? After a few years spending $80K how many of us would suddenly blow $120K after a 50% runnup? I know I put most of the extra $40K away in a rainy day fund so when the inevitable downturn arrives I can spend $70 or $75K or even the full $80K with inflation adjustment instead of $40K.
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