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Old 06-19-2015, 02:39 PM   #41
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How about, "The greater of 4% of your initial fund or 4% of your current fund"?
That's an easier rule to remember and apply.

As Kitches says, the issue is to come up with some rule-of-the-thumb that tells you how soon and how much you can increase spending in good scenarios.

I think he is being more conservative than he needs to be. The problem is in the word "ratchet", which is one way only.

Suppose I start with $1 million and I feel I really "need" $40k from my portfolio. I keep my first year withdrawal to $40k since I have no downside flexibility.

Now I have some good, early years and I'd like to increase to $45k. Kitce assumes I should only go up if I want to put a new floor on my withdrawals.

I don't think that's necessary. If I originally thought I could live on $40k, it seems the extra $5k is "optional" spending that I can readily turn off if my portfolio goes back down.

That is, if I'm willing to live with variable withdrawals only on the excess over 4%, I can be quicker to increase.

I tried back-testing this rule using the standard FireCalc assumptions. It does not add any new failure years. The only "close" year that it impacts is 1964, when this rule converts an ending balance of 5.9% of original portfolio into an ending balance of 4.6% of original portfolio.

I'm sure if I ran 10,000 randomly chosen scenarios, I'd find a few that this rule impacts. But this backtesting says they would be rare.
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Old 06-19-2015, 03:23 PM   #42
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Originally Posted by Independent View Post
How about, "The greater of 4% of your initial fund or 4% of your current fund"?
That's an easier rule to remember and apply.

As Kitches says, the issue is to come up with some rule-of-the-thumb that tells you how soon and how much you can increase spending in good scenarios.

I think he is being more conservative than he needs to be. The problem is in the word "ratchet", which is one way only.

Suppose I start with $1 million and I feel I really "need" $40k from my portfolio. I keep my first year withdrawal to $40k since I have no downside flexibility.

Now I have some good, early years and I'd like to increase to $45k. Kitce assumes I should only go up if I want to put a new floor on my withdrawals.

I don't think that's necessary. If I originally thought I could live on $40k, it seems the extra $5k is "optional" spending that I can readily turn off if my portfolio goes back down.

That is, if I'm willing to live with variable withdrawals only on the excess over 4%, I can be quicker to increase.

I tried back-testing this rule using the standard FireCalc assumptions. It does not add any new failure years. The only "close" year that it impacts is 1964, when this rule converts an ending balance of 5.9% of original portfolio into an ending balance of 4.6% of original portfolio.

I'm sure if I ran 10,000 randomly chosen scenarios, I'd find a few that this rule impacts. But this backtesting says they would be rare.
This seems similar to retire again and again found at: New withdrawal method: Retire Again & Again
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Old 06-19-2015, 05:28 PM   #43
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This seems similar to retire again and again found at: New withdrawal method: Retire Again & Again
I read the link, but I'm not 100% sure I know the rule he wants to use.

It appears to me he has a ratchet system - once you go up, you never come down. That introduces additional risk, so he compensates by lowering the initial SWR.

Similarly, Kitces has a ratchet system. He compensates for the additional risk by being very cautious about when and how much to increase.

In my suggestion, the additional amount over the original SWR is variable. If you do well and later poorly, you drop back, potentially all the way to the original SWR. I claim you can do this because your initial SWR covered all your "basic" spending, and the additional is only bonus money that gets spent on fun-to-have stuff.

It looks like my "4% of greater of original portfolio or current portfolio" lets you start at a higher number than RA&A, and increases your spending more quickly than Kitces, if you're open to going back to the original SWR if necessary.
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Old 06-19-2015, 05:37 PM   #44
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....

In my suggestion, the additional amount over the original SWR is variable. If you do well and later poorly, you drop back, potentially all the way to the original SWR. I claim you can do this because your initial SWR covered all your "basic" spending, and the additional is only bonus money that gets spent on fun-to-have stuff.
Inflation would eat into the purchasing power of your original 4%. Unless you meant an inflation adjusted value.
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Old 06-19-2015, 06:48 PM   #45
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Inflation would eat into the purchasing power of your original 4%. Unless you meant an inflation adjusted value.
Yes, my comments assume the regular, inflation adjusted SWR.

I should have said "The greater of 4% of your inflation-adjusted initial fund or 4% of your current fund"
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Old 06-19-2015, 07:45 PM   #46
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You could always annuitize the value of those future income streams to give an approximation of a "net worth" to base a SWR off of. There may be better ways to do it, but this is a way to make a SWR strategy useful even in those cases.
Generally - SWR is applied to whatever retirement investments exist above pensions, annuities, SS, etc.

No need to model income streams to derive a "net worth". You simply take income needed minus income streams, and compare that to your additional investments to see what the withdrawal rate is, and whether it might be "safe".

If all inflation-adjusted annual expenses are covered by income streams, then the SWR is indeed moot. No point in modeling anything. You can do whatever you want with any additional retirement investments without worrying about safety.
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Old 06-19-2015, 10:31 PM   #47
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I read the link, but I'm not 100% sure I know the rule he wants to use.

It appears to me he has a ratchet system - once you go up, you never come down. That introduces additional risk, so he compensates by lowering the initial SWR.

Similarly, Kitces has a ratchet system. He compensates for the additional risk by being very cautious about when and how much to increase.

In my suggestion, the additional amount over the original SWR is variable. If you do well and later poorly, you drop back, potentially all the way to the original SWR. I claim you can do this because your initial SWR covered all your "basic" spending, and the additional is only bonus money that gets spent on fun-to-have stuff.

It looks like my "4% of greater of original portfolio or current portfolio" lets you start at a higher number than RA&A, and increases your spending more quickly than Kitces, if you're open to going back to the original SWR if necessary.
Another one that's similar to this is Gummy's "Sensible Withdrawals". You use whatever SWR makes sense, but in good years you get a bonus. A good year is defined this way: if, after the year's withdrawal, your portfolio is greater than it was a year ago (after inflation) then take a % of that growth as a bonus. He suggests 3% SWR, but I think it would work with 4% as well. This one has been on my "top 5" list as a variable method as it tends to produce more bonuses early in retirement than later.
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Old 06-19-2015, 10:33 PM   #48
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Oops forgot to post the link: sensible withdrawals
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Old 06-20-2015, 01:25 AM   #49
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Generally - SWR is applied to whatever retirement investments exist above pensions, annuities, SS, etc.

No need to model income streams to derive a "net worth". You simply take income needed minus income streams, and compare that to your additional investments to see what the withdrawal rate is, and whether it might be "safe".

If all inflation-adjusted annual expenses are covered by income streams, then the SWR is indeed moot. No point in modeling anything. You can do whatever you want with any additional retirement investments without worrying about safety.
Except when income streams come online at various points, then the whole SWR exercise is useless.
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Old 06-20-2015, 05:31 AM   #50
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Yes, it is interesting.

It reminds me of a plan discussed from time to time, the "Retire Again and Again" plan.

https://www.bogleheads.org/forum/vie...21138#p1771077


In its simplest form, it is more extreme, and ratchets up spending anytime your portfolio buying power increases. Mathematically, sticking to the historical data-set, it has to work (easier to see if you start with a historically 100% safe withdraw rate). And it answers that paradox about two people retiring on different dates - why can't the earlier retiree increase their withdraws to match the new retiree (if the market has gone up enough to cover withdraws and inflation)? The answer is "they can" (historically).

I haven't looked in a while, but I'm pretty sure it provides the most 'efficient' withdraws - minimizing the portfolio end value, and maximizing withdraws, across all historical paths.

Of course, when taken literally, this is getting into data-mining territory, but the concept is sound and worth thinking about.

-ERD50
Reading this interesting paper did remind me a lot of the twins paradox. Especially because if your assets have increased year over year, your life expectancy has also decreased. So if 62 year with 1 million dollars in assets and 4% (40K) withdrawal who find herself with 1.1 million at age 63 logically should be more likely to be able to withdraw 4% (44k) without running out of money in her life than a 62 year old taking 4%.

I suspect that 50% figure before adjusting the withdrawal is almost certainly much too conservative.

The more I think about withdrawals and observe how real world retirees react, the less important I think your initial starting portfolio should be on your current withdrawal.

I am curious how many people who have been retired lets 5+ actually based their current withdrawal on their initial portfolio? Heck I don't even have records of what my portfolio was until 2 years after I retired.
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Old 06-20-2015, 07:44 AM   #51
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It seems that a lot of these schemes go to considerable trouble to avoid the "reduction in income" scenario.

But, IMO, it's not that big a deal if you have plenty of discretionary spending in your budget (a good idea if you retire very early). Facing an occasional drop in income is far from a disaster, particularly if it has recently increased due to the portfolio doing well.

We have mostly taxable investments. I have tracked the after tax income from our portfolio for many years. Taxes create an interesting "income smoothing" effect on taking a % of remaining portfolio. In years where the portfolio has a big jump, taxes tend to be higher because more is paid in cap gains distributions. In years where the portfolio suffers a loss, cap gains distributions drop significantly, even to zero, and there may even be options for tax loss harvesting.

No such smoothing by taxes effect if you are withdrawing income from an IRA or 401K
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Old 06-20-2015, 08:03 AM   #52
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That is, if I'm willing to live with variable withdrawals only on the excess over 4%, I can be quicker to increase.
The problem I see with these various systems is the complexity of figuring the annual draw. 4% of starting value adjusted for inflation, plus X% of the previous year portfolio gain. UGH!

Getting Guyton-Klinger into a spreadsheet was bad enough, and G-K is conceptually simpler than a lot of these other schemes.
I ran into some difficulty converting G-K's description into a set of rules. Seems that there was a bit of handwaving there. You don't find out if everything is covered until you try to reduce it down to a set of rules for a computer.


Another problem is the rapid jumps -- both up and down -- of the draw. If the market has one very good year, your draw could go from $40K to $43K the next year, back down to $40K the following year.
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Old 06-20-2015, 08:18 AM   #53
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For this reason I prefer the simple approach of % of remaining portfolio. So easy - X% of Dec 31 value each year.

I never liked the idea of inflation adjusting from the initial portfolio value. If the portfolio keeps up with inflation, great, if not, annual withdraw will stay behind until the portfolio catches up. If the portfolio zooms ahead of inflation, then I'd like to withdraw the increase sooner rather than later.

I have no problem at all with variability in annual income. IMO this issue is way blown out of proportion and makes the withdrawal calcs much more complex for early retirees. If someone's budget is so tight that they can't handle the variability, then early retirement may not be the best choice. If someone is retiring at a normal age and the budget is tight, then I can see opting for the Trinity Study method to avoid variability.
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Old 06-20-2015, 09:02 AM   #54
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Except when income streams come online at various points, then the whole SWR exercise is useless.
I posted an example of using SWR with a deferred income stream. See (B) here:

Laurence Kotlikoff - Maximize my SS.com
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Old 06-20-2015, 09:06 AM   #55
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The problem I see with these various systems is the complexity of figuring the annual draw. 4% of starting value adjusted for .
I thought that my "4% x Max[current portfolio, inflated original portfolio]" was pretty simple.
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Old 06-20-2015, 09:07 AM   #56
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The problem I see with these various systems is the complexity of figuring the annual draw. 4% of starting value adjusted for inflation, plus X% of the previous year portfolio gain. UGH!
I don't think it would be too hard. For instance, let's suppose you retired with $1M in 2007, and used a 4%WR, adjusting for inflation.

And now, let's suppose your ending portfolio on 12/31/14 was $1.5M. Well, 4% of $1.5M is $60,000. To find what 4% of $1M is, adjusted for inflation, just plug the number into an inflation calculator. I just did, and $40K in 2007 dollars comes out to about $45,671 in 2014 dollars. Or, $45,877 in 2015 dollars (not sure which figure you should use to calculate your 2015 wd, but in this case they're close).

So, in this hypothetical scenario, if you wanted to take a bonus, you could take $60K if you wanted, instead of ~$46K. At least, that's the way I'm reading into it.
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Old 06-20-2015, 09:24 AM   #57
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Another one that's similar to this is Gummy's "Sensible Withdrawals". You use whatever SWR makes sense, but in good years you get a bonus. A good year is defined this way: if, after the year's withdrawal, your portfolio is greater than it was a year ago (after inflation) then take a % of that growth as a bonus. He suggests 3% SWR, but I think it would work with 4% as well. This one has been on my "top 5" list as a variable method as it tends to produce more bonuses early in retirement than later.
I may not have interpreted the rule correctly, but this is what I think he's saying.

Suppose my portfolio at the end of year 8 is 140% of the inflation-adjusted original portfolio.
And, my portfolio at the end of year 9 is 150% of the inflation-adjusted original portfolio.
Then I take a bonus of X% of the 10% growth. If X=10, I'll get a bonus equal to 1% of my original portfolio. A nice bonus compared to my 4% SWR.

Now suppose that at the end of year 10, my portfolio is again 150% of the inflation-adjusted original portfolio.
I get no bonus, because there is no growth.

But, it seems to me that 150% is enough cushion to justify a bonus. For example, if my portfolio just happens to stay at 150% in each following year, I'll never get another bonus.
Basing the extra payouts on one-year growth creates (IMO) unnecessary volatility in the extra payouts.

But, I'd have to build a model to compare carefully.
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Old 06-20-2015, 09:43 AM   #58
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I don't think it would be too hard. For instance, let's suppose you retired with $1M in 2007, and used a 4%WR, adjusting for inflation.

And now, let's suppose your ending portfolio on 12/31/14 was $1.5M. Well, 4% of $1.5M is $60,000. To find what 4% of $1M is, adjusted for inflation, just plug the number into an inflation calculator. I just did, and $40K in 2007 dollars comes out to about $45,671 in 2014 dollars. Or, $45,877 in 2015 dollars (not sure which figure you should use to calculate your 2015 wd, but in this case they're close).

So, in this hypothetical scenario, if you wanted to take a bonus, you could take $60K if you wanted, instead of ~$46K. At least, that's the way I'm reading into it.
I agree its not very hard. You dont even need a calculator. Nowadays we make a spreadsheet that figure all of this stuff for us.
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Old 06-20-2015, 09:56 AM   #59
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We have mostly taxable investments. I have tracked the after tax income from our portfolio for many years. Taxes create an interesting "income smoothing" effect on taking a % of remaining portfolio. In years where the portfolio has a big jump, taxes tend to be higher because more is paid in cap gains distributions. In years where the portfolio suffers a loss, cap gains distributions drop significantly, even to zero, and there may even be options for tax loss harvesting.
I have noticed this as well. Plus, after a real good year, if you end up owing taxes the following April, somehow I feel like I should add this to the previous years expenses, not this years. Although if you track your distributions and pay estimated taxes accordingly, it should not be a big surprise.
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Old 06-20-2015, 10:34 AM   #60
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For this reason I prefer the simple approach of % of remaining portfolio. So easy - X% of Dec 31 value each year.
How do you factor in taking divs and cap gains throughout the year instead of reinvesting? Your WR % calc is then a little more complicated because you don't know how much of that % will be in your distributions. I guess you're simply deducting what you got this year from the % when you withdraw in January of next year?

For me it's going to be a fair bit more complicated anyway because I'm trying to limit my cap gains to stay under the 200% FPL threshold to maximize ACA subsidies. Subject to the Supremes letting me take advantage of them, of course. I don't think I'll ever be using a standard WR % of port as long as that's the case.
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