A "Ratcheting" SWR - Kitces

[audreyh1]

If you set aside the excess outside your portfolio, isn't that sort of a bucket? Or at least a bowl?

I had an excess from last year. It is in a HISA and I am applying it to this year's expenses. But I still consider it part of my portfolio, just part of the cash allocation.

Is there a benefit to giving it a label? It's just extra we can make use of however we want, whenever we want, and it is no longer exposed to the market risks of our retirement portfolio. It is kept out computing the withdrawal, the AA and the rebalancing.

We have quite a few liquid assets apart from our retirement portfolio, so this is seamless for us.

Jan 2 - withdraw X% of Dec 31 value of retirement portfolio. Rebalance remaining portfolio to the target AA.

That's it, until the next Jan 2, unless the portfolio really needs rebalancing, but it usually doesn't.

 

[dallas27]

given the current investing environment it's a good idea to be conservative.

Will you please list the date or dates in which the environment didn't demand conservativeness?



Sent from my iPhone using Early Retirement Forum

 

[rayvt]

Say you're looking at a 30 year retirement. If you go through the calculation and decide you want to "reset" why would you end up with the same % withdrawal vs. something slightly higher. After all, you now have 29 years because you're one year closer to death. ... But the point is all else being equal, shorter withdrawal periods should result in higher safe withdrawal rates.

It doesn't work that way. I fiddled with a lot of retirement scenarios before that realization hit me.

A portfolio value has only two states: 1) climbing up to the sky, or 2) glide-slope to zero. There is *not* a steady state where it remains flat forever.

When we talk about the 30 year portfolio, we are talking about the 2nd state, glide-slope toward zero, and trying to arrange things so that it doesn't hit zero until sometime after 30 years. It's going to zero, unquestionably. We're just trying to push that out to beyond our lifetime. Similar to the old joke, we know where it's going, we're just trying to negotiate the price.

It's not that, say, reducing the SWR to 2.5% or 3% pushes it out from 30 years to 40. It's that reducing the SWR flips the portfolio into the "grow to the sky" regime.

 

[haha]

Will you please list the date or dates in which the environment didn't demand conservativeness?



Sent from my iPhone using Early Retirement Forum

Easily. Dec 1974; August 1982. There are many others, but these are the most beautiful in my investing lifetime. Interestingly, these were clearly not times to be careful prospectively as well as retrospectively.


We mustn't forget, just because the market bottomed at a given time such as March 2009 that this was a very safe entry. Likely a good speculative entry, due to the monetary plans that were afoot, but not in the class with those earlier ones I mentioned.


Ha

 

[clifp]

Interesting, but a couple points -

A) It's not apples to apples, as you draw significantly less with this plan - so of course your portfolio does better! Average $34,684 versus $40,000.

B) The 4% WR fails 5% of historic periods, so the speculation that the Y2K period will end up looking like one of the 5% failures isn't that unexpected. And cutting your withdraw amount obviously helps - but is a variable cut significantly better/worse than starting at a lower amount?

I'd be more interested in comparing a 100% Historically Safe Withdraw Rate (HSWR) with an adjustment method. If you went with HSWR and the 'retire again & again' plan, you would be able to increase spending if things turn around, but if this truly a very-bad-case period, probably no increase.

It just seems to me that anyone who can cut up to 25% of their budget, and cut by over 17% on average for a full ten years must have a lot of discretionary spending planned, and is willing to give up that discretionary spending for a very long time. Of course, anything above basic food, water, shelter is discretionary, so this is all a matter of degrees.

Of course the flip side is starting with the lower HSWR is taking a cut right from the start. No magic, just numbers. I personally prefer to look at the lower HSWR amount, budget for that with a higher confidence that I will likely never need to figure out what to cut. But that's just me.

-ERD50

Good points.

Fundamentally, I reject that money I retired with 5 years much less 15 years should be the dominate factor in determining how much I spend today.

My entire "I only spend my interest and dividends that way I can't run out of money", works for me because I'm able to create a portfolio that is skewed toward higher income and I had to plan on a much longer than 30 years retirement. But it is really just a way of basing my spending on the current "value" of my assets.

Especially in today interest rate and dividend environment, I don't think my approach is very practical way for the vast majority of people.

If we look at the goals of retirement spending. I suspect that for virtually everyone the priorities are as follows.

1. Don't run out of money before I die
2. Maintain my lifestyle
3. Let me spend more if things go well.

The Trinity approach does an ok job at #1. Actually it is very good for a 65 year old retiree, but I see a lot of 20 and 30 something in Mr. Mustache forum talk about using the 4% rule and retiring at 40 or even younger. They plug a 60 year retirement into a calculator with 100% equities and get a good to go sign. Which as you well know riskier than they think.

It does a fantastic job at #2 and awful job at #3.

The spend a percentage of your current portfolio does a fantastic job of #1, a lousy job at #2 (as my chart illustrates), and ok job at #3.

I just am wondering if there isn't a withdrawal approach which provides a more predictable stream of income of the Trinity approach with the safety of a percentage of current portfolio and the upside of it.

 

[ERD50]

Originally Posted by dallas27 View Post
Will you please list the date or dates in which the environment didn't demand conservativeness?

Easily. Dec 1974; August 1982. There are many others, but these are the most beautiful in my investing lifetime. Interestingly, these were clearly not times to be careful prospectively as well as retrospectively.


We mustn't forget, just because the market bottomed at a given time such as March 2009 that this was a very safe entry. Likely a good speculative entry, due to the monetary plans that were afoot, but not in the class with those earlier ones I mentioned.


Ha

The Great Bull Market of the 1990's came immediately to mind. Now whether it 'felt' like a good time to invest or not is a different story. I really don't recall, I was just plugging money into my 401K and IRAs. The actual investments are fuzzy, I should probably take a look. I'm pretty sure my 401K was mostly in the "General Fund" and I think that was ~ 50/50. And maybe 20% company stock? Sure wish I would have been more aggressive, but it seemed prudent and I can't complain. But now, I also consider 75/25 to be prudent at that age, but that ship has sailed. Still did fantastic though. Much better than most of my co-workers who were afraid to invest, or bought high, sold low.

...

Fundamentally, I reject that money I retired with 5 years much less 15 years should be the dominate factor in determining how much I spend today.

....

I agree with that for sure - it's history.

I just am wondering if there isn't a withdrawal approach which provides a more predictable stream of income of the Trinity approach with the safety of a percentage of current portfolio and the upside of it.

There is I think, but it takes a relatively high stash, and draws the portfolio near zero at the end (depending on your inputs). The 'matching strategy" that DLDS has mentioned . Invest in inflation protected securities, and draw something around 1/X where X is the time frame you want to cover.

-ERD50

 

[David1961]

There is I think, but it takes a relatively high stash, and draws the portfolio near zero at the end (depending on your inputs). The 'matching strategy" that DLDS has mentioned . Invest in inflation protected securities, and draw something around 1/X where X is the time frame you want to cover.

-ERD50

Would FIRECALC be able to simulate this if you selected a100% portfolio allocation in short term treasuries?

 

[ERD50]

Would FIRECALC be able to simulate this if you selected a100% portfolio allocation in short term treasuries?

Not really, because you will still get hit by the inflationary 80's. Did short term treasuries stay a bit above inflation like a TIPs would? I don't know...

OK, a 30 year run says only about 2% for a 100% HSWR, 1/30 should have given 3.33%.

-ERD50

 

[David1961]

Not really, because you will still get hit by the inflationary 80's. Did short term treasuries stay a bit above inflation like a TIPs would? I don't know...

-ERD50

I don't know either. Maybe that is one reason why I bonds and TIPS were established.

 

[samclem]

I just am wondering if there isn't a withdrawal approach which provides a more predictable stream of income of the Trinity approach with the safety of a percentage of current portfolio and the upside of it.

Does Bob Clyatt's 95% rule work for you? From Nords' blog:

Bob advocates withdrawing a straight 4% of the portfolio every year, not the Trinity Study’s system of “initial 4% the first year and rising each following year with inflation”. While the Trinity Study system gives a retiree a constant spending amount (adjusted for inflation), Bob’s 4% withdrawal varies each year with portfolio performance. This is no problem when the stock market rises faster than inflation. However the retiree starts to lose spending power when the stock market is flat. Even worse, the retiree takes a big spending cut during bear markets.
To soften the blow of bear markets, Bob introduced one of the first variable-spending retirement plans. If 4% of that year’s spending would be less than 95% of last year’s spending, then the retiree can use 95% of last year’s spending. During bear markets this raises the portfolio withdrawal rate to 5% or even 6% for a year or two, but when the stock market recovers the portfolio will too. Bob hired a financial analysis firm to backtest the portfolio against available market history.

So, withdrawals are linked to the portfolio's performance (which makes a lot of sense--if it can be tolerated), and the smoothing part cushions things when the market takes a dive, giving the retiree time to find ways to reduce spending in a gradual way, if needed.

 

[Independent]

That does seem like a pretty reasonable rule. I'm curious how often the excess withdrawal early on would hurt the long term sustainability.
So for instance somebody retiring in 98 would have a two years of increased spending followed by three years significantly decreased spending I wonder if they'd be almost as bad off as the Y2K retiree?

My rule is the same as "4% of the inflation-adjusted original portfolio, plus 4% of this year's excess over the inflation-adjusted original portfolio".

That 4% of the excess is nice to get, but had no impact on the number of "failure" years in Firecalc backtesting. The early 1960's are in that backtesting, but 1998 isn't.

Basically, failure years are so rarely above the original portfolio that withdrawaing a little more in those few years (but not ratcheting up) has no impact.

 

[Independent]

Built a model a while back (time to revisit it), but for Gummy's I don't think it was based on the growth relative to the original portfolio - just the last year's growth. Here's a quote from the site:

"I'm suggesting that after we've withdrawn, say 3% for example (to pay the bills), we check to see if our portfolio has increased since a year ago (even after withdrawing that 3%) and, if it has increased by at least the inflation rate, we withdraw some more ... "

Now I think what you described above is a nice buffer, especially if you want to start with a higher withdrawal rate than what Gummy suggested - that is, you don't start even applying the bonus calculation until/if your portfolio has grown for a few years. I think Gummy's method started off with the lower withdrawal rate instead. He treated it as a bonus, much like some of us who are still w*rking have. You (portfolio) do well you get a bonus. If not, wait till next year. The idea is to never count on the bonus as being necessary to cover basic expenses, but to truly treat it as some extra cash to do with as you will (including not withdrawing it).

It looks like I wasn't very good at communicating. I did some numeric examples. The first is Gummy's rule with a 12% bonus rate. The columns are:
A. Annual net investment return
B. Beginning of year portfolio
C. Regular annual withdrawal (taken at beg of year)
D. Investment gain or loss
E. Provisional year end portfolio
F. Gain during the year (D-A)
G. Bonus (12% of F)
H. Year end portfolio

…..A…..	…....B…..	…..C…..	…..D…..	…....E…..	…..F…..	…..G…..	…....H…..
30%	100,000	4,000	28,800	124,800	24,800	2,976	121,824
30%	121,824	4,000	35,347	153,171	31,347	3,762	149,410
-10%	149,410	4,000	-14,541	130,869	0	0	130,869
6%	130,869	4,000	7,612	134,481	3,612	433	134,047
6%	134,047	4,000	7,803	137,850	3,803	456	137,394
6%	137,394	4,000	8,004	141,397	4,004	480	140,917

Yes, I'm assuming either no inflation or that I'm printing inflation-adjusted numbers.

The next is my rule. Columns are the same except.
F. Gain from the beginning (G - 100,000)
G. Bonus (4% of F)

…..A…..	…..B…..	…..C…..	…..D…..	…..E…..	…..F…..	…..G…..	…..H…..
30%	100,000	4,000	28,800	124,800	24,800	992	123,808
30%	123,808	4,000	35,942	155,750	55,750	2,230	153,520
-10%	153,520	4,000	-14,952	134,568	34,568	1,383	133,186
6%	133,186	4,000	7,751	136,937	36,937	1,477	135,459
6%	135,459	4,000	7,888	139,347	39,347	1,574	137,773
6%	137,773	4,000	8,026	141,799	41,799	1,672	140,127

Comparing, note that Gummy's starts with two big bonuses, then has none in the third year and small bonuses in years 4-6, because he's looking at annual gains.

I have more uniform bonuses, because I'm looking at balances compared to the original portfolio. Somehow, I think that's a better measure of "affordable", but I'd have to crunch a lot of numbers to test that.

 

[Independent]

I'd be more interested in comparing a 100% Historically Safe Withdraw Rate (HSWR) with an adjustment method. If you went with HSWR and the 'retire again & again' plan, you would be able to increase spending if things turn around, but if this truly a very-bad-case period, probably no increase.

This is key. The Retire Again & Again method works only if you use 100% safe withdrawal rates. ("Works" means "Doesn't add additional failure years").

 

[clifp]

Does Bob Clyatt's 95% rule work for you? From Nords' blog:

So, withdrawals are linked to the portfolio's performance (which makes a lot of sense--if it can be tolerated), and the smoothing part cushions things when the market takes a dive, giving the retiree time to find ways to reduce spending in a gradual way, if needed.

Yes I started with Clyatt's 95% rule, the only addition I made was a maximum increase year over year plus 10% inflation adjusted. (This had minimal impact starting out in 2000 but probably would make a big difference for say a 1990 retiree.). So basically the spreadsheet I posted is using Clyatt's rule for a Y2K retiree. I think it produces better results than blind 4%+inflation withdrawal. But it produces the opposite problem for the Y2K retiree. Rather that not having enough money, it leaves too much especially for a 65+ year old retire. Having to reduce your spending from $40K to an inflation adjusted $22K is too much.

I like Independents methodology of a more even bonus and spread out over more years. I especially like that is based on the cumulative gains of your portfolio rather than just year over year.

Finally and I think this important, your age matters. I think there is a huge danger and natural tendency to extend the 4% rule to retires off all ages.

The chances of 65 year old living to be 95 AND running out of money withdrawing 4% are very small. Plus they have Social Security, and Medicare, the only really big unexpected expense is nursing homes (which is obviously potentially huge).

For a 40 year 4% isn't nearly as safe, plus there is a 25+ year wait to get Medicare and SS.

This leads me to think that percentage withdrawal should also being a function of your age. I am thinking that something like 1%+ RMD (per the IRS) would be good start point for investigation.

This would result in 40 year starting off withdrawing 3.4% of current portfolio, 50 year old 3.9%, 60 year old 5.0%, 65 5.8%

 

[big-papa]

It looks like I wasn't very good at communicating. I did some numeric examples. The first is Gummy's rule with a 12% bonus rate. The columns are:
A. Annual net investment return
B. Beginning of year portfolio
C. Regular annual withdrawal (taken at beg of year)
D. Investment gain or loss
E. Provisional year end portfolio
F. Gain during the year (D-A)
G. Bonus (12% of F)
H. Year end portfolio

…..A….. …....B….. …..C….. …..D….. …....E….. …..F….. …..G….. …....H…..

30% 100,000 4,000 28,800 124,800 24,800 2,976 121,824

30% 121,824 4,000 35,347 153,171 31,347 3,762 149,410

-10% 149,410 4,000 -14,541 130,869 0 0 130,869

6% 130,869 4,000 7,612 134,481 3,612 433 134,047

6% 134,047 4,000 7,803 137,850 3,803 456 137,394

6% 137,394 4,000 8,004 141,397 4,004 480 140,917

Yes, I'm assuming either no inflation or that I'm printing inflation-adjusted numbers.

The next is my rule. Columns are the same except.
F. Gain from the beginning (G - 100,000)
G. Bonus (4% of F)

…..A….. …..B….. …..C….. …..D….. …..E….. …..F….. …..G….. …..H…..

30% 100,000 4,000 28,800 124,800 24,800 992 123,808

30% 123,808 4,000 35,942 155,750 55,750 2,230 153,520

-10% 153,520 4,000 -14,952 134,568 34,568 1,383 133,186

6% 133,186 4,000 7,751 136,937 36,937 1,477 135,459

6% 135,459 4,000 7,888 139,347 39,347 1,574 137,773

6% 137,773 4,000 8,026 141,799 41,799 1,672 140,127

Comparing, note that Gummy's starts with two big bonuses, then has none in the third year and small bonuses in years 4-6, because he's looking at annual gains.

I have more uniform bonuses, because I'm looking at balances compared to the original portfolio. Somehow, I think that's a better measure of "affordable", but I'd have to crunch a lot of numbers to test that.

Thanks for the clarification. Yep, the bonuses are more uniform, though generally not as big when they happen. It's actually one of the things I like about Gummy's method (my own personal taste that is). Doesn't happen all the time and tends to happen earlier in retirement than later. Another way to get something similar to what you're doing, I think, is to divide the withdrawals into two parts: one part standard, inflation adjusted SWR and one part variable. Maybe 70% inflation adjusted SWR, 30% variable and the variable part could be VPW, Burns 6%/90%, Guyton-Klinger, RMD, whatever. You can think of the variable part as "bonus". Truly when it comes to withdrawals, the possibilities are endless - that's only because nobody has found a method that suits everybody and doubtful ever will.

 

[big-papa]

Does Bob Clyatt's 95% rule work for you? From Nords' blog:

So, withdrawals are linked to the portfolio's performance (which makes a lot of sense--if it can be tolerated), and the smoothing part cushions things when the market takes a dive, giving the retiree time to find ways to reduce spending in a gradual way, if needed.

I hadn't run across this one before, but it appears to be identical to what Scott Burns' mentioned in his column at the end of last year (and discussed here). The difference was that he used 6% instead of 4% and 90% instead of 95%. I've played with the numbers a bit myself and of course it's a trade off regarding how quickly the withdrawals drop vs. how long they take to recover vs. whether you can run out of money. Always interesting to start with a late 1960's backtest. An easy twist to this method is to change the 90% (or 95%) to be inflation adjusted. That way, your spending can't drop more than 5-10% after inflation. Again, there are always tradeoffs.

 

[big-papa]

Oh and one more interesting twist to Bob Clyatt/Scott Burns method I've played with is to adjust the %. Maybe start off with something higher than 6% for the first few years, then ratchet that down after 5-10 years then maybe down again later. I was doing that, again, to see what might happen if I wanted to withdraw a lot at the beginning while still young-ish (for travel, etc) then drop back down to what was needed for bill paying and home-based hobbies later on. It does work, but it does start to look a lot like the dreaded "data-mining" when you try to get the numbers just right based on historical returns.

 

[Nords]

An easy twist to this method is to change the 90% (or 95%) to be inflation adjusted. That way, your spending can't drop more than 5-10% after inflation. Again, there are always tradeoffs.

That's not necessary with Bob Clyatt's 4%/95% rule. It's a different 4% than the 4% SWR.

With the 4%/95% rule, you withdraw 4% of the value of the portfolio every year. The following year's withdrawal is not related to the previous year's withdrawal in any way. It's not adjusted for inflation, although it's presumed that the asset allocation will at least keep up with inflation.

 

[daylatedollarshort]

Would FIRECALC be able to simulate this if you selected a100% portfolio allocation in short term treasuries?

We just use a spreadsheet with inflation and interest rates as variables. I usually just assume a 1% real return. But even with a 0% return and planning for 40 years one can safely take out up 2.5% a year (100/40 years = 2.5% per year). (Assuming you have insurance or other resources set aside for LTC and/or leaving an estate, since the 100/x years method assumes running down the portfolio to zero, if you live to be x years old.)

My spreadsheet results come out to be a bit less that the Fidelity RIP set to an all short term AA. I think this is due in part because my calculations are more rudimentary, but also because the RIP uses historical returns which likely average higher than a 1% real return over their time horizon.

There is more on matching strategies here:
http://www.bogleheads.org/wiki/Matching_strategy

We have had some interesting discussions with mutual fund planners telling us we need "stocks for growth" to keep up with inflation. That was interesting, since their own retirement calculators showed we could go with an all short term AA and be fine. Also, stocks are not pegged to inflation with government guarantees like TIPS and I-bonds are. Stocks also do not always do well during periods of high inflation.

 

[clifp]

M* Christine Benz and pretty good article on 7 retirement portfolio mistake to avoid.

I hadn't seen these two research papers or perhaps I had an had forgotten them.
But they actually were pretty much what I was looking for a floor and ceiling that depend on the current portfolio value.

The Vanguard research got a pretty high survival rate with a 2.5% floor and 5% ceiling while with withdrawing 4% of your current portfolio. Meaning each year your income could increase by 5% or decrease by 2.5% (after inflation.).

Using these parameters the Y2K retiree was withdrawing $39,275 last year and his portfolio was worth 703K, more than enough to likely survive another 16 years. Definitely a significant cut after inflation, but if you have a lot of fix expenses like housing maybe not the end of the world.

Financial planner Jonathan Guyton delved into a flexible withdrawal rate with "guardrails" in this research paper, and this Vanguard research takes a similar tack.

 

[big-papa]

That's not necessary with Bob Clyatt's 4%/95% rule. It's a different 4% than the 4% SWR.

With the 4%/95% rule, you withdraw 4% of the value of the portfolio every year. The following year's withdrawal is not related to the previous year's withdrawal in any way. It's not adjusted for inflation, although it's presumed that the asset allocation will at least keep up with inflation.

I don't think so. According to this website, the algorithm for Clyatt's is the same as Scott Burns' except that 6%->4% and 90%-95% Retirement Withdrawal Strategies - Can I Retire Yet?

In other words, each year you withdraw Burns(Clyatt) 6%(4%) of your portfolio or 90% (95%) of the previous year's withdrawal, whichever is larger.

Anyway, Burns' also doesn't adjust for inflation, either. But when I backtest any of these, I calculate the withdrawal $'s per the algorithm but I also look at what those $'s spending power actually is relative to the first year's withdrawal. So, the twist I described above helps keep the effective withdrawal from dropping excessively when the algorithm chooses 90%(95%) of the previous year's withdrawal. It's not adjusting for inflation per se as in a standard SWR method, but it is limiting inflation's effect if you have a string of years where the portfolio isn't keeping up with inflation. And that would have happened with a standard 60/40 allocation in the early 1970's when inflation was high and there was a bear market.


Big-Papa