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Old 02-21-2009, 11:44 AM   #21
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Originally Posted by RonBoyd View Post
This has , most likely, been mentioned many times before but Kotlikoff and Burns (who are not fans of the 4% SWR theory -- calling it the "four percent Rule of Dumb") in their book, "Spend 'til the End," on page 252 make this point:



They then go on to explain the vastly different outcomes of this decision.

Well Vanguard seems to think the 4% a year is the way to be sure that your money will last especially in these markets


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Old 02-21-2009, 12:27 PM   #22
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Originally Posted by Rich_in_Tampa View Post
Possible but sounds too gloomy to me.

First, that 95% failure rate is a statistical black-and-white parameter. In real life you would usually see it coming a decade in advance (persistent dropping of the nest egg long before a zero balance) and make at least some adjustments. Even in the current chaos, you might be down 25% for the year if you were diversified, and still have 75% of your nest egg left. Not good but plenty of time to switch to plan B before reaching $0 net worth.
I'm not following you here. You seem to be saying we have a crystal ball? We would not "see it coming", we would have "seen it went!". or maybe is more appropriate?

In year 5 of a bear market, do I start cutting back because it might be long and drawn out, or do I expect it to be the start of the next bull market?

So sure, we can cut back after seeing our portfolio dwindle, but I think people over-estimate the effect. It can't hurt, but it's no miracle worker either.

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Second, prolonged inflation can be, but is usually not associated with a prolonged bear market. If you presume both at the same time that's a stretch, though not impossible.
But I am not "presuming" anything. The beauty of FirecCalc is that it takes into account the history of the interaction of inflation and markets and interest rates. The results are what they are - no presumptions.

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It's all about playing the probabilities against your risk tolerance. But it's easy to get paralyzed if you look to go from 95% confidence to 99.9% confidence -- too much angst for too little gain (and too many black swans).

Just my view.
Yes, it is a personal decision. For me, the angst of a 1 in 20 chance that I'll be asking my kids to support me after I took an Early Retirement is greater than the angst of budgeting for an SWR of ~ 3% or less.

To each their own, but I think everyone should be aware of what the numbers are saying.


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Old 02-21-2009, 12:40 PM   #23
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But it's easy to get paralyzed if you look to go from 95% confidence to 99.9% confidence -- too much angst for too little gain (and too many black swans).
Just wanted to add, I'm not following your "black swan" comment either.

Something I hear from time to time, and I'll exaggerate to make the point clearer, goes something like: "Well, there's no point in having a plan, since our plans can get shot out of the water anyway".

Now, let me phrase that more applicably to ER:

A) Retiree A takes a 5% withdraw rate.

B) Retiree B takes a 3% withdraw rate.

Now, a "black swan" event is just as likely to hit either of them. I'd say that Retiree B has a better chance of surviving the black swan (or having a better or "less-bad" outcome) than Retiree A.

What say you?


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Old 02-21-2009, 12:47 PM   #24
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Originally Posted by Moemg View Post
Well Vanguard seems to think the 4% a year is the way to be sure that your money will last especially in these markets
Yeah, well... Vanguard would think that way. (Whose side are they on?)

Anyway, what you said later

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My SWR includes travel , gifting and remodeling . To cover my basic lifestyle I need only 2% of my SWR the rest is covered by SS survivor benefit & a pension . I do write down 4% every year but I have yet to spend the total amount in the two years I've been retired .
is in line what Kotlikoff and Burns are saying.

In any event, I am not qualified to defend their position and I was merely pointing out a dessenting viewpoint. Check the book out at the library and read their explanation (Chapter 33 - Spending Down, page 250) would be a much better option than listening to me.
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Old 02-21-2009, 12:53 PM   #25
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First, that 95% failure rate is a statistical black-and-white parameter.
Sorry, I don't mean to appear that I'm piling on, but as I re-read your posts, one more thing stuck out for me.

I don't see 95% as a "black and white" thing. On the contrary - I see that success factor as a sliding scale along a continuum. An SWR that provides 95% is on average a more conservative withdraw rate than one that gives a 90% success rate. And an SWR that provides 100% is on average a more conservative withdraw rate than one that gives a 95% success rate.

There's nothing black/white about it, since we don't know what the future holds. But I think the trend will hold such that a 3% SWR will be more sustainable over a variety of possible futures than will a 5% SWR.

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Old 02-21-2009, 01:47 PM   #26
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I do 4% of whatever my portfolio is on jan.1 so the cut backs are already built in . Like Rewahoo I'm just going to see how this plays out .
I never intended to take a 4% mostly because at my very early retirement (39) I figured I had 40-50 years, and also because I figured that 99 early 2000, was probably my peak net worth. So my actually withdrawls have been in the 2.5-3% of initial. Now that I am down to a bit more than 1/2 my
retirement. It is looking like I'll be below 4% of Jan 1 liquid net worth, but at or above my March 1 net worth.
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Old 02-21-2009, 01:48 PM   #27
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Just wanted to add, I'm not following your "black swan" comment either...
Now, let me phrase that more applicably to ER:

A) Retiree A takes a 5% withdraw rate.
B) Retiree B takes a 3% withdraw rate.

Now, a "black swan" event is just as likely to hit either of them. I'd say that Retiree B has a better chance of surviving the black swan (or having a better or "less-bad" outcome) than Retiree A.
I do see your point.

Where the black swan comes in is when you have padded your plan to the hilt at substantial cost, covering as many bad things as you can think of; all of a sudden an unforeseen calamity strikes (as it may well over a 20-30 year period -- divorce, 9/11, disability, death, Madoff, etc.). The 3%'er and the 5%'er have the same probability of the black swan, but the 3%'er will have spent a lot more time or money for cushioning over the decades than the 5%'er. The black swan in essence negated all that additional savings and planning to get from 5% down to 3%. (I am assuming their nest eggs are the same size to start.)

I'm a big planner, but try not to let "perfect" be the enemy of "good." Get me to 95% confidence (actually probably more like 85% to 90% in my case) and I'll take my chances rather than delay or alter my decisions. But if I had a surplus of funds rather than "just enough" I'd opt for the 3% SWR, too. I'm talking about the more usual scenario where resources are not over-abundant.

So, more money and lower expenses are better. But for those who are delaying retirement, or depriving themselves of important quality of life acquisitions in order to get from 95 to 99% confidence (or 5% v 3% SWR), it may not always be the best strategy. Depends on your resources, risk tolerance, and values.

Hope I've clarified my view. I'm not implying it's "right" in any absolute sense -- it just helps me sense that "point of diminishing returns."
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Old 02-21-2009, 02:03 PM   #28
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We've had this discussion several times in the past IIRC. I agree that the current unpleasantness is a legitimate reason to discuss it again.

Honestly, I never actually intended to "live" by the 4% rule. That is, I never intended to calculate 4% (or some other number in that neighborhood) of "stash", spend that the first year and then up the spending by recent inflation. Rather, I used the 4% "rule" to assure myself I had a big enough stash to retire early and be financially independent.

Stated elsewhere, I'm a belt and suspenders (and maybe an elastic waistband) kinda guy. So I didn't go until I could "survive" on much less than 4%, "live" on half the 4% and feel extravagant (for my LBYM background) on 4%.

The fact that I'm currently at less than 20% equities (and worse all the time for some strange reason) makes me nervous spending much more than 2% at this point.

But, again, I don't actually sit down and multiply stash time X.x % and then spend that amount within a year. Rather, I spend within a "normal for me" pattern, check the stash from time to time to see what % I'm actually spending, and adjust if I feel a strain in my left suspender or if my belt feels loose.

If that sounds heretical, so be it. It works for me. My "fear" isn't about 3% vs 4% in bad times so much as how to prepare for the "discontinuous" possibilities. What if we have hyperinflation? What if SS or Medicare are "means tested"? What if it really is "different" this time? Those are the things that occasionally disturb my sleep.

I think what I'm saying is that I'm comfortable in a relatively wide range of WDRs. I can live on a lot less than I do now. I just don't want to find myself really "poor" or "destitute" due to something I could have seen coming and dealt with. If a meteor has my name on it, so be it. But if I (we?) can cover the foreseeable possibilities, our FI and RE status will be more secure. This discussion is a step in that direction IMO. Thanks for letting me rant.
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Old 02-21-2009, 02:12 PM   #29
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Hmmm - how about down and dirty - skip that silly % - as the old Norwegian widow whips out her no. 2 pencil.

Kansas City - car paid for but 30 yr mortgage(70k @6%= 534 with prop tax and insurance).

18.5k $ per yr incl. cable, taxes = toss in food, misc, entertainment maybe 25 to 30k depending on how hard we party. Rubbing nickles gets the core under 25k per yr excluding major repairs.

If I be bad to the bone but don't use the 'a' word - anywise have fixed (SS plus Pension in my case cover that) - then somewhere between SEC yield and say 5% variable of my now badly dinged portfolio is still lagniappe.

heh heh heh - I hope that long time forum members notice that 25k/yr budget has mythical properties from ancient days on this forum - sorta like that 4% SWR. . Not out on the lake in a fish camp anymore - but far be it from me to bad mouth Kansas even if I'm really in Missouri.
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Old 02-21-2009, 02:17 PM   #30
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. Check the book out at the library and read their explanation (Chapter 33 - Spending Down, page 250) would be a much better option than listening to me.

Good idea , I'll check it out next week !
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Old 02-21-2009, 02:32 PM   #31
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I think a 4% WR today is a sustainable portfolio over 40 years or even more.

In spite of all the doom and gloom, the real risks today to portfolio sustainability would be two:

Worldwide economic collapse (global depression)
Portfolio underinvestment (keeping it in cash)

Our economy is not on track toward depression perhaps a full year of negative growth of around -2%., then another of very low growth. That means there is still 98% GDP around for salaries and profits. Longer term profit recovery in the finance industry look unlikely, but manufacturing and services are not being held back and may even benefit. In addition, commodity price decreases are cycling through the business cycle. Economic collapse, while possible, is not likely.

Slow but steady profit growth, from a new lower level, looks much more sustainable.

Seems to me real portfolio growth of 4% is much more likely than a year ago or 10 years ago. The biggest risk (IMHO) today is avoiding risk locking in the downside and losing the upside, in both fixed income and equities.
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Old 02-21-2009, 02:36 PM   #32
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Hope I've clarified my view. I'm not implying it's "right" in any absolute sense -- it just helps me sense that "point of diminishing returns."
Yes, and you are correct that there are risks on all sides of this (no one ever said ER was easy ). If you have to wait extra years to manage to get to a 3% SWR, that shortens the time you can enjoy it, and an early demise may take the period to zero.

As far as the black swan, it kinda depends how you look at it. Yes, if the black swan is bad enough to wipe out either sized portfolio, you're dead meat either way. But if it was a $1M black swan (law suit?), and Retiree A had $1M, and Retiree B had $2M, well B is hurtin', but still in the game.

As you say, no right or wrong, people need to evaluate the risks and rewards for themselves.

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Old 02-21-2009, 03:00 PM   #33
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Hey Rich, by the time you retire you should be able to take at least 10% and still be safe.
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Old 02-21-2009, 03:20 PM   #34
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Hey Rich, by the time you retire you should be able to take at least 10% and still be safe.
And at 10% retired now, you should be taking xx% already. Can anyone figure the math on that?
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Old 02-21-2009, 03:50 PM   #35
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Hey Rich, by the time you retire you should be able to take at least 10% and still be safe.
Haven't heard that for a while -- thought I was off the hook .

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And at 10% retired now, you should be taking xx% already. Can anyone figure the math on that?
10% SWR x 10% (retired from fulltime) = 1% x -45% (market drop) = 0.65% SWR before inflation = -1.5% SWR

That's the amount of my "SDR" (safe deposit rate). Retirement age = 108. If it feels right.
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Old 02-21-2009, 04:39 PM   #36
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For me, the angst of a 1 in 20 chance that I'll be asking my kids to support me after I took an Early Retirement is greater than the angst of budgeting for an SWR of ~ 3% or less.

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For me, it would depend on what I was doing to earn the money to increase my portfolio enough to allow for a 3% WR. It could take several years...... if you're miserable in your job...... already in your 50's...... could be a tough decision.

Since MegaCorp booted my sorry ass out at 58, decision making was handled automatically!
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Old 02-21-2009, 04:51 PM   #37
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I retired at 58 and am now 61. Generally, things have gone well. Other than excessive time spent fretting over falling portfolio values and some canceled travel and home improvements this past year, it's been wonderful.

But there is a risk I'm thinking about that few seem to be mentioning. At 61, I can see the end of some recreational activities coming due to age and diminishing physical abilities. Ditto my comfort level with extensive travel. If I cut back the travel/recreational budget now to reduce the threat of an extended recession killing my portfolio but the economy recovers nicely in a couple of years, I'll have not done those things, probably forever, and I could have. To me, that's a real risk. It threatens to diminish the value of my time and current good health.

So, sit at home with a reduced WR making me feel financially comfortable but possibly delaying expenditures for activities I'll probably not be able or want to do later or just go ahead and go and trust my original FireCalc testing holds true?

The same thing could be argued for home improvements. Go ahead and do them now as planned and enjoy them. Or sit on the cash due to the economy and possibly do them later when you'll enjoy them for a shorter period of time, if you feel like doing them at all then.
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Old 02-21-2009, 04:59 PM   #38
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I don't see 95% as a "black and white" thing. On the contrary - I see that success factor as a sliding scale along a continuum. An SWR that provides 95% is on average a more conservative withdraw rate than one that gives a 90% success rate. And an SWR that provides 100% is on average a more conservative withdraw rate than one that gives a 95% success rate.

There's nothing black/white about it, since we don't know what the future holds. But I think the trend will hold such that a 3% SWR will be more sustainable over a variety of possible futures than will a 5% SWR.
That's my point: the 95% or 99% figure (a la Firecalc) is a black and white figure, but reality is not like that. If you saw your nest egg slipping year after year after year, you wouldn't just sit there and eventually draw it down to 0. You'd make adjustments --- tighten the belt, maybe annuitize some of it, downsize, whatever.

So in the real world, 95% is not a 1 in 20 chance of zero net worth. It's an end-point preceded by a long call to action to mitigate the situation. Same with 99% (though a bit less likely) and even 100% per Firecalc. One reason I am comfortable with 90% confidence is that "failure" doesn't really mean bankruptcy, it means a mid-course correction is in order. Not good but I would take that chance along with a 90% chance of "success" and even growth.

To get $50k per year in distributions, you need a million (5% SWR). To get that withdrawal at 3% SWR you'd need 1.67 million. That is a big price tag (time or money) to pay in order to go from 95% to 99% sure in this context. Great if you've go it, not so easy to justify if you don't.
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Old 02-21-2009, 05:05 PM   #39
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I retired at 58 and am now 61. Generally, things have gone well. Other than excessive time spent fretting over falling portfolio values and some canceled travel and home improvements this past year, it's been wonderful.

But there is a risk I'm thinking about that few seem to be mentioning. At 61, I can see the end of some recreational activities coming due to age and diminishing physical abilities. Ditto my comfort level with extensive travel. If I cut back the travel/recreational budget now to reduce the threat of an extended recession killing my portfolio but the economy recovers nicely in a couple of years, I'll have not done those things, probably forever, and I could have. To me, that's a real risk. It threatens to diminish the value of my time and current good health.
Is there an echo in here? Change your "retired at 58 and am now 61" to "retired at 58 and am now 62" and this could have been my post.

I too hear a 'do it now while you still can' voice whispering in one ear and a 'you'd better cut spending now' voice in the other. I'm struggling with canceling a planned 6 week RV trip to the northwest this summer - a trip we've been planning for months. Will the $5,000 I save make a significant difference in our quality of life sometime down the road? Or will I kick myself for not taking the opportunity for a wonderful trip when I had the chance?

Ain't life great?
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Old 02-21-2009, 05:08 PM   #40
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In real life you would usually see it coming a decade in advance (persistent dropping of the nest egg long before a zero balance) and make at least some adjustments.
I'm not following you here. You seem to be saying we have a crystal ball? We would not "see it coming", we would have "seen it went!".
Let's say that at the start of your retirement, you print out a chart that shows how much you should have at each age if you want to end up with a balance of zero on your presumed death day.

If, at age 70, you've found that you are below that line for the last three years, it might be time to go to plan B. That sounds reasonable, doesn't it?
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