Another safe withdrawal rate question

[chinaco]

Quote:

Originally Posted by youbet And that is a major concern for many on this board. If you haven't followed along with threads involving delaying SS or purchasing immediate annuities in an attempt to spend more earlier without increasing the risk of running out of money, you should find and read them.

An annuity is in our plan.

I intend to watch interest rates and purchase an annuity when the time/deal seems right. Unless interest rates rise and a SPIA looks attractive early on, we will probably wait until around age 65 or so.

DW will take her SS @ 62, I will take mine @ 66.x (mine is the larger amount). That will give the surviving spouse a larger COLA'd Annuity.

We will use thes vehicles and my small pension to build a base income for both of us and the surviving spouse. We hase a target amount in mind. The SPIA will be use to fill the income gap (to create a safe income level for us). I am trying to workout the amount and consider inflation needs. I view the SPIA as tool for mitigation of one type of risk (running out of money). If we spend all of our portofolio but a reserve for inflation contigency.... We should have a dependable income source for life. It is our strategy for the later years mainly.... but it will also fund the mid years of retirement also. We (or the surviving spouse) will have the house (as an asset) and possibly the contingency (inflation reserve) portfolio for very old age needs.

We will probably spend-down a fair amount of our assets (perhaps 50%) in early retirement (55-65). The rest will continue to grow and be used in the next 2 maybe 3 decades.

Since we are conservative, the spend-down will may be a bit of a challenge since we will have to change our habits. We should be able to spend more than we do today. If it turned out that we had to belt tighten to our current spending levels... we would still be content.

[youbet]

Quote:

Originally Posted by chinaco An annuity is in our plan. We will probably spend-down a fair amount of our assets (perhaps 50%) in early retirement (55-65). The rest will continue to grow and be used in the next 2 maybe 3 decades.

Sounds reasonable.

Remember while you are spending down those assets during your first decade of RE that you plan to purchase an annuity at around 65 yo. Liquidating a chunk of your remaining portfolio to purchase an annuity would be painful in a down market.

Have you tested your plan (in aggregate - not bucket by bucket) in Firecalc?

[chinaco]

Quote:

Originally Posted by youbet Sounds reasonable. ... Have you tested your plan (in aggregate - not bucket by bucket) in Firecalc?

Not yet. But I intend to do so. I will test each portfolio. Plus aggregate them in some way to understand the total effect.

There are a number of moving parts. I am not too concerned about running out of money. I figure we can tighten the belt if needed.

I am intending to put at least the last 2 decades in a VG target account for the simplicity rebalancing and allocation management of those portfolios. For decade 2 (65-75) I have been thinking of using a target account... But I am not sure. That period of time will only be 10 years out when we retire. A slice and dice approach might work better. That way I can tap into the asset class that is (hopefully) doing well and let the assets that are off recover.

I have wondered if I am over complicating things. I have alot more work to do to develop a plan that I understand. and am confident with... I am not going to go forward with the basic 4% model. I believe the 4% is useful in understanding how things might play out... But (to me) it is a guideline and provide insight. It is not a plan.

I am also working on some basic contengency plans for extreme events if they occur (i.e. high inflation/deflation, protractive bear market, etc...). At least enough to know the common sense approaches to protect our assets. I am not a market timer, but hedging strategies make sense to me... mainly to be used as insurance as opposed to try to make extraordinary gains.

[jdw_fire]

Quote:

Originally Posted by chinaco An annuity is in our plan. I intend to watch interest rates and purchase an annuity when the time/deal seems right. Unless interest rates rise and a SPIA looks attractive early on, we will probably wait until around age 65 or so. DW will take her SS @ 62, I will take mine @ 66.x (mine is the larger amount). That will give the surviving spouse a larger COLA'd Annuity.

You also might want to check out the threads on delaying SS in order to increase your spending prior to age 70. The most cost effective annuity may very well be delaying SS to age 70 while using your portfolio to fund the years prior to 70 at a higher rate then you had previously planned.

[jIMOh]

My understanding is the 4% Initial Withdraw rate is based on following assumptions:

Money needs to last 30+ years
3% inflation rate/ 3% increases to withdraws each year
a CONSTANT allocation of 60% equity and 40% bonds throughout retirement.

Meaning that the "optimum" retirement portfolio (99% success rate) is a 60-40 mix with a 4% initial withdraw rate.

70-30 mix had too many "down periods" and did not last 30+ years
50-50 mix did not keep up with inflation.

Meaning the 4% number highly depends on

a) allocation of assets (going forward)
b) performance of market in early years of retirement

To "hedge" these risks, my plan is to make sure I have 7 years income in cash, outside of my allocation, prior to retirement. It might delay ER a year or two, but this reduces the risk of the withdraw rate being incorrect.

[chinaco]

Quote:

Originally Posted by jIMOh To "hedge" these risks, my plan is to make sure I have 7 years income in cash, outside of my allocation, prior to retirement. It might delay ER a year or two, but this reduces the risk of the withdraw rate being incorrect.

I am intending to use a cash account to deal with market down years... But I am considering on 2 - 3 years. Why are you considering 7 years of cash?

[jIMOh]

I have seen 3 year periods where market did not recover (2002-2004) and I have read that the 70's were similar. No reason to risk anything similar...

3 year CD ladder. plus 3 years in TIPs or something indexed to inflation is my thought. I am 20-30 years away from doing this, so it's my thought, not what I am doing now.

[chinaco]

Quote:

Originally Posted by jIMOh I have seen 3 year periods where market did not recover (2002-2004) and I have read that the 70's were similar. No reason to risk anything similar...

My thoughts: I probably will not hold that much cash until the late years of retirement. I want to capture a little growth from the portfolio in ER and Mid Ret. (55-75)

A well diversified portfolio should have a mix of assets with low correlation. You can draw from the assets that are having a good year. This is what I like about the slice and dice approach. It is not as simple to manage as the target retirement accounts... but it provides a bit more flexibility.

[Rich_by_the_Bay]

Quote:

Originally Posted by jIMOh To "hedge" these risks, my plan is to make sure I have 7 years income in cash, outside of my allocation, prior to retirement. It might delay ER a year or two, but this reduces the risk of the withdraw rate being incorrect.

If I understand your comment, that strategy puts about 28% of assets in cash and 40% of 72% (the remainder in your "allocation") or 29% of total assets in bonds. That puts you at 57% in fixed income overall. Sure that's what you want? Its certainly a hedge but you will be allocated pretty heavily in fixed income for an early retiree.

Perhaps you'd be better off just carving out a total of 8-10 yrs expenses in cash and the rest in stocks. Gives you a lot of waiting power and still keeps you well in the game.

[jIMOh]

Quote:

Originally Posted by chinaco My thoughts: I probably will not hold that much cash until the late years of retirement. I want to capture a little growth from the portfolio in ER and Mid Ret. (55-75) A well diversified portfolio should have a mix of assets with low correlation. You can draw from the assets that are having a good year. This is what I like about the slice and dice approach. It is not as simple to manage as the target retirement accounts... but it provides a bit more flexibility.

2000-2002 was bad, and the S&P barely broke even between 2000 and 2007 (7 years). You can be diversified and still be forced to draw down an asset which has not recovered.

If the drop happens 5-7 years after retirement, not a big deal, if it happens within first year or two of retirement, much bigger deal. I would not keep 7 years of cash throughout retirement, I would just keep it the first year I retire, spend the cash, then use a sensible withdraw strategy, keeping 3-4 years cash most times... more cash after an up year, less after a down year.

[jIMOh]

Quote:

Originally Posted by Rich_in_Tampa If I understand your comment, that strategy puts about 28% of assets in cash and 40% of 72% (the remainder in your "allocation") or 29% of total assets in bonds. That puts you at 57% in fixed income overall. Sure that's what you want? Its certainly a hedge but you will be allocated pretty heavily in fixed income for an early retiree. Perhaps you'd be better off just carving out a total of 8-10 yrs expenses in cash and the rest in stocks. Gives you a lot of waiting power and still keeps you well in the game.

The cash is "outside the allocation" in some respects... I would not be less than 50% equity for sure.

The cash is not part of allocation because if market dropped, I would not take cash out of CDs and put it into market.

For example- 70% equity with 10% bond position and 20% "cash" allocation.

Assume portfolio of $1.4 M ($1 M equity, $142k bond, $285k cash). If market crashed (10%) such that the equity position was only $900k (67%), I would not liquidate 100k of cash to rebalance this. Therefore the cash is not part of allocation. It is a risk hedge, part of my net worth, but not used for allocation purposes in the truest of sense.

[Nords]

Quote:

Originally Posted by jIMOh The cash is "outside the allocation" in some respects... I would not be less than 50% equity for sure.

Having had this conversation before, if you're going to persuade yourself that the cash is "outside the allocation" then it's necessary to build an ER portfolio of a size giving you the survival rate you want and then to pile up enough additional cash to give you the seven years of padding.

Or you could adopt a flexible spending system like ESRBob's 95% rule. Or an iterative feedback system like Bud Hebeler.

Groucho Marx used to have a portfolio built mostly on Treasuries. When it was remarked that you can't live off Treasuries for an entire retirement, his response was "You can if you have enough of them." Nothing wrong with being so conservative in cash, but it's necessary to have a larger portfolio to limit the end-game erosion of inflation-- and most ERs would rather not delay their ER to accumulate the cash.

Here's the challenge with a conservative asset allocation. You mention 3% inflation, which is a century's annualized data. Inflation for the last 30 years (including the woo-hoo 1970s) has actually annualized closer to 5%. But maybe it'll be different this time!

[jIMOh]

Quote:

Originally Posted by Nords Having had this conversation before, if you're going to persuade yourself that the cash is "outside the allocation" then it's necessary to build an ER portfolio of a size giving you the survival rate you want and then to pile up enough additional cash to give you the seven years of padding. Or you could adopt a flexible spending system like ESRBob's 95% rule. Or an iterative feedback system like Bud Hebeler. Groucho Marx used to have a portfolio built mostly on Treasuries. When it was remarked that you can't live off Treasuries for an entire retirement, his response was "You can if you have enough of them." Nothing wrong with being so conservative in cash, but it's necessary to have a larger portfolio to limit the end-game erosion of inflation-- and most ERs would rather not delay their ER to accumulate the cash. Here's the challenge with a conservative asset allocation. You mention 3% inflation, which is a century's annualized data. Inflation for the last 30 years (including the woo-hoo 1970s) has actually annualized closer to 5%. But maybe it'll be different this time!

Because I am 20+ years out (maybe even 30+) I have a plan... nothing is in stone. I know the 7 years cash requires me additional savings beyond normal ER. I am researching how to build this up "efficiently" without holding back the returns of the real allocation.

The thoughts which I have:

don't pay down mortgage and invest the difference (this gives me 3X current income if I get a 9% return)
downsize house (this give me between 2-3X income)
I already have 4 months expenses in cash now... so I need a way to expand this to 12 months over next 20 years...
I could probably stop 10% to 401k a few years short of ER to supplement this.
I also have a side business which nets around 3-9k per year in cash, so I can find ways outside of normal budgeting to do this as well.