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Old 06-25-2010, 02:30 PM   #21
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Ha... I think REW made the point that if the first premise is wrong, the answer is more than likely wrong..

But let's take your reading of the article... financing a fixed expense on a variable income....

If we do say that we will spend the full amount, which means overspending or bad spending in some year... history has shown that a 4% withdrawal rate will be successful 95% of the time... now, some of those times you are very close to zero and if you do not die on time you can be in trouble.... (and this is just for argument sake)... say that the close calls mean that in reality it is closer to 90%... What he seems to be saying is that we should do something to cover that extra 10%... No argument with me.

But since there is probably not one single person in America that is a robot that spend 4% plus inflation every year no matter what is happening in the markets, I think it is a waste of time to try and instill fear in people so they can follow your new thinking... or to prove that 4% does no work...


There are many things that we fund based on one side being fixed and the other variable... gas for one comes to mind... if the price of gas goes up a lot like it did a year or so ago... and my salary does not... I am funding a variable expense based on a fixed income... and if I had that my 'budget' was $200 a month... but after buying $200 worth of gas I can not buy any more.... but with only $200 of gas I can not even drive to work... seems kind of silly to stick with the 'hard' budget number..

That is what I also think of the 4% 'rule'... it is not a hard number... but 'budget'...

Maybe this is not making my point clear... let me know if it is not...
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Old 06-25-2010, 02:42 PM   #22
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Originally Posted by Rustic23 View Post
Ha,
For me it goes to credibility. Unless Sharpe is misquoted, then his credibility is blown when he implies that the 4% rule is 'Each year you take 4%, adjusted for inflation, from your portfolio and spend it weather you need to or not. Buy 'surpluses' if you have to but spend the 4%'.'
Rustic, if that is what he meant, I agree completely. But this is not Sharpe writing, it is a newswire article quoting snippets, and if I read it correctly, doing some explicating of its own.

Here is the passage that I suppose is causing concern:
Quote:
"If a retiree adopts a 4 percent rule, he will waste money by purchasing surpluses, will overpay for his spending distribution, and may be saddled with an inferior spending plan," wrote Sharpe and colleagues Jason Scott
I took this to mean not that a retiree would keep buying things that s/he didn't want or need, but that due to the nature of the process, early on and perhaps at other times, spending 4% is too much, and it may set up the portfolio for failure or close calls. So he wasn't spending surpluses in the sense to too much food on the plate, or too many cars, but that s/he was not able to accurately assess what a safe level of spending might be. Presumably those Firecalc runs that end in failure or come near failure are not because someone just kept spending because s/he thought it was required, but because s/he didn't realize that in her/his case, 4% was going to be too much to spend and have income until death.


BTW, I agree that stripped TIPS would do pretty good job. Not perfect perhaps, but we only have faith and not evidence that our approach is better, and it is certainly riskier, in the sense of variability and the negative cost averaging problem.

Ha
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Old 06-25-2010, 03:09 PM   #23
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Wahoo,
How could you say such. Sharpe is a Nobel Laureate and a Professor Emeritus at a major university. He could not possibly be wrong:

Sorry, could not resist. My bad.
Ok here is a simple yes / no queswtion

Did you read the actual original article before making your comment ?
Or did you only read the news story

If you read the article and not merely the news story no problem
but if you only read the news story it is your problem

original article at
http://www.stanford.edu/~wfsharpe/retecon/4percent.pdf
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Old 06-25-2010, 03:40 PM   #24
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Sharpe makes very good points in the paper- uncertainty, overpaying & surpluses are issues with funding a retirement of unpredictable length using investments with an unpredictable return.

The only options available to us today are investing in TIPs or buying an inflation adjusted immediate annuity. I think these still have risks (aside from institution/sovereign failure) if your personal inflation rate (which is also unpredictable) turns out to be higher than CPI.

I think it is our loss when we dismiss a person or concept just because they say something that is incorrect once, when further reading would show that it is NOT what they meant.
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Old 06-25-2010, 03:47 PM   #25
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No expert here, but the 4% "rule" was an attempt to see what WR would withstand real, historical market results (and fluctuations). Some consider it "godlike", and some insist the number is wrong...

Seems like a reasonable guideline, but not the eleventh commandment.
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Old 06-25-2010, 03:51 PM   #26
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I think it is our loss when we dismiss a person or concept just because they say something that is incorrect once, when further reading would show that it is NOT what they meant.
I'm quick to dismiss a person or a concept when the "news release" regarding the article/study makes an incorrect statement (4% rule definition) and chooses to quote something from the article/study which is also incorrect (purchase of surpluses).

First impressions are difficult to overcome.
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Old 06-25-2010, 04:48 PM   #27
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Ok here is a simple yes / no queswtion

Did you read the actual original article before making your comment ?
Or did you only read the news story

If you read the article and not merely the news story no problem
but if you only read the news story it is your problem

original article at
http://www.stanford.edu/~wfsharpe/retecon/4percent.pdf

Thanks for the article... it will be interesting to read...

But, my concern is still the same..... that the 4% is a hard number... I do not think anybody has a 4% hard number.... here is a quote from the abstract..

"Further, we argue that even if retirees were to recoup these costs, the 4% rule’s spending plan often remains wasteful, since many retirees may actually prefer a different, cheaper spending plan"

So, right off the bat they have this as a hard and fast rule...

Also in the article and I am not that far in

A typical rule of thumb recommends that a retiree annually spend a fixed, real amount
equal to 4% of his initial wealth, and rebalance the remainder of his money in a 60%-
40% mix of stocks and bonds throughout a 30-year retirement period.


I agree... it is a rule of thumb... but not mandatory spending...

The goal of this paper is to price these inefficiencies—we want to know how much money a retiree wastes by adopting a 4% rule.

THIS could be interesting...

OK... quickly read the whole thing.... and I think I read something like this before...

They seem to say that you can 'buy' your retirement cheaper than with the variable portfolio... but they do not seem to show what would happen if EVERYBODY went this way... the stock market has a huge value... the amount of TIPS is not that large... if everybody went to buy the least cost item... then the costs are sure to go up..

So I do not see that the 4% rule is dead... just that it might not be the 'optimal' way to do things... a very different view of the article..
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Old 06-25-2010, 06:21 PM   #28
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Thanks for the article... it will be interesting to read...
I didn't read every word, I got mildly frustrated that his examples and terminology are not as clear as they could be. After a nice lunch out on a sunny day, I just didn't feel like putting forth the effort...

However, if I use my decoder ring and provide another example (not his example - I don't want to appear to be quoting him on this), I think I get his drift from what I did read.

A) If you look at the output of FIRCALC for the 4% & 30 year portfolio, many cases result in more money than you started with, while 5% fail. If your stated goal is to be able to WD 4% for 30 years, you were 'inefficient'. You are 'paying too much' (in the form of failures) for the surplus years (that you don't 'need').

B) So a really simple example (that I am making up) is, if you could invest 100% in something that was guaranteed to do nothing but keep up with inflation, you could WD 3.33% per year, and meet your stated goal, and have no 'wasted' surplus. Year 31 you deplete your portfolio, no ifs, and or buts. It is 'efficient' by one measure.

So I think he is saying to invest in something safe that pays a bit more than inflation, so you can kick that back up to 4%.

The problem I see is:

A) Can we always expect to be able to find 'safe' investments at slightly more than inflation (TIPS?)?

B) If you want to plan for a possible long life, and say stretch that to a 45 year portfolio, you are down to a 2.2% WR (plus your real returns). From what I've seen in FIRECALC, getting down to ~ 2.5% is a 'forever' portfolio with a 50-75% equity AA. No failures and a huge upside for heirs and/or your favorite charities.

I think I'll stick with some equities, a lower than 4% WR, and I'll let you know on my 95th birthday how I'm doing


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Old 06-25-2010, 06:35 PM   #29
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I just thought of another 'risk' we talk about. What if your 'personal rate of inflation' was higher than CPI?

If you take out a higher amount with the fixed income example - you *will* run out of money early. 100% of the time. There is no chance of a surplus.

But if I bump FIRECALC up to a 5% WR, I still succeed >70% of the time. Cross your fingers?

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Old 06-25-2010, 07:25 PM   #30
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[COLOR=black][FONT=Verdana]
Incidentally, it may be a long time coming, but I believe plenty who retired in 1999 or 2000 and stick to 4% annually adjusted with the usually recommended allocations will eventually be up a financing creek of one sort or another. We've put in 10 years and counting from there, perhaps enough to conclude that something fundamental has changed?

Ha
If I understand the theoretical basis of the 4% withdrawal rule correctly, it basically says that a 4% withdrawal over 30 years with a 60/40 split will result in portfolio survival 95% of the time based on the historical record of all such periods going back 100+ years. Your statement above implies that you think that times worse than the Great Depression and two World Wars are ahead. Perhaps am not understanding correctly?
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Old 06-25-2010, 08:08 PM   #31
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Hate to be odd man out, but this is an article about a position, not a white paper. Why should we expect it to be a complete explication of the Sharp et al position?

Also, to me at least it appears that the main thrust of the article is that there is a basic incompatibility in financing a fixed real outflow with gradual liquidation of varying assets. I really don’t think that this should be too controversial, and the next time we have a big downdraft there will be a lot of agreement with this position, even here.

Cavils such as "one doesn't have to spend 4%" are beside the point. Of course if you are well supported by a secure real value pension, you could invest in chicken futures and you still would succeed. If a sub-optimal plan is hugely over financed, it is still very likely to work, and it is for most people still suboptimal. Though not I would assume with ER.orgers.

A mind numbing review of years of threads on the 4% rules, and SWRs in general should show that people’s main question is not “will this cause me to become a mega-consumer trying to spend at least 4% every year”, but "will I never go broke spending what I feel that I want to spend within the upper limit of 4% of initial amount adjusted for inflation.? To say, well my 4% SWR allows me withdraw $60,000 real, but if things really get tight I could live on $22,000, or $12,000, or whatever, do not address the real world problem faced by most people.

Incidentally, it may be a long time coming, but I believe plenty who retired in 1999 or 2000 and stick to 4% annually adjusted with the usually recommended allocations will eventually be up a financing creek of one sort or another. We've put in 10 years and counting from there, perhaps enough to conclude that something fundamental has changed?

Ha
I am with HA on this . The article's conclusion seems pretty obvious: "If people are going to invest in risky assets after they retire, they will need to choose a strategy that adjusts their spending as the value of their savings changes. And that's quite a leap from the inflexible 4 percent rule. " Or as I have said the 4% SWR isn't a rule it is a guideline and it needs to be adjusted based on today conditions.

However, Professor Sharpe larger point is the (I read the original a year or two ago so I am a bit fuzzy) there are some real inefficiencies with the religious adoption of the 4% rule. Given recent events the talk has switched from is the 4% rule too conservative to is it too aggressive. I'll admit I am guilty of this also.

The 4% SWR is useful because it provide a reason to avoid panic during bad times. I found this exchange on the BogleHeads Wiki interesting.


Quote:
Limitations of the Trinity study ...

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.
Nisiprius requested clarification from Professor Philip L. Cooley, senior author of the Trinity study:[3]
What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.
Professor Cooley's response:
You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees.
As a Class of 99 very early retiree, HaHa point is exactly right. I just went and recalculated what an inflation adjusted 4% SWR would mean for me today. A withdrawal of 168,000 a year. In truth with a paid off house I'd have trouble spending that much. My actually spending is less than 1/2 that amount. If I had spend that much my I estimate my withdrawal rate would be around 10%, pretty clearly unsustainable for a 50 year old.

The reality is I never should have looked at 4% SWR for a variety of reason. First, I was to young 50 years was a better planning horizon. Second and probably equally important my portfolio was not very close to the Trinity Study. Now my AA was probably 85%/15% in 1999 but 40% was in Intel and 25% was in NASDAQ stocks. Fortunately I made good/lucky adjustments and by Jan 2000 it was 75%/25% but still heavily weighted NASDAQ weighted and that was cut in 1/2 in short period of time.

On the other hand at the beginning of 2009, when I looked at my portfolio and realize that probably for the first time I was going to be spending near 4% of my portfolio current value, it was helpful to remember that over long periods of time spending less than 4% survived even the worst economic crisises.
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Old 06-25-2010, 08:11 PM   #32
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Just a reminder of why some of us prefer Clyatt's approach of a 4.3% total portfolio per year, the amount variable as the porfolio fluctuates annually. Throw in a "5% less than last year's total" as a safety net or "floor" and you have a back-tested, sensible plan for those of us who can handle some fluctuation of income.

Not for everyone but it fits nicely for us.
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Old 06-25-2010, 08:51 PM   #33
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I am with HA on this . The article's conclusion seems pretty obvious: "If people are going to invest in risky assets after they retire, they will need to choose a strategy that adjusts their spending as the value of their savings changes. And that's quite a leap from the inflexible 4 percent rule. " Or as I have said the 4% SWR isn't a rule it is a guideline and it needs to be adjusted based on today conditions.
When I read the OP; I then read the link from which I made my comment. My reading of the link was wrong. I think my comment about the Rule of Thumb and customization is correct.

The 4% withdrawal rate is only one factor. We have had threads discussing cash flow i.e. several years of expenses in cash equivalents (or short term bond funds) to ride out the downturns. Also, the mix of stocks, bonds and the dividends/interest they generate is important.

After glancing over the original paper I still think there isn't much value to those contemplating retirement. It is over thought and overly complicated. I get the sense they were trying to work in aspects of Freakeconics into their analysis.
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Old 06-25-2010, 09:29 PM   #34
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...by Jan 2000 it was 75%/25% but still heavily weighted NASDAQ weighted and that was cut in 1/2 in short period of time.
My story is almost like that, except my high-water mark was on March 2000, and my lowest point after the tech bubble burst was on Oct 2002, nearly 2-1/2 years later. Between those two points, I lost 44%. That could have been worse, if I did not have a part-time income and had to draw on the savings to live.

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Just a reminder of why some of us prefer Clyatt's approach of a 4.3% total portfolio per year, the amount variable as the porfolio fluctuates annually. Throw in a "5% less than last year's total" as a safety net or "floor" and you have a back-tested, sensible plan for those of us who can handle some fluctuation of income...
I am aiming to do the same, meaning spending a percentage of this year's portfolio value. And I try also not to put a cap on the yearly reduction, like R-i-T's 5% per year. It means really tightening the belt in extreme bad years, like we had in 2008-2009. One must lower the fixed cost of living to perhaps 60% or less of the "usual" expenses, in order to have the other 40% as fat to be cut in lean years. It is tough, but we have done it. Why 60%? It's because I have lost 30-40% of portfolio in 2007-2009. I have reclaimed more than 1/2 of that loss.

As an aside, I cannot see two consecutive 40% yearly cuts though. It would mean that Year 3's expenses would be only 0.6*0.6 = 36% of Year 1's expenses. And Year 4's expenses would be 0.6*0.6*0.6 = 21.6% of Year 1's expenses.

I shudder when thinking of 7 years of famine!
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Old 06-25-2010, 10:01 PM   #35
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And I try also not to put a cap on the yearly reduction, like R-i-T's 5% per year. It means really tightening the belt in extreme bad years, like we had in 2008-2009.
I was thinking about doing the same, but now that I have come up with a retirement budget, I think that abruptly cutting our expenses by 25-30% in bad years would be way too depressing. Basically, one year we'd be cruising around the world and the next we'd be sitting at home watching TV. The plan now is to withdraw 3-3.5% of portfolio value each year with an expense reduction cap of 10% in bad years (we reduced our expenses by roughly 15% in 2008 without suffering too much, so I think it's doable). Even then, FIREcalc shows a number of scenarios where our expenses would still have be cut by as much as 50% over a period of several years. That's a pretty scary thought.
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Old 06-26-2010, 12:36 AM   #36
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Did I scare anybody about the vision of the incredible shrinking portfolio that gets cut 30% per year, and 2 or 3 years in a row? I can have a dark sense of humor, in case you have not noticed.

Just joking around. I cannot fathom the scenario above. If the world economy gets that bad, all bets are off. We wouldn't be too far from Mad Max situation then.

Just now looking at Uncle Mick's beloved Wellesley as a benchmark, I saw that it dropped around 25% in the 2007-2009 time frame. Perhaps it is more reasonable to tweak your living expenses so that around 25% of it is for icing-on-the-cake pleasures. It is still a pretty hefty variation, I know.

My big portfolio variation is due to an aggressive AA, and high-beta stocks on top of that. That makes for an exciting ride, heh heh heh...

We never have a real budget. As long as we underspent our income, we thought we would be OK. I kind of cheat and allow myself a lot of leeway because I still have part-time income. Not until seeing how people here are a lot more serious about budgeting, I went back and found out that over the last 10 years, our annual expenses varied from the $40K to $110K+. The difference was due to a lot of travel and home improvements in good years. I am not sure we can go back to that $40K level anymore, because we have two houses now on top of higher medical insurance. But the point is that I am used to seeing my portfolio and lifestyle going up and down like yo yo.

What are the good shows on TV nowadays? Oops, forgot that we may not have TV while RV boondocking. I will just pack some Tolstoy and Dostoevsky.
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Old 06-26-2010, 01:32 AM   #37
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If I understand the theoretical basis of the 4% withdrawal rule correctly, it basically says that a 4% withdrawal over 30 years with a 60/40 split will result in portfolio survival 95% of the time based on the historical record of all such periods going back 100+ years. Your statement above implies that you think that times worse than the Great Depression and two World Wars are ahead. Perhaps am not understanding correctly?
Actually, I do not think that, although I certainly cannot rule it out. The US was a young capitalist country coming into its own with no huge baggage of entitlements, or government spending, and with no lower cost industrial competition.

What I based my statement on was since valuations (PE10) were at all time highs in 1999 and 2000- much higher than the top in 1929- there is no good reason that I can see to be certain or even put a high probability on the idea that the Depression and our wars represent the worse that might befall the stock market. This is not a popular idea, so I am not really prepared to defend it, but it is my working hypothesis. Also, remember that there are not many 30 year periods in the database, and fewer than five thirty year periods with no overlap.

We have the idea that government can pull us out of anything, but IMO it is at least equally possible that their reponses are just digging a deeper hole. My idea is that over an intermediate timespan, inflation is likely to be a bigger problem than deflation. But they are basically Scylla and Charybdis.

Ha
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Old 06-26-2010, 01:42 AM   #38
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In mathematical terms, what Ha said was that the working assumption of the economic model in Firecalc is that the stock and bond markets are stochastic stationary processes. We really have no proof of that, just a belief or a hope. On the other hand, before the American empire, we all know of the rise and fall of other empires. My thinking is that the change will be gradual enough that we will have time to adapt ourselves to it.

I observe that many posters have significant foreign equities in their AA. It's my way to hedge too.
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Old 06-26-2010, 08:37 AM   #39
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In mathematical terms, what Ha said was that the working assumption of the economic model in Firecalc is that the stock and bond markets are stochastic stationary processes. We really have no proof of that, just a belief or a hope. On the other hand, before the American empire, we all know of the rise and fall of other empires. My thinking is that the change will be gradual enough that we will have time to adapt ourselves to it.

I observe that many posters have significant foreign equities in their AA. It's my way to hedge too.

I agree on the rise and fall of empires... how long did it take for the Roman empire to fall??

And like I tell my boss.... WHO is going to take over Sure, the world economy might take a dive for the next 10 years... but how much does that really change our living standards?

Almost everybody how is worried seems to think that we go from where we are today to "Mad Max"... with nothing in between...

Also, even if we DID lose the top spot... we would still be second or third... not much farther down... there are a LOT of countries where things would be a lot worse...
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Old 06-26-2010, 08:38 AM   #40
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First impressions are difficult to overcome.
Yes, we human beings have a tendency to form judgment and refuse to change it while still insisting that we have an open mind.
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