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Old 06-29-2010, 08:59 AM   #81
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Funding non-volatile inflation adjusted spending from a volatile portfolio IS the question the Trinity study and similar work by Bengen answered - without resorting to non-existent assets or contracts. Withdrawals above 4% ran out of money in the few longer periods of poor market return, while below 4% was unnecesarily conservative based on past US history.

4% of intial portfolio value + annual inflation for up to 30 years from a roughly 60/40 market weight portfolio based on past US data, before deducting investing costs and taxes. After costs and taxes, about 3% for actual spending.

You may do something else - hold a wildly different portfolio, need to incorporate a fixed pension in your planning, or prefer an investment income model over a portfolio withdrawal model.
Stop making sense!
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Old 06-29-2010, 10:02 AM   #82
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Originally Posted by rmark View Post
Funding non-volatile inflation adjusted spending from a volatile portfolio IS the question the Trinity study and similar work by Bengen answered - without resorting to non-existent assets or contracts. Withdrawals above 4% ran out of money in the few longer periods of poor market return, while below 4% was unnecesarily conservative based on past US history.

4% of intial portfolio value + annual inflation for up to 30 years from a roughly 60/40 market weight portfolio based on past US data, before deducting investing costs and taxes. After costs and taxes, about 3% for actual spending.

You may do something else - hold a wildly different portfolio, need to incorporate a fixed pension in your planning, or prefer an investment income model over a portfolio withdrawal model.

I agree.... but what I think Sharpe was trying to show is that this lead to having to much tied up in savings.... ie, the COST is higher than if you paid for it in a different way...

As an example.... if we absolutly knew there was NO possibility of default... and did not wish to leave any money to anybody when we died... buying an annuity that adjusted for inflation that paid you over your full life no matter how long you lived would be the cheapest way to fund your retirement....

I don't disagree with his reasoning and his argument... I just disagree that the 4% is... well, not going back to his article to get the correct word... but 'dead'... and also that you 'have' to spend it all in the year no matter what...
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Old 06-29-2010, 10:55 AM   #83
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Funding non-volatile inflation adjusted spending from a volatile portfolio IS the question the Trinity study and similar work by Bengen answered - without resorting to non-existent assets or contracts. Withdrawals above 4% ran out of money in the few longer periods of poor market return, while below 4% was unnecesarily conservative based on past US history.
Goodness gracious, who would have guessed?

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Old 06-29-2010, 10:59 AM   #84
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The Flip Side of Doom and Gloom
Old 06-29-2010, 11:10 AM   #85
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The Flip Side of Doom and Gloom

< Anyone care to discuss wasted resources per the too small withdrawals>

if you don't retire into a raging bear market that goes on for years and years that the SWR could be significantly higher than the safe 4%. remember that 4% SWR is the SWR is to get you through those very tough prolonged bear markets. So if you retire during anything but some severe bear markets, then a 6% spending spending model just may work fine.

here is Gummi's model showing that if you retire at various times with a diverse portfolio that you could draw 6% or even significantly higher (depending on the markets). This is kind of the flip side of Bernstein's "retirement Calculator from Hell" series that show depending on when you retire you could indeed draw significantly more each year. Note that for a 30 year retirement, on one of these "good" years to retire you could withdraw 8% or higher and still never go broke.

For the plot the horizontal axis is the years you would spend in retirement. The vertical axis is the maximum fixed withdrawal rate you could use if you retired in that particular year. The green dot example shows if you need a 15 year retirement starting in 1960 that you could take out just under 12% and never go broke. Most of us probably want longer retirements so the far right data of 30 year retirements is more interesting. Note that if (for example) you retired in 1960 that over 30 years you could withdraw around 9% and never go broke. If you were lucky enough to retire in 1950 then (over 30 years) you could take out just over 15% per year and never go broke.



It goes without saying that a fixed withdrawal rate higher than 4% is not "safe". However, to be safe under this model - you most certainly will die with tremendous unspent sums in your account. Again remember that the 4% SWR allows for the worst markets early in the retirement. If that horrible market doesn't occur then you will most certainly leave money (perhaps lots and lots of money) unspent when you go. This then gets into all of the variations on non-fixed (variable) withdrawal rates. This topic goes on and on.

for the other side of this issue and to inject some caution here is a link to Bernstein's articles on the Retirement calculator from Hell series: (FAQ archive): Bernstein's "Retirement Calculator from Hell" articles
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Old 06-29-2010, 04:49 PM   #86
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< Anyone care to discuss wasted resources per the too small withdrawals>

if you don't retire into a raging bear market that goes on for years and years that the SWR could be significantly higher than the safe 4%. remember that 4% SWR is the SWR is to get you through those very tough prolonged bear markets. So if you retire during anything but some severe bear markets, then a 6% spending spending model just may work fine.

No offense but I found the discussion of wasted resources (i.e. higher SWRs) way more interesting when the market returns were -5% to +25% every year, TIPs had 3+% real return, and I could stick money in a CD and get 6%. My worries of does my irresponsible Nephew really deserves several million dollars from my $10 million estate, or should I simply go and find the next Annie Nichole Smith when I am 85, seem so quaint in today's investing environment.

I am looking forward to having this discussion in the future, please bring it up when the Dow hits 14,000 again.
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Old 06-29-2010, 05:02 PM   #87
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...
here is Gummi's model s...
Nice illustrations.

There are many many variable depending on one's situation.

Another consideration is the amount of money one needs to support their basic lifestyle (including some discretionary spending) vs over and above ordinary discretionary spending.

If one is cutting it close and has little buffer between non-discretionary spending and discretionary spending funds, they have a bit more risk exposure. Those people with generous discretionary spending funds can more readily absorb shocks without affecting their baseline lifestyle.

In other words, it is one thing to risk that next trip to Europe... it is something quite different to risk not being able to pay property taxes a few years down the road.
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Another take on this...
Old 01-20-2011, 10:46 AM   #88
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Another take on this...

I am new here and exploring and I hope that my thoughts here will not bore anyone...

Sharpe's work on the 'inefficiency' of the 4% rule is actually very sensible. The work by Bengen, Trinity, and all later work on this problem focuses on the worst outcomes: we want to avoid running out of money. The median portfolio value is quite high at presumed death in the 4% scenario--and this is why Sharpe believes that the 4% draw ends up with a surplus in funding. This makes perfect sense and is correct.

If you are happy living on a 4% draw then it does not matter to you that there is a surplus--in fact your kids or beneficiaries will greatly appreciate it.

Sharpe is (obviously) a very smart guy and he is not missing something IMHO. There are many people here that live well below their means so running a surplus funded portfolio is fine. From an actuarial standpoint, annuitizing a chunk of your portfolio makes sense in reducing the 'surplus' funding required but that requires giving over assets and control to a third party, etc.
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Old 01-20-2011, 12:01 PM   #89
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Surpluses are something that I strive for in my ER assets. It might not be the most efficient use of money for me, but I think about my beneficiaries and also about sleeping at night. 4% rule is ok for planning, but there has to be continual feedback between the your level of spending, budget and assets in any sensible plan. Before or after retirement Mr Micawber's rule is the one to use as it emphasizes spending less than your income and the happiness that produces.

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

This is the single most important piece of financial advice that I have ever read and underlines that there's a lot of learning to be found in novels.
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Old 01-20-2011, 12:22 PM   #90
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"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Though to be honest I tend to be paranoid conservative enough in my financial planning that needing 99.8% of my income (as this quote implies) would scare me to death in terms of market fluctuations and inflation. I'd probably not want to do this unless 20 quid represented a 3% withdrawal rate or less.
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Old 01-20-2011, 12:44 PM   #91
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Nice illustrations.

There are many many variable depending on one's situation.

Another consideration is the amount of money one needs to support their basic lifestyle (including some discretionary spending) vs over and above ordinary discretionary spending.

If one is cutting it close and has little buffer between non-discretionary spending and discretionary spending funds, they have a bit more risk exposure. Those people with generous discretionary spending funds can more readily absorb shocks without affecting their baseline lifestyle.

In other words, it is one thing to risk that next trip to Europe... it is something quite different to risk not being able to pay property taxes a few years down the road.
So no matter how painful working is in your personal circumstance, no matter how much of life you're missing, you should work, work, work until you can ER with multiple trips to Europe planned?
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Old 01-20-2011, 01:18 PM   #92
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Sharpe's work on the 'inefficiency' of the 4% rule is actually very sensible.
Sensible, but not particularly relevant to anything other than pure academic inquiry. I'd be very happy to buy efficiently priced products that let me hedge market and longevity risk while safely taking larger distributions from my nest egg. The only problem, those products don't exist. So until they do, I guess I'm just going to have to pile up those surpluses.
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Old 01-20-2011, 01:29 PM   #93
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So no matter how painful working is in your personal circumstance, no matter how much of life you're missing, you should work, work, work until you can ER with multiple trips to Europe planned?

Yeah, that's about it for my DW.

While she was to retire the same time as me (May '07), she still continues to wo*k.

I have tried to explain it in the following manner (since she doesn’t share her actual feelings):

1. She has a "social need" to stay employed.
2. She has a stud a work that is giving her something I can't.
3. She (as a traveler) feels she can't travel the world as she has (and still continues to do so) in retirement (even though I showed her "the numbers" that confirm she still can, even if retired).
4. She is starting to act a bit crazy. I know this can't be true, since she married me 40+ years ago. Many thought she was crazy at that time.

Travel is her passion. Anything she feels she needs to do (e.g. continue being employed) to meet that need? She will do. It's like travel is her "drug" and wo*k is her answer on how to achieve that "high".

So be it. She's happy - I have no complaints. So be it...

BTW, she already has two trips to Europe planned for this year (one booked, one pending). Nope, I'm not going (she's going with her "travel pal" - another women who shares her wonderlust).
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Old 01-20-2011, 11:30 PM   #94
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Originally Posted by GeoffC View Post
Sharpe's work on the 'inefficiency' of the 4% rule is actually very sensible. The work by Bengen, Trinity, and all later work on this problem focuses on the worst outcomes: we want to avoid running out of money. The median portfolio value is quite high at presumed death in the 4% scenario--and this is why Sharpe believes that the 4% draw ends up with a surplus in funding. This makes perfect sense and is correct.
If you are happy living on a 4% draw then it does not matter to you that there is a surplus--in fact your kids or beneficiaries will greatly appreciate it.
Sharpe is (obviously) a very smart guy and he is not missing something IMHO. There are many people here that live well below their means so running a surplus funded portfolio is fine. From an actuarial standpoint, annuitizing a chunk of your portfolio makes sense in reducing the 'surplus' funding required but that requires giving over assets and control to a third party, etc.
Sharpe has a couple issues, among them:
1.) He'll never retire, so he'll never have to experience the thrill of wondering whether he'll outlive his assets,
2.) He just happens to be involved with FinancialEngines.com, whose math depends on annuitizing retirement assets for its calculated success rates, and
3.) With all the 401(k) providers who pay fees to FinancialEngines.com, I'm skeptical that he retains an academic absence of bias about annuities & annuity providers.

He's also said that he's glad the Nobel committee is not reclaiming its prizes.

He may be a smart guy, and humble enough to poke fun at himself, but he's perhaps lacking in appreciation for the commonsense aspects of risk tolerance.
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Old 01-21-2011, 02:30 PM   #95
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Sensible, but not particularly relevant to anything other than pure academic inquiry. I'd be very happy to buy efficiently priced products that let me hedge market and longevity risk while safely taking larger distributions from my nest egg. The only problem, those products don't exist. So until they do, I guess I'm just going to have to pile up those surpluses.
It seems like a CPI adjusted SPIA allows you to hedge market, longevity, and CPI risk. So your issue must be "efficiently priced". How do you measure pricing efficiency?
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Old 01-21-2011, 03:23 PM   #96
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It seems like a CPI adjusted SPIA allows you to hedge market, longevity, and CPI risk. So your issue must be "efficiently priced". How do you measure pricing efficiency?
Any CPI adjusted SPIA's available for a couple of 39 year olds?

If there are, my first requirement for "efficiently priced" financial products would be price transparency. If the price isn't transparent, it isn't efficient.

My second requirement would be that the Annuity paid me a 30yr TIPS rate + the Insurer's 30yr Spread to Treasuries + annual principal amortization over my actuarial life expectancy - 50bp or so for their trouble. A quick back of the envelope says that works out to be about 5% real for a 39 year old, but it's probably closer to 4% if you take the TIPS and credit curves into account. If anyone is going to give me 4+% real for the rest of my life, they can have a good slug of my money. Otherwise, I can build my own.
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Old 01-21-2011, 04:35 PM   #97
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Yeah, that's about it for my DW.

While she was to retire the same time as me (May '07), she still continues to wo*k.

I have tried to explain it in the following manner (since she doesn’t share her actual feelings):

1. She has a "social need" to stay employed.
2. She has a stud a work that is giving her something I can't.
3. She (as a traveler) feels she can't travel the world as she has (and still continues to do so) in retirement (even though I showed her "the numbers" that confirm she still can, even if retired).
4. She is starting to act a bit crazy. I know this can't be true, since she married me 40+ years ago. Many thought she was crazy at that time.

Travel is her passion. Anything she feels she needs to do (e.g. continue being employed) to meet that need? She will do. It's like travel is her "drug" and wo*k is her answer on how to achieve that "high".

So be it. She's happy - I have no complaints. So be it...

BTW, she already has two trips to Europe planned for this year (one booked, one pending). Nope, I'm not going (she's going with her "travel pal" - another women who shares her wonderlust).
Or with that stud from work




JUST JOKING!!!
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