Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Old 06-26-2010, 07:43 AM   #41
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,003
Quote:
Originally Posted by Spanky View Post
Yes, we human beings have a tendency to form judgment and refuse to change it while still insisting that we have an open mind.
I refuse to insist I have an open mind.
__________________
Numbers is hard
REWahoo is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-26-2010, 07:43 AM   #42
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
This has been discussed in other threads.

There are other papers that also point out misconceptions about the 4% WR approach as well as alternative approaches to a 60/40 mix for funding retirement income.

I thought Sharpes paper was thought provoking and made a good point. Don't follow a concept blindly, identify your real goals, look into your options for achieving those goals. If it can be done for less money and less risk... a rational person would/should choose that course of action.
chinaco is offline   Reply With Quote
Old 06-26-2010, 07:45 AM   #43
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,455
Quote:
Originally Posted by NW-Bound View Post
I observe that many posters have significant foreign equities in their AA. It's my way to hedge too.
The correlation between foreign equities and that of U.S. is getting higher, however. Adding other asset classes such as precious metals or commodities may help.
__________________
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Old 06-26-2010, 07:48 AM   #44
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
Quote:
Originally Posted by Rich_in_Tampa View Post
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.
Hey Doc... could you elaborate on the "5% less" part of the approach.
chinaco is offline   Reply With Quote
Old 06-26-2010, 07:49 AM   #45
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,455
Quote:
Originally Posted by chinaco View Post
Don't follow a concept blindly, identify your real goals, look into your options for achieving those goals. If it can be done for less money and less risk... a rational person would/should choose that course of action.
Agreed if we were rational.
__________________
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Old 06-26-2010, 07:53 AM   #46
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 4,629
Quote:
Originally Posted by FIRE'd@51 View Post
To the contrary, in the article you linked, Sharpe does indeed propose a solution. If the Treasury were to issue TIPS with the maturity payment stripped-off so that you could purchase the coupon stream at auction, you could very easily implement Sharpe's proposal. Sharpe is talking about what is basically a 2-bucket approach, where one bucket (the stripped TIPS coupon stream) would fund your 4% inflation adjusted withdrawal for 30 years. The present value of the stripped-off maturity payment (approximately 9% of your portfolio's current value) would be invested in risky assets (e.g. the S&P 500), and would be left untouched for 30 years. Presumably, over such a long time period the stock market would return close to it's long-term historical average of about 6.5% per year real; and at your horizon, would have grown to a large enough value so as to fund the rest of your retirement years. IMO, the beauty of this approach is that you would never have to cut back from your 4% spending rule out of fear that you would run out of money, only to end up with a large surplus on your dying day.
I'll agree that your strategy, if I understand it correctly, is an excellent alternative. (In fact, I'm very heavily weighted in TIPS for that stability.) But, I can't find it in the paper. Maybe it's the financial equivalent of Sharpe's "Least Cost Spending Strategy" on page 11, but I can't make the connection.

My complaint about Sharpe's approach is that he seems to treat 30 years as a perfectly fixed number. Any amount left at the end of 30 years becomes a "surplus", and a source of inefficiency to be squeezed out. But, if he eliminates the possibility of a surplus, then it seems to me he has 100% chance of running out of money if he lives 31 years.

Your approach is better. By my understanding, you say that pure TIPS would allow a 4.46% flat income. If you're willing to move (.46/4.46) of your total portfolio into something with a higher risk/higher reward category, then wait 30 years for the short term volatility to partially cancel out, you'll have some funds for the possibility of a very long life.
Independent is offline   Reply With Quote
Old 06-26-2010, 08:41 AM   #47
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Quote:
Originally Posted by chinaco View Post
Hey Doc... could you elaborate on the "5% less" part of the approach.
You have $1mm on Jan 1, 2000. You take $43k in income, leaving $957k.

Bad year ensues, market down 15%, leaving you with $813k by year's end. According to the basic rule, you would end up taking 4.3% of that $813k for the upcoming year's income = $35k. That's a huge hit.

However the "floor rule" allows you to take no less than 95% of what you took the prior year. 95% of $43k = $40,850. You can that amount rather than $35k and still do well long-term at least as far as back-testing shows.

BTW, following a really good market year, you may wish to withdraw less than the allotted 4.3% if you don't need it all, further enhancing the flexibility of this system - kind of a poor man's value cost averaging.

Hope that helps.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 06-26-2010, 08:58 AM   #48
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 26,819
Quote:
Originally Posted by haha View Post
(RE: great depression, etc)
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.
For a period of time, we were the 'lower cost industrial competition'. So it isn't just that we lost an advantage, it's worse than that - the tables have been turned on us. It might not spell disaster, but I don't think it bodes well for us maintaining our standard of living. But as others have said, if it means a relatively modest decline in our standards, we can still be very happy indeed.

Quote:
Originally Posted by Independent View Post
My complaint about Sharpe's approach is that he seems to treat 30 years as a perfectly fixed number. Any amount left at the end of 30 years becomes a "surplus", and a source of inefficiency to be squeezed out. But, if he eliminates the possibility of a surplus, then it seems to me he has 100% chance of running out of money if he lives 31 years.
That was my take on it also. To me, it makes his whole example a mere academic discussion - it becomes one data point from which you formulate a plan. And in that regard, that is all the '4% rule' is anyhow. So without investing too many brain cells on this, and still working on my caffeine consumption for the morning, I'll hazard the guess that some blend of the two makes the most sense for most people. I feel like I'm stating the obvious.

-ERD50
ERD50 is offline   Reply With Quote
Old 06-26-2010, 09:10 AM   #49
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 4,203
Rich,
Your post confused me a little. Are you applying the initial 4.3%, then applying a 4.3% to the remaining balance each succeeding year? If so, that is not how I thought how a 4% swr was applied. I thought you started with one million, applied the 4% or in your case 4.3% and arrived at $43,000. You then took $43,000, adjusted for inflation, out of your remaining balance, which in down years would be greater than 4.3% and less in good years.
__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Old 06-26-2010, 09:31 AM   #50
Moderator Emeritus
 
Join Date: May 2007
Posts: 12,894
Quote:
Originally Posted by Rich_in_Tampa View Post
You have $1mm on Jan 1, 2000. You take $43k in income, leaving $957k.

Bad year ensues, market down 15%, leaving you with $813k by year's end. According to the basic rule, you would end up taking 4.3% of that $813k for the upcoming year's income = $35k. That's a huge hit.

However the "floor rule" allows you to take no less than 95% of what you took the prior year. 95% of $43k = $40,850. You can that amount rather than $35k and still do well long-term at least as far as back-testing shows.

BTW, following a really good market year, you may wish to withdraw less than the allotted 4.3% if you don't need it all, further enhancing the flexibility of this system - kind of a poor man's value cost averaging.

Hope that helps.
When I plug in the 4.3%/95% scenario in FIREcalc, I find an uncomfortably large number of cycles where the annual income would still have to be progressively cut from $43,000 down to roughly $20,000 at one point or another during a 30-year period. Does it sound right? By the way, I get somewhat similar results using my proposed 3%/90% scenario.

I don't know whether I am allowed to screen capture the FIREcalc results and post them here...
FIREd is offline   Reply With Quote
Old 06-26-2010, 09:38 AM   #51
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 26,819
Quote:
Originally Posted by Rich_in_Tampa View Post
...

However the "floor rule" allows you to take no less than 95% of what you took the prior year. 95% of $43k = $40,850. You can that amount rather than $35k and still do well long-term at least as far as back-testing shows.
When I look at a FIRECALC run with that '95% spending rule', I see an awful lot of squiggly lines that dip down around what looks to be about 1/2 your original spend rate, and they appear to hang there a looooong time. Even when I start with 4.0% (not the 4.3% you mention). It's hard to follow any one line though, maybe there are better outputs forms for this data?

OTOH, a 3.5% inflation adjusted spend rate provides 100% success.

Personal preference of course, but I'd much rather try to stick to 3.5% on average, than to face years and years (of maybe the best years of my retired life) at something much less. It might even turn out to be a 'false alarm' - just a bad period with a good period to follow and make up for it. Sure, I'd adjust if I see some long term trend, but it's doubtful that I would need to.

edit - I gues FIREdeamer and I were thinking alike!

-ERD50
ERD50 is offline   Reply With Quote
Old 06-26-2010, 10:06 AM   #52
Thinks s/he gets paid by the post
 
Join Date: Jun 2010
Location: Palma de Mallorca
Posts: 1,419
Quote:
Originally Posted by Texas Proud View Post
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...
That depends on what you mean by "fixed". If gas is a substantial part of your expenditure, you can go quite some way towards compensating for it by having a higher weight of oil company shares, or energy mutual funds, or crude oil futures, in your portfolio. Hedging is not just for big corporations.
BigNick is offline   Reply With Quote
Old 06-26-2010, 10:42 AM   #53
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Originally Posted by ERD50 View Post
When I look at a FIRECALC run with that '95% spending rule', I see an awful lot of squiggly lines that dip down around what looks to be about 1/2 your original spend rate, and they appear to hang there a looooong time. Even when I start with 4.0% (not the 4.3% you mention). It's hard to follow any one line though, maybe there are better outputs forms for this data?

OTOH, a 3.5% inflation adjusted spend rate provides 100% success.

Personal preference of course, but I'd much rather try to stick to 3.5% on average, than to face years and years (of maybe the best years of my retired life) at something much less. It might even turn out to be a 'false alarm' - just a bad period with a good period to follow and make up for it. Sure, I'd adjust if I see some long term trend, but it's doubtful that I would need to.

edit - I gues FIREdeamer and I were thinking alike!

-ERD50
Did you run that as 4.3% with or without COLA? I think the Clyatt method is non-COLA'd.

DD
__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Old 06-26-2010, 11:43 AM   #54
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 26,819
Quote:
Originally Posted by DblDoc View Post
Did you run that as 4.3% with or without COLA? I think the Clyatt method is non-COLA'd.

DD
I don't know if the Clyatt method is non-COLA or not, but to to be honest I don't care. No way in heck am I going to plan for a 45 year retirement based on a non-cola 4.3%.

I remember Grampa telling me about nickel lunches with a beer!

-ERD50
ERD50 is offline   Reply With Quote
Old 06-26-2010, 11:50 AM   #55
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Location: Lawn chair in Texas
Posts: 14,183
Quote:
Originally Posted by REWahoo View Post
I refuse to insist I have an open mind.
My mind was so open it fell out...
__________________
Have Funds, Will Retire

...not doing anything of true substance...
HFWR is offline   Reply With Quote
Old 06-26-2010, 11:50 AM   #56
Moderator Emeritus
 
Join Date: May 2007
Posts: 12,894
Quote:
Originally Posted by DblDoc View Post
Did you run that as 4.3% with or without COLA? I think the Clyatt method is non-COLA'd.

DD
I ran the 4.3% with no COLA.
$1,000,000 portfolio and $43,000 annual income for the first year, WR is 4.3% of remaining portfolio thereafter with "95% rule", 30-year retirement. I used a 50/50 portfolio (50% total market and 50% 5-year treasuries). FIREcalc shows that even the worse cycle would still leave you about $500,000 (2010 $$$) to pass on to your heirs after 30 or even 50 years in retirement. That's great (for your heirs) but, under some scenarios, you would have had to cut your expenses to half the original spending rate (for years at a time) in order to make it happen.
FIREd is offline   Reply With Quote
Old 06-26-2010, 12:16 PM   #57
Thinks s/he gets paid by the post
walkinwood's Avatar
 
Join Date: Jul 2006
Location: Denver
Posts: 3,504
Quote:
Originally Posted by ERD50 View Post
When I look at a FIRECALC run with that '95% spending rule', I see an awful lot of squiggly lines that dip down around what looks to be about 1/2 your original spend rate, and they appear to hang there a looooong time. Even when I start with 4.0% (not the 4.3% you mention). It's hard to follow any one line though, maybe there are better outputs forms for this data?

-ERD50
That is a definite downside of the 4%/95% rule and I think Bob Clyatt admitted it in one of his posts. Bob has advocated a flexible semi-ER lifestyle where you go out and earn some $s if things are really bad. (otoh, when things are really bad, its hard to get a job!)

I'd like to add two points to the 4%/95% rule that have not yet been called out in this thread :
1. The 4% to 4.3% withdrawal includes all investment expenses too. ie. Management fees.

2. The strategy leaves the purchasing power of your initial portfolio intact after 40 years some 95% of the time.
walkinwood is offline   Reply With Quote
Old 06-26-2010, 12:31 PM   #58
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Quote:
Originally Posted by FIREdreamer View Post
When I plug in the 4.3%/95% scenario in FIREcalc, I find an uncomfortably large number of cycles where the annual income would still have to be progressively cut from $43,000 down to roughly $20,000 at one point or another during a 30-year period. Does it sound right? By the way, I get somewhat similar results using my proposed 3%/90% scenario.

I don't know whether I am allowed to screen capture the FIREcalc results and post them here...
I never quite understood what's going on in FC under the hood in the Clyatt scenarios and haven't found it that useful.

But whatever results you get remember that the model seems to ignore value averaging during up years, which alone might mitigate what appears to be a lot of volatility otherwise. You can be sure that if we hit a great year here and there, I will either take a lower percent that year, or skim some off for future smoothing.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 06-26-2010, 12:33 PM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
Quote:
Originally Posted by walkinwood View Post
That is a definite downside of the 4%/95% rule and I think Bob Clyatt admitted it in one of his posts. Bob has advocated a flexible semi-ER lifestyle where you go out and earn some $s if things are really bad. (otoh, when things are really bad, its hard to get a job!)

I'd like to add two points to the 4%/95% rule that have not yet been called out in this thread :
1. The 4% to 4.3% withdrawal includes all investment expenses too. ie. Management fees.

2. The strategy leaves the purchasing power of your initial portfolio intact after 40 years some 95% of the time.
How can this be true if some years you are down to spending half of what you started at? I think it must be hard to accept that there can be no magic. Either your portfolio earns your living, you earn your living (this is called non-retirement), or your liiving standard goes down, or you eventually go broke. Economics is harsh!

We have a tendency to grab onto whatever guru comes out with a new magic formula. It interest me that the group almost always immediately reject magic investing formulas, but hooks right onto magic withdrawal formulas. It's like sports gambling. Money management is surely important, but not near so important as figuring out a way to predict winners.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 06-26-2010, 01:13 PM   #60
Moderator Emeritus
 
Join Date: May 2007
Posts: 12,894
Quote:
Originally Posted by Rich_in_Tampa View Post
I never quite understood what's going on in FC under the hood in the Clyatt scenarios and haven't found it that useful.

But whatever results you get remember that the model seems to ignore value averaging during up years, which alone might mitigate what appears to be a lot of volatility otherwise. You can be sure that if we hit a great year here and there, I will either take a lower percent that year, or skim some off for future smoothing.
That's true. In good years, I plan on skimming some off for future smoothing (FIRECalc probably assumes we spend your entire withdrawal each year). If we get a few good years after retiring, then 4.3% of portfolio value will give us plenty to skim off. That could help ensure that we don't have to cut back too drastically in later years. However, if we hit a rough patch right after retiring and we have to start cutting expenses right away, then I don't see how we could avoid some of the large income cuts predicted by FIREcalc (unless we have ample cash reserves outside of our retirement portfolio to help smooth our income during such early storm).

Perhaps, FIREcalc should have an upper and lower expense cap for the Clyatt scenario: In bad years, take the greater of 4.3% of portfolio or 95% of the previous year's spending and in good years, take the lesser of 4.3% of portfolio or your original spending rate (adjusted for inflation).
FIREd is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Beware. Socialism is Everywhere tomz Other topics 73 10-09-2007 03:25 PM
Let The Buyer Beware? tangomonster Other topics 18 09-10-2007 09:59 AM
Beware~ CITI scam mickeyd Other topics 21 12-01-2006 09:26 AM
Beware of RCN OldAgePensioner Other topics 18 06-16-2006 02:49 PM
Buyer Beware fletzie FIRE and Money 0 04-20-2005 10:33 AM

» Quick Links

 
All times are GMT -6. The time now is 04:22 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.