Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Blanchett Paper on 'Impact of Guaranteed Income on SWR'
Old 05-22-2017, 03:17 PM   #1
Thinks s/he gets paid by the post
Huston55's Avatar
 
Join Date: Jul 2011
Location: The Bay Area
Posts: 1,629
Blanchett Paper on 'Impact of Guaranteed Income on SWR'

This subject is frequently discussed here, although usually in a tangential way regarding safe withdrawal rates & methods, what percentage of one's FIRE income is "guaranteed", whether to use 'fixed' or 'variable' withdrawals, and the like.

However, this paper analyzes it directly and produces some outputs & guidance that are useful for a range of scenarios that fit most situations. It also analyzes & compares 'past' results (back testing) with 'forward looking' results (actual forecasting), which I find especially useful. It's well worth a read and, for me, prompted some thought about our current FIRE income/SWR approach. The summary and link to the paper are below.

Well done Mr. Blanchett!

Conclusions
To better serve retirees and those saving for retirement, financial planners need to move beyond heuristic-based initial safe withdrawal rates. Results from this analysis suggest that optimal initial safe withdrawal rates varied significantly when guaranteed income was considered, from approximately 6 percent when 95 percent of wealth was in guaranteed income, versus approximately 2 percent when only 5 percent of wealth was in guaranteed income.


https://www.onefpa.org/journal/Pages...wal-Rates.aspx
__________________

__________________
You may be whatever you resolve to be.
Huston55 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 05-22-2017, 05:28 PM   #2
Dryer sheet wannabe
 
Join Date: Oct 2015
Posts: 24
Well done indeed.

Thanks for posting this!
__________________

__________________
Don't take everything I post here at face value as it mostly supports my sinister agenda, briefly outlined in my forum profile.
joylesshusband is offline   Reply With Quote
Old 05-22-2017, 08:37 PM   #3
Thinks s/he gets paid by the post
2017ish's Avatar
 
Join Date: Apr 2012
Posts: 1,720
As with any of these analyses, there are nits to pick. The biggest one in this article, at least for me, was the limitation of spending cuts to 5% year over year. If one's discretionary spending exceeds nondiscretionary spending, that would be short sighted.

Nonetheless, a very good article that has been added to my "reread periodically" bookmark folder.

Thanks!
__________________
OMY * 3 2ish
2017ish is offline   Reply With Quote
Old 05-23-2017, 04:40 AM   #4
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 1,421
Looks like a good study of the subject.
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 05-23-2017, 05:03 PM   #5
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 9,792
Table 5 is confusing. If you have high guaranteed income and your spending is entirely discretionary, your probability of success should be approaching 100%, not zero.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 05-23-2017, 05:11 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 3,371
...Results from this analysis suggest that optimal initial safe withdrawal rates varied significantly when guaranteed income was considered,...

Can one assume that this is what FireCalc (and others) takes into consideration when asking if/when SS will come into effect?
__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko is offline   Reply With Quote
Old 05-23-2017, 05:18 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 15,035
Well, I don't think I have the time to wade through this as I got bogged down easily, and Monte Carlo analysis is used as part of the modeling, and personally I'm not crazy about Monte Carlo for portfolio survival as it ignores history.

And I'm not sure the premise:
Quote:
The potential impact of guaranteed income on safe withdrawal rates is important given its potential impact on consumption when the portfolio fails. For example, the safe initial withdrawal rate (or amount) for a household with $100,000 in annual guaranteed income and a $1 million portfolio should not be the same as a household with $10,000 in annual guaranteed income and a $1 million portfolio, because the impact of portfolio failure on consumption is significantly different for the two households; however, this fact is typically ignored when determining safe initial withdrawal rates based on the probability of success
as it always seemed clear to me that guaranteed income simply reduced the needed income from a portfolio. So in the above cases, the portfolio can provide the same annual income to both households, and household A simply has $90K more in total annual income than household B. So what differences would there be? Certainly household A can consume much more than household B. Might they choose higher risks with their investments? I guess it depends on how high their non-discretionary spending is. Ultimately you have to live within your means.

And where does 2% safe withdrawal rate if only 5% income guaranteed come from? That doesn't pass the smell test to me.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Old 05-24-2017, 04:06 AM   #8
Recycles dryer sheets
 
Join Date: Aug 2009
Posts: 458
Quote:
Originally Posted by Gumby View Post
Table 5 is confusing. If you have high guaranteed income and your spending is entirely discretionary, your probability of success should be approaching 100%, not zero.
I THINK what he's trying to say is that the probability of success that *you should aim at * when running MC ( or Firecalc) is close to 0. I.e., you have so much guaranteed income that you care much less about risk. (E.g., run firecalc with a success rate of 75% or down to 0 and not 95% as we regularly do here)

The drift that I get is that he's suggesting that the probability of success that we strive for when running Monte Carlos can be a lot less for someone that doesn't need the money i.e., that has a lot of guaranteed income, and that therefore they can use a higher SWR.

Seems intuitive but he's putting real numbers on it.
__________________
bmcgonig is offline   Reply With Quote
Old 05-24-2017, 04:31 AM   #9
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 9,792
Quote:
Originally Posted by bmcgonig View Post
I THINK what he's trying to say is that the probability of success that *you should aim at * when running MC ( or Firecalc) is close to 0. I.e., you have so much guaranteed income that you care much less about risk. (E.g., run firecalc with a success rate of 75% or down to 0 and not 95% as we regularly do here)

The drift that I get is that he's suggesting that the probability of success that we strive for when running Monte Carlos can be a lot less for someone that doesn't need the money i.e., that has a lot of guaranteed income, and that therefore they can use a higher SWR.

Seems intuitive but he's putting real numbers on it.
Your interpretation makes sense, but his writing is not entirely clear. To me, this seems like observing that the sun rises in the morning. The precise time it does so is of interest to only a few people.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 05-24-2017, 06:12 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 15,035
Someone doesn't need the money so the FA should point out that they can take more risk with their investments and/or draw more heavily if they'd prefer to spend more sooner?

He did say something about targeting more of a 75% success rate than a 95% success rate might be appropriate, I assume for people who can afford it, but since he is using Monte Carlo analysis which tends to lower success rates I don't know how that corresponds to FIRECALC succes rates.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Old 05-24-2017, 07:36 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Oct 2012
Location: Colorado Mountains
Posts: 1,932
Quote:
Originally Posted by audreyh1 View Post
Well, I don't think I have the time to wade through this as I got bogged down easily, and Monte Carlo analysis is used as part of the modeling, and personally I'm not crazy about Monte Carlo for portfolio survival as it ignores history...
Quote:
Originally Posted by audreyh1 View Post
Someone doesn't need the money so the FA should point out that they can take more risk with their investments and/or draw more heavily if they'd prefer to spend more sooner?

He did say something about targeting more of a 75% success rate than a 95% success rate might be appropriate, I assume for people who can afford it, but since he is using Monte Carlo analysis which tends to lower success rates I don't know how that corresponds to FIRECALC succes rates.
Monte Carlo simulations should not ignore history. They should select values from a range that represents history. The problem, IMHO, is that often the calculators are not clear on how the numbers are selected. With FIRECALC you know exactly how the numbers are selected, but the chance of history repeating to that extent is very slim also. I have used many calculators and I have not seen a major difference in results that would change my retirement perspective. Then again, I will be one of those who has adequate guaranteed income to support my lifestyle when I turn 70.
__________________
Hermit is offline   Reply With Quote
Old 05-24-2017, 05:52 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,731
Quote:
Originally Posted by bmcgonig View Post
I THINK what he's trying to say is that the probability of success that *you should aim at * when running MC ( or Firecalc) is close to 0. I.e., you have so much guaranteed income that you care much less about risk. (E.g., run firecalc with a success rate of 75% or down to 0 and not 95% as we regularly do here)

The drift that I get is that he's suggesting that the probability of success that we strive for when running Monte Carlos can be a lot less for someone that doesn't need the money i.e., that has a lot of guaranteed income, and that therefore they can use a higher SWR.

Seems intuitive but he's putting real numbers on it.
Yes, that's what I get.

Years ago, I happened to be involved in a project at w*rk on this topic, at the same time I was trying to plan my own retirement. It took some puzzling to come to that basic conclusion.

In the words we used - people have "basic" income needs, they need to be nearly 100% certain of covering that amount. In addition, most have "target" or "aspirational" income wants. Unless you're very risk averse, you can be more aggressive with this additional amount.
__________________
Independent is offline   Reply With Quote
Updated Commentary
Old 06-17-2017, 08:05 AM   #13
Thinks s/he gets paid by the post
Huston55's Avatar
 
Join Date: Jul 2011
Location: The Bay Area
Posts: 1,629
Updated Commentary

Here's some updated commentary on the original article from Wade Pfau. I see no new revelations but, it's interesting to see another's comments.

https://retirementresearcher.com/imp...thdrawal-rate/
__________________

__________________
You may be whatever you resolve to be.
Huston55 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
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
On Paper or On Screen (Paper or Plastic) RonBoyd Other topics 0 07-15-2010 10:27 AM
What impact would no health care costs make on SWR? accountingsucks FIRE and Money 35 02-23-2010 06:34 PM
Best toilet paper and paper towels summer2007 FIRE and Money 59 12-04-2008 07:02 PM
Getting A Paper Paper? Danny Other topics 29 06-09-2006 05:03 PM

 

 
All times are GMT -6. The time now is 11:32 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.