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Old 10-16-2010, 11:46 PM   #41
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There is no magic in making a portfolio last forever.
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The 4%/95% methodology has been back tested and proved to keep the purchasing power of the portfolio intact after 40 years 90+% of the time...
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And how low did the WR go? And how much to kick it up to a 98-99% success rate?

-ERD50
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There was a thread earlier about just how low the 4%/95% SWR went. The worst case was pretty bad. However, it wasn't "dog food" bad. We have enough slack in our budget.

I don't worry about bumping the probability up from 90+ (I don't remember what Clyatt's exact number) to 98-99%. See the William Bernstein paper that Nords posted.
Others have chimed in with much the same, but I'll respond directly -

I say it isn't 'magic' because it is just a choice. One can take a fixed X.X% WR, or a somewhat higher initial (but variable) WR. Personally, I prefer to stick with a fixed/lower WR, rather than tell DW & myself, "the market was down this year, so we are cutting our budget by 5%, and then tell her the same thing for the next 2, 3 or X years". Or, to run into a short 2 year drop followed by big gains, and have to say "Hmmm, I guess we really didn't need to cut back at all the past two years - sorry." No right/wrong, no magic, just my choice and yours may be different for good reasons. The higher initial WR has it's upside also.

As far as the Bernstein paper, I just don't think it has any relevance to the success rates that FIRECALC presents. It is a different view of the issue, as kyoung1956 points out. While a reported 95% success rate in FIRECALC may not have much absolute accuracy going forward, I have zero doubt that someone with a 100% success WR will be better able to handle bad times than someone who chooses a 90% success WR. How could that not be true? It has nothing to do with the "accuracy" of 95%.

I'm a big fan of Bernstein, I just think this is a misapplication of what he says.

-ERD50
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Old 10-17-2010, 07:08 AM   #42
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. Personally, I prefer to stick with a fixed/lower WR, rather than tell DW & myself, "the market was down this year, so we are cutting our budget by 5%, and then tell her the same thing for the next 2, 3 or X years". Or, to run into a short 2 year drop followed by big gains, and have to say "Hmmm, I guess we really didn't need to cut back at all the past two years - sorry." No right/wrong, no magic, just my choice and yours may be different for good reasons. The higher initial WR has it's upside also.
-ERD50

Obviously "you pays your money and you makes your choice" No criticism of any kind of your lifestyle choice is suggested. However due to the uncertainty of life anyone may have to cut the budget for X this year due to the need to consume more of Y. Taxes also change the budget. So IMHO the concept of "stability" in consumption is a phantom.

Can I propose a slightly different approach?

By whatever means you split your consumption into required and variable . You use different investment strategies for the two components.

Required consumption you generate from the most secure inflation protected vehicle possible. Low risk, low return. Puts food on the table and a roof over your heads.

Variable consumption is fueled by high risk high return investments. This does expand and cut back with economic conditions and personal needs.

Required can obviously either be "bare bones" or close to your current lifestyle. Owning your house outright put it down as an investment to support required consumption. For many social security and pensions can fill out the remaining required consumption. Insurance can also play a part both health and long term care.

Beyond that there is absolutely no reason to worry about a stable long term SWR. SWR is not a concept critical to variable consumption. whether the variable is a medical emergency, a child in need of help or a trip to Tahiti its simply a different calculus.

In our personal case we found that it takes about 2/3 of our assets, considered as an income stream to fund our comfortable required lifestyle.
That is funded by secure "bedrock" investments. The rest is in broad based market matching stock funds, which we will liquidate as desired. .
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Old 10-18-2010, 10:08 AM   #43
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Obviously "you pays your money and you makes your choice"
...

Can I propose a slightly different approach?

By whatever means you split your consumption into required and variable . You use different investment strategies for the two components.
I think that's reasonable, and most people probably do this, with varying degrees of consciousness/formality. And some might do very little of it if most of their income was COLA pensions - but even they need to look at is because their personal COLA may outstrip official COLA.

For that reason, I'd question being able to fund the "required" category from secure inflation protected, low risk, low return vehicles. We may very well need something above inflation returns to fund our personal inflation rate. So now we face draw-down in bear markets.

And using a combination of your methodology and the 95/5% approach, I think it means that if your investments assigned to the "variable" category fell by 10% in one year, you would cut your variable spending by 10% (or maybe just 5% to do some smoothing). That seems more reasonable to me, with the inflation caveat (which throws a pretty major wrench into this). And I think this focuses my concerns with the 95/5% approach - if someone's "variable" component is a small % of their total expenses (a common tendency for for LBYM types), the 95/5% approach could have you sitting at home denying yourself of most/all 'fun' activities for many years - maybe irretrievable years.

I hate doing micro-budgets, so I've taken pretty much a "40,000 foot view" of this. If projections show my SWR rising a bit, I might decide to get a few more years out the cars, delay a remodel project, fix versus replace, or whatever. OTOH, market downturns can be the best time to buy these things. It's a balancing act. Long term, if I see trouble ahead it would mean downsizing and hopefully pulling net equity out my house.

-ERD50
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Old 10-18-2010, 03:47 PM   #44
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I use 95. It's not that out of the realm of possibility - my grandmothers died at 94 and 87, and my grandfather died at 86.

I do agree that using 90 or 95 doesn't make that much difference to me. There is a little history of Alzheimer's in my family, so I need LTC by then anyway.
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