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Different approach to SWR
Old 02-27-2014, 10:44 PM   #1
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Different approach to SWR

https://www.jpmorganfunds.com/blobco...RI-DYNAMIC.pdf

Above link to a JP Morgan " white paper" advocating a " dynamic" approach to withdrawal rates.

Not sure I understand it all. Would be interested in others opinions.

Makes some interesting points, among them:
Money has more "utility" when you are younger than when you are older.
Focusing exclusively on possibility of failure causes one to overlook how you may best utilize your money over your remaining one life to live.
The conventional Bengen 4-4.5% withdrawal rate, set when you retire and to be followed for the rest of your life, does not correspond to how people actually behave.
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Old 02-27-2014, 11:24 PM   #2
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It's a sales piece loaded with jargon.
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Old 02-27-2014, 11:26 PM   #3
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This has been brought up by other authors under the guise of variable withdrawal rates. Some like it, others don't. Here's my thoughts (in red) below:

Quote:
Originally Posted by gcgang View Post
https://www.jpmorganfunds.com/blobco...RI-DYNAMIC.pdf

Above link to a JP Morgan " white paper" advocating a " dynamic" approach to withdrawal rates.

Not sure I understand it all. Would be interested in others opinions.

Makes some interesting points, among them:
Money has more "utility" when you are younger than when you are older.

Not sure I agree that $ has more utility at any particular age.

Focusing exclusively on possibility of failure causes one to overlook how you may best utilize your money over your remaining one life to live.

Not eating cat food might be one...

The conventional Bengen 4-4.5% withdrawal rate, set when you retire and to be followed for the rest of your life, does not correspond to how people actually behave.

True, but higher WR's = higher risk, and there's already enough risk in a 30+ year retirement for me without WR fiddling
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Old 02-28-2014, 01:29 AM   #4
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Actually I find it to be quite an interesting piece. It supports the concept that "excessive wealth retention" will likely be a problem for many on this board - that calibrating withdrawal to a 95% or 100% FIRECALC success rate will, in almost all cases, leave a considerable amount of unspent funds at the terminal point.
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Old 02-28-2014, 03:25 AM   #5
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Originally Posted by wingfooted View Post
It supports the concept that "excessive wealth retention" will likely be a problem for many on this board - that calibrating withdrawal to a 95% or 100% FIRECALC success rate will, in almost all cases, leave a considerable amount of unspent funds at the terminal point.
We may not all view it as a problem though. Those with kids or other potential benefactors will most likely be happy to leave behind a considerable amount (that may well be a goal, of course). I don't have children, and don't feel a need to leave anything behind for a beneficiary, but have no problem leaving a balance upon my death. I view my portfolio as a source of a steady income stream, rather than as a lump of cash that needs to all be spent. Coming as close as possible to guaranteeing a steady income stream for me until my death is the primary goal, and leaving behind a balance when I'm gone may well be a side-effect of that primary intent.
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Old 02-28-2014, 06:23 AM   #6
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Quote:
Originally Posted by wingfooted View Post
It supports the concept that "excessive wealth retention" will likely be a problem for many on this board - that calibrating withdrawal to a 95% or 100% FIRECALC success rate will, in almost all cases, leave a considerable amount of unspent funds at the terminal point.
Well, why is "excessive wealth retention" a "problem"? I get the sense from posts here that most would rather leave money on the table than risk eating cat food for the last few or more years of their lives. Many want to leave something for their kids or others.

While "skidding into the casket clutching my last dollar" sounds great in theory the timing on that is tough to pull off.
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Old 02-28-2014, 08:05 AM   #7
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Well, why is "excessive wealth retention" a "problem"? I get the sense from posts here that most would rather leave money on the table than risk eating cat food for the last few or more years of their lives.
Yes; I would rather die with money, than live without it ...
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Old 02-28-2014, 08:08 AM   #8
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Too bad the statement below from the JPM paper isn't true in the first place.
Quote:
The “4% rule” dictates that individuals withdraw 4% of their initial portfolio value in the first year of retirement and annually increase that amount by the inflation rate of the preceding year to maintain purchasing power (alternatively, inflation increases may be based on historical rates or long- term averages). This approach focuses on withdrawals only and does not recommend a particular asset allocation. Dollar amounts are determined strictly by portfolio value, without any additional consideration to individual retiree characteristics around wealth, age or lifetime income.
Withdrawals are supposed to be dynamic! What the 4% SWR authors said all along...
Quote:
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:
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.
Safe withdrawal rates - Bogleheads
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Old 02-28-2014, 09:05 AM   #9
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It supports the concept that "excessive wealth retention" will likely be a problem for many on this board
I hope I will be in this category, but I do not consider this "excess wealth" that I have failed to utilize. Even in my lifetime, there have been several considerable shocks in the economic system, and if I consider a slightly larger view, in my parents and grandparents lifetime there have been even more. I strongly doubt that assumptions that I make about inflation, stability, market returns, medical care, and other aspects of my economic life will all be valid for the next 50 years. I doubt that they even will always stay within the historic envelope that FIRECalc uses. I view the excess retention as a safety net. I do not want to return to the workforce (at considerably reduced pay also) after I have retired or when I am very old. I do not want to miss out on future lifestyle opportunity or cutting edge medical care because I cannot pay for it. I'll never be a glittering 1% or IPO millionaire, so my plodding accumulation and (hopefully) excess wealth will be all I have to fall back on. I'd like that safety cushion to have at least some hope of sustaining me in an unknown and unknowable future, which I confidently expect will include surprises.
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Old 02-28-2014, 09:31 AM   #10
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We hope to have enough in retirement to be able to give monitary gifts to our son when he is an adult. We would also be happy to leave a good-sized inheritance for our son, as well as something for our nieces and nephews.
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Old 02-28-2014, 09:36 AM   #11
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I tried to read through all 30+ pages of this but kept falling asleep (well, it was 3am...). It just strikes me as overly complicated, perhaps to confuse you into thinking you need their services because they must be so much smarter than all of us.

Is there some software they have developed to input your financial specifics and have it spit out a plan? Or is that what they are hoping to sell when you call them for more details?
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Old 02-28-2014, 09:47 AM   #12
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Well, why is "excessive wealth retention" a "problem"? I get the sense from posts here that most would rather leave money on the table than risk eating cat food for the last few or more years of their lives. Many want to leave something for their kids or others.

While "skidding into the casket clutching my last dollar" sounds great in theory the timing on that is tough to pull off.
No doubt but I'd like to be as close to skidding as one can while still minimizing risk of running out of fund. I know this is nearly an impossible goal. You almost have to plan to have some residual to cover the unknown, best one can.

Having said that, with no kids, I care not about leaving anything past "closing costs"
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Old 02-28-2014, 10:37 AM   #13
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I agree with the concepts in the paper and intend to apply them to my own situation. This is just an optimization problem subject to never going broke and always having enough to live on.

In summary -

1) Cover basic living income with SS, pensions, and or SPIA annuities

2) use a somewhat aggressive remaining nestegg variable depletion model that reacts to market conditions, age of retiree, etc.

3) expect that my income will vary widely over the years but with the basics always covered.

I see posts on this forum on a regular basis that go something like - " well the SWR model suggests I can take 4% annually from my nestegg - but to be safe I'll just take 2% - or 1%". Those posters are almost certain to go out with large unspent balances.
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Old 02-28-2014, 11:03 AM   #14
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For me, the 4% SWR (PotC Captain Barbossa impersonation here) 'is more like a guideline'...arrrr....

Based on the modeling I have done, my expenses and my income sources are not static from when I plan to retire - they change in phases - and in turn this effects what *my* SWR during each of these phases.

I use the 4% as a 'check' but it isn't a rule.
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Old 02-28-2014, 11:25 AM   #15
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Quote:
Originally Posted by gcgang View Post
Money has more "utility" when you are younger than when you are older.
Actually money has more utility when you are alive than when you are dead
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Old 02-28-2014, 11:35 AM   #16
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Here's our plan:
1) DW does quite well to insure that we will not have excessive wealth retention.

2) We've been subsidizing the leeches in our family for years. If anything's left when we go, good luck to them and 'have a party'.
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Old 02-28-2014, 11:42 AM   #17
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Here's our plan:
1) DW does quite well to insure that we will not have excessive wealth retention.
....ssppppffttt.....coffee all over keyboard!!

Thanks for the Friday guffaw!
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Old 03-07-2014, 04:47 AM   #18
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with the first 15 years of a retirement period determing the entire outcome almost every time frame it is easy to judge and pick up withdrawals down the road if things are good the first 1/2/
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Old 03-07-2014, 04:49 AM   #19
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Actually money has more utility when you are alive than when you are dead
it may have more utility when your alive but the ramifications of running out as far worse than dying with to much.
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Old 03-07-2014, 05:45 AM   #20
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I had a look at the OP's paper last night. There is a lot of jargon. I would prefer to stick to 3 or 3.5% planned SWR.
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