Do you recalculate SWR each year?

Sorry if this has been dicsussed before - I'm new, and looking forward to reading through all the material here, but that will take a while.

Anyway, if you have part or all of your investments in equities, do you recalculate & adjust your withdrawal rate each year based on latest balance?

Thanks...

[cute fuzzy bunny]

That depends on who you ask.

Some think you take the same amount, inflation adjusted.

Some think you take a subset of the basic amount, then a variable amount depending on how well the portfolio did that year.

Some think you can use magical formulas to predict the future, get upset when people censor them and call their approach bullshit, then when given their own "place" to discuss the matter censor people and call their arguments bullshit.

Some people dont give a hoot about SWR and while noting that ~4% has been safe historically, take what they need to live a happy life, and make sure their portfolio is structured to take that, adjust for inflation, and either continue to appreciate or at least not depreciate enough to deplete the portfolio before they die. Presuming they can tell when that might be.

[Nords]

cc,

As you can tell from TH's last couple paragraphs, this has become somewhat controversial and subject to flaming exchanges of high-caliber ordnance. Of course I've been above that, er, never mind the sarcasm.

The vast majority of retirees probably use one of TH's first two choices, but there are other options.

Some take out no more than 4% of the previous year's portfolio. If that's not enough to cover projected budget expenses then they downsize their lifestyle and hope that next year they can get more money on a 4% withdrawal. You can dig into the archives to see where "~4% has been historically safe" comes from, and then you can decide how much you personally feel is safe for your portfolio & lifestyle. If it's a number other than 4% then the "magical formula" issue rears its ugly head again.

Bud Hebeler (http://www.analyzenow.com, J.K. Lasser's "Your Winning Retirement Plan") re-evaluates the next year's withdrawals based on the previous year's budget expenses & portfolio performance. He's extremely conservative because he knows a lot of impoverished widows who have outlived their spouse's "I'll take care of us" portfolios.

Other retirees keep a couple years' (or as many as seven years') expenses in cash (or in a CD ladder) and replenish the stash when the portfolio is up. If it's not up then they keep drawing down the stash until the portfolio "catches up" and can replenish the stash. You have to decide how high is "up".

And everything after that is pretty much a reciprocated diatribe debating whether we can predict the future from the past.

[unclemick]

Then there retro old pharts like me who plan on taking out what my portfolio gives me in dividends and interest, letting the principle ride. In our case, the no. 2 pencil says that's doable. In today's market with our balanced portfolio that's in the 2-3% range - pretty chewy. Balanced index rebalances itself so I guess we'll taking out both stocks and bonds every year. Our inflation adjustment will be outside the market in adjusting expenses - hopefully the div.s/interest will catch up.

There are many ways to craft this, depending on each ER sit. Variable is o.k. for us. The 4% TH mentioned has historical roots with strong relationship to div.s. The current 2% in our Lifestrategy mod is chewy but acceptable - for us.

[unclemick]

Sorry - I didn't answer your question - since balanced index is always rebalancing to a preset asset ratio - we're always in effect selling the 'highest' priced asset first and taking the money out. ?I think I got it right? Anyone?

[malakito]

There's another option (related to a concept called Pay Out Period Reset, or POPR). It goes like this:

1. Figure out what your portfolio is worth.
2. Based on your age and asset allocation, determine your safe withdrawal amount (say 4% of your portfolio).
3. Figure out how much you took out last year and increase that amount by inflation.
4. Take whichever amount is larger.
5. Repeat each year until you die.

This method is what I plan to use.

malakito.

[hocus]

Some think you can use magical formulas to predict the future, get upset when people censor them and call their approach bullshit, then when given their own "place" to discuss the matter censor people and call their arguments bullshit.

Those interested in learning more about the approach being described here by TH might want to check out the SWR Research Group board at NoFeeBoards.com.

http://www.nofeeboards.com/boards/vi...2dbabcbd2d446c

[hocus]

After putting up my earlier post, I gave the question posed by cc a little more thought, and decided that I should craft a post addressing the question kicking off this thread in a more detailed and particular way. Here is a link to the post I put forward doing that.

http://www.nofeeboards.com/boards/viewtopic.php?t=2640

[cute fuzzy bunny]

Quote:

Some think you can use magical formulas to predict the future, get upset when people censor them and call their approach bullshit, then when given their own "place" to discuss the matter censor people and call their arguments bullshit. Those interested in learning more about the approach being described here by TH might want to check out the SWR Research Group board at NoFeeBoards.com. http://www.nofeeboards.com/boards/vi...2dbabcbd2d446c

Or dont.

[BigMoneyJim]

Quote:

Anyway, if you have part or all of your investments in equities, do you recalculate & adjust your withdrawal rate each year based on latest balance?

Being many years away from starting withdrawals I'm still a bit new to the concept. All I can offer is that if you're using a historical comparison calculator to understand which it is doing. (Correct me if I'm wrong: ) FIREcalc uses a fixed percent of the starting balance with up to 3 instances of withdrawal amounts changing based up on income needs (such as SS or pension kicking in), not port balance changing.

The other issue being brought up here is more complex than whether the withdrawal rate is fixed or variable, and the newer approach is not widely trusted so far.

[cute fuzzy bunny]

Jim-

Its not a matter of trust, its that the method is somewhat deficient and the means of communicating it are poor.

The "method" is to stay out of equities while they are over a certain value level, and to live on TIPS and long term CD's and caniballize your principle, hoping that equity prices come down and you dont outlive your portfolio. Note that the "method" would have avoided the recent bear market, but also the run up that preceded it.

Its defective market timing: conservative enough to avoid most major downsides, conservative enough to avoid most major upsides.

The communication method is also problematic. The posts are too long to read and make sense out of, and now any contrary thoughts are being censored out.

I'm not sorry about defending someones "right" to say their piece, but in this case I should probably apologize.

[hocus]

"The "method" is to stay out of equities while they are over a certain value level, and to live on TIPS and long term CD's and caniballize your principle, hoping that equity prices come down and you dont outlive your portfolio."

This description of the Data-Based SWR Tool is not quite right.

There is no requirement that investors making use of the tool stay out of equities at any particular times or invest in any alternate asset classes at those times "hoping" that stock valuation levels will come down.

The tool provides investors using it with information that they may use to guide their investment strategies. It tells you what withdrawal rates are safe for the various investment class so that you can determine which ones makes the most sense for someone in your particular circumstances.

Theoretically, an investor could look at what the tool says about the SWR for a high-stock portfolio at today's valuation levels and still go ahead and invest 100 percent in stocks. It is then possible that stocks could go up by 30 percent in the next 12 months and the investor could end up being pleased that he did this.

That doesn't mean that the investor doing this didn't make proper use of the tool. The tool tells him what the odds are for various long-term outcomes. In the circumstances described above, the tool did not fail the investor. The tool provided information as to how stocks will perform in the long term, the investor had a hunch that stocks would nevertheless do well in the short term, and the hunch ended up being right. There are all sorts of scenarios less dramatic than the one described above in which investors using the tool might make use of it to inform strategies that in a surface sense might not seem to be in concert with the tool's findings re what the historical data says.

The tool is not prescriptive. It does not tell people what to do with their money. It is descriptive. It tells people what the odds are of various long-term results in the event that the investment classes they invest in perform in the future as they have in the past. It's purpose is to inform your investment choices, not to command them.

[cute fuzzy bunny]

Very well then. In that case the tool has been incorrect in "informing" for 7 of the last 9 years when equities had positive returns while the tool told investors they were overpriced.


The tool also does NOT suggest a "safe" withdrawal rate for an investment class. Everything I have seen suggests eating principle with a predictable period over a 35-42 year range. I may live longer than that. Perhaps if you change the acronym or terminology to say "sort of safe, if you dont live longer than expected and medical advances dont add another 5 or 10 years to that...".

There is no such thing as a "safe" withdrawal rate except historically. There is no way to predict the short to medium term future of any investment vehicle with anything approaching actionable percentages. Cyclical market timing doesnt work and likely wont ever work. Should investment vehicles become predictable, they will no longer be profitable.

At best the theory you propose is simply one of yet another market timing and valuation measurement that can be added to the other two thousand of them, most of which are wrong most of the time.

And I swear, this is my last word on this. Its a cyclical argument based on whether something can be accurately predicted over a long time period, where the "right" answer cant be divined until after the period is expired.

[BigMoneyJim]

Quote:

Jim- Its not a matter of trust, its that the method is somewhat deficient and the means of communicating it are poor.

I was just trying to avoid the issue by brushing it aside since it doesn't really apply to cc's question since he asked about recalculating WR based on balance not allocation. But since we're back on the topic my current long term plan is to keep a fixed equity/bond mix in mutual funds throughout my accumulation and retirement and retire as soon as I can be happy with a fixed 3.5% to 4% (of balance at start of retirement) withdrawal rate. I have years until then, and I'm open to adjustments as I learn. At some point I'll need to calculate and plan for the effects of SS and my DB pension, too.

I'm better understanding the frustrations around the issue, though.

I may eventually more carefully check out what ***** and the others are discussing, but at a distance it just don't sound right. ( <--- Shhh, I'm avoiding direct argument... )

[hocus]

I may eventually more carefully check out what ***** and the others are discussing, but at a distance it just don't sound right.

That is a good balanced statement, BigMoneyJim.

You are right to be skeptical because what JWR1945 and I are saying goes very much against what a lot of people have said over the past 20 years about how to invest effectively.

But the only way to know for sure whether the historical data says what we say it says or not is to check things out for yourself. We welcome questions and comments re the new tool over at the other board.

[cute fuzzy bunny]

Quote:

You are right to be skeptical because what JWR1945 and I are saying goes very much against what a lot of people have said over the past 20 years about how to invest effectively.

Yep, like the stuff said about making money.

[unclemick]

Interesting - my review of JWR's data/findings confirms what the people I've read have been saying about effective investing for the last seventy five years. In my particular ER case JWR's P/E 10 stuff has convinced me not to go near TIP's with a ten foot pole. The size of my income streams including the SS cola says my better bet is upper left large value Morningstar box via my 'hobby div. stocks' or good old tryed and true - 1929? Wellington,1935? Dodge and Cox, etc.

Basically the JWR studies/data strings - put me in line with Walter L. Morgan, Ben Graham, Geraldine Weiss, Bernstein's 'value premium' et al. Pretty much the same stuff since Louis Bachelor's famous 1900 Phd treatise.

[unclemick]

Yahoo says 1929 and 1931 for Wellington and Dodge and Cox balanced. Anywise JWR's study convinced me - the price of safety is way, way too expensive for my blood.

Quote:

Yahoo says 1929 and 1931 for Wellington and Dodge and Cox balanced. Anywise JWR's study convinced me - the price of safety is way, way too expensive for my blood.

I have no idea what you are talking about here Unclemick. Would you be so kind to explain it? Thanks.

[cute fuzzy bunny]

I'll take a stab at it (STAB).

Vanguards wellington balanced fund started out around 1929, dont know about the dodge and cox balanced but I know its old, has equally good performance, and is also cheap.

Both funds, inflation adjusted and after taxes, have averaged well in excess of 4% annually since their inception. Their inception a long freakin time ago.

So in other words, instead of chewing on TIPS at 2.5% and eating a little of your portfolio every year, buy one of these funds, take your 4%, and stop worrying about it. And watch your portfolio grow instead of shrink.