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Old 02-06-2013, 02:17 PM   #21
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It's funny how that 30 year survival seems to creep. When I was 58 and ER'd, I figured I'd need the money to last to 88 (58 + 30 = 88). No problem. None of our parents lived that long. Now... at 65, I'm still thinking, "hmmmm... 65 plus 30 equals 95. Too early to exceed the 4% (or more like 3%, heh, heh)."

When I'm 70, I can just see myself calculating "hmmm... 70 plus 30 equals 100." So, I can see why folks find it difficult to open the spending gates freely - even if the stats are with us. Most of us "plan" with the 4% rule, but some of us just go with our gut when the time comes. As someone once accurately "accused" me. "You plan with a micrometer and execute with a chain saw." Touche.

My "real" plan is to play it by ear and keep my spending flexible by - if need be - exercising any number of back-ups.

Of course, YMMV.
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Old 02-06-2013, 02:22 PM   #22
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The 4% "rule" has never been based upon the idea of living of interest and dividends and preserving principal. The 4% rule has always been based the idea of being willing to deplete principal.

I'm not saying you can't set it up the way you talk about it -- just that doing that way isn't what the researchers mean when they talk about a 4% rule.
I hope this isn't a stupid question, but when I look at the Trinity Study results, and various FIREcalc results, I see very high probabilities that a person using a SWR will end up with more than their starting principal after 30 years. Am I interpreting that correctly?

When I see things in the media about "making sure you don't run out of money in your 80's" I get confused. I thought the 4% (or lower) withdrawal rates are "designed" to keep the principal there and have it grow over time?

Hence the balancing act of eating well throughout retirement but also leaving money for the offspring.

I just don't get the "running out of money" issue.

Hope I haven't confused things further--thanks!!
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Old 02-06-2013, 02:29 PM   #23
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I hope this isn't a stupid question, but when I look at the Trinity Study results, and various FIREcalc results, I see very high probabilities that a person using a SWR will end up with more than their starting principal after 30 years. Am I interpreting that correctly?

When I see things in the media about "making sure you don't run out of money in your 80's" I get confused. I thought the 4% (or lower) withdrawal rates are "designed" to keep the principal there and have it grow over time?

Hence the balancing act of eating well throughout retirement but also leaving money for the offspring.

I just don't get the "running out of money" issue.

Hope I haven't confused things further--thanks!!
The classic 4% withdrawal is that you take 4% in Year 1 of your starting portfolio. So, let's say the portfolio is $1 million. You take out $40,000 leaving $960,000. That $960,000 is invested and maybe at the end of the year it is now $1 million, but it might be $1.1 million or maybe $800,000 depending on how your investments did.

Regardless of where it is at the end of the year - in year 2 you withdraw $40,000 adjusted by inflation. Let's say inflation was 3% then in year 2 you withdraw $41,2000 regardless of where your starting balance is.

And you continue on each year.

Most of the time when people do this you do indeed end up with a substantial portfolio at the end of 30 years.

However success for this method occurs if the portfolio does not go to zero before the end of the 30 years. So some of the successes will end up being with portfolios where all or part of the starting portfolio is consumed.

So - someone who ends 30 year with $1 in the portfolio (or $0 for that matter) has succeeded. But someone who hits 0 in year 29 failed.

Note that in the real world - most people aren't going to do it that way. If you retire and your portfolio has a 30% crop in one year most people will reduce spending the next year to at least some extent for example.

Some people do want to have a minimum amount of portfolio left at the end of their plan so they plan for that - for them it isn't successful unless the ending portfolio is at least $X.
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Old 02-06-2013, 02:33 PM   #24
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When it comes to safety, I push pretty hard. Really no reason to skimp on things like keeping the car safe and well maintained, or replacing a rug that she almost trips/slips over.

-ERD50
Yes; I agree it is part of an adult child's duty to try to keep these preventable accidents from happening.

It can be tricky. I went out to see my parents in an unusally snowly winter. There was no safe way to get from the house to the sidewalk leading to the street. Old wooden stairs did not shed snow, and parents could not keep them cleared and would not spend the money to have help. This affected both of them, and renters for flats above first floor. These were mostly residents and fellows at nearby hospitals; all my parents needed was for one of them to be rendered quadriplegic in preventable fall.

So I just had it handled, after getting an authorization from Dad's lawyer that the bill would be paid.

It was awful though, I had to leave early to go back west because my father was so angry. I just hope that I can escape this idiocy as I get up there. People who are trying to help do not deserve grief.

Older people need to understand that they are no longer fully in charge. Our laws and attitudes just make this impossible for the younger generation. Used to be an old farmer could die unmolested, but I don't know how that mght happen today.

Young people can make equally stupid decisions, or stupidly avoid making decisions. But society still mainly figures that is up to them, if they want to behave like idiots, they can do so. Even this is not without it's problems. How many times can a young man walk away from a good job because he wants to go wandering, with no real thought about what happens if he cannot take up where he left off when he wants to return? Eventually he may become just another taker, and the economy loses one more maker.

Ha
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Old 02-06-2013, 02:33 PM   #25
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I plan to use the whole SWR calculation as a moving target. When I look at my annual ss statement showing my earnings over the last 40 years I see wild swings in income over the years. However our standard of living didn't vary with the swings in income. Just a steady increase in net worth and a little bit better lifestyle. The big thing that these calculations ignore is that you need to adapt and adjust. Set too low and you miss out on a lot. Set too high and keep going you'll go broke. Stay flexible, use your head and you'll be fine.
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Old 02-06-2013, 02:59 PM   #26
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\Per Koolao: ***My "real" plan is to play it by ear and keep my spending flexible by - if need be - exercising any number of back-ups.***

Yup. I have a great spreadsheet (don't we all) that projects our portfolio to age 90 (as a target "zero" balance). But, it is completely flexible from year to year. We are almost 59 so this is a very long term projection. We have a good pension and SS. Our draw down plan anticipates that we will be more likely to travel, spend "wildly" (not likely) and so forth in the next 15 years (60-75) than in the subsequent 15 years (75-90). I fully anticipate slowing down as we age. We also have a good "long term care" policy in place. Over the years, when w*rking, we constantly made adjustments when wages changed. Or disappeared for a while. We have had "austerity" budgets before and could do it again. We try to not live in fear of the future, but enjoy today with an eye towards the future.

My base assumptions are COLA raises at 1.5% for Social Security,
COLA from pension at 2.5% (not sure WHY I set up the diff between SS and Pension.)
A desire to have an increased annual Cash Flow of 2.5% per year (since SS is less than that, the diff resultes in an ever increasing draw from portfolio).

I assume the portfolio will earn inflation + 3%

The numbers in the spreadsheet seem to work. NOW if only reality does as well.
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Old 02-06-2013, 03:02 PM   #27
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thank you, Katsmeow, for the explanation.

I guess I just get tired of hearing "run out of money" when in most cases you will have something left. I suppose it's just the media's way of using somewhat emotional terms to attract readers, feeding off their fears with yet another story about how boomers can't retire, etc. etc.

I wish there were more news stories about successful FIRE-ers. But then again, I like having the "secret" with the folks on this and other forums.
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Old 02-06-2013, 03:07 PM   #28
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I hope this isn't a stupid question, but when I look at the Trinity Study results, and various FIREcalc results, I see very high probabilities that a person using a SWR will end up with more than their starting principal after 30 years. Am I interpreting that correctly?

...

I just don't get the "running out of money" issue.

Hope I haven't confused things further--thanks!!
In addition to what Katsmeow posted, if you are more visual, just look at the graph from a default (4% WR, 30 year time-span) FIRECALC run.

There are too many lines to get anything more than a rough idea, but we know that 5% of the time-spans ran to zero or below (the failures), and maybe a third to a half ended up with less than they started (in buying power), so about a half to two-thirds end up with more than they started. Sometimes much more!

edit/add - that results page also shows the min/max/avg. In a case like this, 'average' really isn't very useful, other than to say "well, would you look at that!", but the portfolios on average ended up at 1.76X their starting points in buying power, and would be a higher $ figure due to inflation. So, "well, would you look at that!".

It simply due to the fact that the economic cycles varied for each time period that was run, so the results vary.

-ERD50
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Old 02-06-2013, 03:30 PM   #29
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Me? Since my portfolio is up by .05% -- just in the past month, I have concluded that I am an investing genius and should be a Billionaire very soon. Therefore, I am not going to be all that concerned about SWR... based on my current burn-rate.

Of course, some sparkly thing might catch my eye in the next 40 years so I am not guaranteeing anything.
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Old 02-06-2013, 04:24 PM   #30
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I don't think enough focus is placed on the inflation variable when these SWR are discussed and it is an enormous driver of projected needs. To me, the aggregate number is useless as what's important is what each individual experiences. A previous thread had numerous people sharing that their personal inflation rate was significantly lower for many years than the "standard" number used of 3 or 4%. OTOH, if somebody is actually experiencing a higher rate, they better be prepared for that as well. Using the aggregate number out of convenience simply generates information that is wrong and sadly the result of that is people may hold back from living they life they want.
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Old 02-06-2013, 04:30 PM   #31
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Yes, thanks. Not much detail there. The lack of COLA on most of these makes the calculations a bit trickier.



Very true. My Mom is set well financially, but really has little interest in anything fancy. That's fine, she's not depriving herself, she just doesn't feel the need.

I push in little ways when I think she really would benefit. When I helped her shop for a TV, I nudged her to the next largest size as I thought she would appreciate it over the long run. When it comes to safety, I push pretty hard. Really no reason to skimp on things like keeping the car safe and well maintained, or replacing a rug that she almost trips/slips over.

-ERD50

I think that is true for most older folks. Heck even at 53, I am pretty sure that my Tesla, will be the only expensive toy I buy this decade.

My mom is also doing well financially. She is much happier, and safer since moving into a retirement home 18 months ago. I've been so impressed with her facility that I will probably move into one sometime in my 70s.

The one thing that I know I will be spending money on as I grow older will be services. At most assisted living centers it costs at least $300/month for medicine management. Putting the daily pills in a container and making sure the senior takes it. In my mom's case between her macular degeneration, and her failing memory this is a necessity. We found a "retired" nurse this is the one of the youngest residence, and we pay her $500 /month to do this, plus accompany her to doctor visits where her training has proved invaluable and generally check up on mom. The next thing is to hire somebody to help her shower a couple of times a week, she just isn't very stable on her feet.

Even for those planning staying in their home, will need help with gardening, painting, and anything involving a ladder as they age.

As the population ages demand for these service is going to increase which is why I am still not comfortable having my withdrawal rate exceed my income from dividends, a bit of interest, and now some rents.
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Old 02-06-2013, 04:52 PM   #32
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These are the withdrawal rates I can remember from the last time I had a look at my spreadsheet a few weeks ago. Using deferred annuities before the age of 50 and using SPIAs after 70 or 75 years old makes a big difference in my case.

As I continue to work part time or locum tenens, my WR may be closer to 2% than 3.5%.

I guess I will have to update my signature on an annual basis.

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But I'm a little surprised it would drop the WR to 2%, and is that many years out, or near in? Also, (looking at your sig), I wouldn't call a 3.5%% WR on on all fixed portfolio 'low' (2%, yes). So I'm a little confused by this. Maybe a generic example with round numbers would be illustrative, if that isn't too much work?

TIA- ERD50
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Old 02-06-2013, 05:04 PM   #33
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Can't find a reference to explain right now, but I've contemplated SWR a bit differently. One could start yr 1 with 4% WD, then perhaps every 6mo take out 2% of the portfolio. Basically you would never set your "income" at an inflation-adjusted level (e.g. 4% of initial portfolio), but allow it to float along with portfolio's value. This could allow you to enjoy fruits of "good years" while you still can (i.e. avoid waking up at 95 with a HUGE unspent portfolio). HOWEVER you would need to trim your spending during "bad years" when portfolio was down. Some would not see this as ideal RE scenario, but as was said most all of us have altered spending habits during w#rking years as our employment & expense situations changed.
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Old 02-06-2013, 05:10 PM   #34
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Since the money may have to last for 50+ years and we have no SS etc to fall back on, I am uncomfortable with any plan that calls for a reduction of principal. Current plan is to live off a little less than the mostly dividends and rents we will collect on our investments.

I would be even more uncomfortable with any plan that assumed we would spend down to anywhere close to our last dollar over a given number of years. I would lose so much sleep worrying that I might live longer and not have any money to support ourselves.
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Old 02-06-2013, 05:14 PM   #35
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I have been reading Wade's work and his blog for the last year or so and think that he is really a smart guy who communicates very well. However, his idea about ditching bonds for a fixed annuity would not work at all for someone like me and DW who have 3 pensions and two SS income streams each month.

It would be too much guaranteed income. I prefer to manage my 60/40 asset allocation of index funds on my own and retain the flexibility.
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Old 02-06-2013, 05:22 PM   #36
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Can't find a reference to explain right now, but I've contemplated SWR a bit differently. One could start yr 1 with 4% WD, then perhaps every 6mo take out 2% of the portfolio. Basically you would never set your "income" at an inflation-adjusted level (e.g. 4% of initial portfolio), but allow it to float along with portfolio's value. This could allow you to enjoy fruits of "good years" while you still can (i.e. avoid waking up at 95 with a HUGE unspent portfolio). HOWEVER you would need to trim your spending during "bad years" when portfolio was down. Some would not see this as ideal RE scenario, but as was said most all of us have altered spending habits during w#rking years as our employment & expense situations changed.
This is what we do, although being young retirees we use 3.33% as our withdrawal percent. After a good year, we get a raise. After a bad one, we get a cut. But the after-tax income doesn't vary as much as one might think, because taxes tend to be higher in good years. Also, we don't spend everything we withdraw each year, therefore we build a cushion to help weather the bad years.
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Old 02-06-2013, 05:56 PM   #37
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I have always assumed that the 4% SWR was based on the idea that your portfolio is likely to grow by the approximately same rate as inflation...so if you take out about the amount of inflation, the portfolio replaces it. Given that this would work in perpetuity the arbitrary notion that it only works for 30 years is based on the idea that there are few studies that really back test it for longer times...but in principle it should hold forever. Sequence of returns -in the beginning especially- is the main threat to these calculations working out because any big drops in value reduce the principle too much in the beginning to ever allow the natural,inflation effects to make up enough. I think in the event of a series of bad years, one would be wise to start over with a new 4% value.
I also like the adjusted SWR rules that Guyton and Klinger are known for...they involve adjustment down when returns are negative, capping the inflation increases at 6%, increasing withdrawals after very good years. This predicts success with much higher initial SWR.
http://cornerstonewealthadvisors.com...iteArticle.pdf
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Old 02-06-2013, 06:03 PM   #38
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Since the money may have to last for 50+ years and we have no SS etc to fall back on, I am uncomfortable with any plan that calls for a reduction of principal.
Each situation is unique. DW and I, on the other hand, have pension income (combined w/ SS Disabiity) that is already greater than my net p*ychecks were (I was deferring $40k plus for the last 5 years of w*rk)

So **for us** the transition was actlally painless... more cash, less w*rk. Plus the $600k portfolio.
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Old 02-06-2013, 06:33 PM   #39
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This is what we do, although being young retirees we use 3.33% as our withdrawal percent. After a good year, we get a raise. After a bad one, we get a cut. But the after-tax income doesn't vary as much as one might think, because taxes tend to be higher in good years. Also, we don't spend everything we withdraw each year, therefore we build a cushion to help weather the bad years.
+1
We planned to use 4%. Reality has been below 3.5% except for 2011 when we had a lot of selling/moving/rental costs.
In our case, taxes have been quite constant since we are doing IRA->ROTH transfers till the top of the 15% bracket.
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Old 02-06-2013, 06:50 PM   #40
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+1
We planned to use 4%. Reality has been below 3.5% except for 2011 when we had a lot of selling/moving/rental costs.
In our case, taxes have been quite constant since we are doing IRA->ROTH transfers till the top of the 15% bracket.
Most of my portfolio is taxable which is why I get the high variation in taxes year after year.
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