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Old 02-09-2013, 11:27 AM   #81
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And I think it was discussed in that thread, but how do you define 'principal'? If a fixed income portfolio is not keeping up with inflation, it might just be an illusion that you are not tapping principal. It could be that you gave up some principal to inflation, just to be able to say you are living off divs/interest. It may be a distinction w/o a difference?

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This is a very good point. It illustrates why almost anything has to be appropached with some sophistication and a deep understanding.

These different ideas and approaches are put forward (sold) with sound bites, and people may have only the shallowest understanding of the assumptions and possibilities of the approach that they choose.

These same considerations can make it hard to profitably discuss any of these things on forums. Many people have an opinion, but based on very little other than what they have read or been told. Others may understand the nuances, but be more focused on winning debates or arguments than on openly and in good faith discussing alternatives, benefits, and vulnerabilities.

I favor a dividend centric approach, but I would not try to defend it on this board. Why try? It would take so many words to try to express my considerations, where I draw lines, how sure I am. (Not very, for the most part.) It does seem easier to me to fund recurring expenses with recurring income, but many others clearly feel the opposite.

I feel like I have my hands full trying to be sure that I make it.

Ha
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Old 02-09-2013, 11:38 AM   #82
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I believe that a majority of true LBYMers do not plan to spend their principal. I am one of them :-) however, I am prepared to spend part of the principal during retirement only if necessary.
Obgyn65 -- could you clarify your plan of not spending principal? Given your signature:

Quote:
Not ER'd yet, 47 years old, 100% cash, CDs, munis, sizeable nest egg, WR < 3.5%, pensions, annuities, no debt, and 48-year planning horizon.
How can you arrange a WR as large as 3.5% from cash, CDs, and munis without touching principal?
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Old 02-09-2013, 12:18 PM   #83
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Obgyn65 -- could you clarify your plan of not spending principal? Given your signature:



How can you arrange a WR as large as 3.5% from cash, CDs, and munis without touching principal?
Just start with a "boat load" of money !!!!
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Old 02-09-2013, 12:37 PM   #84
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Just start with a "boat load" of money !!!!
That would have to be a "boat load" of money earning at least 3.5%. Possible to do today if you are in muni bonds and CD's? I don't think so.
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Old 02-09-2013, 02:07 PM   #85
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My IRA (retirement) portfolio is in high-dividend stocks and high-yield bonds.
As a whole, the portfolio throws off an 8% annual income stream, which I intend to start withdrawing next year to fund living expenses and "fun spending." I would not have to draw down any principal to cover living expenses until and unless my portfolio income yield deteriorated below 3% per year due to dividend reductions and/or bond defaults.

So, is my current withdrawal rate 8% or is it 0%? I think the latter.

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Old 02-09-2013, 02:12 PM   #86
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I agree that definitions explanation of assumptions are required. Here's how I see principal and LBYM.

For principal [P] I'd use the starting value of the portfolio [V(0)] and multiply it by (1+r) each year, where r is the inflation rate, to account for inflation. I would not include my cash buffer in the value of the portfolio as I might have to spend that....I realize that it's a bit of a semantic decision and smacks of buckets, but it's how I think of my portfolio.

P(0) = V(0)
P(n+1) = P(n)*(1+r)
So basically, you are applying some arbitrary math and calling it "principal".

Nothing wrong with doing some sort of math to help you decide how much to take out -- but this formula has nothing to do with what principal actually is.

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[If] the value of the portfolio has gone down [] you should do all you can to minimize the income you take out. This is when you reduce expenses, spend down the cash buffer or get a part time job.
Unfortunately, these formulas don't tell you anything concrete. Rather, they are just handwaving generalities. Again, nothing wrong with that, it's just that it's rather impossible to convert handwaving into a set of hard-and-fast concrete rules. It's when you do this step that it becomes apparent that what you thought were rules aren't actionable after all.

You realize that you can't write down the set of machanical rules that effectuate the plan. So what it ultimately comes down to is that each year to use your gut feelings to decide how much income to draw.

Also, the formulas you came up with in a flat or bull market may not work at all in a bear market -- usually because you forgot to consider those scenarios when you came up with the formula. This is the problem with withdrawal strategies that take a constant X% of your portfolio value or gains annually. Strict adherence to the rules may mean that your income varied wildly from one year to the next. Your annual income draw may get reduced by 25% - 50%, or be increased by 25%-50% depending on if the market had a big bear/bull year.

I went through all this myself a few years ago when I retired. Looked at a lot of different proposals, and discovered that many of them seem clear and obvious -- until I tried to write them down as a set of concrete rules that could be put into an Excel spreadsheet. That's when I discovered the holes.

You want to have a roughly even amount of income from your portfolio, similar to a regular paycheck. And you also don't want to exhaust your portfolio before you die.

I eventually decided that the Guyton-Klinger rules made sense --- and can be written up in Excel.
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Old 02-09-2013, 02:17 PM   #87
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That would have to be a "boat load" of money earning at least 3.5%. Possible to do today if you are in muni bonds and CD's? I don't think so.
If you look at obygns signature, it states <3.5% WR, so I am sure what he meant was you can withdraw a much lower percentage and still cover expenses if you are working with a big enough stash, even if you have no equities.
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Old 02-09-2013, 02:20 PM   #88
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If someone says they are not touching their principal, I assume they are never selling any shares. Just living off dividends, and most likely capital gains distributions.

It was also interesting to hear people saying they weren't touching their equities during 2008. But they didn't mean they were reinvesting dividends. That seemed like a backdoor equity allocation reduction to me.

Hasn't obgyn65 been saying annuities as well as CD's? One way to reach 3.5% these days. And the ultimate way to spend down principal.
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Old 02-09-2013, 02:29 PM   #89
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If you look at obygns signature, it states <3.5% WR, so I am sure what he meant was you can withdraw a much lower percentage and still cover expenses if you are working with a big enough stash, even if you have no equities.
I think there are any number of ways to attempt to decipher his sig line and other statements he's made regarding his financial plans. I don't believe we're all on the same wavelength when it comes to what is being posted - he's repeatedly pointed out financial matters aren't his area of expertise.
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Old 02-09-2013, 02:30 PM   #90
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Hasn't obgyn65 been saying annuities as well as CD's? One way to reach 3.5% these days. And the ultimate way to spend down principal.
+1
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Old 02-09-2013, 02:36 PM   #91
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And I think it was discussed in that thread, but how do you define 'principal'? If a fixed income portfolio is not keeping up with inflation, it might just be an illusion that you are not tapping principal. It could be that you gave up some principal to inflation, just to be able to say you are living off divs/interest. It may be a distinction w/o a difference?

-ERD50
+1

I know people who have avoided risk by not buying stocks and invest in guaranteed insured CD's, don't spend principle and ended up getting clobbered by inflation.
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Old 02-09-2013, 02:48 PM   #92
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I can confirm that I would prefer not to spend my principal if possible, and will only do so if necessary.

At this stage 3.5% is my maximum WR, and this rate may go down as CD and muni rates go down. I am happy with a lower WR in the future.

I also make use of deferred annuities. My model includes SPIAs at a later stage in life. I also have SS plus three pensions from three different countries, including the UK state pension which is larger than SS in my case.



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Originally Posted by photoguy View Post

Obgyn65 -- could you clarify your plan of not spending principal? Given your signature:

How can you arrange a WR as large as 3.5% from cash, CDs, and munis without touching principal?
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Old 02-09-2013, 02:52 PM   #93
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I have never said that my money in the US is earning 3,5%. Please show me a post where I said so. Right now all my CDs and Munis earn about 2.85% on average.
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That would have to be a "boat load" of money earning at least 3.5%. Possible to do today if you are in muni bonds and CD's? I don't think so.
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Old 02-09-2013, 02:52 PM   #94
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Oby, you do understand that the payment your receive from an annuity is composed largely of the principal (the amount you paid the insurance company for the annuity)? So by using annuities you are spending your principal.
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Old 02-09-2013, 02:54 PM   #95
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Yes.
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If you look at obygns signature, it states <3.5% WR, so I am sure what he meant was you can withdraw a much lower percentage and still cover expenses if you are working with a big enough stash, even if you have no equities.
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Old 02-09-2013, 02:55 PM   #96
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I have never said that my money in the US is earning 3,5%. Please show me a post where I said so. Right now all my CDs and Munis earn about 2.85% on average.
You said you would draw <3.5% using cash, muni bonds and CD's. I said you couldn't get 3.5% from those investments. I didn't say you claimed to be earning that amount, only that you couldn't.
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Old 02-09-2013, 02:58 PM   #97
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Yes. Eventually I will buy a few SPIAs later in life. Already bought some deferred annuities, as documented in other threads.
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Hasn't obgyn65 been saying annuities as well as CD's? One way to reach 3.5% these days. And the ultimate way to spend down principal.
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Old 02-09-2013, 03:01 PM   #98
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Well I don't work in finance and I would not consider myself an expert in financial matters. This statement is correct. However, my spreadsheet shows a positive cash flow every year until age 95.
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I think there are any number of ways to attempt to decipher his sig line and other statements he's made regarding his financial plans. I don't believe we're all on the same wavelength when it comes to what is being posted - he's repeatedly pointed out financial matters aren't his area of expertise.
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Old 02-09-2013, 03:02 PM   #99
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However, my spreadsheet shows a positive cash flow every year until age 95.
Net of inflation?
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Old 02-09-2013, 03:03 PM   #100
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This why I may do some hours part time or locum tenens in the future. I just don't know at this stage in my life.
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+1

I know people who have avoided risk by not buying stocks and invest in guaranteed insured CD's, don't spend principle and ended up getting clobbered by inflation.
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