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Old 02-10-2013, 06:30 AM   #121
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that 1% advisor fee looks bad in the calculation but it may actually improve things if you are getting something for that money.
I agree. If you feel that you will not get a >1% greater return (if that's the fee) from a selected advisor, than you are better off than DIY. However, that is a tough call and not everyone can make it -- and, perhaps, not necessary if the "right" advisor is found. (Full disclosure: I do not pay an advisor.) But then again, the same can be said about the whole subject article.
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Old 02-10-2013, 06:33 AM   #122
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i i was looking at wades examples and watching the success rate fall as fees were added in. but the more i thought about the variable of one person selling or rebalancing at a greater profit then another was enough to make the expense fees not really accurate in its own way..

there was just no accounting for any better performance in the mix for that fee. of course i understand why as results will be all over the place so you cannot figure any alpha at all.

but in my mind it did kind of does take some of the importance of what fees mean in reality and lighten up the weight they carry.

i look at the entire big picture more heavily then the parameters making it up is what it all boils down to.

kind of like the sum of the parts can be greater then the parts individually.
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Old 02-10-2013, 07:24 AM   #123
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In talking about the direness of low-yielding bonds - they're using 10-year government bonds for crying out loud. Does everyone here have all of their bond portfolio in US treasuries or the equivalent index?

The bond index funds hold a lot of them right now, because that's the biggest chunk of the outstanding bond universe at the moment. But many diversified bond funds do not hold a large chunk of US treasuries. I notice quite a few folks in this forum use mostly corporate bond funds at the moment.

The bond portion and equity portion of our portfolio are both far more diverse than these studies. Plus we don't give ourselves an inflation adjusted raise every year. And then there's the lower fees. So I am not so concerned about the "this time it's different" aspect of this paper crying over low-yielding bonds. [Although actually reading the paper, they give the same result with 80% equities, so why are they naming low-yielding bonds as the primary culprit? It reads like spin. I expect that the real issue is the 1% fee assumption and the models with lower average future equity returns.]

When I read some of the tweaks of the assumptions and the models created for this new paper - well, it's annoying. One M* poster pointed out that they come out trumpeting a wildly different result than previous studies when a huge difference is adding a 1% management fee to the mix. They're comparing apples to oranges, yet making it appear that the previous studies are "wrong". Apples to apples would likely have given a 3.8% answer even with the other model tweaks. Lower, yes, but not nearly so drastic.

Another very annoying aspect about the 1% fee, is that if someone is using a pure bond index and pure stock index to make their mix (from which these models are built) - these are available with very low fees. So the 1% fee aspect seems disingenuous. Far better to warn the reader that if they want to achieve the "better case" survival rate, they better be holding index funds that only charge a 0.25% fee or whatever.
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Old 02-10-2013, 07:50 AM   #124
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there was just no accounting for any better performance in the mix for that fee. of course i understand why as results will be all over the place so you cannot figure any alpha at all.
In this respect, the study exactly replicates the real world.
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Old 02-10-2013, 08:04 AM   #125
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Plus we don't give ourselves an inflation adjusted raise every year.
Yes, I think the sustainable WR will be higher with annual re-figuring of the withdrawals. The "4% adjusted for inflation" is an easier model to present in a short paper, probably makes a more dramatic case for their claim, and preserves another topic as grist for another paper later. Another bullet on the performance report!

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Far better to warn the reader that if they want to achieve the "better case" survival rate, they better be holding index funds that only charge a 0.25% fee or whatever.
Costs matter, especially if we anticipate low returns (whatever the cause). I guess that doesn't make for a bombshell of a paper.

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Old 02-10-2013, 08:08 AM   #126
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Being a trust officer in a past life, I find it interesting that there is a debate on what is principal and what is not..

It is clearly defined in a trust... I did a search and found this from a 'dummies' website...

What Are a Trust's Principal and Income? - For Dummies

Principal, sometimes referred to as the corpus or body, of the trust, is the property that the trust owns. Although trust principal starts with the assets that originally fund the trust, it may increase or decrease in many situations, including the following:
  • The sale of trust property creates capital gains or losses.
  • The grantor makes additional contributions to the trust.
  • The trust receives a settlement or judgment as a party in a lawsuit.
  • You transfer into principal any accumulated income that’s not required to go to an income beneficiary.
Principal in a trust can shape-shift without ceasing to be principal. A common misconception is that when you sell an asset, the cash proceeds that you receive become available to pay the income beneficiary. But in a trust, the cash received from the sale of any asset still remains a principal asset, albeit in a different form.



Now, you might disagree with this, but this has been established by laws and courts....


Let's say that you get a lot of income and do not spend it in that year... under this definition, it does not become principal.... it is still in your income account... your income account balance might grow for many years before it starts to fall... or might never fall at all....
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Old 02-10-2013, 09:15 AM   #127
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In talking about the direness of low-yielding bonds - they're using 10-year government bonds for crying out loud. Does everyone here have all of their bond portfolio in US treasuries or the equivalent index?

The bond index funds hold a lot of them right now, because that's the biggest chunk of the outstanding bond universe at the moment. But many diversified bond funds do not hold a large chunk of US treasuries. I notice quite a few folks in this forum use mostly corporate bond funds at the moment.

The bond portion and equity portion of our portfolio are both far more diverse than these studies. Plus we don't give ourselves an inflation adjusted raise every year. And then there's the lower fees. So I am not so concerned about the "this time it's different" aspect of this paper crying over low-yielding bonds. [Although actually reading the paper, they give the same result with 80% equities, so why are they naming low-yielding bonds as the primary culprit? It reads like spin. I expect that the real issue is the 1% fee assumption and the models with lower average future equity returns.]

When I read some of the tweaks of the assumptions and the models created for this new paper - well, it's annoying. One M* poster pointed out that they come out trumpeting a wildly different result than previous studies when a huge difference is adding a 1% management fee to the mix. They're comparing apples to oranges, yet making it appear that the previous studies are "wrong". Apples to apples would likely have given a 3.8% answer even with the other model tweaks. Lower, yes, but not nearly so drastic.

Another very annoying aspect about the 1% fee, is that if someone is using a pure bond index and pure stock index to make their mix (from which these models are built) - these are available with very low fees. So the 1% fee aspect seems disingenuous. Far better to warn the reader that if they want to achieve the "better case" survival rate, they better be holding index funds that only charge a 0.25% fee or whatever.

i guess they use the intermediate bond pretty much for the same reason i brought up the fees above.

it is simple, it lets you do a comparison under the same parameters and then you can see how your real world total performance compares.

as long as they give us conditions that are worse then we may get we are ahead.


the difference between bengans study where every grouped passed the 4% sniff test with an allocation of 35-90% equities and the trinity where some groups failed with 50/50 was bengan used less volatile intermediate gov't bonds and the trinity used more volatile longer term corporate bonds which really got hit harder in the 1965-1966 group..
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Old 02-10-2013, 09:16 AM   #128
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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.
I don't think my definitions are arbitrary, taking the initial value of a portfolio and adjusting for inflation each year seems like a sensible benchmark. I agree that principal is a poor description of it.

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Unfortunately, these formulas don't tell you anything concrete. Rather, they are just handwaving generalities.
I have rules for maximum withdrawal in both up and down years. I did not put a cap on it in up years, but would use 3-4% as the max whatever the gain, although my budget before 66 calls for 2% and post 66 for 0%.

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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 do mention years of negative return and say that for my approach to work you need to have a cash buffer income sources other than portfolio withdrawals. If the bear market were to be long enough to deplete my cash, money would have to be taken out of the portfolio, but as my budget only requires 2% anyway I'd be ok with that. Some modified withdrawal percentage would be good to calculate, but
I imagine I'd have to put in some conservative factors yo come up with my budget requirement of 2%.

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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.
I too have a spreadsheet and my approach is a very conservative way of controlling withdrawal rates. It doesn't have the rigor of Guyton-Klinger because it's more a statement of my investing and spending philosophy and is only possible because I have income sources that mean I can set a very low initial withdrawal rate. But I would say that my approach is an extreme version of Guyton-Klinger that reduces withdrawal in bad years and emphasizes capital preservation.
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Old 02-10-2013, 10:03 AM   #129
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While I understand conceptually how maintaining a constant inflation adjusted withdrawal works, and have run the MC simulations with various AA and spending levels to obtain a high degree of confidence that I will be OK, after 40+ years of saving, I wonder if I will ever be comfortable with depleting principal.
Well, it certainly is a big change of (mental) direction when you switch from accumulating to decumulating.

The thing that will open our eyes is when you multiply your annual withdrawal times twice your life expectancy and compare that to the size of your nest egg. Or conversely, divide your nest-egg by your annual withdrawal and compare that # of years to your life expectancy.

When you are 80 or 90, you don't need to worry about your portfolio lasting another 30 years.
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Old 02-10-2013, 10:16 AM   #130
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My sense is that many people lose interest in consumerism after age 50. Would guess that it's one reason why marketers seem to focus on age segments below 50.
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Old 02-10-2013, 10:27 AM   #131
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My sense is that many people lose interest in consumerism after age 50. Would guess that it's one reason why marketers seem to focus on age segments below 50.
I would agree some, maybe many 'people lose interest in consumerism after age 50,' and certainly among this audience. And while marketers certainly focus on younger generations with lots of products and services, I'm also seeing way more boomers in ad campaigns these days. They know the boomers have all the wealth and disposable income, not most Millennials, Gen X, Gen Yers.

But we digress, imagine that...
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Old 02-10-2013, 10:36 AM   #132
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Yes to both the above.

There are so many folks who already think a 4% WR is too optimistic and say they will go with less than 3.5%. I fear the 2.8% number will send them into deep depression so I think it important the 1% fee be highlighted.
And the 1% is really deceptive because it is always expressed as a percentage of portfolio value rather than a percentage of earnings. People invest to earn returns, otherwise might as well bury the cash in the back yard and get the guaranteed zero % return.

If one's portfolio is throwing off 10% annual earnings then the "advisor" who is charging 1% is actually taking 10% of your earnings off the top.

If one's portfolio is earning 5% a year then the 1% fee is taking a whopping 20% of your earnings off the top. Most people would taken back by an investment advisor who says "give me your money to play with and I'll take a 20% cut of everything we earn with it. Yet that is exactly what is happening to anyone with a conservative portfolio that is earning 5% a year.
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Old 02-10-2013, 11:27 AM   #133
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I feel like I have my hands full trying to be sure that I make it.
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Old 02-10-2013, 11:32 AM   #134
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I would agree some, maybe many 'people lose interest in consumerism after age 50,' and certainly among this audience.
I can see blatant "consumerism" decreasing with age, but I think for some of us there is a risk in making the assumption that overall spending will voluntarily decrease. It might, it might not. I can see how we could force a reduction in spending to happen. But I can also see how it won't happen until we become infirm enough that activities and a desire to stay in our own home are almost nil.

For example, we currently enjoy camping (small hard-sided pop-up trailer that we refer to as "camping" rather than "RVing") as our main travel activity. While we're still active enough (both 65) to enjoy some primitive (dry) camping and remote areas, that's what we do. We're heading to the SE USA for several weeks this spring and to the NW USA (Yellowstone, etc.) this autumn. There'll be a number of shorter trips as well. Total 2013 cost will be $7k - $8k. When we're no longer active enough to enjoy camping, we'll switch to more traditional vacations. Instead of camping in Yellowstone, it'll be an Alaskan cruise with deluxe amenities and shore excursions, etc. Obviously much pricier.

We like fishing. We spend about $1k per trip to head "Up Nort" to a rented cabin on a lake in northern Minnesota. When I can't haul the outboard motor from the truck to the boat any longer, it'll be time to go to a full survice lodge with guide service and meals provided. That'll triple the cost.

I do most of the maintenance on our home. To stay here, we'll pay others to take on those chores as we age. I already use a lawn service because we're gone a lot and no longer climb onto the roof myself.

Grandkid toys are getting more expensive as they age.

I've always gotten lotsa years and miles out of our cars doing much of the routine maintenance myself. We'll want to be driving late model cars as I feel less confident about keeping the old ones running and safe.

Etc., etc., etc.

Yeah, I can see our "consumerism" diminishing. Actually we were never big consumers in terms of gadgets and doo-dads. But the reduction in spending on new Kindles, laptops, patio furniture, TV's, ....... whatever....... seems like it will be small compared to the areas where we're planning on spending more money as we age.

Therefore I use a constant real WR with a contingency fund to provide for "geezer fun" as we age (it's part of our LTC self-insurance set-aside) and hope our plan to still be active (although probably less active and therefore switching from camping to cruising, etc.) comes true. Otherwise, it means we're dead or bed-ridden.
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Old 02-10-2013, 01:28 PM   #135
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Therefore I use a constant real WR with a contingency fund to provide for "geezer fun" as we age (it's part of our LTC self-insurance set-aside) and hope our plan to still be active (although probably less active and therefore switching from camping to cruising, etc.) comes true. Otherwise, it means we're dead or bed-ridden.
Not necessarily. There is a big difference between 65 and 75 or 85. When my parents were 65 they were both still active. They certainly had no problem with travel or getting out and about at all. Just like my DH at 65 has no problem.

When my mom turned 77 she went on a vacation with us (my dad had died a year or so earlier). She enjoyed it but it was obvious that she tired more easily and found long trips tiring. It was the last long trip that she wanted to take. She is now in her late 80s. She isn't dead and she isn't bedridden. But, there is no way that she wants to go on trips any more. In fact, she doesn't like to go out to dinner all that often. She finds it tiring and most of the time it just isn't worth it. Bear in mind, that for most of her life she was quite active. But, once she got over 80 she slowed down a lot even though she isn't bedridden.
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Old 02-10-2013, 02:02 PM   #136
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Another very annoying aspect about the 1% fee, is that if someone is using a pure bond index and pure stock index to make their mix (from which these models are built) - these are available with very low fees. So the 1% fee aspect seems disingenuous. Far better to warn the reader that if they want to achieve the "better case" survival rate, they better be holding index funds that only charge a 0.25% fee or whatever.
I'm guessing that he's not trying to implicate the entire financial planning industry as not being necessary (especially considering that it's the industry he's in).

Kind of like a new car dealer doing a study to not focus on how much $ you lose to depreciation in the first 30 seconds you own any new car and should instead buy used, but rather focus on some new cars having less depreciation than other new cars....or (taking an example from my own employment industry) an engineering firm doing a study on how an owner can hire a contractor do the building design themselves and cut out the middlemen (architect/engineering firms).

There's a natural bias to not trumpet in big, bold letters how cutting their own throats would lead to lower costs (and perhaps, in some cases, even better results) : "Don't hire my firm or any other firm in the industry, because you can save more money by cutting us out!"
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Old 02-10-2013, 02:13 PM   #137
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Not necessarily.
Well.... of course "not necessarily." Everyone is different and will age differently. But I'm not banking on the youbet duo following the average and spending less as we age. I'm planning on our current budget (or more) for at least the next decade or as long as we can afford it. That is, as long as no asteroids hit the FIRE portfolio. FIREing under the Bernicke plan, or similar, means you are commiting up front to significantly reduced spending as you age.
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There is a big difference between 65 and 75 or 85. When my parents were 65 they were both still active. They certainly had no problem with travel or getting out and about at all. Just like my DH at 65 has no problem.
That's why we're doing the outdoors stuff now and postponing cruising, train trips, guided international travel, etc., until later. There's the risk some health issue will come up (like croaking for example) and we won't ever get to those things. But camping, fishing, canoeing now and the "gentler things" on down the road seems like the most likely way to eventually get to do both. That strategy does push the more expensive things to later in life however.
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When my mom turned 77 she went on a vacation with us (my dad had died a year or so earlier). She enjoyed it but it was obvious that she tired more easily and found long trips tiring. It was the last long trip that she wanted to take. She is now in her late 80s. She isn't dead and she isn't bedridden. But, there is no way that she wants to go on trips any more. In fact, she doesn't like to go out to dinner all that often. She finds it tiring and most of the time it just isn't worth it. Bear in mind, that for most of her life she was quite active. But, once she got over 80 she slowed down a lot even though she isn't bedridden.
Yeah, my dad slowed down after 80 as well. Although other issues associated with those years added to his expenses so spending wasn't down very much if at all.

Bernicke's plan (which very well could be an excellent one for many folks) starts reducing expenses long before the age at which your mom started slowing down. From FireCalc's instructions:
Quote:
If selected, this option will reduce your inflation-adjusted yearly spending by 2-3% per year starting at age 56, and then stabilizing at age 76 to keep up with inflation
It's all a guess. We've planned on being as active as possible until the end and recognize the expenses involved with that. Building a budget which mandates reduced travel, sports, dining out, entertainment, etc., because you're older wasn't for us. Now..... whether we'll be able and want to take advantage of the budget being there or not, only time will tell.
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Old 02-10-2013, 03:28 PM   #138
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I can see blatant "consumerism" decreasing with age, but I think for some of us there is a risk in making the assumption that overall spending will voluntarily decrease. It might, it might not. I can see how we could force a reduction in spending to happen. But I can also see how it won't happen until we become infirm enough that activities and a desire to stay in our own home are almost nil.

[many good example deleted]
I really see aan most infinite potential to spend more on service and amenities as I age. I currently fly coach and even put up with red eye flight to the mainland. It is not to hard to envision the day when I'll be using my Frequent Flyer miles to upgrade to business/first class on those long flight, just cause the pain of being stuck in the middle seat with a weak bladder will be too much to handle.

I never was much of a camper, so those type of vacation were never something I did, but I can easily see me enjoying more cruises as I age.

But the real increase in spending is in services as I age. Instead of the cleaning lady coming every 3 weeks, every other week and probably eventually ever week. Currently I handle my own investments, and my own taxes. Will I be mentally sharp enough to handle those taxes in my late 70s, I don't know.

I am cautiously optimistic that Google Driver will be in widespread when I can no longer drive, but if not then I'm going to have to pay for transportation services.

Of course this all assume, I can walk, see, control, my bladder, and my memory isn't awful. My mom goes through $20 worth of Depends a week. How many of us have that fun item in our annual budget?
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Old 02-10-2013, 05:50 PM   #139
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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
I understand, but I'm a very curious guy.

I'm wondering if you favor dividend payers because maybe you find it easier to evaluate those types of stocks? Maybe the dividend adds extra clues - you can't get much more transparent than handing someone some cash every quarter (though there could still be shenanigans on the cash balance side)? I recall from other posts that you do a lot of research on these stocks and the companies, and maybe also invest in some industries you were familiar with from your past career?

Or is that not part of it at all?

I just rarely ever feel that I can trust my judgement over the combined market forces. And even when I am fairly confident, that old saying "the market may remain irrational longer than I can remain solvent'. Hence, I've committed myself to mostly the boring indexes. I wish it weren't so, but best to acknowledge one's limits.

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Old 02-10-2013, 06:02 PM   #140
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I guess that doesn't make for a bombshell of a paper.

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Mr Smith: "Read Bogle. Thanks for having me today."
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I am in the middle of Kansas right now so I don't have access to my full complement of weapons so pretend that there is a big "Thumbs up" here.
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