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Old 02-12-2013, 11:30 AM   #161
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I wonder how the risk averse folks chose their career to make a living. Are there not risks everywhere, from being able to get accepted to schools, being able to compete and pass various tests, licensing exams, interviews for jobs? And then, you can get fired, laid off, made obsolete by technological advances? Are there ever any guarantees?

Does thinking along the above lines not make you just want give up before you even start, and accept some common service or retail jobs, and call it done?

Yes, never mind that some people could advance above the average status. They may just be lucky, and there is no guarantee that you could be so fortunate, right?
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Old 02-12-2013, 11:34 AM   #162
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Originally Posted by NW-Bound View Post
I wonder how the risk averse folks chose their career to make a living. Are there not risks everywhere, from being able to get accepted to schools, being able to compete and pass various tests, licensing exams, interviews for jobs? And then, you can get fired, laid off, made obsolete by technological advances? Are there ever any warranties?

Does thinking along the above lines not make you just want give up before you even start, and accept some common service or retail jobs, and call it done?

Yes, never mind that some people could advance above the average status. They may just be lucky, and there is no warranty that you could be so fortunate, right?

Nobody said that these extreme risk adverse folks were rational....
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Old 02-12-2013, 12:17 PM   #163
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That may sound good in theory but most of the risk averse folks I know don't want anything at all to do with the market, which they consider to be nothing more than legalized gambling.
Exactly! They may be in their 70's or 80's and just could not sleep at night knowing that their money could lose value in the short term.
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Old 02-12-2013, 12:27 PM   #164
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I wonder how the risk averse folks chose their career to make a living. Are there not risks everywhere, from being able to get accepted to schools, being able to compete and pass various tests, licensing exams, interviews for jobs? And then, you can get fired, laid off, made obsolete by technological advances? Are there ever any guarantees?
Many of these people are now single after a spouse passed away and never worked much at all during their lifetime.
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Old 02-12-2013, 01:08 PM   #165
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I wonder how the risk averse folks chose their career to make a living. Are there not risks everywhere, ...
But the consequences of risk in the accumulation phase is different than the risk in retirement.

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Old 02-13-2013, 10:38 AM   #166
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I've been following this thread (and the links to Dr. Pfau's blog posts) and have what I hope isn't a stupid question/concern. My understanding is that the 4% rule as he and FIREcalc use the term is an inflation-adjusted 4%. That never seemed prudent to me after reading Bob Clyatt's "Work Less, Live More," so I've been using his 95% rule:

The 95% rule: each year's withdrawal is the greater of 95% of last year's withdrawal or 4% of current portfolio value.

I've thought that 4% using this more conservative approach was/is reasonable, but a steady diet of Dr. Pfau has me thinking about annuitiies. Any thoughts?
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Old 02-13-2013, 11:03 AM   #167
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I've thought that 4% using this more conservative approach was/is reasonable, but a steady diet of Dr. Pfau has me thinking about annuitiies. Any thoughts?
I haven't done the modeling, but I think 4% of your year-end portfolio balance would probably be safe. As noted earlier by ReWAHOO, even Pfau's more gloomy recent paper allows for 3.6% withdrawals (rather than the 2.8% he cites) if our investing costs are .2% rather than the 1% he uses. The buffering effect of taking a % of year-end values rather than blindly taking an inflation-adjusted percent of a base amount set decades in the past does a lot to help portfolios recover when they take a hit.
By using this "4% of year end value" method you'll never go broke. At the worst (if your portfolio's returns didn't keep ahead of inflation) your annual withdrawals would slowly lose true value, which is something that can be tracked and addressed if needed.
My guess is that Dr Pfau et al will next look at the impact of low anticipated bond returns on these variable withdrawal strategies, now that he's made the case using the simplest (and most dramatic) "fixed percent of base plus inflation" strategies.
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Old 02-13-2013, 11:32 AM   #168
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Originally Posted by kevink
I've been following this thread (and the links to Dr. Pfau's blog posts) and have what I hope isn't a stupid question/concern. My understanding is that the 4% rule as he and FIREcalc use the term is an inflation-adjusted 4%. That never seemed prudent to me after reading Bob Clyatt's "Work Less, Live More," so I've been using his 95% rule:

The 95% rule: each year's withdrawal is the greater of 95% of last year's withdrawal or 4% of current portfolio value.

I've thought that 4% using this more conservative approach was/is reasonable, but a steady diet of Dr. Pfau has me thinking about annuitiies. Any thoughts?
Not disagreeing by any means as there are no universal answers, just food for "thoughts"...

Case 1 Inputs: $1MM, 35 years, solve for %WR using Percentage of Remaining Portfolio [FIRECALC "you can enter 95 to approximate the "95% Rule" from Work Less, Live More."]
Quote:
Looking for a spending level that will result in 95% success rate . . . . . . . . . . . . . . . [done] A spending level of $34,346 provided a success rate of 95.3% (106 total cycles, of which 5 failed). This spending level is 3.43% of your starting portfolio.
Base case.

Case 2 Inputs: $1MM, 35 years, solve for %WR using Constant spending model, same inflation adjusted annual income methodology as SWR.
Quote:
Looking for a spending level that will result in 95% success rate . . . . . . . . . . . . . . . [done] A spending level of $38,345 provided a success rate of 95.3% (106 total cycles, of which 5 failed). This spending level is 3.83% of your starting portfolio.
Observation: Same failure rate as Case 1 with no annual income reductions and almost 12% higher annual income.

Case 3 Inputs: $1MM, 35 years, initial income of $34,346 (from case 1) Constant spending model, again same inflation adjusted annual income methodology as SWR.
Quote:
FIRECalc looked at the 106 possible 35 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter. Here is how your portfolio would have fared in each of the 106 cycles. The lowest and highest portfolio balance throughout your retirement was $33,250 to $10,357,673, with an average of $2,607,632. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.) For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.
Observation: Same income as Case 1 with no annual income reductions and 100% success rate (vs 95).
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Old 02-13-2013, 12:13 PM   #169
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Case 1 Inputs: $1MM, 35 years, solve for %WR using Percentage of Remaining Portfolio
Quote:
Looking for a spending level that will result in 95% success rate . . . . . . . . . . . . . . . [done] A spending level of $34,346 provided a success rate of 95.3% (106 total cycles, of which 5 failed). This spending level is 3.43% of your starting portfolio.
[FIRECALC "you can enter 95 to approximate the "95% Rule" from Work Less, Live More."]Base case.
Midpack,
I defer to your FIRECalc expertise, but I can't see where the "Percentage of Remaining Portfolio" spending method provides a "number of failed cases" output. Here's the graph of spending outcomes I got using what I think you put in ($1M, 3% inflation, FIRECALC default AA, 35 year window, 3.43% WR (computed on year-end balances))


As we'd expect, the portfolio never goes to zero balance, but (as shown above in the inflation-adjusted WR amounts) it sometimes fails to keep up with inflation over time. For reference, the red and blue lines are the US poverty level (one and two person households).

Maybe there's a FIRECalc nook or cranny I'm not seeing?
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Old 02-13-2013, 12:32 PM   #170
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Originally Posted by kevink View Post
I....

I've thought that 4% using this more conservative approach was/is reasonable, but a steady diet of Dr. Pfau has me thinking about annuitiies. Any thoughts?
Even Dr. Pfau thinks that a 4% SWR is a good place to start, but the retiree has to be prepared to adjust.
See his comment at the end of this article
Safe Withdrawal Rates In Today's Low Yield Environment - Walking On The Edge Of A Cliff? - kitces.com | Nerd's Eye View

From the comment:
Quote:
About your final question, I don't think it is practical for most people to spend much less than 4%, and as well with regard to some other research you've covered that I was a part of about balancing tradeoffs, I think it can still be appropriate to start at 4% while maintaining flexibility to reduce spending later if needed.
I think about annuities, but will probably not go for them till I'm in my mid-late 60s - a good 10+ years from now. If I see trouble ahead before then, I'll probably go back to work.
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Old 02-13-2013, 12:44 PM   #171
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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!!
Here is how Dr Pfau and some others differ from Fire Calc and the Triity Study. Both of those models are based upon historical results. Dr Pfau thinks with current yields on bonds that withdrawing 4% at this time isn't safe as it will deplete too much capital. Furthermore and this is the real key to his thought, the historical returns used in Fire Calc and The Trinity study were based on a time when the USA went through an unusally prosperous time and not likely to be repeated. (that's his opinion and that of some others - I've also read that we just might be on the edge of another economic boom - you decide) When he looked at the returns of other nations during this time period, the 4% withdrawal rate did not succeed at any time much less 80% of the time if I remember his report correctly.

Also, his thoughts are based on a 4% withdrawal with inflationary increases. What if one takes just 4% of their remaining portfolio each year without inflationary increases would the results be different? I think they would. Also, with his current studies, he proposes no bonds when one retires but all stocks after setting a safe floor with pensions, annuities, and SS. By doing so he argues, the retiree has a better standard of living in retirement and will most likely leave a larger pot of money for heirs.

Dr Pfaus study is geared to those fully retired and in their 60's or older. May not be of value at this point to some of the younger early retirees.

I am a new member and this is my first post. I look forward to the dialog with all of you!
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Old 02-13-2013, 01:25 PM   #172
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I wonder how the risk averse folks chose their career to make a living.
Good question. You have to recall that in the "good old days", there were actually companies with the reputation of being places with life-long c@reers available. I did, indeed, attempt to seek out such a place - as a risk averse person. In fact, through thick and thin and everything in between I rarely was concerned about my j*b going away once I secured a position. Stayed at the same place for 36+ years.

I'm reminded of a line in the Eagles song "Lyin' Eyes". "Every form of refuge has its price." While my Megacorp rarely fired anyone (except for serious issues like substance abuse on the job, toting guns and violence, etc.) Folks quickly became pigeonholed and could almost never break out and go along another track. I was one of the lucky "also-rans" who was able to create a new j*b for myself within the corp and break out of the "cast" in which I was first established. Otherwise, even though I could have stayed, I would have been most miserable for 36 years.

Not sure this is totally germane to the topic, but I thought I'd answer the question. I'm quite aware that few such places exist now. In fact, my megacorp has become much less of a refuge in recent years. Good for me as a stock holder, but bad for folks I used to w*rk with who have lost jobs, had to move significant distances to keep j*bs and otherwise begun to live in fear. Naturally, YMMV.
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Old 02-13-2013, 01:31 PM   #173
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Annuities

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Originally Posted by kevink View Post
I've been following this thread (and the links to Dr. Pfau's blog posts) and have what I hope isn't a stupid question/concern. My understanding is that the 4% rule as he and FIREcalc use the term is an inflation-adjusted 4%. That never seemed prudent to me after reading Bob Clyatt's "Work Less, Live More," so I've been using his 95% rule:

The 95% rule: each year's withdrawal is the greater of 95% of last year's withdrawal or 4% of current portfolio value.

I've thought that 4% using this more conservative approach was/is reasonable, but a steady diet of Dr. Pfau has me thinking about annuitiies. Any thoughts?
I am not a fan of annuities at least at this point in the interest rate cycle. Annuity rates are, as you might know, based essentially on the 10 year bond rate and a payout of your principal. There are just much better uses of your capital (IMHO.)
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Old 02-13-2013, 01:41 PM   #174
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Midpack,
I defer to your FIRECalc expertise, but I can't see where the "Percentage of Remaining Portfolio" spending method provides a "number of failed cases" output. Here's the graph of spending outcomes I got using what I think you put in ($1M, 3% inflation, FIRECALC default AA, 35 year window, 3.43% WR (computed on year-end balances))


As we'd expect, the portfolio never goes to zero balance, but (as shown above in the inflation-adjusted WR amounts) it sometimes fails to keep up with inflation over time. For reference, the red and blue lines are the US poverty level (one and two person households).

Maybe there's a FIRECalc nook or cranny I'm not seeing?
I'm NOT an expert by any means, more like 'a little information is dangerous' in my case. Unfortunately I can't "see" your attachment on my PC for reference.

I just repeated my case 1 and got the same result as shown above including number of cycles & failures (it was cut-n-pasted directly).
  • On the Start Here tab, I input $1MM and 35 years.
  • On the Spending Models tab, I chose the Percentage of Remaining Portfolio and input 95 in the associated input box (since Clyatt's 95% rule is highlighted with that option.
  • On the Investigate tab, I chose the Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level, left success rate at the default 95%, and chose Spending Level. I am guessing this is where our inputs differed.
  • Hit Submit.
If that misrepresents the base case, please let me know so I can correct it.
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Old 02-13-2013, 02:10 PM   #175
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I am not a fan of annuities at least at this point in the interest rate cycle. Annuity rates are, as you might know, based essentially on the 10 year bond rate and a payout of your principal. There are just much better uses of your capital (IMHO.)

I agree with you 100%. There is, however, a different school of thought that says as long as you don't buy with funds from bonds. When interest rates rise, the value of bond portfolios will decrease. This would mean that a future date that you can buy an annuity cheaper because of higher interest rates but have less money to do it with.

For the sake of simplicity, I didn't include the fact that as one gets older annuities get cheaper.
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Old 02-13-2013, 02:32 PM   #176
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Thanks all for the thoughtful comments. It's interesting that both FIRECalc and Dr. Pfau use past performance of a couple of key asset classes to base their predictions on, but Pfau's arguments are based on a prediction that future stock and bond market returns will depart greatly from the past. Essentially his advice is "all in" on equities, with an annuity to make it possible to sleep at night. Given what happened in 2008 I personally wouldn't feel comfortable with that kind of exposure if I were in my late 60's or 70's.

We were invested in Clyatt's slice-and-dice RIP Portfolio during the market crash and had paper losses of around 21%. That prompted a search for a more robust defensive approach, and I've been invested in Harry Browne's Permanent Portfolio ever since. I mention it not to "sell" it - knowing it's far too out there for most here - but because it does seem to provide another interesting way to effectively build your own annuity, if you will, providing quite consistently 4% real returns without the counterparty risks of annuitiies. There are some thoughts on this on one of the specialized PP boards:

Viewing the PP as an Annuity - Page 1

Midpack I am in awe of your FIRECalc savvy but would only say that given my risk-averse nature I'd go with the 95% rule which by definition guarentees never running out of money vs. relying on FIRECalc projections based on past performance of two asset classes under circumstances that Pfau and others are saying are gone for good. For all of our sakes I hope we are on the verge of another bull run in the markets, but the older I get the more I tend to live by the old Will Rogers saw: "I'm more concerned about the return of my capital than the return on it."
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Old 02-13-2013, 02:32 PM   #177
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  • On the Investigate tab, I chose the Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level, left success rate at the default 95%, and chose Spending Level. I am guessing this is where our inputs differed.
If that misrepresents the base case, please let me know so I can correct it.
Here's what I did:
START HERE:
Spending: $34,300 (reversed-in from your numbers in Case 1. This, I think, sets 3.43% as the amount to be withdrawn each year once we choose the "Percent of Remaining Portfolio" spending model.)
Portfolio: $1,000,000
Years: 35
Submit
OTHER INCOME/SPENDING: Use defaults
SPENDING MODELS: Select Percent of Remaining Portfolio. Leave the "Clyatt box" at 0%. Submit.
YOUR PORTFOLIO: Use "Total Market (FIRECalc default). ER is kept at .18% (BTW, changing this to 2-3% is probably the easiest way to "fool" FIRECALC into using lower annual returns to simulate the scenario Dr Pfau is suggesting) Submit.
Don't go the "investigate" tab, just look at the results screen. Along with the depictions is this text:
Quote:
In other models in FIRECalc, "failure" means the portfolio drops to zero. Since you are limiting spending to a percentage of your remaining portfolio, the total balance should never reach zero — but it could become pretty small in some situations. Pay attention to the spending graph, below. Since we can't use portfolio failure as a metric, FIRECalc is following the lead of the 95% Rule from Work Less, Live More, in which one of the goals is for the portfolio to be as big (after adjustment for inflation) at the end of the 35 years as it was when you started. FIRECalc found that 98.1% of the time, the portfolio you would have left behind exceeded the portfolio you started with.
So, now I see that is the definition of "failure": an inflation-adjusted portfolio value at the end of the time window that is less than the starting amount. That, to me, is a lot different than the "you are totally broke" failure criteria used for the "fixed spending" model. If I were 87 years old today (35 years from now) and had $10 less than the portfolio size I have right now (and the same inflation-adjusted amount I started with), it would be a "failure" under these criteria. Huh? I'd feel like I was in darn good shape--it's only gotta last a few more years and I have 25x my historic "regular" WR!

For whatever reason, after I go to the "investigate" tab I can't get this same "results screen" to show again. I have to totally exit FIRECalc and re-enter my data if I want to see this screen again.

kevink did say he wanted to use Bob Clyatt's 95% rule, so your method is probably more appropriate than what I did. It looks like the "success rate" goes from about 95% to 98% if the "95% of last year's withdrawal" rule isn't used.
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Old 02-13-2013, 04:20 PM   #178
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DANG! Mistake in previous posting: I'd left the "inflation button" clicked on "CPI" instead of a straight 3%. Using 3% inflation the "success rate" was 69.8%, not 98% as previously stated. Anyway, the observations concerning "failure" for this situation remain the same: Is it really a "failure" if someone is 87 YO and his portfolio has the same inflation-adjusted value as when he was 52? I don't think so. I'd say a "failure" when using the "X% of annual balance" withdrawal method should be when the portfolio can't support some user-defined percentage of the initial withdrawal value. For our family, I'd put failure at about 50% of our initial withdrawal amount (adjusted for inflation). That's "move to the trailer at the fish camp" time (not that there's ANYTHING wrong with that.).
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Old 02-13-2013, 07:16 PM   #179
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Wow, SamClem, thanks for the digging! Things were not making sense to me either.

I agree that 50% of the initial value, inflation adjusted, sounds like a more reasonable "failure" criteria - yet still way better than going to $0!

So IMO these two methods (% of remaining portfolio and inflation adjusted withdrawals) aren't comparable the way FIRECALC is set up. You can't say that one gives you a higher initial spending amount in comparison when it has a terminal value of 0, and the other has a terminal value of just under the starting portfolio inflation adjusted.

Personally, I would be delighted if my terminal portfolio were the same as I started with, adjusted for inflation. If it's much higher than that - I wasn't spending enough!
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Old 02-13-2013, 07:19 PM   #180
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DANG! Mistake in previous posting: I'd left the "inflation button" clicked on "CPI" instead of a straight 3%. Using 3% inflation the "success rate" was 69.8%, not 98% as previously stated. Anyway, the observations concerning "failure" for this situation remain the same: Is it really a "failure" if someone is 87 YO and his portfolio has the same inflation-adjusted value as when he was 52? I don't think so. I'd say a "failure" when using the "X% of annual balance" withdrawal method should be when the portfolio can't support some user-defined percentage of the initial withdrawal value. For our family, I'd put failure at about 50% of our initial withdrawal amount (adjusted for inflation). That's "move to the trailer at the fish camp" time (not that there's ANYTHING wrong with that.).
Since CPI goes along with the historical data, what's wrong with using the historical CPI?
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