endowment method of retirement spending

[OldAgePensioner]

Jeff2006,
thanks for that link those are very thought provoking articles.

[obryanjf]

Justin, you are right, The hybrid has a fixed and variable component.* The fixed is set at the start and is inflation adjusted.* The var is reset every year based on the ending portfolio value.* I have coded the endowement as fixed based on last years draw * percentage + variable component * percentage.*

They act a little different.* When i turn on a failure at a draw of < 50% of initial is on, the endowement performs very well (see graph).* When that is turned on then they perform about the same. The average of the terminal value and the std dev of NW is very similar.* Judge for yourself though.

job

BTW these runs have no extras and no Ty and no parttime.

< 50% draw is a failure


<50% draw is not a failure

[justin]

So the dampening effect of the endowment method allows a higher withdrawal rate when "failure" is defined as complete portfolio depletion.

[obryanjf]

Yes, that is correct.* Just don't forget with the defination of failure being running out of money, withdrawls going down to $1 and bouncing back up, is not failure, but I'm sure it would not feel good.* That is why I added the < 50% rule to count as a failure.*

I do not quite understand the WD% reaction and will need to think about it a bit.* It does a good job of keeping the WD% in a range which I think is important.* See the graph.* For comps I'll add a graph of the Hybrid 50/50.*

WD = withdrawal; 1MM port, 6% initial draw, Non monte carlo mode, no failure on < 50%, 40 year simulation

4 graphs, Hybrid WD%'s over time and WD's over time and the same for the Endowement(EM) so 4 graphs total.

The EM adjusted down further than the hybrid, notice on the WD graphs the lower amounts during the middle of the sim.* The WD% on the EM stays in a nive range.* This is similar behaviour as the ESRbob model.*

Comments

job

[justin]

It appears image 1 and 3 are the same, and 2 and 4 are the same.

From the endowment method graphs, it looks like the withdrawal rate will be 5-7% most years. That's 5-7% of the initial portfolio balance?

[Chris24]

For some reason I the link for the endowment method doesn,t work for me. Can someone please post the address ? .. Thanks

[obryanjf]

Fixed the graph.

The WD% is the running withdrawl percentage. The theory is if the WD% starts going crazy high (above 10, 15 or maybe even 20% !!), then some old person is going to start to get very nervous. So my preference is to track it to make sure the model holds it down to respectical levels while at the same time keeping the actual WD to a high enough level.

job

[obryanjf]

A couple other thoughts on the endowement model, 1 good and 1 bad.* From the graphs i would say the EM versus Hybdrib comps, the pain visualized in a low WD would generally be felt in the early years of retirement, where presumably one could take some positive action to shore up the accounts.* I note this* in comparing graph 2 versus 4. On 2 the WD's get low in most cases early in the retirement while in 4 some slowly bleed down.* That is the positive for EM.

The negative; one benefit of not necessarily having the WD% in such a tight band as graph 1 is to get an early read on whether one might be in trouble 15 or so years into the future.* Note graph 3 and some of the lines cross the 10% line.* This is an early indication that trouble is ahead, where again one should be able to take some action.* The 1st one actually fails in year 38 or so.* The others that cross the 10% line would make me nervous all along the way.

job

[ronin]

Just a thought, would there be any benefit from smoothing out the expense factor input by using a trailing average of, say, 3 years instead of the previous year alone?

[d]

certainly, but if you smooth it sufficiently i suspect you end-up with the fixed SWR.

[starboardtack]

Quote:

Originally Posted by Daddy O From the graphs i would say the EM versus Hybdrib comps, the pain visualized in a low WD would generally be felt in the early years of retirement, where presumably one could take some positive action to shore up the accounts.* ....This is an early indication that trouble is ahead, where again one should be able to take some action.* job

Having previously run the EM sims vs. suggestions/models of SWR found in this forum and at other independent resources, IMHO the EM's intriguing element is its flexibility and partial tracking dependence upon the retirement fund's changing value in light of "past performance is not indicative of future results" caveat so often read.* This may be especially important in the critical early years of distribution when the inevitable pain can be best tolerated*and course adjustments made to increase the probability of maintaining the necessary later end of years(LEOY) spending element intact.* This may be facilitated, as has been discussed and written about elsewhere, by the tendency for spending to decrease in the LEOY. *

Since the retiring endowment model (REM) benefits from removal of the condition of perpetuity, unless failure = < X % to provide for residual legacy wishes or IRA "generational stretching", inclusion of optional multi-tiered (second, third, etc.) order conditionals to accomodate individual customization requirements, if desired, seem to be indicated for adaptation and refinement of EM > REM.* Hopefully, this can be accomplished for the benefit of all.*

IMHO success = passing to the great beyond with a* of satisfaction and a* and not a lot of bucks left over in the retirement fund.*

[unclemick]

And then - there are those of us who have a date with the Godfather - aka Da IRS and RMD.

Cheap early on and the historical blessing of the 90's was a great help the first decade of this ER.

heh heh heh