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endowment method of retirement spending
Old 06-15-2006, 01:46 AM   #1
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endowment method of retirement spending

Hello all.* My first post/question on this fine forum.* Am retired early @ 60 and in distribution phase of IRA and the question relates to same circumstance.* *I seek comments and observations regarding adaptation of the so called "endowment" model of spending to retirement fund spending.* The model is used for endowments at various universities, and mentioned by Robert Carlson in New Rules of Retirement, and explained to me by economics prof (aka crew member in training).* *As all know, the goal of endowments is longevity of spending.* Assuming the flexibility in spending to accomodate the model:

Last year's spending + inflation X 70 % = $pot #1*
Target distribution rate X retirement fund value X 30 % = $pot #2

$pot #1 + $pot #2 = distribution for the year

This model seems to avoid the "wasting" effect of common fixed percentage + inflation spending which increases each year regardless of portfolio performance and burdens the portfolio.* Rather, it adjusts spending to reflect portfolio performance without exceptional pain in years of poor performance while allowing moderate exuberance, and thus avoiding deprivation, in good times.* As has been pointed out by the model's proponents, the retirement fund, unlike the endowment fund, does not have to last forever.* Thus, additional flexibility is afforded, when needed, through temporary suspension of the spending model if a successive decline in necessary spending is caused by several years of poor performance and some spending of principal is required.* Subsequent spending after resumption of the model would reflect this contingency since 30 % of spending is based upon the value of the fund.* *The model benefits from the many decades of its use in spending of endowment funds and has withstood the scrutiny many professors of economics, some of whom have benefited from the spending.* * *
Any comments would be welcome.
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Re: endowment method of retirement spending
Old 06-15-2006, 04:49 AM   #2
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Re: endowment method of retirement spending

A similar model is discussed at length by Henry Hebeler at www.analyzenow.com

Go to the section on "free publications" and look at the articles called "The Biggest Retirement Planning Myth" and "Financial Dynamics Improves Lifelong Planning."

Mr. Hebeler calls the model the "Retirement Autopilot."* His ideas include further refinements that take finite lifespan into account wrt the target protfolio withdrawal rate.

Despite the title of the first-cited work above, he is a great supporter of your model -- the title suggests criticism of competing techniques, not the one you have proposed.

In my opinion, Hebeler's work is highly credible.

I hope this helps . . .
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Re: endowment method of retirement spending
Old 06-15-2006, 09:33 AM   #3
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Re: endowment method of retirement spending

this methods seems to be directly equivalent to the fixed/variable method, but specifying a 70/30 initial mix
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Re: endowment method of retirement spending
Old 06-15-2006, 09:52 AM   #4
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Re: endowment method of retirement spending

Quote:
Originally Posted by d
this methods seems to be directly equivalent to the fixed/variable method, but specifying a 70/30 initial mix
Those were my thoughts too at first, but it's a little more complicated than that. The 70% component is based on last year's spending (based on the formula) plus inflation, whereas the fixed component of the fixed+variable method is a predetermined amount set in year zero of the withdrawal strategy.

The "endowment method" seems to provide an additional dampening effect on upward and downward revisions in withdrawals since the n+1 year withdrawal is linked to the n year withdrawal. The fixed+variable method has no such year to year link (other than partial portfolio depletion due to previous year's spending).

Seems like an interesting strategy overall though.
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Re: endowment method of retirement spending
Old 06-15-2006, 10:24 AM   #5
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Re: endowment method of retirement spending

ah yes!
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Re: endowment method of retirement spending
Old 06-15-2006, 12:58 PM   #6
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Re: endowment method of retirement spending

Thanks for the reference and link, Jeff.* I especially like the "retirement autopilot" analogy to which Mr. Hebeler refers.* I've bumped it up on my "to read" list.

The dampening effect caused by the linkage of n+1 year withdrawal and n year withdrawal is what piqued my interest, Justin.* It seems a "kinder and gentler" method of course adjustments to the spending of a retirement fund.* I intend to adopt this model in the coming months.* Some have pointed to concerns for this approach during times of stagflation.* However, the inherent flexibility helps.*

Of course, I can always move aboard, ease the mainsheets, hoist the halyard, and cast off!* ** That would be not a bad thing in any event.* *
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Re: endowment method of retirement spending
Old 06-15-2006, 01:14 PM   #7
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Re: endowment method of retirement spending

Quote:
Originally Posted by starboardtack
Of course, I can always move aboard, ease the mainsheets, hoist the halyard, and cast off! That would be not a bad thing in any event.
Welcome to the board starboard tack.
The additional beauty of this solutuin is that for most people liveaboard expenses are smaller than for dirt dwellers
What kind of a boat?
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Re: endowment method of retirement spending
Old 06-15-2006, 01:40 PM   #8
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Re: endowment method of retirement spending

Cutter rigged Shannon 38.* Harder it blows, the better she likes it.* * * Thinking of casting off for a year or so, first to Mexico, then a "puddle jump" to So. Pacific.* Thus the appeal of the "retirement autopilot" analogy.
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Re: endowment method of retirement spending
Old 06-15-2006, 02:17 PM   #9
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Re: endowment method of retirement spending

beautiful boat, wish you good luck on your journey plans.
And it looks like a lot of brightwork to keep you occupied

We are a family of 3 (soon to be 4), and are planning to cast off in maybe 10-12 years. (sooner if we attain FI sooner)
probably ICW & Carribean first.
DW likes the space and speed of cats, so maybe a medium sized cruising cat is in our future,
like a Gemini 3400 or one of smaller PDQs.
Currently along with LBYM principle we satisfy our sailing lust with a trailerable pocket cruiser.
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Re: endowment method of retirement spending
Old 06-15-2006, 06:49 PM   #10
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Re: endowment method of retirement spending

Starb, links not working. Could you repost link ... THanks
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Re: endowment method of retirement spending
Old 06-15-2006, 10:14 PM   #11
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Re: endowment method of retirement spending

Quote:
Originally Posted by starboardtack
Cutter rigged Shannon 38.* Harder it blows, the better she likes it.* * * Thinking of casting off for a year or so, first to Mexico, then a "puddle jump" to So. Pacific.* Thus the appeal of the "retirement autopilot" analogy.
i chatted with walt schulz aboard his highly stylized 38 ft motor boat at fort laud boat show a few years back. interesting guy. he is all boat and looks the part. very proud of his boats & with good reason. i haven't been on a shannon sail but his motor boat was gorgeous.

i'm thinking of moving aboard within 5 years and i'd also like my investments to be as automated as possible so appreciate you bringing up this topic. good info.
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Re: endowment method of retirement spending
Old 06-15-2006, 10:47 PM   #12
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Re: endowment method of retirement spending

Quote:
Originally Posted by sailor
beautiful boat, wish you good luck on your journey plans.
And it looks like a lot of brightwork to keep you occupied*

Currently along with LBYM principle we satisfy our sailing lust with a trailerable pocket cruiser.
Thanks Sailor. *Got eager young crew for the bright work. * *Sailed cats in the Antilles and around Barbados. *Great fun but prefer a keel under me arse in a big blow. *Brother lives on ICW in Wilmington, NC. and the shifting sandbars there make things exciting. *Got to make the passage soon, swallow the anchor, or trade for a stinkpot. *Not old enought for that yet. * Fair winds.

Quote:
Originally Posted by Chris24
Starb, links not working. Could you repost link ... THanks
Chris the link I referred to was* Henry Hebeler's at www.analyzenow.com posted by Jeff in this this thread.* The book I referred to was "The New Rules of Retirement; Strategies for a Secure Future" by Robert Carlson, JD, CPA.* Hope these are the links/references you wanted.

Quote:
Originally Posted by lazygood4nothinbum
...he is all boat and looks the part. very proud of his boats & with good reason. i haven't been on a shannon sail but his motor boat was gorgeous.

i'm thinking of moving aboard within 5 years and i'd also like my investments to be as automated as possible so appreciate you bringing up this topic. good info.
You are welcome.* Shannon boats are robust and put together well, IMHO.* Wouldn't* call it a light airs boat, but a very suitable, stable and safe bluewater world cruiser.* A well behaved lady, especially in heavy weather.* ERed from high tech, high stress place and wanted to simplify.* Didn't want to constantly tinker with std. dev., SWRs, etc.* Did a diverse Vanguard based allocation similar to what Bernstein outlined in "The Four Pillars of Investing".* Living costs decrease very nicely if living aboard.* Can live fairly high on the hog (around the ears somewhere) when not a dirt dweller.* * Will be moving back aboard in a couple of months after landlines are stowed.* Regards.
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Re: endowment method of retirement spending
Old 06-16-2006, 03:39 PM   #13
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Re: endowment method of retirement spending

I think we have some sort of a record here in thread-hijacking. Not sure how to measure it, but the hijack was swift and total....
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Re: endowment method of retirement spending
Old 06-16-2006, 03:43 PM   #14
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Re: endowment method of retirement spending

or does it officially qualify as a hijack when the op participates?
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Re: endowment method of retirement spending
Old 06-16-2006, 04:25 PM   #15
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Re: endowment method of retirement spending

It does, but there are far more impressive examples of hijacks. A few surprised even me, and some of them were my posts, and on a couple I didnt even do the hijacking!
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Re: endowment method of retirement spending
Old 06-16-2006, 08:37 PM   #16
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Re: endowment method of retirement spending

Quote:
Originally Posted by bosco
I think we have some sort of a record here in thread-hijacking.* Not sure how to measure it, but the hijack was swift and total....
Quote:
Originally Posted by Cute n Fuzzy Bun'ny
It does, but there are far more impressive examples of hijacks. A few surprised even me, and some of them were my posts, and on a couple I didnt even do the hijacking!
Uh Oh!* Busted by the thread police?** : What rule(s) did I violate?** Just answered some unsolicited queries as to "retirement autopilot" from those who contemplate not sitting in front of a monitor for the duration of their retirement.* *
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Re: endowment method of retirement spending
Old 06-16-2006, 09:00 PM   #17
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Re: endowment method of retirement spending

Ignore the landlubbers. They just don't understand that cruising is a suitable diversion in any thread...

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Re: endowment method of retirement spending
Old 06-16-2006, 09:22 PM   #18
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Re: endowment method of retirement spending

Quote:
Originally Posted by dory36
Ignore the landlubbers. They just don't understand that cruising is a suitable diversion in any thread...*

dory36
Roger that Dory, thanks.* Been messing with the fickle iron jib all day.* ** Which is why I might be a little cranky.* May just use it as a sea anchor.* Will mend my ways.* ** After an almost last qtr. moonlight sail.* **
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Re: endowment method of retirement spending
Old 06-16-2006, 10:03 PM   #19
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Re: endowment method of retirement spending

Quote:
Originally Posted by justin
Those were my thoughts too at first, but it's a little more complicated than that. The 70% component is based on last year's spending (based on the formula) plus inflation, whereas the fixed component of the fixed+variable method is a predetermined amount set in year zero of the withdrawal strategy.
The spending from last year ='s last years withdrawl, at least in my book.* Then the Hybrib and Endowment are the same with 70/30 versus my typical 50/50.

Quote:
Originally Posted by justin
The "endowment method" seems to provide an additional dampening effect on upward and downward revisions in withdrawals since the n+1 year withdrawal is linked to the n year withdrawal. The fixed+variable method has no such year to year link (other than partial portfolio depletion due to previous year's spending).
I'm not sure I agree with this.* The fixed portion is linked to last year as it forms the starting point then gets inflation adjsuted.* The way I think of it is part is inflation adjusted and part is portfolio adjusted.

The way I read above and my code makes it equivalent to Hybrid with different percents.* Perhaps I've coded it wrong..would not be the 1st time.

I don't think this is the same as Hebener.* If been meaning to compare his but have not messed with it yet.

job
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Re: endowment method of retirement spending
Old 06-19-2006, 09:03 AM   #20
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Re: endowment method of retirement spending

Job,

Maybe you and I have a different conception of what the "hybrid method" is.

I assume it is something like taking a 3% "fixed" withdrawal each year based on the original principal amount (in year 0). Each year it is adjusted for inflation. The "fixed" component of the withdrawal does not change based on fluctuations in portfolio value from year to year.

The "variable" component of the withdrawal is, say, 1.5% of the portfolio value each year. Regardless of inflation or portfolio value fluctuation.

The real value of the fixed component of the hybrid method of withdrawal is established in year zero for all subsequent years. In nominal terms, the only thing that changes the fixed component is the CPI inflator value for each future year.

In contrast, the endowment method defines the "fixed" component of withdrawal each year in terms of the previous year's withdrawal (which includes the "fixed" component and the "variable" component). In other words, the "fixed" component includes feedback from the portfolio value fluctuation.

Under my version of the hybrid method, the "fixed" component is not affected by the fluctuation in portfolio value.
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