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Old 03-11-2015, 12:36 PM   #21
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For planning, I am using 6% average ROI for a 50/50 mix of US/international equities of which maybe about 2.5% in the way of dividends.

This year and the following two will be high draw-down years (for back-door IRA tol Roth conversions...if Congress doesn't change the laws on us), but thereafter figuring on taking only 3.5% out of the Roth per annum. Somewhere in there, I might chicken out and convert everything to Wellington. My stock picking (O&G and pipelines) has not fared well in the last few months.
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Old 03-11-2015, 12:46 PM   #22
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My retirement model assumes 4.4% nominal return and 2.6% inflation. So 1.8% real. We survive down to zero real, without adjusting the planned expense profile. The 4.4% uses Ferri's 30-year asset class expectations matched to my portfolio (as best I can), plus a 1.5% haircut across the board. I suspect we'll do much better than that. This system may be only marginally better than staring at tea leaves, but it's a plan, and I make spending decisions every day based on it.

I wouldn't quarrel with a bleak outlook for the next 10 years, based on today's valuations and interest rates. That's consistent with my own completely unscientific gut feel. But my planning horizon is longer than that, so I'll stick with Ferri and longer-term actual history as a planning assumption.
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Old 03-11-2015, 01:09 PM   #23
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How did he arrive at that conclusion?

Low returns to me seem to be only the result of high volatility for those that buy at a peak and sell when low. In other words, high volatility gives bigger return spreads for individual investors.

You have a linky for this idea?

Low volatility can also mean low returns if earnings growth steadily goes down, and the stock market steadily goes down with it ..
Peter Bernstein was an expert in financial risk and risk management. What he said about volatility was in an interview with Consuelo Mack on Wealthtrack, Oct 21, 2005
Quote:
CONSUELO MACK: Now, you've been an early proponent of the theory that stocks and bonds -- stocks, especially, I think -- are going to deliver low returns. After the terrific returns we saw in the 80s and 90s that essentially we're talking about lower returns going forward. How low, and why do you feel that way?

PETER BERNSTEIN: How low? Who knows? Just not high. One thing bothers me about this view, that there's very little opposition to it.

CONSUELO MACK: And it's not going to be with our other two guests either.

PETER BERNSTEIN: And that's dangerous. But it's very hard to make the case that returns will be, say, after inflation, more than 6% to 7%. That's the most optimistic expectation. We start from a point where we've had a very -- a huge bull market in the 1990s, only part of which has been given back. Equities are still valued at historically high prices. Interest rates, I don't have to tell you, are historically low. And so you start from there, and there you are. I think something very important to think about this, that a period of low returns, you think, well, every year maybe we'll have 4%, 5%. It doesn't work that way. Low returns result from high volatility. You have a big year, and then a bad year, and the pattern of low return periods is high volatility, not low volatility. It's a scary time.
The point he makes which is not always appreciated is that annualized average returns can be substantially lower than average annual returns because of high volatility.
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Old 03-11-2015, 01:41 PM   #24
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This is why I like ESPlanner. Provides annual speding suggestions in the event of 0 returns (conservative option) in Monte Carlo mode. In Upside, treats stock market like the casino that it is, as if all $ invested in stocks is lost. From there, it provides annual spending suggestions allowing one to specify a range for returns in "safe" assets (i.e., bonds). Personally I went with their recommendation of 2@ return for safe assets (TIPS). In either scenario, it works out for me. I've been playing with that software for a year now, and the more I do, the more I like it.

Agree with above post arguing for reducing expeses as best antidote to low expected returns. Other considerations could include delayying SS to 70, immediate annuity at 70, 75, or 80, among others. Point is, options do exist.
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Old 03-11-2015, 06:09 PM   #25
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So what do you use to plan?

I use long term historical average, and i assume the future will look like the past, that is growth will continue. If i'm wrong, so what, we will all be screwed.


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Old 03-11-2015, 08:10 PM   #26
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https://personal.vanguard.com/us/ins...hlights-122014

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I believe more to Vanguard outlook. Given low inflation environment (in fact threat of deflation) outlooks looks reasonable.
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Old 03-12-2015, 10:09 AM   #27
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I use long term historical average, and i assume the future will look like the past, that is growth will continue.
...
Average? Wow, so that means you run FireCALC with a 50% success rate? That allows for a 6% WR for 30 years, or 5.2% for 40 years, or 5.11% for 45 years.


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If i'm wrong, so what, we will all be screwed.
No, if we are well below average, but still not much worse than the worst of the past, someone with a 3%~3.5% WR will likely be in good shape. Someone with a 5-6% WR may well be screwed.

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Old 03-12-2015, 10:48 AM   #28
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.....Someone with a 5-6% WR may well be screwed.
Agree, but unless they are really old when they retired if they retired with a 5-6% WR they are likely delusional to begin with so perhaps they won't notice late in life that they can't afford even cat food.
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Old 03-12-2015, 10:49 AM   #29
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I use long term historical average, and i assume the future will look like the past, that is growth will continue. If i'm wrong, so what, we will all be screwed. ....
That sounds like a recipe for disaster.
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Old 03-12-2015, 11:03 AM   #30
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If you do 3% withdrawal you will probably end up with a big pile of money. If you do not want a big pile then you will need to take more at some point.

What is wrong with taking more immediately and adjust down instead of up? As long as you adjust spending frequently based on your portfolio balance you should not have to eat cat food.
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Old 03-12-2015, 11:24 AM   #31
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bold mine...
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If you do 3% withdrawal you will probably end up with a big pile of money. If you do not want a big pile then you will need to take more at some point.
Probably. But maybe not. Will you wear a seat belt on your next drive? You probably won't get in an accident.

Quote:
What is wrong with taking more immediately and adjust down instead of up? As long as you adjust spending frequently based on your portfolio balance you should not have to eat cat food.
Because we can't predict the future?

Once again, for all those who claim they will just 'adjust their spending', I suggest you go into a historical calculator, start with a 6% WR, and then try backing out some spending to try to recover the money that was lost forever. I predict you will be surprised at what little effect it has, even with drastic spending cuts. It sounds nice though.

And also estimate what kind of lifestyle you'd have if you made a drastic cut to spending every time the market wiggles. I can't get back my life in 2008 - I'm glad I kept doing all the things I enjoy, rather than living like a pauper. And the market came back, I'm fine. And if it didn't, my conservative WR should still keep me in good shape.

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Old 03-12-2015, 11:25 AM   #32
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If you do 3% withdrawal you will probably end up with a big pile of money. If you do not want a big pile then you will need to take more at some point.
.
Sounds like a good case for one of the variable withdrawal rate methods that protect one from running out of money to soon, or needlessly avoiding life's good things to save a buck one doesn't really need to save.
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Old 03-12-2015, 02:17 PM   #33
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I will wear a seat belt but will not stop driving altogether (just to be safe).

I think a balance can be had with money as well. Does taking only a 100% safe withdrawal rate really make sense?

I know what you are talking about if you take money early at higher levels in down markets you would be permanently hurt.

But if markets fall 30% and you reduce spending 30% immediately do you still get hurt permanently?

Most calculators use all these rules of thumb and constant spending. I think a custom/flexible/more real life approach is a better way. I may need to build my own model to prove it.
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Old 03-12-2015, 02:39 PM   #34
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Most calculators use all these rules of thumb and constant spending. I think a custom/flexible/more real life approach is a better way. I may need to build my own model to prove it.
Before you do, look at this one: Variable percentage withdrawal - Bogleheads

And agree with stay flexible, always a good attitude. Especially in yoga classes.
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Old 03-12-2015, 02:42 PM   #35
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Personnally, I'm not going to lose any sleep over these financial prognostics and their predictions. I'm finishing my second year of ER and too rely on ESPlanner as my planning tool. I use the Monte Carlo analysis trying to match my AA as close I can with the DFA funds that it provides. For my AA it provides a real return of 5.87%, and our spending is based on receiving half of that, or the "cautious" spending level. Even at that, there is room to adjust the spending downward if hair starts standing up on the back of my neck.
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Old 03-12-2015, 02:42 PM   #36
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Bernstein has said previously that a 2% w/r is "bulletproof" and that one would "probably" be ok with a 3% w/r (he didn't specify years, but I assume he meant for a typical 30 year retirement). Pfau published a recent paper using current valuations and 10,000 simulations to estimate SWR's for (IIRC) 25, 30, 35, and 40 year retirements (sorry, unable to post link here). In that paper, however, he incorporated 1% expense fees. I recall a 2.5% w/r rate for 35 years if one backs out the outrageous 1% expense fee used (personally, my overall VG fees are .11% and about to go lower after transferring employer's investor shares to admiral shares upon FIRE). Another set of predictions, as noted above, are contained in VG's recent paper.

Who to believe in light of such conflicting "predictions"? What's useful? Best to plan conservatively.
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Old 03-12-2015, 02:54 PM   #37
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The problem with these SWR studies is that they don't take pending pensions or SS into account. This is a primary reason I use ESPlanner for my calculations. Not to mention tax implications.
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Old 03-12-2015, 02:56 PM   #38
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I recall a 2.5% w/r rate for 35 years if one backs out the outrageous 1% expense fee used (personally, my overall VG fees are .11% and about to go lower after transferring employer's investor shares to admiral shares upon FIRE). Another set of predictions, as noted above, are contained in VG's recent paper.

Who to believe in light of such conflicting "predictions"? What's useful? Best to plan conservatively.
If you can find an inflation-linked investment and want only a 35 year time frame, 2.85% is the garantueed 100% succes rate. Since 10 year TIPS yield 0.41%, that kind of deal is still available even in this environment.

Why 2.85%? 100% capital consumed / 35 years to eat it up = 2.85%. That's only the value of the principal.

So here is a potentially useful thought: you can safely put your minimum withdrawal rate at (1/ remaining years left).

So for a 65 year old, 3% is as safe as anything. For a 45 year old, 2%. Easy-peasy.

[Edit: of course, this implies you won't become immortal or have life extension therapies ..]
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Old 03-12-2015, 03:08 PM   #39
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So what do you all think of this site:

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

His chart shows the 30 year SWR on an all TIPS portfolio (using yields from 9/23/2013) would have been 4.37%.
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Old 03-12-2015, 03:14 PM   #40
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The problem with these SWR studies is that they don't take pending pensions or SS into account. This is a primary reason I use ESPlanner for my calculations. Not to mention tax implications.
I agree that it's a comprehensive tool that uses various methods of planning such as conventional, Monte Carlo and upside investing and I've used it on and off since 2011 to figure out SS benefits , spousal benefits, taxes but one problem I have with it is not been able to figure out how to reduce spending if I want to leave a bequest in my estate. It insists on a higher annual consumption smoothing and then recommends you buy life insurance to achieve that end value bequest.
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